e10vk
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT UNDER
SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission File Number 0-33501
Northrim BanCorp,
Inc.
(Exact name of registrant as
specified in its charter)
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Alaska
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92-0175752
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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3111 C Street
Anchorage, Alaska 99503
(Address of principal executive
offices) (Zip Code)
Registrants Telephone Number, Including Area Code:
(907) 562-0062
Securities
Registered Pursuant to Section 12(b) of the Act:
None
Securities
Registered Pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
(Title
of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No
þ
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 þ No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(17 C.F.R. 229.405) is not contained herein, and will not
be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendments to this
Form 10-K. Yes o No
þ
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. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of common stock held by
non-affiliates of registrant at June 30, 2008, was
$110,642,670.
The number of shares of registrants common stock
outstanding at March 1, 2009, was 6,332,236.
Documents incorporated by reference and parts of
Form 10-K
into which incorporated: The portions of the Proxy Statement for
Northrim BanCorps Annual Shareholders Meeting to be
held on May 14, 2009, referenced in Part III of this
Form 10-K
are incorporated by reference therein.
Northrim
BanCorp, Inc.
Table of Contents
Note
Regarding Forward-Looking Statements
This report includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements describe
Northrim Bancorp, Inc.s (the Company)
managements expectations about future events and
developments such as future operating results, growth in loans
and deposits, continued success of the Companys style of
banking, and the strength of the local economy. All statements
other than statements of historical fact, including statements
regarding industry prospects and future results of operations or
financial position, made in this report are forward-looking. We
use words such as anticipates, believes,
expects, intends and similar expressions
in part to help identify forward-looking statements.
Forward-looking statements reflect managements current
plans and expectations and are inherently uncertain. Our actual
results may differ significantly from managements
expectations, and those variations may be both material and
adverse. Forward-looking statements are subject to various risks
and uncertainties that may cause our actual results to differ
materially and adversely from our expectations as indicated in
the forward-looking statements. These risks and uncertainties
include: the general condition of, and changes in, the Alaska
economy; factors that impact our net interest margins; and our
ability to maintain asset quality. Further, actual results may
be affected by 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 our filings with the SEC.
However, you should be aware that these factors are not an
exhaustive list, and you should not assume these are the only
factors that may cause our actual results to differ from our
expectations. In addition, you should note that we do not intend
to update any of the forward-looking statements or the
uncertainties that may adversely impact those statements.
i
Northrim
BanCorp, Inc.
About the Company
Overview
Northrim BanCorp, Inc. (the Company) is a publicly
traded bank holding company with five wholly-owned subsidiaries,
Northrim Bank (the Bank), a state chartered,
full-service commercial bank; Northrim Investment Services
Company (NISC), which we formed in November 2002 to
hold the Companys equity interest in Elliott Cove Capital
Management LLC, (Elliott Cove), an investment
advisory services company; Northrim Capital Trust 1
(NCT1), an entity that we formed in May of 2003 to
facilitate a trust preferred security offering by the Company;
Northrim Statutory Trust 2 (NST2), an entity
that we formed in December of 2005 to facilitate a trust
preferred security offering by the Company, and Northrim
Building LLC (NBL), which owns and operates the
Companys main office facility at 3111 C Street
in Anchorage. We also hold a 24% interest in the profits and
losses of a residential mortgage holding company, Residential
Mortgage Holding Company LLC (RML Holding Company)
through Northrim Banks wholly-owned subsidiary, Northrim
Capital Investments Co. (NCIC). The predecessor of
RML Holding Company, Residential Mortgage LLC (RML),
was formed in 1998 and has offices throughout Alaska. We also
operate in the Washington and Oregon market areas through
Northrim Funding Services (NFS), a division of the
Bank that was formed in 2004. In March and December of 2005,
NCIC purchased ownership interests totaling 50.1% in Northrim
Benefits Group, LLC (NBG), an insurance brokerage
company that focuses on the sale and servicing of employee
benefit plans. Finally, in the first quarter of 2006, through
NISC, we purchased a 24% interest in Pacific Wealth Advisors,
LLC (PWA), an investment advisory, trust and wealth
management business located in Seattle, Washington.
The Company is regulated by the Board of Governors of the
Federal Reserve System, and the Bank is regulated by the Federal
Deposit Insurance Corporation (FDIC), and the State
of Alaska Department of Community and Economic Development,
Division of Banking, Securities and Corporations. We began
banking operations in Anchorage in December 1990, and formed the
Company in connection with our reorganization into a holding
company structure; that reorganization was completed effective
December 31, 2001. We make our Securities Exchange Act
reports available free of charge on our Internet web site,
www.northrim.com. Our reports can also be obtained through the
Securities and Exchange Commissions EDGAR database at
www.sec.gov.
We opened for business in 1990 shortly after the dramatic
consolidation of the Alaska banking industry in the late 1980s
that left three large commercial banks with over 93% of
commercial bank deposits in greater Anchorage. Through the
successful implementation of our Customer First
Service philosophy of providing our customers with the
highest level of service, we capitalized on the opportunity
presented by this consolidation and carved out a market niche
among small business and professional customers seeking more
responsive and personalized service.
We grew substantially in 1999 when we completed a public stock
offering in which we raised $18.5 million and acquired
eight branches from Bank of America. The Bank of America branch
acquisition was completed in June 1999 and increased our
outstanding loans by $114 million, our deposits by
$124 million, and provided us fixed assets valued at
$2 million, for a purchase price of $5.9 million, in
addition to the net book value of the loans and fixed assets.
The stock offering allowed us to achieve the Bank of America
acquisition while remaining well-capitalized under bank
regulatory guidelines.
In October 2007, we acquired 100% of the outstanding shares of
Alaska First Bank & Trust, N.A. (Alaska
First) for a purchase price of $6.3 million and
merged it into Northrim Bank. The Company did not acquire Alaska
Firsts subsidiary, Hagen Insurance, Inc., nor did it
retain the two Alaska First branches. The Alaska First
acquisition increased our cash by $18.8 million,
investments by $23.8 million, outstanding loans by
$13.2 million and other assets by $1.6 million. We
assumed $47.7 million of deposits, $5.1 million of
borrowings and $900,000 of other liabilities.
We have grown to be the third largest commercial bank in Alaska
and the second largest in Anchorage in terms of deposits, with
$843.3 million in total deposits and over $1 billion
in total assets at December 31, 2008. Through our 11
branches, we are accessible by approximately 67% of the Alaska
population.
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Anchorage: We have two major financial
centers in Anchorage, four smaller branches, and one supermarket
branch. We continue to explore for future branching
opportunities in this market.
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Fairbanks: We opened our financial center in
Fairbanks, Alaskas second largest city, in mid-1996. This
branch has given us a strong foothold in Interior Alaska, and
management believes that there is significant potential to
increase our share of that market. In the second quarter of
2008, we opened another branch in Fairbanks that is located
within a large newly developed retail area.
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Eagle River: We also serve Eagle River, a
community outside of Anchorage. In January of 2002, we moved
from a supermarket branch into a full-service branch to provide
a higher level of service to this growing market.
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Wasilla: Wasilla is a rapidly growing market
in the Matanuska Valley outside of Anchorage where we completed
construction of a new financial center in December of 2002 and
moved from our supermarket branch and loan production office
into this new facility.
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Elliott
Cove Capital Management LLC
As of December 31, 2008, the Company owned a 48% equity
interest in Elliott Cove, an investment advisory services
company, through its wholly owned subsidiary, NISC.
Elliott Cove began active operations in the fourth quarter of
2002 and has had
start-up
losses since that time as it continues to build its assets under
management. In addition to its ownership interest, the Company
provides Elliott Cove with a line of credit that has a committed
amount of $750,000 and an outstanding balance of $557,000 as of
December 31, 2008.
As of December 31, 2008, there are eight Northrim Bank
employees who are licensed as Investment Advisor Representatives
and actively selling the Elliott Cove investment products. We
plan to continue to use the Elliott Cove products to strengthen
our existing customer relationships and bring new customers into
the Bank.
Northrim
Funding Services
In the third quarter of 2004, we formed NFS as a division of the
Bank. NFS is based in Bellevue, Washington and provides
short-term working capital to customers in the states of
Washington and Oregon by purchasing their accounts receivable.
In 2009, we expect NFS to continue to penetrate its market and
increase its market share in the purchased receivables business
and to continue to contribute to the Companys net income.
Business
Strategies
In addition to our acquisition strategy, we are pursuing a
strategy to increase our market share within our different
business areas. Our success will depend on our ability to manage
our credit risks and control our costs while providing
competitive products and services. To achieve our objectives, we
are pursuing the following business strategies:
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Providing Customer First Service: We believe
that we provide a high level of customer service. Our guiding
principle is to serve our market areas by operating with a
Customer First Service philosophy, affording our
customers the highest priority in all aspects of our operations.
To achieve this objective, our management emphasizes the hiring
and retention of competent and highly motivated employees at all
levels of the organization. Management believes that a
well-trained and highly motivated core of employees allows
maximum personal contact with customers in order to understand
and fulfill customer needs and preferences. This Customer
First Service philosophy is combined with our emphasis on
personalized, local decision making.
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High Performance Checking: In the first part
of 2005, we launched our High Performance Checking
(HPC) product consisting of several consumer
checking accounts tailored to the needs of specific segments of
our market, including a totally free checking product. We
supported the new products with a targeted marketing program and
extensive branch sales promotions. Through the concentrated
efforts of our branch employees, we increased the number of our
deposit accounts and the balances in them. In the fourth quarter
of 2006, we introduced HPC for our business checking accounts.
In 2007 and 2008, we continued to market the HPC products
through a targeted mailing program and branch promotions, which
helped us to increase the number of these accounts. In 2009, we
plan to continue to support the HPC consumer and business
checking products with a similar marketing and sales program in
an effort to continue to expand our core deposits.
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Emphasizing Business and Professional
Lending: We endeavor to provide commercial lending
products and services, and to emphasize relationship banking
with businesses and professional individuals. Management
believes that our focus on providing financial services to
businesses and professional individuals has and may continue to
increase lending and core deposit volumes.
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Providing Competitive and Responsive Real Estate Lending:
We estimate that we are a major land development and
residential construction lender and an active lender in the
commercial real estate market in our Alaskan markets. Management
believes that our willingness to provide these services in a
professional and responsive manner has contributed significantly
to our growth. Because of our relatively small size, our
experienced senior management can be more involved with serving
customers and making credit decisions, allowing us to compete
more favorably for lending relationships. In 2009, we will make
a substantial effort to decrease our loans measured for
impairment and other real estate owned (OREO), many
of which consist of residential construction and land
development loans. As a result of these efforts and continued
projected slowness in the residential real estate market, our
loan balances in the residential construction sector are
projected to decline in 2009.
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Pursuing Strategic Opportunities for Additional Growth:
Management believes that the Bank of America branch
acquisition in 1999 significantly strengthened our local market
position and enabled us to further capitalize on expansion
opportunities resulting from the demand for a locally based
banking institution providing a high level of service. Not only
did the acquisition increase our size, number of branch offices,
and lending capacity, but it also expanded our consumer lending,
further diversifying our loan portfolio. Although to a lesser
degree than the Bank of America branch acquisition, we believe
that the Alaska First acquisition also strengthened our position
in the Anchorage market. We expect to continue seeking similar
opportunities to further our growth while maintaining a high
level of credit quality. We plan to affect our growth strategy
through a combination of growth at existing branch locations,
new branch openings, primarily in Anchorage, Wasilla and
Fairbanks, and strategic banking and non-banking acquisitions in
the future.
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Developing a Sales Culture: In 2003, we
conducted extensive sales training throughout the Company and
developed a comprehensive approach to sales. In 2007 and 2008,
the Company continued with its sales calling and training
efforts and plans to continue with this program in 2009. Our
goal throughout this process is to increase and broaden the
relationships that we have with new and existing customers and
to continue to increase our market share within our existing
markets.
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Improving Credit Quality: In 2007, we formed
a Quality Assurance department to provide independent, detailed
financial analysis of our largest, most complex loans. In
addition, this department, along with the Chief Lending Officer
and others in the Loan Administration department, has developed
processes to analyze and manage various concentrations of credit
within the overall loan portfolio. The Loan Administration
department has also enhanced the procedures and processes for
the analysis and reporting of problem loans along with the
development of strategies to resolve them. In 2009, we plan to
continue with these initiatives. In addition, we will devote
more resources towards the reduction of our nonperforming assets
and substandard loans.
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Services
We provide a wide range of banking services in Southcentral and
Interior Alaska to businesses, professionals, and individuals
with high service expectations.
Deposit Services: Our deposit services
include noninterest-bearing checking accounts and
interest-bearing time deposits, checking accounts, and savings
accounts. Our interest-bearing accounts generally earn interest
at rates established by management based on competitive market
factors and managements desire to increase or decrease
certain types or maturities of deposits. We have two deposit
products that are indexed to specific U.S. Treasury rates.
Several of our innovative deposit services and products are:
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An indexed money market deposit account;
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A
Jump-Up
certificate of deposit (CD) that allows additional
deposits with the opportunity to increase the rate to the
current market rate for a similar term CD;
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An indexed CD that allows additional deposits, quarterly
withdrawals without penalty, and tailored maturity
dates; and
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Arrangements to courier noncash deposits from our customers to
their branch.
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Lending Services: We are an active lender
with an emphasis on commercial and real estate lending. We also
believe we have a significant niche in construction and land
development lending in Anchorage, Fairbanks, and the Matanuska
Valley (near Anchorage). To a lesser extent, we provide consumer
loans. See Lending Activities.
Other Customer Services: In addition to our
deposit and lending services, we offer our customers several
24-hour
services: Telebanking, faxed account statements, Internet
banking for individuals and businesses, and automated teller
services. Other special services include personalized checks at
account opening, overdraft protection from a savings account,
extended banking hours (Monday through Friday, 9 a.m. to
6 p.m. for the lobby, and 8 a.m. to 7 p.m. for
the
drive-up,
and Saturday 10 a.m. to 3 p.m.), commercial
drive-up
banking with coin service, automatic transfers and payments,
wire transfers, direct payroll deposit, electronic tax payments,
Automated Clearing House origination and receipt, cash
management programs to meet the specialized needs of business
customers, and courier agents who pick up noncash deposits from
business customers.
3
Directors and Executive Officers: The
following table presents the names and occupations of our
directors and executive officers.
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Executive
Officers/Age
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Occupation
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*R. Marc Langland, 67
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Chairman, President, & CEO of the Company and the Bank;
Director, Alaska Air Group; Director, Usibelli Coal Mine, Inc.
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*Christopher N. Knudson, 55
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Executive Vice President and Chief Operating Officer of the
Company and the Bank
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Joseph M. Schierhorn, 51
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Executive Vice President, Chief Financial Officer, and
Compliance Manager of the Company and the Bank
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Joseph M. Beedle, 57
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Executive Vice President of the Company and Chief Lending
Officer of the Bank
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Steven L. Hartung, 62
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Executive Vice President of the Company and Quality Assurance
Officer of the Bank
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*Indicates individual serving as both director and executive
officer.
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Directors/Age
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Occupation
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Larry S. Cash, 57
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President and CEO, RIM Architects (Alaska, Guam, Hawaii and
California)
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Mark G. Copeland, 66
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Owner and sole member of Strategic Analysis, LLC, a management
consulting firm
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Ronald A. Davis, 76
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Former Vice President, Acordia of Alaska Insurance (full service
insurance agency)
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Anthony Drabek, 61
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President and CEO, Natives of Kodiak, Inc. (Alaska Native
Corporation), Chairman and President, Koncor Forest Products
Co.; Secretary/Director, Atikon Forest Products Co.
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Richard L. Lowell, 68
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Former Chairman, Ribelin Lowell & Company (insurance
brokerage firm)
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Irene Sparks Rowan, 67
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Former Chairman and Director, Klukwan, Inc. (Alaska Native
Corporation) and its subsidiaries
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John C. Swalling, 59
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President, Swalling & Associates, P.C. (accounting
firm)
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David G. Wight, 68
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Former President and CEO, Alyeska Pipeline Service Company, and
Director, Storm Cat Energy Corporation
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4
Selected
Financial Data
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2008
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2007
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2006
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2005
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2004
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Unaudited
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(In Thousands Except Per Share Amounts)
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Net interest income
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$45,814
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$49,830
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$47,522
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$43,908
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$41,271
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Provision for loan losses
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7,199
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5,513
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2,564
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1,170
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1,601
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Other operating income
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11,399
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9,954
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7,766
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4,933
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3,893
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Other operating expense
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40,439
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35,063
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31,476
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29,577
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26,636
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Income before income taxes and minority interest
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9,575
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19,208
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21,248
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18,094
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16,927
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Minority interest in subsidiaries
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370
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290
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296
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Pre tax income
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9,205
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18,918
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20,952
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18,094
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16,927
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Income taxes
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3,122
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7,260
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7,978
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6,924
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6,227
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Net income
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$6,083
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$11,658
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$12,974
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$11,170
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$10,700
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Earnings per share:
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Basic
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$0.96
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$1.82
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$2.02
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$1.70
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$1.60
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Diluted
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0.95
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1.80
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1.99
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1.64
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1.55
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Cash dividends per share
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0.66
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0.57
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0.45
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0.40
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0.36
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Assets
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$1,006,392
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$1,014,714
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$925,620
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$895,580
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$800,726
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Loans
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711,286
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714,801
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717,056
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705,059
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678,269
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Deposits
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843,252
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867,376
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794,904
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779,866
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699,061
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Long-term debt
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15,986
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1,774
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2,174
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2,574
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2,974
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Junior subordinated debentures
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18,558
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18,558
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18,558
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18,558
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8,000
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Shareholders equity
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104,648
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101,391
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95,418
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84,474
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83,358
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Book value
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$16.53
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$16.09
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$15.61
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$13.86
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$13.01
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Tangible book value
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$15.06
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$14.51
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$14.48
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$12.65
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$11.97
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Net interest margin (tax equivalent)
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5.26%
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5.89%
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5.89%
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5.66%
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5.88%
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Efficiency
ratio(1)
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70.07%
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58.09%
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56.06%
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59.80%
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58.16%
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Return on assets
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0.62%
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1.24%
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1.46%
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1.33%
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1.41%
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Return on equity
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5.85%
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11.70%
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14.45%
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13.17%
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13.50%
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Equity/assets
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10.40%
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10.00%
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10.31%
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9.44%
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10.41%
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Dividend payout ratio
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68.93%
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30.54%
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21.43%
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22.92%
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21.57%
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Nonperforming loans/portfolio loans
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3.66%
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1.59%
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0.92%
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0.86%
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0.97%
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Net charge-offs/average loans
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0.86%
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0.86%
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0.16%
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0.18%
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0.16%
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Allowance for loan losses/portfolio loans
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1.81%
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1.64%
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1.69%
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1.52%
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1.59%
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Nonperforming assets/assets
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3.84%
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1.56%
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0.79%
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0.69%
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0.82%
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Tax rate
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34%
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38%
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38%
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38%
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37%
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Number of banking offices
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11
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10
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10
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10
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10
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Number of employees (FTE)
|
|
290
|
|
302
|
|
277
|
|
272
|
|
272
|
|
|
|
|
(1) |
In managing our business, we review the efficiency ratio
exclusive of intangible asset amortiztion (see definition in
table below), which is not defined in accounting principles
generally accepted in the United States (GAAP). The
efficiency ratio is calculated by dividing noninterest expense,
exclusive of intangible asset amortization, by the sum of net
interest income and noninterest income. Other companies may
define or calculate this data differently. We believe this
presentation provides investors with a more accurate picture of
our operating efficiency. In this presentation, noninterst
expense is adjusted for intangible asset amortization. For
additional information see the Noninterest Expense
section in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operation
of this report.
|
5
Reconciliation
of Selected Financial Data to GAAP Financial
Measures(2)
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
Net interest
income(1)
|
|
$45,814
|
|
$49,830
|
|
$47,522
|
|
$43,908
|
|
$41,271
|
Noninterest income
|
|
11,399
|
|
9,954
|
|
7,766
|
|
4,933
|
|
3,893
|
Noninterest expense
|
|
40,439
|
|
35,063
|
|
31,476
|
|
29,577
|
|
26,636
|
Less intangible asset amortization
|
|
347
|
|
337
|
|
482
|
|
368
|
|
368
|
|
|
Adjusted noninterest expense
|
|
$40,092
|
|
$34,726
|
|
$30,994
|
|
$29,209
|
|
$26,268
|
|
|
Efficiency ratio
|
|
70.07%
|
|
58.09%
|
|
56.06%
|
|
59.80%
|
|
58.16%
|
|
|
|
|
(1)
|
Amount represents net interest income before provision for loan
losses.
|
(2)
|
These unaudited schedules provide selected financial information
concerning the Company that should be read in conjunction with
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations of this
report.
|
6
Managements
Discussion and Analysis of Financial Condition and
Results of Operation
Overview
We are a publicly traded bank holding company with five
wholly-owned subsidiaries: the Bank, a state chartered,
full-service commercial bank; NISC, a company formed to invest
in both Elliott Cove, an investment advisory services company,
and PWA, an investment advisory, trust and wealth management
business located in Seattle, Washington; NCT1 and NST2, entities
formed to facilitate two trust preferred securities offerings;
and NBL, which owns and operates the Companys main office
facility at 3111 C Street in Anchorage. The Bank in
turn has a wholly-owned subsidiary, NCIC, which has an interest
in RML Holding Company, a residential mortgage holding company
and NBG, an insurance brokerage company that provides employee
benefit plans to businesses throughout Alaska. We are
headquartered in Anchorage and have 11 branch locations, seven
in Anchorage, two in Fairbanks, and one each in Eagle River and
Wasilla. The Bank also operates Northrim Funding Services, a
division headquartered in Bellevue, Washington with operations
in the Washington and Oregon markets. We offer a wide array of
commercial and consumer loan and deposit products, investment
products, and electronic banking services over the Internet.
We opened the Bank for business in Anchorage in 1990. The Bank
became the wholly-owned subsidiary of the Company effective
December 31, 2001, when we completed our bank holding
company reorganization. We opened our first branch in Fairbanks
in 1996, and our second location in Anchorage in 1997. During
the second quarter of 1999, we purchased eight branches located
in Anchorage, Eagle River and Wasilla from Bank of America. This
acquisition resulted in us acquiring $114 million in loans,
$124 million in deposits and $2 million in fixed
assets for a purchase price of $5.9 million. Then, in
October of 2007, we acquired 100% of the outstanding stock of
another local bank, Alaska First. This acquisition resulted in
us acquiring cash equivalents and investments of
$42.6 million, outstanding loans of $13.2 million,
deposits of $47.7 million and borrowings of
$5.1 million.
One of our major objectives is to increase our market share in
Anchorage, Fairbanks, and the Matanuska Valley, Alaskas
three largest urban areas. We estimate that we hold a 24% share
of the commercial bank deposit market in Anchorage, 7% share of
the Fairbanks market, and a 10% share of the Matanuska Valley
market as of June 30, 2008.
Our growth and operations depend upon the economic conditions of
Alaska and the specific markets we serve. The economy of Alaska
is dependent upon the natural resources industries, in
particular oil production, as well as tourism, government, and
U.S. military spending. According to the State of Alaska
Department of Revenue, approximately 86% of the Alaska state
government is funded through various taxes and royalties on the
oil industry. Any significant changes in the Alaska economy and
the markets we serve eventually could have a positive or
negative impact on the Company.
At December 31, 2008, we had assets of over
$1 billion, a decrease of less than 1% from
December 31, 2007. Also, we had gross loans of
$711.3 million at December 31, 2008, a decrease of
less than 1% from $714.8 million at December 31, 2007.
Our net income and diluted earnings per share for 2008 were
$6.1 million and $0.95, respectively, a decrease of 48% for
each item, respectively, from $11.7 million and $1.80 at
year end 2007. During the same time period, our net interest
income decreased by $4.0 million, or 8%, to
$45.8 million, from $49.8 million for the year ended
2007. Our provision for loan losses in 2008 increased by
$1.7 million, or 31% to $7.2 million, from
$5.5 million in 2007, as our nonperforming loans for 2008
increased by $14.7 million, or 129%, from
$11.3 million in 2007 to $26.0 million in 2008. In
2008 our other operating income increased by $1.4 million,
or 15%, to $11.4 million from $10 million in 2007.
Critical
Accounting Estimates
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. We believe that our most critical
accounting policies upon which our financial condition depends,
and which involve the most complex or subjective decisions or
assessments are as follows:
Allowance for loan losses (the
Allowance): The Company maintains an
Allowance to reflect inherent losses from its loan portfolio as
of the balance sheet date. The Allowance is decreased by loan
charge-offs and increased by loan recoveries and
7
provisions for loan losses. On a quarterly basis, the Company
calculates the Allowance based on an established methodology
which has been consistently applied.
In determining its total Allowance, the Company first estimates
a specific allowance for impaired loans. This analysis is based
upon a specific analysis for each impaired loan, including
appraisals on loans secured by real property, managements
assessment of the current market, recent payment history and an
evaluation of other sources of repayment. With regard to our
appraisal process, the Company obtains appraisals on real and
personal property that secure its loans during the loan
origination process in accordance with regulatory guidance and
its loan policy. The Company obtains updated appraisals on loans
secured by real or personal property based upon its assessment
of changes in the current market or particular projects or
properties, information from other current appraisals, and other
sources of information. The Company uses the information
provided in these updated appraisals along with its evaluation
of all other information available on a particular property as
it assesses the collateral coverage on its performing and
nonperforming loans and the impact that may have on the adequacy
of its Allowance.
The Company then estimates an allowance for all loans that are
not impaired. This allowance is based on loss factors applied to
loans that are quality graded according to an internal risk
classification system (classified loans). The
Companys internal risk classifications are based in large
part upon regulatory definitions for classified loans. The loss
factors that the Company applies to each group of loans within
the various risk classifications are based on industry
standards, historical experience and managements judgment.
Portfolio components also receive specific attention in the
Allowance analysis when those components constitute a
significant concentration as a percentage of the Companys
capital, when current market or economic conditions point to
increased scrutiny, or when historical or recent experience
suggests that additional attention is warranted in the analysis
process.
Once the Allowance is determined using the methodology described
above, management assesses the adequacy of the overall Allowance
through an analysis of the size and mix of the loan portfolio,
historical and recent credit performance of the loan portfolio
(including the absolute level and trends in delinquencies and
impaired loans), industry metrics and ratio analysis.
We recognize the determination of the Allowance is sensitive to
the assigned credit risk ratings and inherent loss rates at any
given point in time. Therefore, we perform a sensitivity
analysis to provide insight regarding the impact of adverse
changes in risk ratings may have on our Allowance. The
sensitivity analysis does not imply any expectation of future
deterioration in our loans risk ratings and it does not
necessarily reflect the nature and extent of future changes in
the Allowance due to the numerous quantitative and qualitative
factors considered in determining our Allowance. At
December 31, 2008, in the event that 1 percent of our
loans were downgraded from the pass category to the
special mention category within our current
allowance methodology, the Allowance would have increased by
approximately $336,000.
Based on our methodology and its components, management believes
the resulting Allowance is adequate and appropriate for the risk
identified in the Companys loan portfolio. Given current
processes employed by the Company, management believes the risk
ratings and inherent loss rates currently assigned are
appropriate. It is possible that others, given the same
information, may at any point in time reach different reasonable
conclusions that could be material to the Companys
financial statements. In addition, current risk ratings and fair
value estimates of collateral are subject to change as we
continue to review loans within our portfolio and as our
borrowers are impacted by economic trends within their market
areas. Although we have established an Allowance that we
consider adequate, there can be no assurance that the
established Allowance will be sufficient to offset losses on
loans in the future.
Goodwill and other intangibles: Net assets of
entities acquired in purchase transactions are recorded at fair
value at the date of acquisition. Identified intangibles are
amortized over the period benefited either on a straight-line
basis or on an accelerated basis depending on the nature of the
intangible. Goodwill is not amortized, although it is reviewed
for impairment on an annual basis or if events or circumstances
indicate a potential impairment. Goodwill impairment testing is
performed at the reporting unit level. The Company has only one
reporting unit.
Under applicable accounting standards, goodwill impairment
analysis is a two-step test. The first step, used to identify
potential impairment, involves comparing each reporting
units fair value to its carrying value including goodwill.
If the fair value of a reporting unit exceeds its carrying
value, applicable goodwill is considered not to be impaired. If
the carrying value exceeds fair value, there is an indication of
impairment and the second step is performed to measure the
amount of impairment.
The second step involves calculating an implied fair value of
goodwill for each reporting unit for which the first step
indicated impairment. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill
recognized in a business combination, which is the excess of the
fair value of the reporting unit, as determined in the first
step, over the aggregate fair values of the individual assets,
liabilities and identifiable intangibles as if the reporting
unit was being acquired in a business combination. If the
implied fair value of goodwill in the pro forma
business combination accounting as described above exceeds the
goodwill assigned to the reporting unit, there is no impairment.
If the goodwill assigned to a reporting unit exceeds the implied
fair value of the goodwill, an impairment charge is recorded for
the excess. An impairment loss recognized cannot exceed the
8
amount of goodwill, and the loss establishes a new basis in the
goodwill. Subsequent reversal of goodwill impairment losses is
not permitted under applicable accounting standards.
At December 31, 2008, we utilized two methods of estimating
the fair value of the Company: an income method that
incorporates discounted cash flows and a market comparison
method. As our market capitalization declined and financial
sector volatility increased, we weighted these methods based on
how we believe they best represent a market participants
view of fair value. The income and market comparison were given
weights of 70% and 30%, respectively. As a result, at
December 31, 2008, we relied primarily on the income
method, using management projections and risk-adjusted discount
rates, as we considered it to be most reflective of a market
participants view of fair value given the current market
conditions.
The income method used at December 31, 2008 utilized
discount rates that we believe adequately reflected the risk and
uncertainty in the financial markets generally and specifically
in our internally developed earnings projections. This method
employs a capital asset pricing model in estimating the discount
rate (i.e., cost of equity financing). The inputs to this model
include: risk-free rate of return; beta; market equity risk
premium; and an unsystematic (company-specific) risk factor. The
unsystematic risk factor is the input that specifically
addresses uncertainty related to our projections of earnings and
growth, including the uncertainty related to loss expectations.
In the market comparison approach used at December 31,
2008, management selected a set of comparable companies located
in the Western region of the United States with similar asset
size and that are publicly-traded on a national exchange. The
market value on an adjusted control basis was measured based on
the market capitalization of comparable companies and the
application of a control premium that represents the potential
additional value which would be received from a market
participant acquirer assuming the sale of the Company. Investors
are willing to pay a premium for control of a company, as
evidenced by the historically sizeable premiums typically paid
in mergers and acquisitions. Management applied a control
premium of 35% to these values based on observation of
historically observable control premiums and the current market
environment.
For the December 31, 2008, goodwill impairment test, we
calculated a total company fair value of $89 million based
on the analysis described above. The table below details
estimated fair values using each method as well as market
capitalization. Estimating the fair value of a reporting unit is
a very subjective process that involves the use of estimates and
judgments, particularly related to cash flows, the appropriate
discount rates and an applicable control premium.
|
|
|
|
|
|
|
|
|
|
Equity Value
|
|
Weight
|
|
Weighted Value
|
|
|
(In thousands)
|
|
|
Income approach
|
|
$90,150
|
|
70%
|
|
$63,105
|
Management forecasts
|
|
|
|
|
|
|
Market approach
|
|
86,580
|
|
30%
|
|
25,974
|
Western publicly traded guideline companies
|
|
|
|
|
|
|
|
|
Concluded fair value of equity (weighted)
|
|
|
|
|
|
$89,079
|
|
|
Market capitalization plus control premium of 35%
|
|
|
|
|
|
$87,864
|
|
|
At December 31, 2008, the Company performed both step 1 and
step 2 of the annual impairment test and concluded that no
impairment existed at that time. The Company continues to
monitor the Companys goodwill for potential impairment on
an ongoing basis. Note 10 to the Consolidated Financial
Statements has further information on the goodwill impairment
analysis as of December 31, 2008. No assurance can be given
that we will not charge earnings during 2009 for goodwill
impairment, if, for example, our stock price declines further
and continues to trade at a significant discount to its book
value, although there are many factors that we analyze in
determining the impairment of goodwill.
Valuation of other real estate owned: Other real
estate owned represents properties acquired through foreclosure
or its equivalent. Prior to foreclosure, the carrying value is
adjusted to the fair value, less cost to sell, of the real
estate to be acquired by an adjustment to the allowance for loan
loss. The amount by which the fair value less cost to sell is
greater than the carrying amount of the loan plus amounts
previously charged off is recognized in earnings up to the
original cost of the asset. Any subsequent reduction in the
carrying value at acquisition is charged against earnings.
Reductions in the carrying value of other real estate owned
subsequent to acquisition are determined based on
managements estimate of the fair value of individual
properties. Significant inputs into this estimate include
estimated costs to complete projects, as well as our assessment
of current market conditions. During 2008, $2 million in
impairment was recognized on OREO due to adjustments to the
Companys estimate of the fair value of certain properties
based on changes in estimated costs to complete the projects.
9
Results
of Operations
Net
Income
We earned net income of $6.1 million in 2008, compared to
net income of $11.7 million in 2007, and $13 million
in 2006. During these periods, net income per diluted share was
$0.95, $1.80, and $1.99, respectively.
Net
Interest Income
Our results of operations are dependent to a large degree on our
net interest income. We also generate other income, primarily
through service charges and fees, purchased receivables
products, employee benefit plan income, electronic banking
income, earnings from our mortgage affiliate, and other sources.
Our operating expenses consist in large part of compensation,
employee benefits expense, occupancy, expenses related to OREO,
insurance, marketing, and professional and outside services.
Interest income and cost of funds are affected significantly by
general economic conditions, particularly changes in market
interest rates, and by government policies and the actions of
regulatory authorities.
Net interest income is the difference between interest income
from loan and investment securities portfolios and interest
expense on customer deposits and borrowings. Net interest income
in 2008 was $45.8 million, compared to $49.8 million
in 2007 and $47.5 million in 2006, reflecting the effect of
the 400 basis point drop in interest rates that occurred in
2008.
Changes in net interest income result from changes in volume and
spread, which in turn affect our margin. For this purpose,
volume refers to the average dollar level of interest-earning
assets and interest-bearing liabilities, spread refers to the
difference between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities, and margin
refers to net interest income divided by average
interest-earning assets. Changes in net interest income are
influenced by the level and relative mix of interest-earning
assets and interest-bearing liabilities. During the fiscal years
ended December 31, 2008, 2007, and 2006, average
interest-earning assets were $876.9 million,
$849.3 million, and $810.9 million, respectively.
During these same periods, net interest margins were 5.22%,
5.87%, and 5.86%, respectively, which reflect our balance sheet
mix and premium pricing on loans compared to other community
banks and an emphasis on construction lending, which generally
produces a higher yield than other interest earning assets. Our
average yield on earning-assets was 6.81% in 2008, 8.60% in
2007, and 8.57% in 2006, while the average cost of
interest-bearing liabilities was 2.11% in 2008, 3.67% in 2007
and 3.63% in 2006.
Our net interest margin decreased in 2008 from 2007 mainly due
to the fact that the cost of interest-bearing liabilities
decreased by 156 basis points while the yield on
interest-earning assets decreased by 179 basis points.
During this time, the average balance of our interest-bearing
deposits increased by $14.7 million to $617.3 million
at December 31, 2008 from $602.7 million at
December 31, 2007 and the average balance of
interest-earning assets increased $27.6 million to
$876.9 million at December 31, 2008 from
$849.3 million at December 31, 2007.
10
The following table sets forth for the periods indicated,
information with regard to average balances of assets and
liabilities, as well as the total dollar amounts of interest
income from interest-earning assets and interest expense on
interest-bearing liabilities. Resultant yields or costs, net
interest income, and net interest margin are also presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Average
|
|
Interest
|
|
|
|
Average
|
|
Interest
|
|
|
|
Average
|
|
Interest
|
|
|
|
|
outstanding
|
|
earned/
|
|
Yield/
|
|
outstanding
|
|
earned/
|
|
Yield/
|
|
outstanding
|
|
earned/
|
|
Yield/
|
|
|
balance
|
|
paid(1)
|
|
rate
|
|
balance
|
|
paid(1)
|
|
rate
|
|
balance
|
|
paid(1)
|
|
rate
|
|
|
|
(In Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(2)
|
|
$702,117
|
|
$53,287
|
|
7.59%
|
|
$710,959
|
|
$66,463
|
|
9.35%
|
|
$712,116
|
|
$65,347
|
|
9.18%
|
Securities
|
|
134,705
|
|
5,493
|
|
4.08%
|
|
98,578
|
|
4,619
|
|
4.69%
|
|
71,164
|
|
2,799
|
|
3.93%
|
Short term investments
|
|
40,082
|
|
936
|
|
2.34%
|
|
39,726
|
|
1,985
|
|
5.00%
|
|
27,665
|
|
1,375
|
|
4.97%
|
|
|
Total interest-earning assets
|
|
876,904
|
|
59,716
|
|
6.81%
|
|
849,263
|
|
73,067
|
|
8.60%
|
|
810,945
|
|
69,521
|
|
8.57%
|
Noninterest-earning assets
|
|
108,140
|
|
|
|
|
|
92,065
|
|
|
|
|
|
77,920
|
|
|
|
|
|
|
Total assets
|
|
$985,044
|
|
|
|
|
|
$941,328
|
|
|
|
|
|
$888,865
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand accounts
|
|
$97,171
|
|
$578
|
|
0.59%
|
|
$85,192
|
|
$1,188
|
|
1.39%
|
|
$78,872
|
|
$830
|
|
1.05%
|
Money market accounts
|
|
187,779
|
|
3,306
|
|
1.76%
|
|
186,722
|
|
7,378
|
|
3.95%
|
|
151,871
|
|
6,053
|
|
3.99%
|
Savings accounts
|
|
187,225
|
|
3,444
|
|
1.84%
|
|
234,780
|
|
8,756
|
|
3.73%
|
|
254,209
|
|
10,113
|
|
3.98%
|
Certificates of deposit
|
|
145,153
|
|
4,851
|
|
3.34%
|
|
95,961
|
|
4,080
|
|
4.25%
|
|
94,595
|
|
3,322
|
|
3.51%
|
|
|
Total interest-bearing deposits
|
|
617,328
|
|
12,179
|
|
1.97%
|
|
602,655
|
|
21,402
|
|
3.55%
|
|
579,547
|
|
20,318
|
|
3.51%
|
Borrowings
|
|
41,567
|
|
1,723
|
|
4.15%
|
|
30,337
|
|
1,835
|
|
6.05%
|
|
26,052
|
|
1,681
|
|
6.45%
|
|
|
Total interest-bearing liabilities
|
|
658,895
|
|
13,902
|
|
2.11%
|
|
632,992
|
|
23,237
|
|
3.67%
|
|
605,599
|
|
21,999
|
|
3.63%
|
Demand deposits and other noninterest-bearing liabilities
|
|
222,247
|
|
|
|
|
|
208,671
|
|
|
|
|
|
193,461
|
|
|
|
|
Total liabilities
|
|
881,142
|
|
|
|
|
|
841,663
|
|
|
|
|
|
799,060
|
|
|
|
|
|
|
Shareholders equity
|
|
103,902
|
|
|
|
|
|
99,665
|
|
|
|
|
|
89,805
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$985,044
|
|
|
|
|
|
$941,328
|
|
|
|
|
|
$888,865
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$45,814
|
|
|
|
|
|
$49,830
|
|
|
|
|
|
$47,522
|
|
|
|
|
Net interest
margin(3)
|
|
|
|
|
|
5.22%
|
|
|
|
|
|
5.87%
|
|
|
|
|
|
5.86%
|
|
|
|
|
|
(1)
|
|
Interest income included loan fees.
|
(2)
|
|
Nonaccrual loans are included with
a zero effective yield.
|
(3)
|
|
The net interest margin on a tax
equivalent basis was 5.26%, 5.89%, and 5.89%, respectively, for
2008, 2007, and 2006.
|
11
The following table sets forth the changes in consolidated net
interest income attributable to changes in volume and to changes
in interest rates. Changes attributable to the combined effect
of volume and interest rate have been allocated proportionately
to the changes due to volume and the changes due to interest
rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 compared to 2007
|
|
2007 compared to 2006
|
|
|
|
Increase (decrease) due to
|
|
Increase (decrease) due to
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$(817)
|
|
$(12,359)
|
|
$(13,176)
|
|
$(106)
|
|
$1,222
|
|
$1,116
|
Securities
|
|
1,352
|
|
(478)
|
|
874
|
|
1,217
|
|
603
|
|
1,820
|
Short term investments
|
|
18
|
|
(1,066)
|
|
(1,049)
|
|
603
|
|
7
|
|
610
|
|
|
Total interest income
|
|
$553
|
|
$(13,904)
|
|
$(13,351)
|
|
$1,714
|
|
$1,832
|
|
$3,546
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand accounts
|
|
$198
|
|
$(808)
|
|
$(610)
|
|
$71
|
|
$287
|
|
$358
|
Money market accounts
|
|
42
|
|
(4,114)
|
|
(4,072)
|
|
1,378
|
|
(53)
|
|
1,325
|
Savings accounts
|
|
(1,517)
|
|
(3,795)
|
|
(5,312)
|
|
(747)
|
|
(610)
|
|
(1,357)
|
Certificates of deposit
|
|
1,325
|
|
(553)
|
|
771
|
|
49
|
|
709
|
|
758
|
|
|
Total interest on deposits
|
|
48
|
|
(9,270)
|
|
(9,223)
|
|
751
|
|
333
|
|
1,084
|
Borrowings
|
|
689
|
|
(577)
|
|
(112)
|
|
249
|
|
(95)
|
|
154
|
|
|
Total interest expense
|
|
$737
|
|
$(9,848)
|
|
$(9,335)
|
|
$1,000
|
|
$238
|
|
$1,238
|
|
|
Other
Operating Income
Total other operating income increased $1.4 million, or
15%, in 2008, after increasing $2.2 million, or 28%, in
2007, and increasing $2.8 million, or 57%, in 2006. The
following table separates the more routine (operating) sources
of other income from those that can fluctuate significantly from
period to period:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
|
Other Operating Income
|
|
|
|
|
|
|
|
|
|
|
Deposit service charges
|
|
$3,283
|
|
$3,116
|
|
$1,975
|
|
$1,800
|
|
$1,718
|
Purchased receivable income
|
|
2,560
|
|
2,521
|
|
1,855
|
|
993
|
|
201
|
Employee benefit plan income
|
|
1,451
|
|
1,194
|
|
1,113
|
|
|
|
|
Electronic banking fees
|
|
1,193
|
|
914
|
|
790
|
|
632
|
|
608
|
Equity in earnings from RML
|
|
595
|
|
454
|
|
649
|
|
493
|
|
438
|
Loan service fees
|
|
476
|
|
516
|
|
531
|
|
374
|
|
379
|
Merchant credit card transaction fees
|
|
451
|
|
509
|
|
531
|
|
444
|
|
414
|
Rental income
|
|
463
|
|
134
|
|
108
|
|
100
|
|
101
|
Equity in loss from Elliott Cove
|
|
(106)
|
|
(93)
|
|
(230)
|
|
(424)
|
|
(457)
|
Other transaction fees
|
|
380
|
|
267
|
|
227
|
|
214
|
|
204
|
Other income
|
|
462
|
|
312
|
|
217
|
|
298
|
|
136
|
|
|
Operating sources
|
|
11,208
|
|
9,844
|
|
7,766
|
|
4,924
|
|
3,742
|
Gain on sale of securities available for sale, net
|
|
146
|
|
|
|
|
|
9
|
|
151
|
Gain on sale of other real estate owned, net
|
|
45
|
|
110
|
|
|
|
|
|
|
|
|
Other sources
|
|
191
|
|
110
|
|
|
|
9
|
|
151
|
|
|
Total other operating income
|
|
$11,399
|
|
$9,954
|
|
$7,766
|
|
$4,933
|
|
$3,893
|
|
|
12
Total operating sources of other operating income in 2008
increased $1.4 million, or 15% over 2007 levels. In 2007,
this income increased $2.2 million, or 28%, and in 2006, it
increased $2.8 million, or 57% as compared to 2005 levels.
The main reasons for the increase in operating income in 2008
was the increase in income from rental income, electronic
banking fees and employee benefit plan income.
Deposit service charges increased $167,000, or 5%, in 2008 as
compared to 2007, and increased $1.1 million, or 58%, in
2007 as compared to 2006. The increase in 2007 was primarily
from the April 2007 implementation of non-sufficient funds
(NSF) fees on point-of-sale transactions. The new
point-of-sale NSF fees represented $1.1 million of the
increase in service charges in 2007.
Income from the Companys purchased receivable products
increased by $39,000, or 2%, in 2008 as compared to 2007, and
increased $666,000, or 36%, in 2007 as compared to 2006. The
Company uses these products to purchase accounts receivable from
its customers and provide them with working capital for their
businesses. While the customers are responsible for collecting
these receivables, the Company mitigates this risk with
extensive monitoring of the customers transactions and
control of the proceeds from the collection process. The Company
earns income from the purchased receivable product by charging
finance charges to its customers for the purchase of their
accounts receivable. The income from this product has grown as
the Company has used it to purchase more receivables from its
customers. In 2008, the Company stopped offering one of its
purchased receivable products in Alaska, which accounts for the
slower growth rate for this product during that time.
In December of 2005, the Company, through its wholly-owned
subsidiary NCIC, purchased an additional 40.1% interest in NBG,
which brought its ownership interest in this company to 50.1%.
As a result of this increase in ownership, the Company now
consolidates the balance sheet and income statement of NBG into
its financial statements. The Company included employee benefit
plan income from NBG for the first time in its other operating
income in 2006. In 2008, the income from employee benefit plan
income from NBG increased by $257,000, or 22%, from 2007, due in
part to premium increases by the largest insurance carrier
represented by NBG which corresponded to higher commission
income for NBG in 2008. In 2007, the Company recorded an $81,000
increase for this item, or 7%, compared to the initial
$1.1 million income recorded in 2006. In contrast, the
Company did not record any income for this item in its other
operating income in 2005 as it purchased a 10% interest in NBG
in March of 2005 and accounted for this interest according to
the equity method in 2005.
The Companys electronic banking fees increased by
$279,000, or 31%, in 2008 as compared to 2007, and increased by
$124,000, or 16%, in 2007 as compared to 2006. These increases
resulted from additional fees collected from increased point of
sale and ATM transactions. The point of sale and ATM fees have
increased as a result of the increased number of deposit
accounts that the Company has acquired through the marketing of
the HPC product and overall continued increased usage of point
of sale by the entire customer base.
Included in operating sources of other operating income in 2008,
2007, and 2006 were $595,000, $454,000, and $649,000,
respectively, of income from our share of the earnings from RML,
which we account for according to the equity method. RML was
formed in 1998 and has offices throughout Alaska. During the
third quarter of 2004, RML reorganized and became a wholly-owned
subsidiary of a newly formed holding company, RML Holding
Company. In this process, RML Holding Company acquired another
mortgage company, Pacific Alaska Mortgage Company
(PAM). In the first quarter of 2005, PAM was merged
into RML. Prior to the reorganization, the Company, through
Northrim Banks wholly-owned subsidiary, NCIC, owned a 30%
interest in the profits and losses of RML. Following the
reorganization, the Companys interest in RML Holding
Company decreased to 24%.
Earnings from RML and RML Holding Company have fluctuated with
activity in the housing market, which has been affected by local
economic conditions and changes in mortgage interest rates. In
2005 and 2006, RML Holding Company began to realize some
efficiencies from its merger and increased its income from its
combined operations. However, the decline in mortgage
applications due to the slowdown in the Alaskan housing market
had a direct effect on RMLs operating income in 2007. In
2008, earnings from RML increased due to an increase in mortgage
loan originations and a reduction in its costs. The Company
expects that its income from RML will increase in 2009 as
refinance activity that started in late 2008 continues into 2009.
Loan service fees decreased by $40,000, or 8% in 2008 as
compared to 2007 due to decreased service fees as loan volume
decreased in 2008. These fees decreased by $15,000, or 3% in
2007 as compared to 2006 primarily due to the collection of past
due late fees in 2006 on non performing loans that paid off in
2006.
Merchant credit card transaction fees decreased by $58,000, or
11%, in 2008 as compared to 2007 and decreased by $22,000, or
4%, in 2007 as compared to 2006 due to decreased sales at
merchants utilizing the Companys credit card system.
Rental income increased by $329,000, or 246% to $463,000 from
$134,000 in 2007 due to the purchase of the Companys main
office facility through NBL in July 2008. The Company leases
approximately 40% of the building to other companies and earned
$399,000 from these leases in 2008. Rental income increased by
$26,000, or 24% in 2007 to $134,000 from $108,000 in 2006 due
mainly due to increased rental income received for space rented
at the Wasilla branch.
13
Our share of the loss from Elliott Cove in 2008 remained
consistent with 2007 at $106,000 as compared to $93,000 in 2007.
Losses in 2006 and 2005 were $230,000 and $424,000,
respectively, as Elliott Cove continued to increase its assets
under management, which provided it with increased revenues.
Other income increased by $150,000, or 48%, to $462,000 at
December 31, 2008 from $312,000 at December 31, 2007.
In the first quarter of 2006, through our subsidiary, NISC, the
Company purchased a 24% interest in PWA. PWA is a holding
company that owns Pacific Portfolio Consulting, LLC
(PPC) and Pacific Portfolio Trust Company
(PPTC). PPC is an investment advisory company with
an existing client base while PPTC is a
start-up
operation. The Company had income of $36,000 in 2008 and
incurred a loss of $105,000 on its investment in PWA in 2007,
which it accounts for according to the equity method. The
increase in income from PWA accounts for a large part of the
increase in other income for the Company in 2008.
Included in other sources of income is gain on sale of OREO and
gain on available for sale securities. At December 31,
2008, the gain on sale of OREO was $45,000 compared to a gain of
$110,000 in 2007 and a loss of less than $1,000 at the end of
2006. Additionally, there was $432,000 of deferred gain on the
sale of OREO included in other liabilities at December 31,
2008. This gain will be recognized using the installment method.
Finally, there were security gains of $146,000 in 2008, and none
were recorded in 2007 or 2006.
Expenses
Provision for Loan Losses: The provision for loan
losses in 2008 was $7.2 million, compared to
$5.5 million in 2007 and $2.6 million in 2006. We
increased the provision for loan losses in 2008 due to an
increase in our nonperforming loans and to address the impact of
the current economic environment on our loan portfolio. In 2008,
nonperforming loans increased to $26.0 million from a
balance of $11.3 million at December 31, 2007. In
addition, net loan charge-offs were $6 million, or 0.86% of
average loans, in 2008 as compared to $6.1 million, or
0.86% of average loans, in 2007 and $1.1 million, or 0.16%
of average loans, in 2006. The allowance for loan losses
increased in 2008 as a result of the increase in the provision
for loan losses. At December 31, 2008, the allowance was
$12.9 million, or 1.81% of portfolio loans as compared to
$11.7 million, or 1.64% of portfolio loans at
December 31, 2007 and $12.1 million, or 1.69% of
portfolio loans, at December 31, 2006. The coverage ratio
of the allowance for loan losses versus nonperforming loans
decreased to 50% in 2008 as compared to a coverage ratio of 104%
in 2007 and 183% in 2006. The Company will devote more resources
towards the reduction of our nonperforming assets and
substandard loans in 2009.
Other Operating Expense: Other operating expense
increased $5.4 million, or 15%, in 2008, $3.6 million,
or 11%, in 2007, and $1.9 million, or 6%, in 2006. The
following table breaks out the other operating expense
categories:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
|
Other Operating Expense
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense
|
|
$20,996
|
|
$20,700
|
|
$19,277
|
|
$17,656
|
|
$15,708
|
Occupancy, net
|
|
3,399
|
|
2,957
|
|
2,611
|
|
2,517
|
|
2,231
|
OREO expense, including impairment
|
|
2,558
|
|
(20)
|
|
(5)
|
|
|
|
|
Insurance expense
|
|
1,779
|
|
465
|
|
378
|
|
451
|
|
318
|
Marketing
|
|
1,558
|
|
1,617
|
|
1,641
|
|
1,657
|
|
1,201
|
Professional and outside services
|
|
1,498
|
|
1,167
|
|
840
|
|
923
|
|
905
|
Equipment
|
|
1,233
|
|
1,350
|
|
1,350
|
|
1,371
|
|
1,372
|
Intangible asset amortization
|
|
347
|
|
337
|
|
482
|
|
368
|
|
368
|
Other expenses
|
|
7,071
|
|
6,490
|
|
4,902
|
|
4,634
|
|
4,533
|
|
|
Total other operating expense
|
|
$40,439
|
|
$35,063
|
|
$31,476
|
|
$29,577
|
|
$26,636
|
|
|
Salaries and other personnel expense increased $296,000, or 1%,
in 2008, $1.4 million, or 7%, in 2007, and
$1.6 million, or 9%, in 2006. Salary and other personnel
expenses remained consistent with 2007 in 2008 due in part to
the fact that the Company did not pay most management and
officer incentives that were paid in 2007 as the Companys
net income decreased by 48% in 2008 as compared to 2007.
Additionally, deferred compensation expense decreased $668,000
from the prior year as the Companys liability under this
plan decreased due to market losses incurred on plan assets. The
Company incurs a liability to pay deferred compensation
according to the level of assets held in variable annuity life
insurance plans on certain key executives. As the value of these
assets declined in 2008, the Companys liability and
expenses for that plan also decreased during the year. The
increase in 2007 from 2006 reflects increases in salary and
benefit costs throughout this time due in part to ongoing
competition for our employees, which placed upward pressure on
our salary structure. In addition, as noted above, the Company
now accounts for NBG on a consolidated basis. In 2007,
NBGs salary and benefit costs included in the
Companys own salary and benefit costs increased by $82,000
to $528,000 from
14
$446,000 in 2006. In 2008, NBGs salary and benefit costs
included in the Companys own salary and benefit costs
increased by $52,000 to $580,000. The acquisition of Alaska
First in the fourth quarter of 2007 also added salary and
benefits costs. Lastly, stock-based compensation expense
increased to $597,000 in 2008 from $578,000 in 2007 and $390,000
in 2006. In the first quarter of 2006, the Company adopted FASB
123R, Share-Based Payment. As a result, in 2006, the
Company recorded $256,000 in additional expense associated with
its stock options. Prior to 2006, the Companys stock-based
compensation expense was associated with the fair value of
restricted stock granted to its employees and expensed over the
required service period.
During 2008, our occupancy expenses increased by $442,000, or
15%, to $3.4 million from $3 million in 2007. This
increase is primarily the result of a $254,000 increase in
depreciation expense, a $197,000 increase in repairs and
maintenance, a $151,000 increase in real estate taxes, a
$132,000 increase in utility expense, and a $71,000 increase in
janitorial costs. These increases are the result of the Company
taking on additional space in both Anchorage and Fairbanks as
well as the purchase of the Companys main office facility
in July 2008. Additionally, these increases were offset by a
$386,000 decrease in rent expense which also resulted from the
purchase of the main office facility. During 2007, occupancy
expenses increased by $346,000, or 13%, to $3 million from
$2.6 million, as we incurred higher costs in repair and
maintenance as well as increased utility expenses. In addition
to this, the Company incurred a $233,000 increase in rent
expense due to expenses associated with the Alaska First
buildings, as well as an overall increase in rents. The Company
closed the two Alaska First branches in December of 2007 and
February of 2008. In 2008, the Company incurred $31,000 in rent
expense associated with these branches. The Company does not
expect to incur expenses on these branches in 2009. In 2006,
occupancy expense increased by $94,000, or 4%, to
$2.6 million from $2.5 million as we incurred higher
costs in one of our branch locations.
OREO expenses increased to $2.6 million in 2008 from
negative $20,000 in 2007. This includes $2.0 million in
impairment charges that arose from adjustments to the
Companys estimate of the fair value of certain properties
based on changes in estimated costs to complete the projects.
The Company also incurred $365,000 in taxes and insurance costs,
$133,000 in legal expense and $91,000 in property management
expense related to OREO properties in 2008. In 2007 and 2006,
the Company did not incur any expenses related to OREO
properties. Additionally, the Company recognized rental income
on OREO properties of $1,000, $20,000 and $5,000 in 2008, 2007
and 2006, respectively. In 2009, the Company expects to incur
lower overall OREO expenses due in large part to lower expected
impairment charges on its OREO properties. Although we cannot
guarantee that we will be successful, by December 31, 2009,
the Company intends to reduce its loans measured for impairment
and OREO by 20% from December 31, 2008 levels.
Insurance expense increased by $1.3 million, or 283% to
$1.8 million in 2008 from $465,000 in 2007. This increase
is attributable to a $805,000 increase in Keyman insurance
expense that arose from decreases in the cash surrender value of
assets held under the Companys policies and a $472,000
increase in FDIC insurance expense that was due to changes in
the assessment of FDIC insurance premiums. The Company expects
further increases in its FDIC insurance costs in 2009 as the
FDIC assesses higher insurance premiums on the entire financial
services industry. Insurance expense increased by $87,000, or
23% in 2007 to $465,000 from $378,000 in 2006 due to changes in
the assessment of FDIC insurance premiums.
Marketing costs decreased by $59,000, or 5%, in 2008, decreased
by $24,000, or 1%, in 2007, and decreased $16,000, or 1%, in
2006. Although the Company has incurred additional marketing
expenses due to promoting its HPC Program in 2008, 2007 and
2006, those costs have been offset by a decrease in other
marketing expenses such as advertising for some of the
Companys other products. The Company plans to continue to
market its HPC Program as it has since the second quarter of
2005. Furthermore, the Company expects that the additional
deposit accounts will continue to generate increased fee income
that will offset a majority of the increased marketing costs
associated with the HPC Program.
Professional and outside services expense increased by $331,000,
or 28% to $1.5 million in 2008 from $1.2 million in
2007. The majority of this increase is due to fees paid for
services rendered by former Alaska First employees to facilitate
the transition of Alaska First operations to the Company,
increased fees related to tax services, increased investment
management fees due to higher average investment security
balances in 2008, and the outsourcing of internal audit work.
Professional and outside services expense increased by $327,000,
or 39% in 2007 to $1.2 million from $840,000 in 2006 due to
increased legal fees, increased audit fees and fees related to
tax services, the outsourcing of internal audit work, and fees
paid for services rendered by former Alaska First employees to
facilitate the transition of Alaska First operations to the
Company,
Equipment expense decreased $117,000, or 9% to $1.2 million
in 2008 from $1.4 million in 2007. This decrease is
primarily the result of decreased rental costs related on some
of the Companys office equipment. Equipment expense is
$1.4 million for both 2007 and 2006.
Intangible asset amortization increased by $10,000 or 3% to
$347,000 during 2008 from $337,000 during 2007. In 2007, the
Company finished amortizing the core deposit intangible
(CDI) related to the accounts it acquired in 1999
from the Bank of America transaction. The Company had no
amortization related to this CDI in 2008 and $163,000 in 2007.
Additionally, the Company recognized amortization on the CDI
associated with the Alaska First acquisition of $232,000 in 2008
and $60,000 in 2007.
15
In 2007, amortization expense decreased by $145,000, or 30%, to
$337,000 from $482,000 in 2006 as the Company finished
amortizing the core deposit intangible related to the accounts
it acquired in 1999 from the Bank of America transaction. The
amortization expense on the NBG intangible asset was $115,000 in
2008, 2007 and 2006. Prior to the Companys additional
investment in NBG in December of 2005, the Company accounted for
its investment in NBG according to the equity method and did not
record its amortization expense on the NBG investment on a
separate basis.
Other expenses, which includes software expenses, amortization
of low income housing tax credit partnerships, ATM and debit
card processing fees, internet banking fees and other
operational expenses, increased $581,000, or 9%, in 2008 as
compared to 2007 and increased $1.6 million, or 33%, in
2007 as compared to 2006 due to changes in a variety of expense
accounts. The largest increases in 2008 can be attributed to a
$382,000 increase in costs associated with loan collection, and
a $122,000 increase in correspondent bank charges due to the
Company converting to Check 21. In addition, the amortization
expense associated with the Companys investments in
partnerships that develop low-income housing increased by
$118,000 in 2008.
Income Taxes: The provision for income taxes
decreased $4.1 million, or 57%, to $3.1 million in
2008, decreased $718,000, or 9%, to $7.3 million in 2007,
and increased $1.1 million, or 15%, to $8 million in
2006. The effective tax rates for 2008, 2007 and 2006 were 34%,
38%, and 38%. The decrease in the tax rate for 2008 was
primarily due to increased tax exempt income on investments and
tax credits relative to the level of taxable income.
Financial
Condition
Assets
Loans and Lending Activities
General: Our loan products include short and
medium-term commercial loans, commercial credit lines,
construction and real estate loans and consumer loans. We
emphasize providing financial services to small and medium-sized
businesses and to individuals. From our inception, we have
emphasized commercial, land development and home construction,
and commercial real estate lending. These types of lending have
provided us with needed market opportunities and higher net
interest margins than other types of lending. However, they also
involve greater risks, including greater exposure to changes in
local economic conditions, than certain other types of lending.
Loans are the highest yielding component of earning assets.
Average loans were $8.8 million, or 1% lower in 2008 than
in 2007. Average loans were $1.2 million, or less than 1%
lower in 2007 than in 2006. Average loans comprised 80% of total
earning assets on average in 2008, 84% in 2007 and 88% in 2006.
The yield on loans averaged 7.59% in 2008, 9.35% in 2007, and
9.18% in 2006.
The reduction in the loan portfolio during 2008 was
$3.5 million, or less than 1%. Commercial loans increased
$8.3 million, or 3%, commercial real estate loans increased
$25.6 million, or 11%, and construction loans decreased
$37.6 million, or 27%, in 2008. In light of recent market
conditions in the construction loan sector, we expect further
declines in construction loans in 2009. Home equity and consumer
loans increased $173,000, or less than 1%.
16
Nonperforming Loans; Other Real Estate Owned:
Nonperforming assets consist of nonaccrual loans, accruing loans
that are 90 days or more past due, restructured loans, and
other real estate owned. We had other real estate owned property
of $12.6 million at December 31, 2008, as compared to
$4.4 million at December 31, 2007. The Company expects
to expend $2.2 million during 2009 to complete these
projects with an estimated completion date of September 30,
2009. The following table sets forth information regarding our
nonperforming loans and total nonperforming assets:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
|
Nonperforming loans
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$20,593
|
|
$9,673
|
|
$5,176
|
|
$5,090
|
|
$5,876
|
Accruing loans past due 90 days or more
|
|
5,411
|
|
1,665
|
|
708
|
|
981
|
|
290
|
Restructured loans
|
|
|
|
|
|
748
|
|
|
|
424
|
|
|
Total nonperforming loans
|
|
26,004
|
|
11,338
|
|
6,632
|
|
6,071
|
|
6,590
|
Real estate owned
|
|
12,617
|
|
4,445
|
|
717
|
|
105
|
|
|
|
|
Total nonperforming assets
|
|
$38,621
|
|
$15,783
|
|
$7,349
|
|
$6,176
|
|
$6,590
|
|
|
Allowance for loan losses to portfolio loans
|
|
1.81%
|
|
1.64%
|
|
1.69%
|
|
1.52%
|
|
1.59%
|
Allowance for loan losses to nonperforming loans
|
|
50%
|
|
104%
|
|
183%
|
|
176%
|
|
163%
|
Nonperforming loans to portfolio loans
|
|
3.66%
|
|
1.59%
|
|
0.92%
|
|
0.86%
|
|
0.97%
|
Nonperforming assets to total assets
|
|
3.84%
|
|
1.56%
|
|
0.79%
|
|
0.69%
|
|
0.82%
|
|
|
Nonaccrual, Accruing Loans 90 Days or More Past Due, and
Restructured Loans: The Companys financial
statements are prepared on the accrual basis of accounting,
including recognition of interest income on its loan portfolio,
unless a loan is placed on a nonaccrual basis. Loans are placed
on a nonaccrual basis when management believes serious doubt
exists about the collectability of principal or interest. Our
policy generally is to discontinue the accrual of interest on
all loans 90 days or more past due unless they are well
secured and in the process of collection. Cash payments on
nonaccrual loans are directly applied to the principal balance.
The amount of unrecognized interest on nonaccrual loans was
$1.9 million, $865,000, and $437,000, in 2008, 2007, and
2006, respectively.
Restructured loans are those for which concessions, including
the reduction of interest rates below a rate otherwise available
to that borrower, have been granted due to the borrowers
weakened financial condition. Interest on restructured loans
will be accrued at the restructured rates when it is anticipated
that no loss of original principal will occur, and the interest
can be collected.
Total nonperforming loans at December 31, 2008, were
$26 million, or 3.66% of portfolio loans, an increase of
$14.7 million from $11.3 million at December 31,
2007, and an increase of $4.7 million from
$6.6 million at December 31, 2006. The increase in
nonperforming loans at December 31, 2008 as compared to
December 31, 2007 is due in large part to the addition of
$10.9 million in nonaccrual loans. This increase is
primarily tied to lending relationships with seven customers.
Potential Problem Loans: At December 31,
2008, management had identified potential problem loans of
$21.6 million as compared to potential problem loans of
$13.5 million at December 31, 2007. Potential problem
loans are loans which are currently performing and are not
included in nonaccrual, accruing loans 90 days or more past
due, or restructured loans that have developed negative
indications that the borrower may not be able to comply with
present payment terms and which may later be included in
nonaccrual, past due, or restructured loans.
Loans Measured for Impairment and OREO: At
December 31, 2008, the Company had $79.7 million in
loans measured for impairment and OREO. Management is
aggressively attempting to reduce the outstanding loans measured
for impairment and OREO and, although we cannot guarantee that
we will be successful, by December 31, 2009, the Company
intends to reduce its loans measured for impairment and OREO by
20% from December 31, 2008 levels.
Analysis of Allowance for Loan Losses: The Company
maintains an Allowance to reflect inherent losses from its loan
portfolio as of the balance sheet date. The Allowance is
decreased by loan charge-offs and increased by loan recoveries
and provisions for loan losses. On a quarterly basis, the
Company calculates the Allowance based on an established
methodology which has been consistently applied.
In determining its total Allowance, the Company first estimates
a specific allowance for impaired loans. This analysis is based
upon a specific analysis for each impaired loan, including
appraisals on loans secured by real property, managements
assessment of the current market, recent payment history and an
evaluation of other sources of repayment. With regard to our
appraisal process, the Company obtains appraisals on real and
personal property that secure its loans during the loan
origination process in accordance with regulatory guidance and
its loan policy. The Company obtains updated appraisals on loans
secured by
17
real or personal property based upon its assessment of changes
in the current market or particular projects or properties,
information from other current appraisals, and other sources of
information. The Company uses the information provided in these
updated appraisals along with its evaluation of all other
information available on a particular property as it assesses
the collateral coverage on its performing and nonperforming
loans and the impact that may have on the adequacy of its
Allowance.
The Company then estimates an allowance for all loans that are
not impaired. This allowance is based on loss factors applied to
loans that are quality graded according to an internal risk
classification system (classified loans). The
Companys internal risk classifications are based in large
part upon regulatory definitions for classified loans. The loss
factors that the Company applies to each group of loans within
the various risk classifications are based on industry
standards, historical experience and managements judgment.
Portfolio components also receive specific attention in the
Allowance analysis when those components constitute a
significant concentration as a percentage of the Companys
capital, when current market or economic conditions point to
increased scrutiny, or when historical or recent experience
suggests that additional attention is warranted in the analysis
process.
Once the Allowance is determined using the methodology described
above, management assesses the adequacy of the overall Allowance
through an analysis of the size and mix of the loan portfolio,
historical and recent credit performance of the loan portfolio
(including the absolute level and trends in delinquencies and
impaired loans), industry metrics and ratio analysis. The
unallocated portion of the Allowance at December 31, 2008
increased to $5.2 million from $2.6 million at
December 31, 2007. This increase reflects managements
assumption that there is higher inherent risk in the remaining
portfolio in todays lending environment.
Our banking regulators, as an integral part of their examination
process, periodically review the Companys Allowance. Our
regulators may require the Company to recognize additions to the
allowance based on their judgments related to information
available to them at the time of their examinations.
At December 31, 2008, nonperforming loans increased to
$26 million, or 3.66% of portfolio loans as compared to
$11.3 million, or 1.59% of portfolio loans at
December 31, 2007. In addition, the coverage ratio of the
allowance for loan losses verses nonperforming loans decreased
to 50% in 2008 as compared to a coverage ratio of 104% in 2007.
The increase in nonperforming loans and potential problem loans
has been factored into the Companys methodology for
analyzing its allowance on a consistent basis. The Company has
also taken steps to improve its credit quality including the
formation of a Quality Assurance department to provide
independent, detailed financial analysis of its largest, most
complex loans, which it believes will help to improve its credit
quality in the future. Management believes that at
December 31, 2008, the allowance is adequate to cover
losses that are probable in light of our current loan portfolio
and existing economic conditions.
In October 2007, the Company acquired $13.2 million in
loans as a part of its acquisition of Alaska First. The company
has determined that acquisition of these loans did not cause any
material changes in the risk characteristics of the
Companys loan portfolio.
The increase in nonperforming loans between December 31,
2007 and December 31, 2008 in general has been caused by an
increase in nonperforming residential construction and land
development loans which have increased due to several factors.
First, there has been a slowdown in the residential real estate
sales cycle in the Companys major markets that has been
caused in part by more restrictive mortgage lending standards
that has decreased the number of eligible purchasers for
residential properties. In addition, there has been a decrease
in new construction activity. As a result, inventory levels have
remained approximately constant over the last year. Second, the
slowdown in the sales cycle and the decrease in new construction
have led to slower absorption of residential lots. Third, a
number of the Companys residential construction and land
development borrowers have been unable to profitably operate in
this slower real estate market. As a result of the slower
residential real estate market, the Company expects that its
level of lending in this sector will decrease which will lead to
a lower level of earnings from this portion of its loan
portfolio.
While management believes that it uses the best information
available to determine the allowance for loan losses, unforeseen
market conditions and other events could result in adjustment to
the allowance for loan losses, and net income could be
significantly affected, if circumstances differed substantially
from the assumptions used in making the final determination.
18
The following table shows the allocation of the allowance for
loan losses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
% of Total
|
|
|
|
% of Total
|
|
|
|
% of Total
|
|
|
|
% of Total
|
|
|
|
% of Total
|
Balance applicable to:
|
|
Amount
|
|
Loans(1)
|
|
Amount
|
|
Loans(1)
|
|
Amount
|
|
Loans(1)
|
|
Amount
|
|
Loans(1)
|
|
Amount
|
|
Loans(1)
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Commercial
|
|
$5,558
|
|
41%
|
|
$6,496
|
|
40%
|
|
$8,208
|
|
40%
|
|
$6,913
|
|
41%
|
|
$5,130
|
|
39%
|
Construction
|
|
1,736
|
|
14%
|
|
940
|
|
19%
|
|
330
|
|
21%
|
|
246
|
|
19%
|
|
276
|
|
18%
|
Real estate term
|
|
306
|
|
38%
|
|
1,661
|
|
34%
|
|
964
|
|
33%
|
|
1,214
|
|
35%
|
|
1,634
|
|
37%
|
Home equity lines and other consumer
|
|
61
|
|
7%
|
|
16
|
|
7%
|
|
6
|
|
6%
|
|
37
|
|
5%
|
|
|
|
6%
|
Unallocated
|
|
5,239
|
|
0%
|
|
2,622
|
|
0%
|
|
2,617
|
|
0%
|
|
2,296
|
|
0%
|
|
3,724
|
|
0%
|
|
|
Total
|
|
$12,900
|
|
100%
|
|
$11,735
|
|
100%
|
|
$12,125
|
|
100%
|
|
$10,706
|
|
100%
|
|
$10,764
|
|
100%
|
|
|
|
|
|
(1)
|
|
Represents percentage of this
category of loans to total loans.
|
The following table sets forth for the periods indicated
information regarding changes in our allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
|
Balance at beginning of period
|
|
|
$11,735
|
|
|
|
$12,125
|
|
|
|
$10,706
|
|
|
|
$10,764
|
|
|
|
$10,186
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
(4,187)
|
|
|
|
(4,291)
|
|
|
|
(2,545)
|
|
|
|
(1,552)
|
|
|
|
(1,387)
|
|
Construction loans
|
|
|
(1,004)
|
|
|
|
(2,982)
|
|
|
|
|
|
|
|
(100)
|
|
|
|
|
|
Real estate loans
|
|
|
(1,402)
|
|
|
|
(599)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other consumer loans
|
|
|
(132)
|
|
|
|
(45)
|
|
|
|
(72)
|
|
|
|
(63)
|
|
|
|
(84)
|
|
|
|
Total charge-offs
|
|
|
(6,725)
|
|
|
|
(7,917)
|
|
|
|
(2,617)
|
|
|
|
(1,715)
|
|
|
|
(1,471)
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
577
|
|
|
|
1,723
|
|
|
|
1,086
|
|
|
|
418
|
|
|
|
200
|
|
Construction loans
|
|
|
61
|
|
|
|
50
|
|
|
|
|
|
|
|
15
|
|
|
|
185
|
|
Real estate loans
|
|
|
3
|
|
|
|
|
|
|
|
355
|
|
|
|
15
|
|
|
|
|
|
Home equity and other consumer loans
|
|
|
50
|
|
|
|
21
|
|
|
|
31
|
|
|
|
39
|
|
|
|
63
|
|
|
|
Total recoveries
|
|
|
691
|
|
|
|
1,794
|
|
|
|
1,472
|
|
|
|
487
|
|
|
|
448
|
|
|
|
Charge-offs net of recoveries
|
|
|
(6,034)
|
|
|
|
(6,123)
|
|
|
|
(1,145)
|
|
|
|
(1,228)
|
|
|
|
(1,023)
|
|
|
|
Allowance aquired with Alaska First acquisition
|
|
|
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
7,199
|
|
|
|
5,513
|
|
|
|
2,564
|
|
|
|
1,170
|
|
|
|
1,601
|
|
|
|
Balance at end of period
|
|
|
$12,900
|
|
|
|
$11,735
|
|
|
|
$12,125
|
|
|
|
$10,706
|
|
|
|
$10,764
|
|
|
|
Ratio of net charge-offs to average loans outstanding during the
period
|
|
|
0.86%
|
|
|
|
0.86%
|
|
|
|
0.16%
|
|
|
|
0.18%
|
|
|
|
0.16%
|
|
|
|
The increase in real estate charge offs in 2008 and 2007 relate
to two borrowers. Management has consistently applied its
methodology for calculating the allowance for loan losses from
period-to-period, and the unallocated portion of the allowance
has increased in 2008 to address the impact of the current
economic environment on our loan portfolio.
19
Credit Authority and Loan Limits: All of our loans
and credit lines are subject to approval procedures and amount
limitations. These limitations apply to the borrowers
total outstanding indebtedness and commitments to us, including
the indebtedness of any guarantor.
Generally, we are permitted to make loans to one borrower of up
to 15% of the unimpaired capital and surplus of the Bank. The
loan-to-one-borrower limitation for the Bank was
$19.1 million at December 31, 2008. At
December 31, 2008, the Company had four relationships whose
total direct and indirect commitments exceeded
$19.1 million, however no individual direct relationship
exceeded the limit. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Provision for Loan Losses.
Loan Policy: Our lending operations are guided by
loan policies, which outline the basic policies and procedures
by which lending operations are conducted. Generally, the
policies address our desired loan types, target markets,
underwriting and collateral requirements, terms, interest rate
and yield considerations, and compliance with laws and
regulations. The policies are reviewed and approved annually by
the Board of Directors. We supplement our own supervision of the
loan underwriting and approval process with periodic loan
reviews by experienced officers who examine quality, loan
documentation, and compliance with laws and regulations. Our
Quality Assurance department also provides independent, detailed
financial analysis of our largest, most complex loans. In
addition, the department, along with the Chief Lending Officer
and others in the Loan Administration department, has developed
processes to analyze and manage various concentrations of credit
within the overall loan portfolio. The Loan Administration
department has also enhanced the procedures and processes for
the analysis and reporting of problem loans along with the
development of strategies to resolve them.
Loans Receivable: Loans receivable decreased to
$711.3 million at December 31, 2008, compared to
$714.8 million and $717.1 million at December 31,
2007 and 2006, respectively. At December 31, 2008, 67% of
the portfolio was scheduled to mature or reprice in 2009 with
28% scheduled to mature or reprice between 2010 and 2013. Future
growth in loans is generally dependent on new loan demand and
deposit growth, constrained by our policy of being
well-capitalized as determined by the FDIC.
Loan Portfolio Composition: The following table
sets forth at the dates indicated our loan portfolio composition
by type of loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
Amount
|
|
of total
|
|
Amount
|
|
of total
|
|
Amount
|
|
of total
|
|
Amount
|
|
of total
|
|
Amount
|
|
of total
|
|
|
|
(Dollars in Thousands)
|
|
Commercial loans
|
|
|
$293,249
|
|
|
|
41.23%
|
|
|
|
$284,956
|
|
|
|
39.87%
|
|
|
|
$287,281
|
|
|
|
40.06%
|
|
|
|
$287,617
|
|
|
|
40.79%
|
|
|
|
$267,737
|
|
|
|
39.47%
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
100,438
|
|
|
|
14.12%
|
|
|
|
138,070
|
|
|
|
19.32%
|
|
|
|
153,059
|
|
|
|
21.35%
|
|
|
|
131,532
|
|
|
|
18.66%
|
|
|
|
122,873
|
|
|
|
18.12%
|
|
Real estate term
|
|
|
268,864
|
|
|
|
37.80%
|
|
|
|
243,245
|
|
|
|
34.03%
|
|
|
|
237,599
|
|
|
|
33.14%
|
|
|
|
252,395
|
|
|
|
35.80%
|
|
|
|
252,358
|
|
|
|
37.21%
|
|
Home equity lines and other consumer
|
|
|
51,447
|
|
|
|
7.23%
|
|
|
|
51,274
|
|
|
|
7.17%
|
|
|
|
42,140
|
|
|
|
5.88%
|
|
|
|
36,519
|
|
|
|
5.18%
|
|
|
|
38,166
|
|
|
|
5.63%
|
|
|
|
Total
|
|
|
713,998
|
|
|
|
100.38%
|
|
|
|
717,545
|
|
|
|
100.38%
|
|
|
|
720,079
|
|
|
|
100.42%
|
|
|
|
708,063
|
|
|
|
100.43%
|
|
|
|
681,134
|
|
|
|
100.42%
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned purchase discount
|
|
|
|
|
|
|
0.00%
|
|
|
|
|
|
|
|
0.00%
|
|
|
|
|
|
|
|
0.00%
|
|
|
|
|
|
|
|
0.00%
|
|
|
|
(44)
|
|
|
|
-0.01%
|
|
Unearned loan fees net of origination costs
|
|
|
(2,712)
|
|
|
|
-0.38%
|
|
|
|
(2,744)
|
|
|
|
-0.38%
|
|
|
|
(3,023)
|
|
|
|
-0.42%
|
|
|
|
(3,004)
|
|
|
|
-0.43%
|
|
|
|
(2,821)
|
|
|
|
-0.42%
|
|
|
|
Net loans
|
|
|
$711,286
|
|
|
|
100.00%
|
|
|
|
$714,801
|
|
|
|
100.00%
|
|
|
|
$717,056
|
|
|
|
100.00%
|
|
|
|
$705,059
|
|
|
|
100.00%
|
|
|
|
$678,269
|
|
|
|
100.00%
|
|
|
|
20
The following table presents at December 31, 2008, the
aggregate maturity and repricing data of our loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
Within
|
|
|
|
Over
|
|
|
|
|
1 Year
|
|
1-5 Years
|
|
5 Years
|
|
Total
|
|
|
|
|
|
(In Thousands)
|
|
|
|
Commercial
|
|
|
$164,052
|
|
|
|
$79,059
|
|
|
|
$50,099
|
|
|
|
$293,210
|
|
Construction
|
|
|
80,140
|
|
|
|
20,301
|
|
|
|
|
|
|
|
100,441
|
|
Real estate term
|
|
|
46,990
|
|
|
|
87,758
|
|
|
|
134,116
|
|
|
|
268,864
|
|
Home equity lines and other consumer
|
|
|
2,223
|
|
|
|
9,526
|
|
|
|
39,734
|
|
|
|
51,483
|
|
|
|
Total
|
|
|
$293,405
|
|
|
|
$196,644
|
|
|
|
$223,949
|
|
|
|
$713,998
|
|
|
|
Fixed interest rate
|
|
|
$95,662
|
|
|
|
$77,390
|
|
|
|
$52,935
|
|
|
|
$225,987
|
|
Floating interest rate
|
|
|
197,743
|
|
|
|
119,254
|
|
|
|
171,014
|
|
|
|
488,011
|
|
|
|
Total
|
|
|
$293,405
|
|
|
|
$196,644
|
|
|
|
$223,949
|
|
|
|
$713,998
|
|
|
|
Commercial Loans: Our commercial loan portfolio
includes both secured and unsecured loans for working capital
and expansion. Short-term working capital loans generally are
secured by accounts receivable, inventory, or equipment. We also
make longer-term commercial loans secured by equipment and real
estate. We also make commercial loans that are guaranteed in
large part by the Small Business Administration or the Bureau of
Indian Affairs and commercial real estate loans that are
participated with the Alaska Industrial Development and Export
Authority (AIDEA). Commercial loans represented 41%
of our total loans outstanding as of December 31, 2008 and
reprice more frequently than other types of loans, such as real
estate loans. More frequent repricing means that commercial
loans are more sensitive to changes in interest rates. In a
rising interest rate environment, our philosophy is to emphasize
the pricing of loans on a floating rate basis, which allows
these loans to reprice more frequently and to contribute
positively to our net interest margin. The majority of these
loans reprice to an index based upon the prime rate of interest.
In 2008, the Company began to implement floors in its loans as
they were originated or renewed during the year.
Construction Loans:
Land Development: We believe we are a major land
development and residential construction lender. At
December 31, 2008 and 2007, we had $39 million and
$46.9 million, respectively, of residential subdivision
land development loans outstanding, or 5% and 7% of total loans.
One-to-Four-Family Residences: We financed approximately
one-fifth of the single-family houses constructed in Anchorage
in 2008. We originated one-to-four-family residential
construction loans to builders for construction of homes. At
December 31, 2008 and 2007, we had $39.8 million and
$71.5 million, respectively, of one-to-four-family
residential and condominium construction loans, or 6% and 10%of
total loans. Of the homes under construction at
December 31, 2008 and 2007, for which these loans had been
made, 33% and 33% were subject to sale contracts between the
builder and homebuyers who were pre-qualified for loans, usually
with other financial institutions.
The Companys construction loans decreased from
$138.1 million to $100.4 million in 2008 due to the
continued decrease in new construction activity. The Company
expects continued slowness in residential construction in 2009,
which, along with managements efforts to decrease loans
measured for impairment and OREO, much of which is secured by
residential construction and land development loans, should lead
to further decreases in its construction loan balances.
Commercial Construction: We also provide construction
lending for commercial real estate projects. Such loans
generally are made only when there is a firm take-out commitment
upon completion of the project by a third party lender.
Commercial Real Estate: We believe we are an
active lender in the commercial real estate market. At
December 31, 2008, our commercial real estate loans were
$268.9 million, or 38% of our loan portfolio, an increase
over $243.2 million, or 34% of our loan portfolio at
December 31, 2007. These loans are typically secured by
office buildings, apartment complexes or warehouses. Loan
maturities range from 10 to 25 years, ordinarily subject to
our right to call the loan within 10 to 15 years of its
origination. The interest rate for approximately 54% of these
loans originated by Northrim resets every one to five years
based on the spread over an index rate, and 23% reset on either
a daily or monthly basis. The indices for these loans have
historically been prime or the respective
21
Treasury rate. In 2008, the Company began to use the interest
rates of the Federal Home Loan Bank of Seattle as an additional
index. In addition, the Company began to implement floors in its
interest rates for loans originated or renewed during the year.
We may sell all or a portion of our commercial real estate loans
to two State of Alaska entities that were established to provide
long-term financing in the State, AIDEA, and the Alaska Housing
Finance Corporation (AHFC). We may sell up to a 90%
loan participation to AIDEA. AIDEAs portion of the
participated loan typically features a maturity twice that of
the portion retained by us and bears a lower interest rate. The
blend of our and AIDEAs loan terms allows us to provide
competitive long-term financing to our customers, while reducing
the risk inherent in this type of lending. We also originate and
sell to AHFC loans secured by multifamily residential units.
Typically, 100% of these loans are sold to AHFC and we provide
ongoing servicing of the loans for a fee. AIDEA and AHFC make it
possible for us to originate these commercial real estate loans
and enhance fee income while reducing our exposure to risk.
Home Equity Lines and Other Consumer Loans: We
provide personal loans for automobiles, recreational vehicles,
boats, and other larger consumer purchases. We provide both
secured and unsecured consumer credit lines to accommodate the
needs of our individual customers, with home equity lines of
credit serving as the major product in this area.
Off-Balance Sheet Arrangements Commitments and
Contingent Liabilities: In the ordinary course of
business, we enter into various types of transactions that
include commitments to extend credit that are not reflected on
our balance sheet. We apply the same credit standards to these
commitments as in all of our lending activities and include
these commitments in our lending risk evaluations. Our exposure
to credit loss under commitments to extend credit is represented
by the amount of these commitments. See Note 20 to
Notes to Consolidated Financial Statements in our
Annual Report for the year ended December 31, 2008. See
also Liquidity and Capital Resources.
Investments
and Investment Activities
General: Our investment portfolio consists
primarily of government sponsored entity securities, corporate
bonds, and municipal securities. Investment securities totaled
$152.4 million at December 31, 2008, an increase of
$9.3 million, or 6%, from year-end 2007. The average
maturity of the investment portfolio was approximately two years
at December 31, 2008.
Investment securities designated as available for sale comprised
93% of the portfolio and are available to meet liquidity
requirements. Both available for sale and held to maturity
securities may be pledged as collateral to secure public
deposits. At December 31, 2008 and 2007, $67.4 and
$32.4 million in securities were pledged for deposits and
borrowings, respectively.
Investment Portfolio Composition: Our investment
portfolio is divided into two classes:
Securities Available For Sale: These are securities we
may hold for indefinite periods of time. These securities
include those that management intends to use as part of our
asset/liability management strategy and that may be sold in
response to changes in interest rates
and/or
significant prepayment risks. We carry these securities at fair
value with any unrealized gains or losses reflected as an
adjustment to shareholders equity.
Securities Held To Maturity: These are securities that we
have the ability and the intent to hold to maturity. Events that
may be reasonably anticipated are considered when determining
our intent to hold investment securities to maturity. These
securities are carried at amortized cost.
22
The following tables set forth the composition of our investment
portfolio at the dates indicated:
|
|
|
|
|
|
|
|
Amortized
|
|
Fair
|
December 31,
|
|
Cost
|
|
Value
|
|
|
|
(In Thousands)
|
|
Securities Available for Sale:
|
|
|
|
|
2008:
|
|
|
|
|
Government Sponsored Entities
|
|
$115,936
|
|
$117,465
|
Mortgage-backed Securities
|
|
345
|
|
361
|
Corporate Bonds
|
|
23,203
|
|
23,184
|
|
|
Total
|
|
$139,484
|
|
$141,010
|
|
|
2007:
|
|
|
|
|
U.S. Treasury
|
|
$4,977
|
|
$4,982
|
Government Sponsored Entities
|
|
134,370
|
|
134,738
|
Mortgage-backed Securities
|
|
466
|
|
465
|
Corporate Bonds
|
|
7,813
|
|
7,824
|
|
|
Total
|
|
$147,626
|
|
$148,009
|
|
|
2006:
|
|
|
|
|
U.S. Treasury
|
|
$16,860
|
|
$16,840
|
Government Sponsored Entities
|
|
70,438
|
|
69,971
|
Mortgage-backed Securities
|
|
183
|
|
182
|
|
|
Total
|
|
$87,481
|
|
$86,993
|
|
|
Securities Held to Maturity:
|
|
|
|
|
2008:
|
|
|
|
|
Municipal securities
|
|
$9,431
|
|
$9,502
|
|
|
Total
|
|
$9,431
|
|
$9,502
|
|
|
2007:
|
|
|
|
|
Municipal securities
|
|
$11,701
|
|
$11,748
|
|
|
Total
|
|
$11,701
|
|
$11,748
|
|
|
2006:
|
|
|
|
|
Municipal securities
|
|
$11,776
|
|
$11,775
|
|
|
Total
|
|
$11,776
|
|
$11,775
|
|
|
For the periods ending December 31, 2008, 2007, and 2006,
we held Federal Home Loan Bank (FHLB) stock with a
book value approximately equal to its market value in the
amounts of $2.0 million, $2.0 million, and
$1.6 million, respectively.
23
Fair Value, Maturities and Weighted Average
Yields: The following table sets forth the market value,
maturities and weighted average yields of our investment
portfolio for the periods indicated as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
Within
|
|
|
|
|
|
Over
|
|
|
|
|
1 Year
|
|
1-5 Years
|
|
5-10 Years
|
|
10 Years
|
|
Total
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Sponsored Entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$5,001
|
|
|
$105,236
|
|
|
|
$5,109
|
|
|
|
$2,119
|
|
|
|
$117,465
|
|
Weighted Average Yield
|
|
4.15%
|
|
|
3.37%
|
|
|
|
4.95%
|
|
|
|
4.74%
|
|
|
|
3.50%
|
|
Mortgage-Backed Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
255
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
361
|
|
Weighted Average Yield
|
|
5.65%
|
|
|
0.00%
|
|
|
|
4.32%
|
|
|
|
0.00%
|
|
|
|
5.22%
|
|
Corporate Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
3,932
|
|
|
19,252
|
|
|
|
|
|
|
|
|
|
|
|
23,184
|
|
Weighted Average Yield
|
|
1.55%
|
|
|
5.13%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
4.51%
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$9,188
|
|
|
$124,488
|
|
|
|
$5,215
|
|
|
|
$2,119
|
|
|
|
$141,010
|
|
Weighted Average Yield
|
|
3.06%
|
|
|
3.65%
|
|
|
|
4.94%
|
|
|
|
4.74%
|
|
|
|
3.67%
|
|
Securities Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$3,389
|
|
|
$5,484
|
|
|
|
$629
|
|
|
|
$
|
|
|
|
$9,502
|
|
Weighted Average Yield
|
|
3.86%
|
|
|
3.90%
|
|
|
|
4.02%
|
|
|
|
0.00%
|
|
|
|
3.89%
|
|
|
|
At December 31, 2008, we held no securities of any single
issuer (other than government sponsored entities) that exceeded
10% of our shareholders equity.
Purchased
Receivables
General: We purchase accounts receivable from
our business customers and provide them with short-term working
capital. We provide this service to our customers in Alaska and
in Washington and Oregon through NFS.
Our purchased receivable balances decreased slightly in 2008 to
$19.1 million, as compared to $19.4 million in 2007
due in part to the fact that the Company stopped offering one of
its purchased receivable products in Alaska in 2008. The Company
expects that purchased receivable balances will increase in the
future as NFS continues to expand its customer base.
Policy and Authority Limits: Our purchased
receivable activity is guided by policies that outline risk
management, documentation, and approval limits. The policies are
reviewed and approved annually by the Board of Directors.
Liabilities
Deposits
General: Deposits are our primary source of funds.
Total deposits decreased 3% to $843.3 million at
December 31, 2008, compared with $867.4 million at
December 31, 2007, and $794.9 million at
December 31, 2006. Our deposits generally are expected to
fluctuate according to the level of our market share, economic
conditions, and normal seasonal trends.
24
Average Balances and Rates: The following
table sets forth the average balances outstanding and average
interest rates for each major category of our deposits, for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
|
balance
|
|
rate paid
|
|
balance
|
|
rate paid
|
|
balance
|
|
rate paid
|
|
balance
|
|
rate paid
|
|
balance
|
|
rate paid
|
|
|
|
(Dollars in Thousands)
|
|
Interest-bearing demand accounts
|
|
|
$97,171
|
|
|
|
0.59%
|
|
|
|
$85,192
|
|
|
|
1.39%
|
|
|
|
$78,872
|
|
|
|
1.05%
|
|
|
|
$65,890
|
|
|
|
0.56%
|
|
|
|
$57,373
|
|
|
|
0.39%
|
|
Money market accounts
|
|
|
187,779
|
|
|
|
1.76%
|
|
|
|
186,722
|
|
|
|
3.95%
|
|
|
|
151,871
|
|
|
|
3.99%
|
|
|
|
139,331
|
|
|
|
2.78%
|
|
|
|
126,567
|
|
|
|
1.21%
|
|
Savings accounts
|
|
|
187,225
|
|
|
|
1.84%
|
|
|
|
234,780
|
|
|
|
3.73%
|
|
|
|
254,209
|
|
|
|
3.98%
|
|
|
|
207,277
|
|
|
|
3.02%
|
|
|
|
139,876
|
|
|
|
1.64%
|
|
Certificates of deposit
|
|
|
145,153
|
|
|
|
3.34%
|
|
|
|
95,961
|
|
|
|
4.25%
|
|
|
|
94,595
|
|
|
|
3.51%
|
|
|
|
138,284
|
|
|
|
2.52%
|
|
|
|
155,134
|
|
|
|
1.72%
|
|
|
|
Total interest-bearing accounts
|
|
|
617,328
|
|
|
|
1.97%
|
|
|
|
602,655
|
|
|
|
3.55%
|
|
|
|
579,547
|
|
|
|
3.51%
|
|
|
|
550,782
|
|
|
|
2.54%
|
|
|
|
478,950
|
|
|
|
1.40%
|
|
Noninterest-bearing demand accounts
|
|
|
212,447
|
|
|
|
|
|
|
|
196,313
|
|
|
|
|
|
|
|
185,958
|
|
|
|
|
|
|
|
182,535
|
|
|
|
|
|
|
|
181,731
|
|
|
|
|
|
|
|
Total average deposits
|
|
|
$829,775
|
|
|
|
|
|
|
|
$798,968
|
|
|
|
|
|
|
|
$765,505
|
|
|
|
|
|
|
|
$733,317
|
|
|
|
|
|
|
|
$660,681
|
|
|
|
|
|
|
|
Certificates of Deposit: The only deposit category
with stated maturity dates is certificates of deposit. At
December 31, 2008, we had $173.4 million in
certificates of deposit, of which $144.7 million, or 83%,
are scheduled to mature in 2009. At December 31, 2008, the
Companys certificates of deposit increased to
$173.4 million as compared to $103.5 million at
December 31, 2007 due in part to an increase in
certificates of deposit sold to the Alaska Permanent Fund as
described more fully below. The Company is also a member of the
Certificate of Deposit Account Registry System
(CDARS) which is a network of approximately 3,000
banks throughout the United States. The CDARS system was founded
in 2003 and allows participating banks to exchange FDIC
insurance coverage so that 100% of the balance of their
customers certificates of deposit are fully subject to
FDIC insurance. At December 31, 2008, the Company had
$12.2 million in CDARS certificates of deposits as compared
to $1 million at December 31, 2007.
Alaska Certificates of Deposit: The Alaska
Certificate of Deposit (Alaska CD) is a savings
deposit product with an open-ended maturity, interest rate that
adjusts to an index that is tied to the two-year United States
Treasury Note, and limited withdrawals. The total balance in the
Alaska CD at December 31, 2008, was $108.1 million, a
decrease of $63.2 million as compared to the balance of
$171.3 million at December 31, 2007 as customers moved
from the Alaska CD account to other interest bearing accounts
such as certificates of deposit.
Alaska Permanent Fund: The Alaska Permanent Fund
may invest in certificates of deposit at Alaska banks in an
aggregate amount with respect to each bank, not to exceed its
capital and at specified rates and terms. The depository bank
must collateralize the deposit. At December 31, 2008, we
held $45 million in certificates of deposit for the Alaska
Permanent Fund. We did not hold any certificates of deposit for
the Alaska Permanent Fund at December 31, 2007 or
December 31, 2006.
Borrowings
FHLB: At December 31, 2008, our maximum
borrowing line from the FHLB was equal to $121 million,
approximately 12% of the Companys assets. FHLB advances
are subject to collateral criteria that require the Company to
pledge assets under a blanket pledge arrangement as collateral
for its borrowings from the FHLB. At December 31, 2008 and
2007 there was $11.0 million and $1.8 million
outstanding on the line respectively. The increase in the
outstanding balance at December 31, 2008 as compared to the
same period in 2007 results in part from an additional draw on
the line to fund the Companys acquisition of its main
office facility on July 1, 2008.
The Company purchased its main office facility for
$12.9 million on July 1, 2008. In this transaction,
the Company, through NBL, assumed an existing loan secured by
the building in an amount of approximately $5.0 million. At
December 31, 2008, the outstanding balance on this loan was
$5.0 million. This loan has a maturity date of
April 1, 2014.
Federal Reserve Bank: The Company entered into a
note agreement with the Federal Reserve Bank on the payment of
tax deposits. The Federal Reserve has the option to call the
note at any time. The balance at December 31, 2008, and
2007, was $490,000 and $1 million, respectively, which was
secured by investment securities.
The Federal Reserve Bank is holding $65.7 million of loans
as collateral to secure advances made through the discount
window on December 31, 2008. There were no discount window
advances outstanding at December 31, 2008 and 2007.
Other Short-term Borrowing: At December 31,
2008, the Company had $12 million in overnight advances
outstanding from correspondent banks. These advances were repaid
on January 2, 2009. There were no short-term (original
maturity of one year or less) borrowings that exceeded 30% of
shareholders equity at December 31, 2008.
25
Contractual
Obligations
The following table references contractual obligations of the
Company for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Within
|
|
|
|
|
|
Over
|
|
|
December 31, 2008
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
Total
|
|
|
|
(In Thousands)
|
|
Certificates of deposit
|
|
$144,726
|
|
|
$27,815
|
|
|
|
$804
|
|
|
|
$22
|
|
|
|
$173,367
|
|
Short-term debt obligations
|
|
14,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,120
|
|
Long-term debt obligations
|
|
1,517
|
|
|
3,056
|
|
|
|
2,502
|
|
|
|
8,911
|
|
|
|
15,986
|
|
Junior subordinated debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
18,558
|
|
|
|
18,558
|
|
Operating lease obligations
|
|
844
|
|
|
1,563
|
|
|
|
845
|
|
|
|
5,089
|
|
|
|
8,341
|
|
Other long-term liabilities
|
|
1,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,811
|
|
|
|
Total
|
|
$163,018
|
|
|
$32,434
|
|
|
|
$4,151
|
|
|
|
$32,580
|
|
|
|
$232,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Within
|
|
|
|
|
|
Over
|
|
|
December 31, 2007
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
Total
|
|
|
|
(In Thousands)
|
|
Certificates of deposit
|
|
$71,065
|
|
|
$31,859
|
|
|
|
$545
|
|
|
|
$21
|
|
|
|
$103,490
|
|
Short-term debt obligations
|
|
14,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,996
|
|
Long-term debt obligations
|
|
400
|
|
|
800
|
|
|
|
574
|
|
|
|
|
|
|
|
1,774
|
|
Junior subordinated debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
18,558
|
|
|
|
18,558
|
|
Operating lease obligations
|
|
1,867
|
|
|
3,652
|
|
|
|
3,377
|
|
|
|
3,209
|
|
|
|
12,105
|
|
Other long-term liabilities
|
|
950
|
|
|
2,368
|
|
|
|
|
|
|
|
|
|
|
|
3,318
|
|
|
|
Total
|
|
$89,278
|
|
|
$38,679
|
|
|
|
$4,496
|
|
|
|
$21,788
|
|
|
|
$154,241
|
|
|
|
Long-term debt obligations consist of (a) $1.4 million
advance from the FHLB that was originated on May 7, 2002,
matures on May 7, 2012, and bears interest at 5.46%,
(b) $9.6 million advance from the FHLB that was
originated on July 3, 2008 and matures on July 3, 2018
and bears interest at 4.99%, (c) $5.0 million
amortizing note that was assumed by the NBL on July 1,
2008, when the Companys main office facility was purchased
that matures on April 1, 2014 and bears interest at 5.95%,
(d) $8.2 million junior subordinated debentures that
were originated on May 8, 2003, mature on May 15,
2033, and bears interest at a rate of
90-day LIBOR
plus 3.15%, adjusted quarterly, and (e) $10.3 million
junior subordinated debentures that were originated on
December 16, 2005, mature on March 15, 2036, and bears
interest at a rate of
90-day LIBOR
plus 1.37%, adjusted quarterly. The operating lease obligations
are more fully described at Note 20 of the Companys
annual report. Other long-term liabilities consist of amounts
that the Company owes for its investments in Delaware limited
partnerships that develop low-income housing projects throughout
the United States. The Company purchased a $3 million
interest in CharterMac Corporate Partners XXXIII, L.P.,
(CharterMac), in September 2006. The Company also
purchased a $3 million interest in U.S.A. Institutional Tax
Credit Fund LVII L.P. (USA 57) in December
2006. CharterMac changed its name to Centerline in April 2007
and the investment was subsequently renamed Centerline XXXIII,
L.P., (Centerline). The investments in Centerline
and USA 57 will be fully funded in 2009.
Liquidity
and Capital Resources
Our primary sources of funds are customer deposits and advances
from the Federal Home Loan Bank of Seattle. These funds,
together with loan repayments, loan sales, other borrowed funds,
retained earnings, and equity are used to make loans, to acquire
securities and other assets, and to fund deposit flows and
continuing operations. The primary sources of demands on our
liquidity are customer demands for withdrawal of deposits and
borrowers demands that we advance funds against unfunded
lending commitments. Our total unfunded lending commitments at
December 31, 2008, were $147 million, and we do not
expect that all of these loans are likely to be fully drawn upon
at any one time. Additionally, as noted above, our total
deposits at December 31, 2008, were $843.3 million.
26
On February 5, 2009, the Board of Directors approved
payment of a $0.10 per share dividend on February 27, 2009,
to shareholders of record on February 19, 2009. This is a
decrease of $0.07 per share from the Companys last
dividend of $0.17 per share that was declared in October 2008.
The Company reduced the dividend to reflect a payout level more
consistent with 2008 earnings. Additionally, management believes
that the decrease is the prudent course of action considering
the uncertain economic and regulatory environment.
The sources by which we meet the liquidity needs of our
customers are current assets and borrowings available through
our correspondent banking relationships and our credit lines
with the Federal Reserve Bank and the FHLB. At December 31,
2008, our current assets were $379.4 million and our funds
available for borrowing under our existing lines of credit were
$168.8 million. Given these sources of liquidity and our
expectations for customer demands for cash and for our operating
cash needs, we believe our sources of liquidity to be sufficient
in the foreseeable future. However, continued deterioration in
the FHLB of Seattles financial position may result in
impairment in the value of our FHLB stock, the requirement that
the Company contribute additional funds to recapitalize the FHLB
of Seattle, or a reduction in the Companys ability to
borrow funds from the FHLB of Seattle, impairing the
Companys ability to meet liquidity demands.
In September 2002, our Board of Directors approved a plan
whereby we would periodically repurchase for cash up to
approximately 5%, or 306,372, of our shares of common stock in
the open market. In August of 2004, the Board of Directors
amended the stock repurchase plan and increased the number of
shares available under the program by 5% of total shares
outstanding, or 304,283 shares. In June of 2007, the Board
of Directors amended the stock repurchase plan and increased the
number of shares available under the program by 5% of total
shares outstanding, or 305,029 shares. We have purchased
688,442 shares of our stock under this program through
December 31, 2008 at a total cost of $14.2 million at
an average price of $20.65, which leaves a balance of
227,242 shares available under the stock repurchase
program. No shares were repurchased on 2008. We intend to
continue to repurchase our stock from time to time depending
upon market conditions, but we can make no assurances that we
will continue this program or that we will repurchase all of the
authorized shares.
The stock repurchase program had an effect on earnings per share
because it decreased the total number of shares outstanding in
2007, 2006, and 2005, by 137,500, 17,500, and
308,642 shares respectively. The Company did not repurchase
any of its shares in 2008 or 2004. The table below shows this
effect on diluted earnings per share.
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|
|
|
|
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|
|
Diluted
|
|
|
Diluted EPS
|
|
EPS without
|
Years Ending:
|
|
as Reported
|
|
Stock Repurchase
|
|
2008
|
|
$0.95
|
|
$0.83
|
2007
|
|
$1.80
|
|
$1.64
|
2006
|
|
$1.99
|
|
$1.83
|
2005
|
|
$1.64
|
|
$1.56
|
2004
|
|
$1.55
|
|
$1.50
|
|
|
On May 8, 2003, the Companys newly formed subsidiary,
Northrim Capital Trust 1, issued trust preferred securities
in the principal amount of $8 million. These securities
carry an interest rate of
90-day LIBOR
plus 3.15% per annum that was initially set at 4.45% adjusted
quarterly. The securities have a maturity date of May 15,
2033, and are callable by the Company on or after May 15,
2008. These securities are treated as Tier 1 capital by the
Companys regulators for capital adequacy calculations. The
interest cost to the Company of the trust preferred securities
was $503,000 in 2008. At December 31, 2008, the securities
had an interest rate of 5.50%.
On December 16, 2005, the Companys newly formed
subsidiary, Northrim Statutory Trust 2, issued trust
preferred securities in the principal amount of
$10 million. These securities carry an interest rate of
90-day LIBOR
plus 1.37% per annum that was initially set at 5.86% adjusted
quarterly. The securities have a maturity date of March 15,
2036, and are callable by the Company on or after March 15,
2011. These securities are treated as Tier 1 capital by the
Companys regulators for capital adequacy calculations. The
interest cost to the Company of these securities was $465,000 in
2008. At December 31, 2008, the securities had an interest
rate of 3.37%.
Our shareholders equity at December 31, 2008, was
$104.6 million, as compared to $101.4 million at
December 31, 2007. The Company earned net income of
$6.1 million during 2008 and issued 31,000 shares
through the exercise of stock options. The Company did not
repurchase any shares of its common stock in 2008. At
December 31, 2008, the Company had 6.3 million shares
of its common stock outstanding.
We are subject to minimum capital requirements. Federal banking
agencies have adopted regulations establishing minimum
requirements for the capital adequacy of banks and bank holding
companies. The requirements address both risk-based capital and
27
leverage capital. We believe as of December 31, 2008, that
the Company and Northrim Bank met all applicable capital
adequacy requirements.
The FDIC has in place qualifications for banks to be classified
as well-capitalized. As of December 15, 2008,
the most recent notification from the FDIC categorized Northrim
Bank as well-capitalized. There were no conditions
or events since the FDIC notification that we believe have
changed Northrim Banks classification.
The table below illustrates the capital requirements for the
Company and the Bank and the actual capital ratios for each
entity that exceed these requirements. Based on recent turmoil
in the financial markets and the increase in the Companys
loans measured for impairment and OREO, management intends to
maintain a Tier 1 risk-based capital ration for the Bank in
excess of 10% in 2009, exceeding the FDICs
well-capitalized capital requirement classification.
The capital ratio for the Company exceed those for the Bank
primarily because the $8 million trust preferred securities
offering that the Company completed in the second quarter of
2003 and another offering of $10 million completed in the
fourth quarter of 2006 are included in the Companys
capital for regulatory purposes although they are accounted for
as a long-term debt in our financial statements. The trust
preferred securities are not accounted for on the Banks
financial statements nor are they included in its capital. As a
result, the Company has $18 million more in regulatory
capital than the Bank, which explains most of the difference in
the capital ratios for the two entities.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately -
|
|
|
Well -
|
|
|
Actual
|
|
|
Actual
|
|
December 31, 2008
|
|
Capitalized
|
|
|
Capitalized
|
|
|
Ratio BHC
|
|
|
Ratio Bank
|
|
|
|
Tier 1 risk-based capital
|
|
|
4.00%
|
|
|
|
6.00%
|
|
|
|
12.65%
|
|
|
|
11.79%
|
|
Total risk-based capital
|
|
|
8.00%
|
|
|
|
10.00%
|
|
|
|
13.90%
|
|
|
|
13.04%
|
|
Leverage ratio
|
|
|
4.00%
|
|
|
|
5.00%
|
|
|
|
11.54%
|
|
|
|
10.77%
|
|
|
|
(See Note 21 of the Consolidated Financial Statements for a
detailed discussion of the capital ratios.)
Effects
of Inflation and Changing Prices
The primary impact of inflation on our operations is increased
operating costs. Unlike most industrial companies, virtually all
the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institutions
performance than the effects of general levels of inflation.
Although interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and
services, increases in inflation generally have resulted in
increased interest rates, which could affect the degree and
timing of the repricing of our assets and liabilities. In
addition, inflation has an impact on our customers ability
to repay their loans.
Market
for Common Stock
Our common stock trades on the Nasdaq Stock Market under the
symbol, NRIM. We are aware that large blocks of our
stock are held in street name by brokerage firms. At
December 31, 2008, the number of shareholders of record of
our common stock was 171.
We began paying regular cash dividends of $0.05 per share in the
second quarter of 1996. In the second quarters of 2008, 2007,
and 2006, we began paying cash dividends of $0.17, $0.15, and
$0.125 per share, respectively. Cash dividends totaled
$4.2 million, $3.6 million, and $2.8 million in
2008, 2007, and 2006, respectively. On February 5, 2009,
the Board of Directors approved payment of a $0.10 per share
dividend on February 27, 2009, to shareholders of record on
February 19, 2009. The Company and the Bank are subject to
restrictions on the payment of dividends pursuant to applicable
federal and state banking regulations.
The following are high and low sales prices as reported by
Nasdaq. Prices do not include retail markups, markdowns or
commissions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
23.01
|
|
|
$
|
20.13
|
|
|
$
|
17.28
|
|
|
$
|
16.14
|
|
Low
|
|
$
|
17.75
|
|
|
$
|
18.11
|
|
|
$
|
14.15
|
|
|
$
|
10.05
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
28.71
|
|
|
$
|
28.73
|
|
|
$
|
28.29
|
|
|
$
|
24.20
|
|
Low
|
|
$
|
25.26
|
|
|
$
|
24.46
|
|
|
$
|
23.37
|
|
|
$
|
18.42
|
|
|
|
28
Market Price of and Dividends on the Registrants Common
Equity and Related Stockholder Matters
Stock
Performance Graph
The graph shown below depicts the total return to shareholders
during the period beginning after December 31, 2002, and
ending December 31, 2008. The definition of total return
includes appreciation in market value of the stock, as well as
the actual cash and stock dividends paid to shareholders. The
comparable indices utilized are the Russell 3000 Index,
representing approximately 98% of the U.S. equity market,
and the SNL Financial Bank Stock Index, comprised of publicly
traded banks with assets of $500 million to
$1 billion, which are located in the United States. The
graph assumes that the value of the investment in the
Companys common stock and each of the three indices was
$100 on December 31, 2003, and that all dividends were
reinvested.
Total
Return Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
Index
|
|
12/31/03
|
|
12/31/04
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
|
12/31/08
|
|
|
Northrim BanCorp, Inc.
|
|
100.00
|
|
104.31
|
|
105.51
|
|
128.12
|
|
110.19
|
|
55.32
|
Russell 3000
|
|
100.00
|
|
111.95
|
|
118.80
|
|
137.47
|
|
144.54
|
|
90.61
|
SNL Bank $1B-$5B
|
|
100.00
|
|
123.42
|
|
121.31
|
|
140.38
|
|
102.26
|
|
84.81
|
|
|
29
Repurchase of Securities
The Company did not repurchase any of its common stock during
the fourth quarter of 2008.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
Number of Securities to be
|
|
Weighted-Average Exercise
|
|
Remaining Available for
|
|
|
|
|
Issued Upon Exercise of
|
|
Price of Outstanding
|
|
Future Issuance Under
|
|
|
|
|
Outstanding Options,
|
|
Options, Warrants and
|
|
Equity Compensation Plans
|
|
|
|
|
Warrants and Rights
|
|
Rights
|
|
(Excluding Securities
|
|
|
Plan Category
|
|
(a)
|
|
(b)
|
|
Reflected in Column (a))
|
|
|
|
|
Equity compensation plans
|
|
493,894
|
|
|
$13.16
|
|
|
|
63,298
|
|
|
|
|
|
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
493,894
|
|
|
$13.16
|
|
|
|
63,298
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
On January 1, 2008, the Company adopted the following new
accounting pronouncements:
|
|
|
|
|
FASB Statement No. 157 (SFAS 157), Fair
Value Measurements
|
|
|
|
FASB Statement No. 159 (SFAS 159), The
Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115
|
The adoption of SFAS 157 and SFAS 159 did not have any
affect on the Companys financial statements at the date of
adoption. For additional information, see Note 22.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141R, Business Combinations
(SFAS 141R). This statement establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain
purchase; determines what information to disclose to enable
users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141R is
effective for the Companys financial statements for the
year beginning on January 1, 2009 and must be adopted
prospectively. The Company does not expect that adoption of
SFAS 141R will impact its financial condition and results
of operations.
In December 2007, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 160,
Noncontrolling Interests in Consolidated Financial Statements
(as amended) (SFAS 160). The FASB issued
FAS 160 during 2007 to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and
for the deconsolidation of a subsidiary. SFAS 160 clarifies
that a non-controlling interest in a subsidiary, which is
sometimes referred to as minority interest, is an ownership
interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements.
Among other requirements, SFAS 160 requires consolidated
net income to be reported at amounts that included the amounts
attributable to both the parent and the non-controlling
interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated
net income attributable to the parent and to the non-controlling
interest. SFAS 160 is effective for the Companys
financial statements for the year beginning on January 1,
2009 and must be adopted prospectively. The Company does not
expect that adoption of SFAS 160 to have a significant
impact its financial condition and results of operations.
In March 2008, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 161, Disclosures about
Derivative Instruments and Hedging Activities an
amendment of FASB No. 133 (SFAS 161).
SFAS 161 requires expanded qualitative, quantitative and
credit-risk disclosures about derivatives and hedging activities
and their effects on the Companys financial position,
financial performance and cash flows. SFAS 161 also
clarifies that derivatives are subject to credit risk
disclosures as required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments.
SFAS 161 is effective for the Companys financial
statements for the year beginning on January 1, 2009 and
must be adopted prospectively. The Company does not expect that
adoption of SFAS 161 will impact its financial condition
and results of operations.
In April 2008, the FASB issued FASB Staff Position
(FSP)
No. 142-3,
Determination of the Useful Life of Intangible Assets
(FSP 142-3).
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS 142,
Goodwill and Other Intangible Assets
(SFAS 142).
30
The intent of
FSP 142-3
is to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the
asset under SFAS No. 141 (revised 2007), Business
Combinations, and other GAAP.
FSP 142-3
is effective for the Companys financial statements for the
year beginning on January 1, 2009 and will be adopted
prospectively. The Company does not expect that adoption of
FSP 142-3
will impact its financial condition and results of operations.
In June 2008, the FASB issued Financial Accounting Staff
Position Emerging Issues Task Force
No. 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(FSP 03-6-1).
FSP 03-6-1
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and,
therefore, need to be included in the earnings allocation in
computing earnings per share (EPS) under the two-class method
described in paragraphs 60 and 61 of
SFAS No. 128, Earnings Per Share.
FSP 03-6-1
is effective for the Companys financial statements for the
year beginning on January 1, 2009 and must be adopted
retrospectively for all earnings per share calculations. The
Company does not expect that adoption of
FSP 03-6-1
will have a material impact its financial condition and results
of operations.
In October 2008, the FASB issued Financial Accounting Staff
Position
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
(FSP 157-3).
FSP 157-3
clarifies the application of SFAS 157 in a market that is
not active and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
FSP 157-3
was effective upon issuance and must be adopted prospectively.
The adoption of
FSP 157-3
did not impact the Companys financial condition and
results of operations.
On December 31, 2008, the Company adopted Financial
Accounting Staff Position
FAS 140-4
and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities
(FSP 140-4
and FIN 46(R)-8).
FSP 140-4
and FIN 46(R)-8 amends SFAS No. 140 and
FIN No. 46(R) to require public companies to disclose
additional information regarding transfers of financial assets
and interests in variable interest entities.
FSP 140-4
and FIN 46(R)-8 is effective for all reporting periods that
end after December 15, 2008. The adoption of
FSP 140-4
and FIN 46(R)-8 did not have any affect on the
Companys financial statements at the date of adoption.
Quantitative
and Qualitative Disclosure About Market Risk
Our results of operations depend substantially on our net
interest income. Like most financial institutions, our interest
income and cost of funds are affected by general economic
conditions, levels of market interest rates, and by competition,
and in addition, our community banking focus makes our results
of operations particularly dependent on the Alaska economy.
The purpose of asset/liability management is to provide stable
net interest income growth by protecting our earnings from undue
interest rate risk, which arises from changes in interest rates
and changes in the balance sheet mix, and by managing the
risk/return relationships between liquidity, interest rate risk,
market risk, and capital adequacy. We maintain an
asset/liability management policy that provides guidelines for
controlling exposure to interest rate risk by setting a target
range and minimum for the net interest margin and running
simulation models under different interest rate scenarios to
measure the risk to earnings over the next
12-month
period.
In order to control interest rate risk in a rising interest rate
environment, our philosophy is to shorten the average maturity
of the investment portfolio and emphasize the pricing of new
loans on a floating rate basis in order to achieve a more asset
sensitive position, therefore, allowing quicker repricings and
maximizing net interest margin. Conversely, in a declining
interest rate environment, our philosophy is to lengthen the
average maturity of the investment portfolio and emphasize fixed
rate loans, thereby becoming more liability sensitive. In each
case, the goal is to exceed our targeted net interest margin
range without exceeding earnings risk parameters.
Our excess liquidity not needed for current operations has
generally been invested in short-term assets or securities,
primarily securities issued by government sponsored entities.
The securities portfolio contributes to our profits and plays an
important part in the overall interest rate management. The
primary tool used to manage interest rate risk is determination
of mix, maturity, and repricing characteristics of the loan
portfolios. The loan and securities portfolios must be used in
combination with management of deposits and borrowing
liabilities and other asset/liability techniques to actively
manage the applicable components of the balance sheet. In doing
so, we estimate our future needs, taking into consideration
historical periods of high loan demand and low deposit balances,
estimated loan and deposit increases, and estimated interest
rate changes.
Although analysis of interest rate gap (the difference between
the repricing of interest-earning assets and interest-bearing
liabilities during a given period of time) is one standard tool
for the measurement of exposure to interest rate risk, we
believe that because interest rate gap analysis does not address
all factors that can affect earnings performance, it should not
be used as the primary indicator of exposure to interest rate
risk and the related volatility of net interest income in a
changing interest rate environment. Interest rate gap analysis
is primarily a measure of liquidity based upon the amount of
change in principal amounts of assets and liabilities
outstanding, as opposed to a measure of changes in the overall
net interest margin.
31
The following table sets forth the estimated maturity or
repricing, and the resulting interest rate gap, of our
interest-earning assets and interest-bearing liabilities at
December 31, 2008. The amounts in the table are derived
from internal data based upon regulatory reporting formats and,
therefore, may not be wholly consistent with financial
information appearing elsewhere in the audited financial
statements that have been prepared in accordance with generally
accepted accounting principles. The amounts shown below could
also be significantly affected by external factors such as
changes in prepayment assumptions, early withdrawals of
deposits, and competition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated maturity or repricing at December 31, 2008
|
|
|
Within 1 year
|
|
1-5 years
|
|
³5 years
|
|
Total
|
|
|
|
|
|
(In Thousands)
|
|
|
|
Interest -Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments
|
|
$6,905
|
|
|
$
|
|
|
|
$
|
|
|
|
$6,905
|
|
Domestic certificates of deposit
|
|
9,500
|
|
|
|
|
|
|
|
|
|
|
9,500
|
|
Investment securities
|
|
87,699
|
|
|
59,977
|
|
|
|
4,768
|
|
|
|
152,444
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
229,136
|
|
|
53,955
|
|
|
|
1,346
|
|
|
|
284,437
|
|
Real estate construction
|
|
84,943
|
|
|
7,989
|
|
|
|
|
|
|
|
92,932
|
|
Real estate term
|
|
143,281
|
|
|
118,276
|
|
|
|
3,142
|
|
|
|
264,699
|
|
Installment and other consumer
|
|
18,767
|
|
|
17,679
|
|
|
|
14,891
|
|
|
|
51,337
|
|
|
|
Total interest-earning assets
|
|
$580,231
|
|
|
$257,876
|
|
|
|
$24,147
|
|
|
|
$862,254
|
|
Percent of total interest-earning assets
|
|
67%
|
|
|
30%
|
|
|
|
3%
|
|
|
|
100%
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand accounts
|
|
$101,065
|
|
|
$
|
|
|
|
$
|
|
|
|
$101,065
|
|
Money market accounts
|
|
158,114
|
|
|
|
|
|
|
|
|
|
|
158,114
|
|
Savings accounts
|
|
166,315
|
|
|
|
|
|
|
|
|
|
|
166,315
|
|
Certificates of deposit
|
|
144,148
|
|
|
29,197
|
|
|
|
22
|
|
|
|
173,367
|
|
Short-term borrowings
|
|
14,120
|
|
|
|
|
|
|
|
|
|
|
14,120
|
|
Long-term borrowings
|
|
2,167
|
|
|
8,741
|
|
|
|
5,078
|
|
|
|
15,986
|
|
Junior subordinated debentures
|
|
18,558
|
|
|
|
|
|
|
|
|
|
|
18,558
|
|
|
|
Total interest-bearing liabilities
|
|
$604,487
|
|
|
$37,938
|
|
|
|
$5,100
|
|
|
|
$647,525
|
|
Percent of total interest-bearing liabilities
|
|
93%
|
|
|
6%
|
|
|
|
1%
|
|
|
|
100%
|
|
|
|
Interest sensitivity gap
|
|
$(24,256)
|
|
|
$219,938
|
|
|
|
$19,047
|
|
|
|
$214,729
|
|
Cumulative interest sensitivity gap
|
|
$(24,256)
|
|
|
$195,682
|
|
|
|
$214,729
|
|
|
|
|
|
Cumulative interest sensitivity gap as a percentage of total
assets
|
|
-2%
|
|
|
19%
|
|
|
|
21%
|
|
|
|
|
|
|
|
As stated previously, certain shortcomings, including those
described below, are inherent in the method of analysis
presented in the foregoing table. For example, although certain
assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may
lag behind changes in market interest rates. Additionally,
certain assets have features that restrict changes in their
interest rates, both on a short-term basis and over the lives of
the assets. Further, in the event of a change in market interest
rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the tables as
can the relationship of rates between different loan and deposit
categories. Moreover, the ability of many borrowers to service
their adjustable-rate debt may decrease in the event of an
increase in market interest rates.
32
We utilize a simulation model to monitor and manage interest
rate risk within parameters established by our internal policy.
The model projects the impact of a 100 basis point increase
and a 100 basis point decrease, from prevailing interest
rates, on the balance sheet over a period of 12 months.
Generalized assumptions are made on how investment securities,
classes of loans and various deposit products might respond to
the interest rate changes. These assumptions are inherently
uncertain, and as a result, the model cannot precisely estimate
net interest income nor precisely predict the impact of higher
or lower interest rates on net interest income. Actual results
would differ from simulated results due to factors such as
timing, magnitude and frequency of rate changes, customer
reaction to rate changes, changes in market conditions and
management strategies, among other factors.
Based on the results of the simulation models at
December 31, 2008, we expect a decrease in net interest
income of $851,000 and an increase of $1.7 million in net
interest income over a
12-month
period, if interest rates decreased or increased an immediate
100 basis points, respectively. As indicated in the table
above, at December 31, 2008, the Companys
interest-bearing liabilities reprice or mature faster than the
Companys earning assets by a margin of $24.3 million
over the next 12 months. The results of the simulation
model indicate a decrease in net interest income in a falling
rate environment and an increase in net interest income in a
rising rate environment because the repricing of
interest-bearing liabilities will lag the repricing of earning
assets. Additionally, in some instances, the extent to which
interest-bearing liabilities reprice may not reach that of
earning assets due in part to the historically low level of
interest rates.
Controls
and Procedures
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
As of the end of the period covered by this report, we evaluated
the effectiveness of the design and operation of our disclosure
controls and procedures. Our principal executive and financial
officers supervised and participated in this evaluation. Based
on this evaluation, our principal executive and financial
officers each concluded that our disclosure controls and
procedures were effective in timely alerting them to material
information required to be included in our periodic reports to
the Securities and Exchange Commission. The design of any system
of controls is based in part upon various assumptions about the
likelihood of future events, and there can be no assurance that
any of our plans, products, services or procedures will succeed
in achieving their intended goals under future conditions. There
were no changes in the Companys internal controls over
financial reporting that occurred during the period covered by
this report that have materially affected, or are likely to
materially affect, the Companys internal control over
financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and
maintaining internal control over financial reporting as defined
in
Rules 13a-15(f)
and 15(d)-15(f) of the Securities Exchange Act of 1934. The
Companys internal control over financial reporting is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements and
can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or
procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2008. In making this assessment management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal
Control Integrated Framework.
Based on our assessment and the criteria discussed above,
management believes that, as of December 31, 2008, the
Company maintained effective internal control over financial
reporting.
The Companys registered public accounting firm has issued
an attestation report on the Companys effectiveness of
internal control over financial reporting. This report follows
below.
33
Report of
Independent Registered Public Accounting Firm
The Board of Directors
Northrim BanCorp, Inc.:
We have audited Northrim BanCorp, Inc. and subsidiaries
(the Company) internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Management Report on Effectiveness of internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Northrim BanCorp, Inc. and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Northrim BanCorp, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of income, shareholders
equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2008, and
our report dated March 11, 2009 expressed an unqualified
opinion on those consolidated financial statements.
Anchorage, Alaska
March 11, 2009
34
Report of
Independent Registered Public Accounting Firm
The Board of Directors of
Northrim BanCorp, Inc.:
We have audited the accompanying consolidated balance sheets of
Northrim BanCorp, Inc. and subsidiaries (the Company) as of
December 31, 2008 and 2007, and the related consolidated
statements of income, shareholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2008. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Northrim BanCorp, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Northrim BanCorp, Inc.s internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 11,
2009 expressed an unqualified opinion on the effectiveness of
the Companys internal control over financial reporting.
Anchorage, Alaska
March 11, 2009
35
Consolidated
Financial Statements
NORTHRIM BANCORP, INC.
Consolidated Balance Sheets
December 31, 2008 and 2007
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
(In Thousands Except Share Amounts)
|
|
Assets
|
|
|
|
|
Cash and due from banks
|
|
$30,925
|
|
$30,767
|
Money market investments
|
|
6,905
|
|
33,039
|
Domestic certificates of deposit
|
|
9,500
|
|
|
Investment securities held to maturity
|
|
9,431
|
|
11,701
|
Investment securities available for sale
|
|
141,010
|
|
148,009
|
Investment in Federal Home Loan Bank stock
|
|
2,003
|
|
2,003
|
|
|
Total Portfolio Investments
|
|
152,444
|
|
161,713
|
Loans
|
|
711,286
|
|
714,801
|
Allowance for loan losses
|
|
(12,900)
|
|
(11,735)
|
|
|
Net Loans
|
|
698,386
|
|
703,066
|
Purchased receivables
|
|
19,075
|
|
19,437
|
Accrued interest receivable
|
|
4,812
|
|
5,232
|
Premises and equipment, net
|
|
29,733
|
|
15,621
|
Goodwill and intangible assets
|
|
9,320
|
|
9,946
|
Other real estate owned
|
|
12,617
|
|
4,445
|
Other assets
|
|
32,675
|
|
31,448
|
|
|
Total Assets
|
|
$1,006,392
|
|
$1,014,714
|
|
|
Liabilities
|
|
|
|
|
Deposits:
|
|
|
|
|
Demand
|
|
$244,391
|
|
$224,986
|
Interest-bearing demand
|
|
101,065
|
|
96,455
|
Savings
|
|
58,214
|
|
55,285
|
Alaska CDs
|
|
108,101
|
|
171,341
|
Money market
|
|
158,114
|
|
215,819
|
Certificates of deposit less than $100,000
|
|
76,738
|
|
61,586
|
Certificates of deposit greater than $100,000
|
|
96,629
|
|
41,904
|
|
|
Total Deposits
|
|
843,252
|
|
867,376
|
Borrowings
|
|
30,106
|
|
16,770
|
Junior subordinated debentures
|
|
18,558
|
|
18,558
|
Other liabilities
|
|
9,792
|
|
10,595
|
|
|
Total Liabilities
|
|
901,708
|
|
913,299
|
|
|
Minority interest in subsidiaries
|
|
36
|
|
24
|
Shareholders Equity
|
|
|
|
|
Common stock, $1 par value, 10,000,000 shares
authorized, 6,331,372 and 6,300,256 shares issued and
outstanding at December 31, 2008 and 2007, respectively
|
|
6,331
|
|
6,300
|
Additional paid-in capital
|
|
51,458
|
|
50,798
|
Retained earnings
|
|
45,958
|
|
44,068
|
Accumulated other comprehensive income-net unrealized
gains/losses on available for sale on investment securities
|
|
901
|
|
225
|
|
|
Total Shareholders Equity
|
|
104,648
|
|
101,391
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$1,006,392
|
|
$1,014,714
|
|
|
See accompanying notes to the consolidated financial statements.
36
NORTHRIM
BANCORP, INC.
Consolidated Statements of Income
Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In Thousands Except Per Share Amounts)
|
|
Interest Income
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$53,287
|
|
$66,463
|
|
$65,347
|
Interest on investment securities-available for sale
|
|
5,066
|
|
4,120
|
|
2,396
|
Interest on investment securities-held to maturity
|
|
427
|
|
499
|
|
403
|
Interest on money market investments
|
|
429
|
|
2
|
|
|
Interest on domestic certificates of deposit
|
|
507
|
|
1,983
|
|
1,375
|
|
|
Total Interest Income
|
|
59,716
|
|
73,067
|
|
69,521
|
Interest Expense
|
|
|
|
|
|
|
Interest expense on deposits and borrowings
|
|
13,902
|
|
23,237
|
|
21,999
|
|
|
Net Interest Income
|
|
45,814
|
|
49,830
|
|
47,522
|
Provision for loan losses
|
|
7,199
|
|
5,513
|
|
2,564
|
|
|
Net Interest Income After Provision for Loan Losses
|
|
38,615
|
|
44,317
|
|
44,958
|
Other Operating Income
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
3,283
|
|
3,116
|
|
1,975
|
Purchased receivable income
|
|
2,560
|
|
2,521
|
|
1,855
|
Employee benefit plan income
|
|
1,451
|
|
1,194
|
|
1,113
|
Electronic banking income
|
|
1,193
|
|
914
|
|
790
|
Equity in earnings from mortgage affiliate
|
|
595
|
|
454
|
|
649
|
Equity in loss from Elliott Cove
|
|
(106)
|
|
(93)
|
|
(230)
|
Other income
|
|
2,423
|
|
1,848
|
|
1,614
|
|
|
Total Other Operating Income
|
|
11,399
|
|
9,954
|
|
7,766
|
|
|
Other Operating Expense
|
|
|
|
|
|
|
Salaries and other personnel expense
|
|
20,996
|
|
20,700
|
|
19,277
|
Occupancy, net
|
|
3,399
|
|
2,957
|
|
2,611
|
OREO expense net, including impairment
|
|
2,558
|
|
(20)
|
|
(5)
|
Insurance expense
|
|
1,779
|
|
465
|
|
378
|
Marketing expense
|
|
1,558
|
|
1,617
|
|
1,641
|
Professional and outside services
|
|
1,498
|
|
1,167
|
|
840
|
Equipment expense
|
|
1,233
|
|
1,350
|
|
1,350
|
Intangible asset amortization expense
|
|
347
|
|
337
|
|
482
|
Other expense
|
|
7,071
|
|
6,490
|
|
4,902
|
|
|
Total Other Operating Expense
|
|
40,439
|
|
35,063
|
|
31,476
|
|
|
Income Before Income Taxes and Minority Interest
|
|
9,575
|
|
19,208
|
|
21,248
|
Minority interest in subsidiaries
|
|
370
|
|
290
|
|
296
|
|
|
Income Before Income Taxes
|
|
9,205
|
|
18,918
|
|
20,952
|
Provision for income taxes
|
|
3,122
|
|
7,260
|
|
7,978
|
|
|
Net Income
|
|
$6,083
|
|
$11,658
|
|
$12,974
|
|
|
Earnings Per Share, Basic
|
|
$0.96
|
|
$1.82
|
|
$2.02
|
|
|
Earnings Per Share, Diluted
|
|
$0.95
|
|
$1.80
|
|
$1.99
|
|
|
Weighted Average Shares Outstanding, Basic
|
|
6,358,595
|
|
6,400,974
|
|
6,426,002
|
|
|
Weighted Average Shares Outstanding, Diluted
|
|
6,388,681
|
|
6,485,972
|
|
6,516,117
|
|
|
See accompanying notes to the consolidated financial statements.
37
NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in
Shareholders Equity and Comprehensive Income
Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Common Stock
|
|
Additional
|
|
|
|
Other
|
|
|
|
|
Number
|
|
Par
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
of Shares
|
|
Value
|
|
Capital
|
|
Earnings
|
|
Income
|
|
Total
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
5,803
|
|
$5,803
|
|
$39,161
|
|
$39,999
|
|
$(489)
|
|
$84,474
|
Cash dividend declared
|
|
|
|
|
|
|
|
(2,780)
|
|
|
|
(2,780)
|
Stock dividend
|
|
291
|
|
291
|
|
6,690
|
|
(6,981)
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
390
|
|
|
|
|
|
390
|
Exercise of stock options
|
|
38
|
|
38
|
|
300
|
|
|
|
|
|
338
|
Excess tax benefits from share-based payment arrangements
|
|
|
|
|
|
230
|
|
|
|
|
|
230
|
Treasury stock buy-back
|
|
(18)
|
|
(18)
|
|
(392)
|
|
|
|
|
|
(410)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding (gain/loss) on available for sale
investment securities, net of related income tax effect
|
|
|
|
|
|
|
|
|
|
202
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
12,974
|
|
|
|
12,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
13,176
|
|
|
Balance as of December 31, 2006
|
|
6,114
|
|
$6,114
|
|
$46,379
|
|
$43,212
|
|
$(287)
|
|
$95,418
|
Cash dividend declared
|
|
|
|
|
|
|
|
(3,560)
|
|
|
|
(3,560)
|
Stock dividend
|
|
301
|
|
301
|
|
6,941
|
|
(7,242)
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
578
|
|
|
|
|
|
578
|
Exercise of stock options
|
|
23
|
|
23
|
|
50
|
|
|
|
|
|
73
|
Excess tax benefits from share-based payment arrangements
|
|
|
|
|
|
108
|
|
|
|
|
|
108
|
Treasury stock buy-back
|
|
(138)
|
|
(138)
|
|
(3,258)
|
|
|
|
|
|
(3,396)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding (gain/loss) on available for sale
investment securities, net of related income tax effect
|
|
|
|
|
|
|
|
|
|
512
|
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
11,658
|
|
|
|
11,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
12,170
|
|
|
Balance as of December 31, 2007
|
|
6,300
|
|
$6,300
|
|
$50,798
|
|
$44,068
|
|
$225
|
|
$101,391
|
Cash dividend declared
|
|
|
|
|
|
|
|
(4,193)
|
|
|
|
(4,193)
|
Stock option expense
|
|
|
|
|
|
597
|
|
|
|
|
|
597
|
Exercise of stock options
|
|
31
|
|
31
|
|
(3)
|
|
|
|
|
|
28
|
Excess tax benefits from share-based payment arrangements
|
|
|
|
|
|
66
|
|
|
|
|
|
66
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding (gain/loss) on available for sale
investment securities, net of related income tax effect
|
|
|
|
|
|
|
|
|
|
676
|
|
676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
6,083
|
|
|
|
6,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
6,759
|
|
|
Balance as of December 31, 2008
|
|
6,331
|
|
$6,331
|
|
$51,458
|
|
$45,958
|
|
$901
|
|
$104,648
|
|
|
See accompanying notes to the consolidated financial statements.
38
NORTHRIM
BANCORP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
Operating Activities:
|
|
|
|
|
|
|
Net income
|
|
$6,083
|
|
$11,658
|
|
$12,974
|
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
|
|
|
|
|
|
|
Security gains
|
|
(146)
|
|
|
|
|
Depreciation and amortization of premises and equipment
|
|
1,384
|
|
1,123
|
|
1,116
|
Amortization of software
|
|
176
|
|
240
|
|
354
|
Intangible asset amortization
|
|
347
|
|
337
|
|
482
|
Amortization of investment security premium, net of discount
accretion
|
|
72
|
|
(500)
|
|
(133)
|
Deferred tax benefit
|
|
(3,638)
|
|
(393)
|
|
(1,862)
|
Stock-based compensation
|
|
597
|
|
578
|
|
390
|
Excess tax benefits from share-based payment arrangements
|
|
(66)
|
|
(108)
|
|
(230)
|
Deferral of loan fees and costs, net
|
|
(32)
|
|
(279)
|
|
19
|
Provision for loan losses
|
|
7,199
|
|
5,513
|
|
2,564
|
Purchased receivable loss
|
|
193
|
|
245
|
|
|
Gain on sale of other real estate owned
|
|
(45)
|
|
(110)
|
|
|
Impairment on other real estate owned
|
|
1,958
|
|
|
|
|
Earnings in RML, net of distributions
|
|
49
|
|
118
|
|
(124)
|
Equity in loss from Elliott Cove
|
|
106
|
|
93
|
|
230
|
Minority interest in subsidiaries
|
|
370
|
|
290
|
|
296
|
(Increase) decrease in accrued interest receivable
|
|
420
|
|
(316)
|
|
(519)
|
(Increase) decrease in other assets
|
|
1,985
|
|
(2,283)
|
|
(6,794)
|
Increase (decrease) of other liabilities
|
|
(748)
|
|
(22)
|
|
6,196
|
|
|
Net Cash Provided by Operating Activities
|
|
16,264
|
|
16,184
|
|
14,959
|
|
|
Investing Activities:
|
|
|
|
|
|
|
Investment in securities:
|
|
|
|
|
|
|
Purchases of investment securities available-for-sale
|
|
(134,237)
|
|
(136,393)
|
|
(40,643)
|
Purchases of investment securities held-to-maturity
|
|
(1,001)
|
|
|
|
(10,905)
|
Proceeds from sales/maturities of securities
available-for-sale
|
|
142,464
|
|
100,126
|
|
6,608
|
Proceeds from calls/maturities of securities
held-to-maturity
|
|
3,265
|
|
70
|
|
65
|
Investment in domestic certificates of deposit
|
|
(9,500)
|
|
|
|
|
(Investment in) cash proceeds from purchased receivables, net
|
|
169
|
|
1,501
|
|
(8,985)
|
Investments in loans:
|
|
|
|
|
|
|
Sales of loans and loan participations
|
|
8,477
|
|
8,886
|
|
22,601
|
Loans made, net of repayments
|
|
(20,359)
|
|
(2,502)
|
|
(35,762)
|
Proceeds from sale of other real estate owned
|
|
2,583
|
|
266
|
|
|
Investment in other real estate owned
|
|
(3,273)
|
|
|
|
|
Alaska First acquisition, net of cash received
|
|
|
|
12,699
|
|
|
Investment in Elliott Cove
|
|
(100)
|
|
(100)
|
|
(210)
|
Loan to Elliott Cove, net of repayments
|
|
108
|
|
(48)
|
|
58
|
Loan to PWA, net of repayments
|
|
|
|
|
|
385
|
Purchases of premises and equipment
|
|
(15,496)
|
|
(3,861)
|
|
(3,387)
|
Purchases of software, net of disposals
|
|
(106)
|
|
(183)
|
|
(440)
|
|
|
Net Cash Used by Investing Activities
|
|
(27,006)
|
|
(19,539)
|
|
(70,615)
|
|
|
Financing Activities:
|
|
|
|
|
|
|
Increase (decrease) in deposits
|
|
(24,124)
|
|
24,786
|
|
15,038
|
Proceeds from borrowings
|
|
15,124
|
|
5,546
|
|
|
Paydowns on borrowings
|
|
(1,788)
|
|
(401)
|
|
(1,913)
|
Distributions to minority interests
|
|
(358)
|
|
(295)
|
|
(267)
|
Proceeds from issuance of common stock
|
|
28
|
|
73
|
|
338
|
Excess tax benefits from share-based payment arrangements
|
|
66
|
|
108
|
|
230
|
Repurchase of common stock
|
|
|
|
(3,396)
|
|
(410)
|
Cash dividends paid
|
|
(4,182)
|
|
(3,542)
|
|
(2,768)
|
|
|
Net Cash Provided (Used) by Financing Activities
|
|
(15,234)
|
|
22,879
|
|
10,248
|
|
|
Net Increase (Decrease) by Cash and Cash Equivalents
|
|
(25,976)
|
|
19,524
|
|
(45,408)
|
|
|
Cash and cash equivalents at beginning of period
|
|
63,806
|
|
44,282
|
|
89,690
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$37,830
|
|
$63,806
|
|
$44,282
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
Income taxes paid
|
|
$5,657
|
|
$8,740
|
|
$9,296
|
Interest paid
|
|
$13,708
|
|
$23,105
|
|
$21,891
|
Transfer of loans to other real estate owned
|
|
$9,395
|
|
$4,445
|
|
$717
|
Cash dividends declared but not paid
|
|
$39
|
|
$28
|
|
$12
|
|
|
See accompanying notes to the consolidated financial statements.
39
Notes to
Consolidated Financial Statements
NOTE 1 Organization and Summary of
Significant Accounting Policies
Northrim BanCorp, Inc. (the Company) is a bank
holding company whose subsidiaries are Northrim Bank (the
Bank), which serves Anchorage, Eagle River, the
Matanuska Valley, Fairbanks, Alaska, and the Pacific Northwest
through its Northrim Funding Services division
(NFS); Northrim Investment Services Company
(NISC) which holds the Companys interest in
both Elliott Cove Capital Management LLC (Elliott
Cove), an investment advisory services company, and
Pacific Wealth Advisors (PWA), an investment
advisory, trust and wealth management business located in
Seattle, Washington; Northrim Building LLC (NBL),
which owns and operates the Companys main office facility
at 3111 C Street in Anchorage; and Northrim Capital
Trust 1 (NCT1) and Northrim Statutory
Trust 2 (NST2), entities that were formed to
facilitate trust preferred securities offerings by the Company.
NBL purchased the main office facility in the third quarter of
2008. The Company has evaluated the requirements of Financial
Accounting Standards Board (FASB) Statement
No. 131, Disclosures about Segments of an Enterprise and
Related Information (as amended) and determined that the Company
operates as a single operating segment. The Company is regulated
by the State of Alaska and the Federal Reserve Board. The
Company was incorporated in Alaska, and its primary market areas
include Anchorage, the Matanuska Valley, and Fairbanks, Alaska,
where the majority of its lending and deposit activities have
been with Alaska businesses and individuals.
Effective December 31, 2001, Northrim Bank became a
wholly-owned subsidiary of a new bank holding company, Northrim
BanCorp, Inc. The Banks shareholders agreed to exchange
their ownership in the Bank for ownership in the Company. The
ownership interests in the Company are the same as the ownership
interests in the Bank prior to the exchange. The exchange has
been accounted for similarly to a pooling of interests.
The Bank formed a wholly-owned subsidiary, Northrim Capital
Investments Co. (NCIC), in 1998. This subsidiary
owns a 24% profit interest in Residential Mortgage Holding
Company LLC (RML Holding Company), a residential
mortgage holding company that owns one mortgage company,
Residential Mortgage LLC (RML). RML has branches
throughout Alaska. The Company accounts for RML Holding Company
using the equity method. In addition, NCIC owns a 50.1% interest
in Northrim Benefits Group, LLC (NBG), an insurance
brokerage company that provides employee benefit plans to
businesses throughout Alaska. The Company consolidates NBG in
its financial results.
Estimates and Assumptions: In preparing the
financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenue and
expenses for the period and the disclosure of contingent assets
and liabilities in accordance with generally accepted accounting
principles. Actual results could differ from those estimates.
Significant estimates include the allowance for loan losses,
valuation of goodwill and other intangibles, and valuation of
other real estate owned.
Cash and Cash Equivalents: For purposes of
reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, interest-bearing balances with
other banks, money market investments including interest-bearing
balances with the FHLB, bankers acceptances, commercial
paper, securities purchased under agreement to resell, federal
funds sold, and securities with maturities of less than
90 days at acquisition.
Investment Securities: Securities
available-for-sale are stated at fair value with unrealized
holding gains and losses, net of tax, excluded from earnings and
reported as a separate component of other comprehensive income,
unless an unrealized loss is deemed other than temporary. Gains
and losses on available-for-sale securities sold are determined
on a specific identification basis.
Held-to-maturity securities are stated at cost, adjusted for
amortization of premium and accretion of discount on a
level-yield basis. The Company has the ability and intent to
hold these securities to maturity.
A decline in the market value of any available for sale or held
to maturity security below cost that is deemed other than
temporary results in a charge to earnings and the establishment
of a new cost basis for the security. Unrealized investment
securities losses are evaluated at least quarterly on a specific
identification basis to determine whether such declines in value
should be considered other than temporary and
therefore be subject to immediate loss recognition in income.
Although these evaluations involve significant judgment, an
unrealized loss in the fair value of a debt security is
generally deemed to be temporary when the fair value of the
security is below the carrying value primarily due to changes in
interest rates, there has not been significant deterioration in
the financial condition of the issuer, and the Company has the
intent and ability to hold the security for a sufficient time to
recover the carrying value. Other factors that may be considered
in determining whether a decline in the value is other
than temporary include ratings by recognized rating
agencies; actions of commercial banks or other lenders relative
to the continued extension of credit facilities to the issuer of
the security; the financial condition, capital strength and
near-term prospects of the issuer, and recommendations of
investment advisors or market analysts.
Loans, Recognition of Interest Income and Loan
Fees: Loans are carried at their principal amount
outstanding, net of unamortized fees and direct loan origination
costs. Interest income on loans is accrued and recognized on the
principal amount outstanding except
40
for loans in a non-accrual status. Loans are placed on
non-accrual when management believes doubt exists as to the
collectibility of the interest or principal. Cash payments
received on non-accrual 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 and
certain ongoing performance criteria have been met.
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 loans effective interest rate, except that if the
loan is collateral dependant, the impairment is measured by
using the fair value of the loans collateral.
Nonperforming loans greater than $50,000 are individually
evaluated for impairment based upon the borrowers overall
financial condition, resources, and payment record, and the
prospects for support from any financially responsible
guarantors.
Loan origination fees received in excess of direct origination
costs are deferred and accreted to interest income using a
method approximating the level-yield method over the life of the
loan.
Allowance for Loan Losses: The Company maintains
an Allowance for Loan Losses (the Allowance) to
reflect inherent losses from its loan portfolio as of the
balance sheet date. The Allowance is decreased by loan
charge-offs and increased by loan recoveries and provisions for
loan losses. On a quarterly basis, the Company calculates the
Allowance based on an established methodology which has been
consistently applied.
In determining its total Allowance, the Company first estimates
a specific allowance for impaired loans. This analysis is based
upon a specific analysis for each impaired loan, including
appraisals on loans secured by real property, managements
assessment of the current market, recent payment history and an
evaluation of other sources of repayment.
The Company then estimates an allowance for all loans that are
not impaired. This allowance is based on loss factors applied to
loans that are quality graded according to an internal risk
classification system (classified loans). The
Companys internal risk classifications are based in large
part upon regulatory definitions for classified loans. The loss
factors that the Company applies to each group of loans within
the various risk classifications are based on industry
standards, historical experience and managements judgment.
Portfolio components also receive specific attention in the
Allowance analysis when those components constitute a
significant concentration as a percentage of the Companys
capital, when current market or economic conditions point to
increased scrutiny, or when historical or recent experience
suggests that additional attention is warranted in the analysis
process.
Once the Allowance is determined using the methodology described
above, management assesses the adequacy of the overall Allowance
through an analysis of the size and mix of the loan portfolio,
historical and recent credit performance of the loan portfolio
(including the absolute level and trends in delinquencies and
impaired loans), industry metrics and ratio analysis.
Our banking regulators, as an integral part of their examination
process, periodically review the Companys Allowance. Our
regulators may require the Company to recognize additions to the
allowance based on their judgments related to information
available to them at the time of their examinations.
While management believes that it uses the best information
available to determine the allowance for loan losses, unforeseen
market conditions and other events could result in adjustment to
the allowance for loan losses, and net income could be
significantly affected, if circumstances differed substantially
from the assumptions used in making the final determination.
Purchased Receivables: The Bank purchases accounts
receivable at a discount from its customers. The purchased
receivables are carried at cost. The discount and fees charged
to the customer are earned while the balances of the purchases
are outstanding. In the event an impairment or write-down is
evident and warranted, the charge is taken against the asset
balance and not from the allowance for loan losses.
Premises and Equipment: Premises and equipment,
including leasehold improvements, are stated at cost, less
accumulated depreciation and amortization. Depreciation and
amortization expense for financial reporting purposes is
computed using the straight-line method based upon the shorter
of the lease term or the estimated useful lives of the assets
that vary according to the asset type and include; vehicles at
3 years, furniture and equipment ranging between 3 and
7 years, leasehold improvements ranging between 2 and
15 years, and buildings over 39 years. Maintenance and
repairs are charged to current operations, while renewals and
betterments are capitalized.
Intangible Assets: As part of an acquisition of
branches from Bank of America in 1999, the Company recorded
$6.9 million of goodwill and $2.9 million of core
deposit intangible (CDI). This CDI is fully
amortized as of December 31, 2008. In 2007, the Company
recorded $2.1 million of goodwill and $1.3 million of
CDI as part of the acquisition of Alaska First Bank &
Trust, N.A. (Alaska First) stock. The Company
amortizes this CDI over its estimated useful life of ten years
using an accelerated method. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets,
41
management reviews goodwill at least annually for impairment by
reviewing a number of key market indicators. Finally, the
Company recorded $1.1 million in intangible assets related
to customer relationships purchased in the acquisition of an
additional 40.1% of NBG in December 2005. The Company amortizes
this intangible over its estimated life of ten years.
Other Assets: Other assets include purchased
software and prepaid expenses. Purchased software is carried at
amortized cost and is amortized using the straight-line method
over their estimated useful life or the term of the agreement.
Also included in other assets is the net deferred tax asset and
the Companys investments in RML Holding Company, Elliott
Cove, NBG, and PWA. All of these entities are affiliates of the
Company. The Company includes the income and loss from its
affiliates in its financial statements on a one month lagged
basis.
Also included in other assets are the Companys investments
in three low-income housing partnerships. These partnerships are
all Delaware limited partnerships and include Centerline
Corporate Partners XXII, L.P. (Centerline XXII)
Centerline Corporate Partners XXXIII, L.P. (Centerline
XXXIII), and U.S.A. Institutional Tax Credit
Fund LVII L.P. (USA 57). These entities are
variable interest entities (VIEs). A variable
interest entity is an entity whose equity investors lack the
ability to make decisions about the entitys activity
through voting rights and do not have the obligation to absorb
the entitys expected losses or receive residual returns if
they occur. The Company made commitments to purchase a
$3 million interest in each of these partnerships in
January 2003, September 2006 and December 2006, respectively.
Other Real Estate Owned: Other real estate owned
represents properties acquired through foreclosure or its
equivalent. Prior to foreclosure, the carrying value is adjusted
to the fair value, less cost to sell, of the real estate to be
acquired by an adjustment to the allowance for loan losses.
Managements evaluation of fair value is based on
appraisals or discounted cash flows of anticipated sales. The
amount by which the fair value less cost to sell is greater than
the carrying amount of the loan plus amounts previously charged
off is recognized in earnings up to the original cost of the
asset. Any subsequent reduction in the carrying value is charged
against earnings. Operating expenses associated with other real
estate owned are charged to earnings in the period they are
incurred.
Advertising: Advertising, promotion and marketing
costs are expensed as incurred. The Company reported total
expenses of $1.6 million for each of the periods ending
December 31, 2008, 2007, and 2006.
Income Taxes: The Company uses the asset and
liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for
the future consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
Earnings Per Share: Earnings per share is
calculated using the weighted average number of shares and
dilutive common stock equivalents outstanding during the period.
Stock options, as described in Note 19, are considered to
be common stock equivalents. There were no dilutive incremental
shares at December 31, 2008. Incremental shares were 31,400
and 92,782 at December 31, 2007 and 2006, respectively.
Average incremental shares were 30,086, 84,998, and 90,115 for
2008, 2007, and 2006, respectively.
Information used to calculate earnings per share was as follows:
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
Net income
|
|
$6,083
|
|
$11,658
|
|
$12,974
|
Basic weighted average common shares outstanding
|
|
6,359
|
|
6,401
|
|
6,426
|
Dilutive effect of potential comment shares from awards granted
under equity incentive program
|
|
30
|
|
85
|
|
90
|
|
|
Diluted weitghted average common shares outstanding
|
|
6,389
|
|
6,486
|
|
6,516
|
|
|
Earnings per common share
|
|
|
|
|
|
|
Basic
|
|
$0.96
|
|
$1.82
|
|
$2.02
|
Diluted
|
|
$0.95
|
|
$1.80
|
|
$1.99
|
|
|
42
Potential dilutive shares are excluded from the computation of
earnings per share if their effect is anti-dilutive.
Anti-dilutive shares outstanding related to options to acquire
common stock for the year ended December 31, 2008 totaled
336,817. There were no anti-dilutive shares outstanding related
to options to acquire common stock for the years 2007 and 2006.
Stock Option Plans: The Company accounts for its
stock option plans in accordance with the provisions of FASB
Statement No. 123R, Share Based-Payment, a
revision of FASB 123, Accounting for Stock Based
Compensation. FASB Statement No. 123R establishes
accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation
plans. The Company has elected the modified prospective method
for recognition of compensation cost associated with stock-based
employee compensation awards. The Company amortizes stock-based
compensation expense over the vesting period of each award.
Comprehensive Income: Comprehensive income
consists of net income and net unrealized gains (losses) on
securities after tax effect and is presented in the consolidated
statements of shareholders equity and comprehensive income.
Segments: The Company has evaluated the
requirements of Financial Accounting Standards Board
(FASB) Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information (as amended)
and determined that the Company operates as a single operating
segment. This determination is based on the fact that the chief
executive officer reviews financial information and assess
resource allocation on a consolidated basis. Additionally, the
aggregate revenue earned through, and total assets of, the
insurance brokerage, mortgage lending and wealth management
activities are less than 10% of the Companys consolidated
total revenue and total assets.
Concentrations: Substantially all of our business
is derived from the Anchorage, Matanuska Valley, and Fairbanks,
areas of Alaska. As such, he Companys growth and
operations depend upon the economic conditions of Alaska and
these specific markets. These areas rely primarily upon the
natural resources industries, particularly oil production, as
well as tourism, government and U.S. military spending for
their economic success. Approximately 86% of the Alaska state
government is funded through various taxes and royalties on the
oil industry. Our business is and will remain sensitive to
economic factors that relate to these industries and local and
regional business conditions. As a result, local or regional
economic downturns, or downturns that disproportionately affect
one or more of the key industries in regions served by the
Company, may have a more pronounced effect upon its business
than they might on an institution that is less geographically
concentrated. The extent of the future impact of these events on
economic and business conditions cannot be predicted; however,
prolonged or acute fluctuations could have a material and
adverse impact upon our results of operation and financial
condition.
At December 31, 2008 and 2007, the Company had
$393.7 million and $423 million, respectively, in
commercial and construction loans in Alaska. In addition, the
Company has commitments of $149 million to seven
commercial, commercial real estate, and residential
construction/land development borrowing relationships at
December 31, 2008. $135 million of these commitments
are outstanding at December 31, 2008.
Consolidation Policy: The consolidated financial
statements include the financial information for Northrim
BanCorp, Inc. and its majority-owned subsidiaries that include
Northrim Bank, NBL, and NISC. All intercompany balances have
been eliminated in consolidation. The Company accounts for its
investments in RML Holding Company, Elliott Cove, and Pacific
Wealth Advisors, LLC using the equity method. Minority interest
relates to the minority ownership in NBG.
NOTE 2
Alaska First Acquisition
At the close of business on October 19, 2007, the Company
acquired 100 percent of the outstanding shares of Alaska
First for $6.3 million in an all cash transaction. Prior to
the closing of the Alaska First acquisition, Alaska First sold
its subsidiary, Hagen Insurance. The results of Alaska
Firsts operations have been included in the consolidated
financial statements since that date. Alaska First was a local
bank that had two branches in Anchorage. The Company closed one
of the branches on December 31, 2007 and the other on
January 29, 2008.
43
The acquisition was accounted for as a purchase in accordance
with Statement 141. Accordingly, the purchase price was
allocated to the assets acquired and the liabilities assumed
based on their estimated fair values at the acquisition date as
summarized in the following table:
|
|
|
|
|
|
(In Thousands)
|
|
Total Purchase Price
|
|
$6,250
|
|
|
Allocation of purchase price
|
|
|
Alaska Firsts shareholder equity
|
|
4,479
|
Estimated adjustments to reflect assets acquired and liabilities
assumed at fair value:
|
|
|
Investments
|
|
165
|
Fixed assets
|
|
(109)
|
Other assets
|
|
(840)
|
Core deposit intangible
|
|
1,311
|
|
|
Estimated fair value of net assets aquired
|
|
5,006
|
|
|
Direct acquisition costs
|
|
825
|
|
|
Goodwill resulting from acquisition
|
|
$2,069
|
|
|
Of the $2.6 million of acquired intangible assets,
$1.3 million was assigned to CDI. The CDI asset will be
amortized over its estimated useful life of 10 years on an
accelerated basis and is deductible for tax purposes only if the
Company divests itself of Northrim Bank. The remaining $1.2 of
intangible asset acquired represents goodwill and is not
deductible for tax purposes. The Company capitalized an
additional $825,000 in external direct costs related to the
acquisition for a total of $2.1 million in goodwill at
December 31, 2007.
The fair value of assets and liabilities of Alaska First at the
date of acquisition are presented below:
|
|
|
|
|
|
(In Thousands)
|
|
Cash
|
|
$18,806
|
Available for sale securities
|
|
23,821
|
Loans, net of allowance for losses of $220,000
|
|
13,205
|
Other assets
|
|
1,565
|
Core deposit intangible
|
|
1,311
|
Goodwill
|
|
1,244
|
|
|
Total Assets
|
|
59,952
|
|
|
Deposits
|
|
47,686
|
Repurchase Agreements
|
|
5,123
|
Other liabilities
|
|
893
|
Total Liabilities
|
|
53,702
|
|
|
Net Assets Acquired
|
|
$6,250
|
|
|
The proforma affect of this acquisition on consolidated results
of operations was not significant.
|
|
NOTE 3
|
Cash and
Due from Banks
|
The Company is required to maintain a $500,000 minimum average
daily balance with the Federal Reserve Bank for purposes of
settling financial transactions and charges for Federal Reserve
Bank services. The Company is also required to maintain cash
balances or deposits with the Federal Reserve Bank sufficient to
meet its statutory reserve requirements. The average reserve
requirement for the maintenance period, which included
December 31, 2008, was $0.
44
|
|
NOTE 4
|
Money
Market Investments
|
Money market investment balances are as follows:
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
|
|
(In Thousands)
|
|
Interest bearing deposits at Federal Home Loan Bank (FHLB)
|
|
$348
|
|
$6,039
|
Interest bearing deposits at Federal Reserve Bank (FRB)
|
|
6,557
|
|
|
Fed funds sold
|
|
|
|
27,000
|
|
|
Total
|
|
$6,905
|
|
$33,039
|
|
|
All money market investments had a
one-day
maturity.
|
|
NOTE 5
|
Investment
Securities
|
The carrying values and approximate fair values of investment
securities are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
December 31,
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In Thousands)
|
|
2008:
|
|
|
|
|
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
Government Sponsored Entities
|
|
$115,936
|
|
$1,702
|
|
$173
|
|
$117,465
|
Mortgage-backed Securities
|
|
345
|
|
22
|
|
5
|
|
361
|
Corporate Bonds
|
|
23,203
|
|
251
|
|
270
|
|
23,184
|
|
|
Total
|
|
$139,484
|
|
$1,975
|
|
$448
|
|
$141,010
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$9,431
|
|
$98
|
|
$27
|
|
$9,502
|
|
|
Federal Home Loan Bank Stock
|
|
$2,003
|
|
$
|
|
$
|
|
$2,003
|
|
|
2007:
|
|
|
|
|
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$4,977
|
|
$5
|
|
$
|
|
$4,982
|
Government Sponsored Entities
|
|
134,370
|
|
447
|
|
79
|
|
134,738
|
Mortgage-backed Securities
|
|
466
|
|
|
|
1
|
|
465
|
Coporate Bonds
|
|
7,813
|
|
11
|
|
|
|
7,824
|
|
|
Total
|
|
$147,626
|
|
$463
|
|
$80
|
|
$148,009
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$11,701
|
|
$49
|
|
$1
|
|
$11,749
|
|
|
Federal Home Loan Bank Stock
|
|
$2,003
|
|
$
|
|
$
|
|
$2,003
|
|
|
45
Gross unrealized losses on investment securities and the fair
value of the related securities, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position, at December 31,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Less Than 12 Months
|
|
More Than 12 Months
|
|
Total
|
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
|
|
(In Thousands)
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Sponsored Entities
|
|
$4,881
|
|
$173
|
|
$
|
|
$
|
|
$4,881
|
|
$173
|
Corporate Bonds
|
|
14,021
|
|
270
|
|
|
|
|
|
14,021
|
|
270
|
Mortgage-backed Securities
|
|
14
|
|
1
|
|
106
|
|
4
|
|
120
|
|
5
|
|
|
Total
|
|
$18,916
|
|
$444
|
|
$106
|
|
$4
|
|
$19,022
|
|
$448
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$2,646
|
|
$27
|
|
$
|
|
$
|
|
$2,646
|
|
$27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Less Than 12 Months
|
|
More Than 12 Months
|
|
Total
|
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
|
|
(In Thousands)
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Sponsored Entities
|
|
$33,390
|
|
$55
|
|
$12,671
|
|
$24
|
|
$46,061
|
|
$79
|
Mortgage-backed Securities
|
|
150
|
|
1
|
|
|
|
|
|
150
|
|
1
|
|
|
Total
|
|
$33,540
|
|
$56
|
|
$12,671
|
|
$24
|
|
$46,211
|
|
$80
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$0
|
|
$0
|
|
$2,037
|
|
$1
|
|
$2,037
|
|
$1
|
|
|
The unrealized losses on investments in government sponsored
entities, corporate bonds and municipal securities were caused
by interest rate increases. At December 31, 2008, there
were eleven available-for-sale securities in an unrealized loss
position of $448,000. 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. Because the
Company has the ability and intent to hold these investments
until a market price recovery or maturity, these investments are
not considered other-than-temporarily impaired.
46
The amortized cost and fair values of debt securities at
December 31, 2008, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Amortized
|
|
|
|
Average
|
|
|
|
|
Cost
|
|
Fair Value
|
|
Yield
|
|
|
|
|
|
(In Thousands)
|
|
|
|
Government Sponsored Entitiese
Within 1 Year
|
|
$5,000
|
|
$5,001
|
|
4.15%
|
|
|
1-5 Years
|
|
103,575
|
|
105,236
|
|
3.37%
|
|
|
5-10 Years
|
|
5,175
|
|
5,109
|
|
5.00%
|
|
|
Over 10 Years
|
|
2,186
|
|
2,119
|
|
0.00%
|
|
|
|
|
Total
|
|
$115,936
|
|
$117,465
|
|
3.44%
|
|
|
|
|
Mortgage-backed Securities
Within 1 Year
|
|
$235
|
|
$255
|
|
5.65%
|
|
|
1-5 Years
|
|
|
|
|
|
0.00%
|
|
|
5-10 Years
|
|
110
|
|
106
|
|
4.32%
|
|
|
Over 10 Years
|
|
|
|
|
|
0.00%
|
|
|
|
|
Total
|
|
$345
|
|
$361
|
|
5.22%
|
|
|
|
|
Corporate Bonds Within 1 Year
|
|
$3,994
|
|
$3,932
|
|
1.55%
|
|
|
1-5 Years
|
|
19,209
|
|
19,252
|
|
5.13%
|
|
|
5-10 Years
|
|
|
|
|
|
0.00%
|
|
|
Over 10 Years
|
|
|
|
|
|
0.00%
|
|
|
|
|
Total
|
|
$23,203
|
|
$23,184
|
|
4.51%
|
|
|
|
|
Municipal Securities
Within 1 Year
|
|
$3,360
|
|
$3,389
|
|
3.86%
|
|
|
1-5 Years
|
|
5,434
|
|
5,484
|
|
3.90%
|
|
|
5-10 Years
|
|
637
|
|
629
|
|
4.02%
|
|
|
Over 10 Years
|
|
|
|
|
|
0.00%
|
|
|
|
|
Total
|
|
$9,431
|
|
$9,502
|
|
3.89%
|
|
|
|
|
The proceeds and resulting gains and losses, computed using
specific identification, from sales of investment securities are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
December 31,
|
|
Proceeds
|
|
Gains
|
|
Losses
|
|
|
|
(In Thousands)
|
|
2008:
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
$
|
23,371
|
|
$146
|
|
$
|
Held-to-Maturity Securities
|
|
$
|
|
|
$
|
|
$
|
2007:
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
$
|
8,900
|
|
$
|
|
$
|
Held-to-Maturity Securities
|
|
$
|
|
|
$
|
|
$
|
2006:
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
$
|
|
|
$
|
|
$
|
Held-to-Maturity Securities
|
|
$
|
|
|
$
|
|
$
|
|
|
The Company pledged $67.4 million and $32.4 million of
investment securities at December 31, 2008, and 2007,
respectively, as collateral for public deposits and borrowings.
47
A summary of taxable interest income on available for sale
investment securities is as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
U.S. Treasury
|
|
$23
|
|
$363
|
|
$438
|
Government Sponsored Entities
|
|
4,423
|
|
3,666
|
|
1,948
|
Other
|
|
620
|
|
91
|
|
10
|
|
|
Total
|
|
$5,066
|
|
$4,120
|
|
$2,396
|
|
|
Included in investment securities at December 31, 2008 is a
required investment in stock of the FHLB of Seattle. The amount
of the required investment is based on the Companys
capital stock and lending activity, and amounted to
$2.0 million for 2008 and 2007. This security is reported
at par value, which represents the Companys cost. The FHLB
of Seattle recently announced that it would report a risk-based
capital deficiency under the regulations of the Federal Housing
Finance Agency (the FHFA), its primary regulator, as
of December 31, 2008, and as a result would not pay a
dividend for the fourth calendar quarter of 2008 and that it
would suspend the repurchase and redemption of outstanding
common stock.
The FHLB of Seattle has communicated to the Company that they
believe the calculation of risk-based capital under the current
rules of the FHFA significantly overstates the market risk of
the FHLBs private-label mortgage-backed securities in the
current market environment and that they have enough capital to
cover the risks reflected in the FHLBs balance sheet. As a
result, the Company has not recorded an other than
temporary impairment on its investment in FHLB stock.
However, continued deterioration in the FHLB of Seattles
financial position may result in impairment in the value of
those securities, the requirement that the Company contribute
additional funds to recapitalize the FHLB of Seattle, or a
reduction in the Companys ability to borrow funds from the
FHLB of Seattle, impairing the Companys ability to meet
liquidity demands.
The composition of the loan portfolio is presented below:
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
|
|
(In Thousands)
|
|
Commercial
|
|
$293,249
|
|
$284,956
|
Real estate construction
|
|
100,438
|
|
138,070
|
Real estate term
|
|
268,864
|
|
243,245
|
Home equity lines and other consumer
|
|
51,447
|
|
51,274
|
|
|
Sub-total
|
|
713,998
|
|
717,545
|
Less: Unearned origination fees, net of origination costs
|
|
(2,712)
|
|
(2,744)
|
|
|
Total loans
|
|
711,286
|
|
714,801
|
Allowance for loan losses
|
|
(12,900)
|
|
(11,735)
|
|
|
Net Loans
|
|
$698,386
|
|
$703,066
|
|
|
The Companys primary market areas are Anchorage, the
Matanuska Valley, and Fairbanks, Alaska, where the majority of
its lending has been with Alaska businesses and individuals. At
December 31, 2008, approximately 69% and 30% of the
Companys loans are secured by real estate, or for general
commercial uses, including professional, retail, and small
businesses, respectively. Substantially all of these loans are
collateralized and repayment is expected from the
borrowers cash flow or, secondarily, the collateral. The
Companys exposure to credit loss, if any, is the
outstanding amount of the loan if the collateral is proved to be
of no value.
48
Non-accrual loans totaled $20.6 million and
$9.7 million at December 31, 2008, and 2007,
respectively. Interest income which would have been earned on
non-accrual loans for 2008, 2007, and 2006 amounted to
$1.9 million, $865,000, and $437,000, respectively.
At December 31, 2008, and 2007, the recorded investment in
loans that are considered to be impaired was $79.7 million
and $51.4 million, respectively, (of which
$20.4 million and $9.6 million, respectively, were on
a non-accrual basis). A specific allowance of $3.2 million
was established for $35.1 million of the $79.7 million
of impaired loans in 2008. A specific allowance of
$3.3 million was established for $11.7 million of the
$51.4 million of impaired loans in 2007. At
December 31, 2008 and 2007, the Company had impaired loans
$44.6 million and $39.7 million, respectively, for
which no specific allowance was taken due to the fact that fair
value exceeded book value for these loans. Management determined
the fair value of these loans based on the underlying collateral
values. The average recorded investment in impaired loans during
the years ended December 31, 2008, and 2007, was
approximately $71.8 million and $49.7 million,
respectively. For December 31, 2008, 2007 and 2006 the
Company recognized interest income on these impaired loans of
$3 million, $4.2 million and $2.5 million,
respectively.
At December 31, 2008, and 2007, there were no loans pledged
as collateral to secure public deposits.
At December 31, 2008, and 2007, the Company serviced
$85 million and $92 million of loans, respectively,
which had been sold to various investors without recourse. At
December 31, 2008, and 2007, the Company held $864,000 and
$1.1 million, respectively, in trust for these loans for
the payment of such items as taxes, insurance, and maintenance
costs.
Maturities and sensitivity of accrual loans to changes in
interest rates as of December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
Within
|
|
|
|
Over
|
|
|
|
|
1 Year
|
|
1-5 Years
|
|
5 Years
|
|
Total
|
|
|
|
(In Thousands)
|
|
Commercial
|
|
$156,822
|
|
$77,682
|
|
$49,933
|
|
$284,437
|
Construction
|
|
72,631
|
|
20,301
|
|
|
|
92,932
|
Real estate term
|
|
45,937
|
|
85,633
|
|
133,129
|
|
264,699
|
Home equity lines and other consumer
|
|
2,093
|
|
9,462
|
|
39,782
|
|
51,337
|
|
|
Total
|
|
$277,483
|
|
$193,078
|
|
$222,844
|
|
$693,405
|
|
|
Fixed interest rate
|
|
$86,827
|
|
$75,738
|
|
$51,970
|
|
$214,535
|
Floating interest rate
|
|
190,656
|
|
117,340
|
|
170,874
|
|
478,870
|
|
|
Total
|
|
$277,483
|
|
$193,078
|
|
$222,844
|
|
$693,405
|
|
|
Certain directors, and companies of which directors are
principal owners, have loans and other transactions such as
insurance placement and architectural fees with the Company.
Such transactions are made on substantially the same terms,
including interest rates and collateral required, as those
prevailing for similar transactions of unrelated parties. An
analysis of the loan transactions follows:
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
|
|
(In Thousands)
|
|
Balance, beginning of the year
|
|
$2,041
|
|
$1,123
|
Loans made
|
|
818
|
|
6,495
|
Repayments or change to nondirector status
|
|
1,969
|
|
5,577
|
|
|
Balance, end of year
|
|
$890
|
|
$2,041
|
|
|
The Companys unfunded loan commitments to these directors
or their related interests on December 31, 2008, and 2007,
were $137,000 and $917,000, respectively.
49
|
|
NOTE 7
|
Allowance
for Loan Losses
|
The following is a detail of the allowance for loan losses:
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
Balance, beginning of the year
|
|
$11,735
|
|
$12,125
|
|
$10,706
|
Allowance aquired with stock purchase
|
|
|
|
220
|
|
|
Provision charged to operations
|
|
7,199
|
|
5,513
|
|
2,564
|
Charge-offs:
|
|
|
|
|
|
|
Commercial
|
|
(4,187)
|
|
(4,291)
|
|
(2,545)
|
Construction
|
|
(1,004)
|
|
(2,982)
|
|
|
Real estate
|
|
(1,402)
|
|
(599)
|
|
|
Installment and other consumer
|
|
(132)
|
|
(45)
|
|
(72)
|
|
|
Total Charge-offs
|
|
(6,725)
|
|
(7,917)
|
|
(2,617)
|
|
|
Recoveries:
|
|
|
|
|
|
|
Commercial
|
|
577
|
|
1,723
|
|
1,086
|
Construction
|
|
61
|
|
50
|
|
|
Real estate
|
|
3
|
|
|
|
355
|
Installment and other consumer
|
|
50
|
|
21
|
|
31
|
|
|
Total Recoveries
|
|
691
|
|
1,794
|
|
1,472
|
|
|
Charge-offs net of recoveries
|
|
(6,034)
|
|
(6,123)
|
|
(1,145)
|
|
|
Balance, End of Year
|
|
$12,900
|
|
$11,735
|
|
$12,125
|
|
|
At December 31, 2008, the allowance for loan losses was
$12.9 million as compared to balances of $11.7 million
and $12.1 million, respectively, at December 31, 2007
and 2006. The increase in the allowance for the loan losses
between December 31, 2008 and December 31, 2007 was
caused primarily by the increased provision for loan losses due
to increases in non-performing loans. The unallocated portion of
the Allowance at December 31, 2008 increased to
$5.2 million from $2.6 million at December 31,
2007 to address the impact of the current economic environment
on our loan portfolio. .
The allowance is based on loss factors applied to loans that are
quality graded according to an internal risk classification
system (classified loans). The Companys
internal risk classifications are based in large part upon
regulatory definitions for classified loans. The loss factors
that the Company applies to each group of loans within the
various risk classifications are based on industry standards,
historical experience and managements judgment. The
increase in potential problem loans, nonaccrual loans and loans
measured for impairment have been factored into the
Companys methodology for analyzing the allowance, which
has been applied on a consistent basis. The Company is
developing resolution plans for its classified loans and by
December 31, 2009, intends to reduce its loans measured for
impairment and OREO by 20% from December 31, 2009 levels.
As described in note 6, the majority of these loans were
evaluated for impairment and due to the estimated collateral
value, additional reserves were not considered necessary.
50
|
|
NOTE 8
|
Premises
and Equipment
|
The following summarizes the components of premises and
equipment:
|
|
|
|
|
|
|
|
December 31,
|
|
Useful Life
|
|
2008
|
|
2007
|
|
|
|
|
|
(In Thousands)
|
|
Land
|
|
|
|
$3,201
|
|
$2,297
|
Vehicle
|
|
3 years
|
|
61
|
|
61
|
Furniture and equipment
|
|
3-7 years
|
|
8,861
|
|
10,090
|
Tenant improvements
|
|
2-15 years
|
|
6,469
|
|
9,841
|
Buildings
|
|
39 years
|
|
24,070
|
|
6,865
|
|
|
Total Premises and Equipment
|
|
|
|
42,662
|
|
29,154
|
Accumulated depreciation and amortization
|
|
|
|
(12,929)
|
|
(13,533)
|
|
|
Total Premises and Equipment, Net
|
|
|
|
$29,733
|
|
$15,621
|
|
|
Depreciation expense was $1.4 million, $1.1 million,
and $1.1 million in 2008, 2007, and 2006, respectively. The
Company purchased its main office facility for
$12.9 million on July 1, 2008. In this transaction,
the Company assumed an existing loan secured by the building of
$5.1 million and took out a long-term borrowing to pay the
remaining amount of the purchase price.
|
|
NOTE 9
|
Other
Real Estate Owned
|
At December 31, 2008 and 2007 the Company held
$12.6 million and $4.5 million, respectively, as other
real estate owned. The Company expects to expend approximately
$2.2 million during 2009 to complete construction of these
projects. During 2008, the Company received approximately
$2.6 million in proceeds from the sale of several owned
properties and recognized net gains on sales of $45,000. During
2007, the Company sold two owned properties and recognized a
gain on sale of $110,000. An additional $432,000 of gain has
been deferred and will be recognized using the installment
method. There were no sales of owned property in 2006. During
2008, $2 million in impairment was recognized on OREO due
to adjustments to the Companys estimate of the fair value
of certain properties based on changes in estimated costs to
complete the projects. The Company also incurred $558,000 in
operating expenses related to OREO in 2008.
51
A summary of intangible assets and other assets is as follows:
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
|
|
(In Thousands)
|
|
Intangible assets:
|
|
|
|
|
Goodwill
|
|
$7,524
|
|
$7,804
|
Core deposits intangible
|
|
1,019
|
|
1,251
|
NBG customer relationships
|
|
777
|
|
891
|
|
|
Total
|
|
$9,320
|
|
$9,946
|
|
|
Prepaid expenses
|
|
$893
|
|
$962
|
Software
|
|
437
|
|
507
|
Deferred taxes, net
|
|
13,762
|
|
10,595
|
Note receivable from Elliott Cove
|
|
557
|
|
665
|
Investment in Elliott Cove
|
|
82
|
|
88
|
Investment in PWA
|
|
1,825
|
|
1,789
|
Investment in RML Holding Company
|
|
4,161
|
|
4,209
|
Investment in Low Income Housing Partnerships
|
|
6,940
|
|
7,639
|
Bank owned life insurance
|
|
2,458
|
|
2,853
|
Taxes receivable
|
|
217
|
|
731
|
Other assets
|
|
1,343
|
|
1,410
|
|
|
Total
|
|
$32,675
|
|
$31,448
|
|
|
As part of the acquisition of branches from Bank of America in
1999, the Company recorded $6.9 million of goodwill and
$2.9 million of CDI. In 2007, the Company finished
amortizing the CDI related to the Bank of America acquisition.
As part of the stock acquisition of Alaska First in October
2007, the Company recorded $2.1 million of goodwill and
$1.3 million of CDI for the acquisition of Alaska First
stock. The Company is amortizing the CDI related to the Alaska
First acquisition using the sum of years digits method
over the estimated useful life of 10 years. In the first
quarter of 2008, the Company recorded a $289,000 decrease in
goodwill related to the Alaska First acquisition to adjust the
net deferred tax assets carried over to the Companys
financial statements per FASB Statement No. 141,
Business Combinations (Revised 2007).
The Company performed goodwill impairment testing at
December 31, September 30, and June 30, 2008 and
at December 31, 2007 in accordance with the policy
described in Note 1. There was no indication of impairment
in the first step of the impairment test at September 30,
and June 30, 2008 or at December 31, 2007, and
accordingly, the Company did not perform the second step. At
December 31, 2008, there was an indication of impairment,
and accordingly, the second step was performed. Based on the
results of the step 2, the Company concluded that no impairment
existed at that time. The more significant fair value
adjustments in the pro forma business combination in the second
step were to loans. Also, our step two analysis included
adjustments to previously recorded identifiable intangible
assets to reflect them at fair value and also included the fair
value of additional intangibles not previously recognized
(generally related to businesses not acquired in a purchase
business combination). The adjustments to measure the assets,
liabilities and intangibles at fair value are for the purpose of
measuring the implied fair value of goodwill and such
adjustments are not reflected in the consolidated balance sheet.
The Company continues to monitor the Companys goodwill for
potential impairment on an ongoing basis. No assurance can be
given that we will not charge earnings during 2009 for goodwill
impairment, if, for example, our stock price declines further
and continues to trade at a significant discount to its book
value, although there are many factors that we analyze in
determining the impairment of goodwill.
In the first quarter of 2005, NCIC purchased a 10% interest in
NBG, an insurance brokerage company that provides employee
benefit plans to businesses throughout Alaska. In the fourth
quarter of 2005, NCIC purchased an additional 40.1% interest in
NBG, bringing its ownership interest to 50.1%. The Company has
invested $1.1 million in NBG and has attributed all of this
investment to an intangible asset represented by the value of
the customer relationships of NBG. The Company is amortizing the
52
NBG intangible asset over a ten-year period on a straight-line
basis. In 2008, the amortization expense on the NBG intangible
asset was $115,000.
The Company recorded amortization expense of its intangible
assets of $347,000, $337,000, and $482,000 in 2008, 2007, and
2006, respectively. The net increase in the amortization expense
in 2008 as compared to 2007 resulted from the fact that the
Company expensed a full year of amortization related to the
Alaska First CDI in 2008 and had no amortization expense related
to the acquisition of Bank of America. The decrease in the
amortization expense in 2007 as compared to 2006 resulted from
the completion of amortization expense on the CDI related to the
acquisition of the Bank of America branches. The future
amortization expense required on these assets is as follows:
|
|
|
|
Year Ending December 31:
|
|
(In Thousands)
|
|
2009
|
|
$324
|
2010
|
|
300
|
2011
|
|
276
|
2012
|
|
252
|
2013
|
|
228
|
Thereafter
|
|
416
|
|
|
Total
|
|
$1,796
|
|
|
As of December 31, 2008, the Company owns a 48% equity
interest in Elliott Cove, an investment advisory services
company, through its wholly owned subsidiary, NISC.
Elliott Cove began active operations in the fourth quarter of
2002 and has had
start-up
losses since that time as it continues to build its assets under
management. In addition to its ownership interest, the Company
provides Elliott Cove with a line of credit that has a committed
amount of $750,000 and an outstanding balance of $557,000 as of
December 31, 2008.
In the fourth quarter of 2005, the Company, through NISC,
purchased subscription rights to an ownership interest in
Pacific Wealth Advisors, LLC (PWA), an investment
advisory and wealth management business located in Seattle,
Washington. The Company also made commitments to make two loans
to PWA of $225,000 and $175,000, respectively. There were no
outstanding balances on these two commitments as of
December 31, 2008. Subsequent to the investment in these
subscription rights, PWA purchased Pacific Portfolio Consulting
L.P., an investment advisory business, and formed Pacific
Portfolio Trust Company. After the completion of these
transactions, NISC owned a 24% interest in PWA and applies the
equity method of accounting for its ownership interest in PWA.
RML was formed in 1998 and has offices throughout Alaska. During
the third quarter of 2004, RML reorganized and became a
wholly-owned subsidiary of a newly formed holding company, RML
Holding Company. In this process, RML Holding Company acquired
another mortgage company, PAM, which was merged into RML in the
first quarter of 2005. Prior to the reorganization, the Company,
through Northrim Banks wholly-owned subsidiary, NCIC,
owned a 30% interest in the profits of RML. As a result of the
reorganization, the Company now owns a 24% interest in the
profits of RML Holding Company and applies the equity method of
accounting for its ownership interest in RML.
53
Below is summary balance sheet and income statement information
for RML Holding Company.
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(In Thousands)
|
|
Assets
|
|
|
|
|
Cash
|
|
$7,366
|
|
$8,564
|
Loans held for sale
|
|
77,643
|
|
32,697
|
Other assets
|
|
9,981
|
|
8,170
|
|
|
Total Assets
|
|
$94,990
|
|
$49,431
|
|
|
Liabilities
|
|
|
|
|
Lines of credit
|
|
$73,390
|
|
$29,852
|
Other liabilities
|
|
4,865
|
|
3,997
|
|
|
Total Liabilities
|
|
78,255
|
|
33,849
|
|
|
Shareholders Equity
|
|
16,735
|
|
15,582
|
|
|
Total Liabilities and Shareholders Equity
|
|
$94,990
|
|
$49,431
|
|
|
Income/expense
|
|
|
|
|
Gross income
|
|
$17,188
|
|
$15,245
|
Total expense
|
|
13,930
|
|
14,305
|
Joint venture allocations
|
|
635
|
|
492
|
|
|
Net Income
|
|
$3,893
|
|
$1,432
|
|
|
In December of 2006, September of 2006 and January of 2003 the
Company made commitments to investment $3 million each in
USA 57, Centerline XXXIII and Centerline XXII, respectively. The
Company earns a return on its investments in the form of tax
credits and deductions that flow through to it as a limited
partner in these partnerships over a fifteen, eighteen and
eighteen-year period, respectively. The Company will fund its
remaining $1.8 million in commitments on these investments
in 2009.
The aggregate amount of certificates of deposit in amounts of
$100,000 or more at December 31, 2008, and 2007, was
$96.6 million and $41.9 million, respectively.
At December 31, 2008, the scheduled maturities of
certificates of deposit (excluding Alaska CDs, which do
not have scheduled maturities) are as follows:
|
|
|
|
Year Ending December 31:
|
|
(In Thousands)
|
|
2009
|
|
$144,726
|
2010
|
|
18,253
|
2011
|
|
9,562
|
2012
|
|
462
|
2013
|
|
342
|
Thereafter
|
|
22
|
|
|
Total
|
|
$173,367
|
|
|
54
The Company is a member of the Certificate of Deposit Account
Registry System (CDARS) which is a network of
approximately 3,000 banks throughout the United States. The
CDARS system was founded in 2003 and allows participating banks
to exchange FDIC insurance coverage so that 100% of the balance
of their customers certificates of deposit are fully
subject to FDIC insurance. The system also allows for investment
of banks own investment dollars in the form of domestic
certificates of deposit. At December 31, 2008, the Company
had $12.2 million in CDARS certificates of deposits as
compared to $1 million at December 31, 2007.
At December 31, 2008 and 2007, the Company did not hold any
certificates of deposit from a public entity collateralized by
letters of credit issued by the Federal Home Loan Bank. At
December 31, 2008, the Company had $47.1 million in
securities pledged to collateralize certificates of deposit from
the Alaska Permanent Fund. At December 31, 2007, the
Company did not have any securities pledged to collateralize
certificates of deposit from a public entity.
The Company has a line of credit with the FHLB of Seattle
approximating 12% of assets, or $121 million at
December 31, 2008. FHLB advances are subject to collateral
criteria that require the Company to pledge assets under a
blanket pledge arrangement as collateral for its borrowings from
the FHLB. At December 31, 2008, and 2007, there was
$11.0 million and $1.8 million outstanding on the
line, respectively. The increase in the outstanding balance at
December 31, 2008 as compared to the same period in 2007 is
the result of an additional draw on the line to fund the
Companys acquisition of its main office facility on
July 1, 2008. Additional advances are dependent on the
availability of acceptable collateral such as marketable
securities or real estate loans, although all FHLB advances are
secured by a blanket pledge of the Companys assets.
$1.4 million of the outstanding balance on the FHLB line of
credit has a maturity date of May 7, 2012 and an interest
rate of 5.46% as of December 31, 2008, and the rest of the
balance matures on July 3, 2018 and an interest rate of
4.99% as of December 31, 2008.
The Company purchased its main office facility for
$12.9 million on July 1, 2008. In this transaction,
the Company, through NBL, assumed an existing loan secured by
the building in an amount of $5.1 million. At
December 31, 2008, the outstanding balance on this loan is
$5.0 million. This is an amortizing loan and has a maturity
date of April 1, 2014 and an interest rate of 5.95% as of
December 31, 2008.
The Company entered into a note agreement with the Federal
Reserve Bank on December 27, 1996 on the payment of tax
deposits. Under this agreement, the Company takes in tax
payments from customers and reports these payments to the
Federal Reserve Bank. The Federal Reserve has the option to call
the tax deposits at any time. The balance at December 31,
2008, and 2007, was $490,000 and $1 million, respectively,
which was secured by investment securities.
The Federal Reserve Bank is holding $65.7 million of loans
as collateral to secure advances made through the discount
window on December 31, 2008. There were no discount window
advances outstanding at December 31, 2008 and 2007. The
Company is not paying interest on these agreements at
December 31, 2008.
Securities sold under agreements to repurchase were
$1.6 million and $14.0 million, respectively, for
December 31, 2008 and 2007. The Company is not paying
interest on these agreements at December 31, 2008, and the
interest rate at December 31, 2007 was 3.21%. The average
balance outstanding of securities sold under agreement to
repurchase during 2008 and 2007 was $8.6 million and
$8.9 million, respectively, and the maximum outstanding at
any month-end was $11.6 million and $15.2 million,
respectively, during the same time periods. The securities sold
under agreement to repurchase are held by the Federal Home Loan
Bank under the Companys control.
At December 31, 2008, the Company had $7 million at an
interest rate of 1.0% and $5 million at an interest rate of
0.63% in overnight borrowings. Both of these borrowings matured
on January 2, 2009.
55
The principal payments that are required on these borrowings as
of December 31, 2008, are as follows:
|
|
|
|
Year Ending December 31:
|
|
(In Thousands)
|
|
2009
|
|
$15,637
|
2010
|
|
1,524
|
2011
|
|
1,532
|
2012
|
|
1,349
|
2013
|
|
1,153
|
Thereafter
|
|
8,911
|
|
|
Total
|
|
$30,106
|
|
|
|
|
NOTE 13
|
Junior
Subordinated Debentures
|
In May of 2003, the Company formed a wholly-owned Delaware
statutory business trust subsidiary, Northrim Capital
Trust 1 (the Trust), which issued
$8 million of guaranteed undivided beneficial interests in
the Companys Junior Subordinated Deferrable Interest
Debentures (Trust Preferred Securities). These
debentures qualify as Tier 1 capital under Federal Reserve
Board guidelines. All of the common securities of the Trust are
owned by the Company. The proceeds from the issuance of the
common securities and the Trust Preferred Securities were
used by the Trust to purchase $8.2 million of junior
subordinated debentures of the Company. The Trust is not
consolidated in the Companys financial statements in
accordance with FASB Interpretation No. 46R
(FIN 46); therefore, the Company has recorded
its investment in the Trust as an other asset and the
subordinated debentures as a liability. The debentures which
represent the sole asset of the Trust, accrue and pay
distributions quarterly at a variable rate of
90-day LIBOR
plus 3.15% per annum, adjusted quarterly, of the stated
liquidation value of $1,000 per capital security. The interest
rate on these debentures was 5.50% at December 31, 2008.
The interest cost to the Company on these debentures was
$503,000 in 2008 and $689,000 in 2007. The Company has entered
into contractual arrangements which, taken collectively, fully
and unconditionally guarantee payment of: (i) accrued and
unpaid distributions required to be paid on the
Trust Preferred Securities; (ii) the redemption price
with respect to any Trust Preferred Securities called for
redemption by the Trust and (iii) payments due upon a
voluntary or involuntary dissolution, winding up or liquidation
of the Trust. The Trust Preferred Securities are
mandatorily redeemable upon maturity of the debentures on
May 15, 2033, or upon earlier redemption as provided in the
indenture. The Company has the right to redeem the debentures
purchased by the Trust in whole or in part, on or after
May 15, 2008. As specified in the indenture, if the
debentures are redeemed prior to maturity, the redemption price
will be the principal amount and any accrued but unpaid interest.
In December of 2005, the Company formed a wholly-owned
Connecticut statutory business trust subsidiary, Northrim
Statutory Trust 2 (the Trust 2), which
issued $10 million of guaranteed undivided beneficial
interests in the Companys Junior Subordinated Deferrable
Interest Debentures (Trust Preferred Securities
2). These debentures qualify as Tier 1 capital under
Federal Reserve Board guidelines. All of the common securities
of Trust 2 are owned by the Company. The proceeds from the
issuance of the common securities and the Trust Preferred
Securities 2 were used by Trust 2 to purchase
$10.3 million of junior subordinated debentures of the
Company. The Trust 2 is not consolidated in the Companys
financial statements in accordance with FIN 46; therefore,
the Company has recorded its investment in the Trust 2 as
an other asset and the subordinated debentures as a liability.
The debentures which represent the sole asset of Trust 2,
accrue and pay distributions quarterly at a variable rate of
90-day LIBOR
plus 1.37% per annum, adjusted quarterly, of the stated
liquidation value of $1,000 per capital security. The interest
rate on these debentures was 3.37% at December 31, 2008.
The interest cost to the Company on these debentures was
$465,000 in 2008 and $689,000 in 2007. The Company has entered
into contractual arrangements which, taken collectively, fully
and unconditionally guarantee payment of: (i) accrued and
unpaid distributions required to be paid on the
Trust Preferred Securities 2; (ii) the redemption
price with respect to any Trust Preferred Securities 2
called for redemption by Trust 2 and (iii) payments
due upon a voluntary or involuntary dissolution, winding up or
liquidation of Trust 2. The Trust Preferred Securities
2 are mandatorily redeemable upon maturity of the debentures on
March 15, 2036, or upon earlier redemption as provided in
the indenture. The Company has the right to redeem the
debentures purchased by Trust 2 in whole or in part, on or
after March 15, 2011. As specified in the indenture, if the
debentures are redeemed prior to maturity, the redemption price
will be the principal amount and any accrued but unpaid interest.
56
|
|
NOTE 14
|
Interest
Expense
|
Interest expense on deposits and borrowings is presented below:
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
Interest-bearing demand accounts
|
|
$578
|
|
$1,188
|
|
$830
|
Money market accounts
|
|
3,306
|
|
7,378
|
|
6,053
|
Savings accounts
|
|
3,444
|
|
8,756
|
|
10,113
|
Certificates of deposit greater than $100,000
|
|
2,361
|
|
1,583
|
|
1,425
|
Certificates of deposit less than $100,000
|
|
2,490
|
|
2,497
|
|
1,897
|
Borrowings
|
|
1,723
|
|
1,835
|
|
1,681
|
|
|
Total
|
|
$13,902
|
|
$23,237
|
|
$21,999
|
|
|
Components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Tax
|
|
Deferred
|
|
Total
|
December 31,
|
|
|
|
Expense
|
|
(Benefit)
|
|
Expense
|
|
|
|
|
|
(In Thousands)
|
|
2008:
|
|
Federal
|
|
$5,360
|
|
$(2,822)
|
|
$2,538
|
|
|
State
|
|
1,400
|
|
(816)
|
|
584
|
|
|
Total
|
|
|
|
$6,760
|
|
$(3,638)
|
|
$3,122
|
|
|
2007:
|
|
Federal
|
|
$6,026
|
|
$(303)
|
|
$5,723
|
|
|
State
|
|
1,627
|
|
(90)
|
|
1,537
|
|
|
Total
|
|
|
|
$7,653
|
|
$(393)
|
|
$7,260
|
|
|
2006:
|
|
Federal
|
|
$7,828
|
|
$(1,436)
|
|
$6,392
|
|
|
State
|
|
2,012
|
|
(426)
|
|
1,586
|
|
|
Total
|
|
|
|
$9,840
|
|
$(1,862)
|
|
$7,978
|
|
|
The actual expense for 2008, 2007, and 2006, differs from the
expected tax expense (computed by applying the
U.S. Federal Statutory Tax Rate of 35% for the year ended
December 31, 2008, 2007, and 2006) as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
Computed expected income tax expense
|
|
$3,222
|
|
$6,621
|
|
$7,333
|
State income taxes, net
|
|
380
|
|
999
|
|
1,031
|
Low income housing credits
|
|
(695)
|
|
(545)
|
|
(322)
|
Other
|
|
215
|
|
185
|
|
(64)
|
|
|
Total
|
|
$3,122
|
|
$7,260
|
|
$7,978
|
|
|
57
The components of the net deferred tax asset are as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
Deferred Tax Asset:
|
|
|
|
|
|
|
Provision for loan losses
|
|
$18,239
|
|
$13,776
|
|
$10,499
|
Loan fees, net of costs
|
|
1,115
|
|
1,126
|
|
1,240
|
Unrealized loss on available-for-sale investment securities
|
|
|
|
|
|
201
|
Depreciation and amortization
|
|
814
|
|
902
|
|
826
|
Other real estate owned
|
|
907
|
|
|
|
|
Other
|
|
4,824
|
|
3,165
|
|
3,224
|
|
|
Total Deferred Tax Asset
|
|
$25,899
|
|
$18,969
|
|
$15,990
|
Deferred Tax Liability:
|
|
|
|
|
|
|
Net loan charge offs
|
|
$(8,384)
|
|
$(5,903)
|
|
$(3,386)
|
Unrealized gain on available-for-sale investment securities
|
|
(629)
|
|
(158)
|
|
|
Intangible amortization
|
|
(1,504)
|
|
(1,350)
|
|
(1,196)
|
Other
|
|
(1,620)
|
|
(963)
|
|
(848)
|
|
|
Total Deferred Tax Liability
|
|
$(12,137)
|
|
$(8,374)
|
|
$(5,430)
|
|
|
Net Deferred Tax Asset
|
|
$39,661
|
|
$29,564
|
|
$26,550
|
|
|
A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax asset will not be
realized. The primary source of recovery of the deferred tax
assets will be future taxable income. Management believes it is
more likely than not that the results of future operations will
generate sufficient taxable income to realize the deferred tax
assets. The deferred tax asset is included in other assets.
58
|
|
NOTE 16
|
Comprehensive
Income
|
At December 31, 2008, 2007, and 2006, the related tax
effects allocated to each component of other comprehensive
income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
Before Tax
|
|
(Expense)
|
|
|
December 31,
|
|
Amount
|
|
Benefit
|
|
Net Amount
|
|
|
|
(In Thousands)
|
|
2008:
|
|
|
|
|
|
|
Unrealized net holding gains on investment securities arising
during 2008
|
|
$1,290
|
|
$(528)
|
|
$762
|
Plus: Reclassification adjustment for net realized gains
included in net income
|
|
(146)
|
|
60
|
|
(86)
|
|
|
Net unrealized gains
|
|
$1,144
|
|
$(468)
|
|
$676
|
|
|
2007:
|
|
|
|
|
|
|
Unrealized net holding gains on investment securities arising
during 2007
|
|
$871
|
|
$(359)
|
|
$512
|
Plus: Reclassification adjustment for net realized gains
included in net income
|
|
|
|
|
|
|
|
|
Net unrealized gains
|
|
$871
|
|
$(359)
|
|
$512
|
|
|
2006:
|
|
|
|
|
|
|
Unrealized net holding gains on investment securities arising
during 2006
|
|
$342
|
|
$(140)
|
|
$202
|
Plus: Reclassification adjustment for net realized gains
included in net income
|
|
|
|
|
|
|
|
|
Net unrealized gains
|
|
$342
|
|
$(140)
|
|
$202
|
|
|
|
|
NOTE 17
|
Employee
Benefit Plans
|
On July 1, 1992, the Company implemented a profit sharing
plan, including a provision designed to qualify the plan under
Section 401(k) of the Internal Revenue Code of 1986, as
amended. Employees may participate in the plan if they work more
than 1,000 hours per year. Under the plan, each eligible
participant may contribute a percentage of their eligible salary
to a maximum established by the IRS, and the Company provides
for a mandatory $0.25 match for each $1.00 contributed by an
employee up to 6% of the employees salary. The Company may
increase the matching contribution at the discretion of the
Board of Directors. The plan also allows the Company to make a
discretionary contribution on behalf of eligible employees based
on their length of service to the Company.
To be eligible for 401(k) contributions, participants must be
employed at the end of the plan year, except in the case of
death, disability or retirement. The Company expensed $744,000,
$780,000, and $727,000, in 2008, 2007, and 2006, respectively
for 401(k) contributions and included these expenses in salaries
and other personal expense in the Consolidated Statements of
Income.
On July 1, 1994, the Company implemented a Supplemental
Executive Retirement Plan to executive officers of the Company
whose retirement benefits under the 401(k) plan have been
limited under provisions of the Internal Revenue Code.
Contributions to this plan totaled $302,000, $309,000, and
$255,000, in 2008, 2007, and 2006, respectively and included
these expenses in salaries and other personnel expense in the
Consolidated Statements of Income. At December 31, 2008 and
2007, the balance of the accrued liability for this plan was
included in other liabilities and totaled $2.0 million and
$1.7 million, respectively.
In February of 2002, the Company implemented a non-qualified
deferred compensation plan in which certain of the executive
officers participate. The Companys net liability under
this plan is dependant upon market gains and losses on assets
held in the plan. For 2008, the Company recognized a $249,000
reduction in its liability related to this plan. In 2007 and
2006, the Company recognized increases in its liability of
$419,000 and $381,000, respectively. These expenses are included
in salaries and other personnel expense in the Consolidated
Statements of Income. At December 31, 2008 and 2007, the
balance of the accrued liability for this plan was included in
other liabilities and totaled $1.3 million and
$1.5 million, respectively.
59
Quarterly cash dividends were paid aggregating to
$4.2 million, $3.6 million, and $2.8 million, or
$0.66 per share, $0.57 per share, and $0.45 per share, in 2008,
2007, and 2006, respectively. On February 5, 2009, the
Board of Directors declared a $0.10 per share cash dividend
payable on February 27, 2008, to shareholders of record on
February 19, 2009. Federal and State regulations place
certain limitations on the payment of dividends by the Company.
In September 2002, our Board of Directors approved a plan
whereby we would periodically repurchase for cash up to
approximately 5%, or 306,372, of our shares of common stock in
the open market. In August of 2004, the Board of Directors
amended the stock repurchase plan and increased the number of
shares available under the program by 5% of total shares
outstanding, or 304,283 shares. In June of 2007, the Board
of Directors amended the stock repurchase plan and increased the
number of shares available under the program by 5% of total
shares outstanding, or 305,029 shares. We purchased
688,442 shares of our stock under this program through
December 31, 2008 at a total cost of $14.2 million at
an average price of $20.65, which left a balance of
227,242 shares available under the stock repurchase
program. We intend to continue to repurchase our stock from time
to time depending upon market conditions, but we can make no
assurances that we will continue this program or that we will
repurchase all of the authorized shares. No repurchases occurred
during 2008.
The Company has set aside 330,750 shares of authorized
stock for the 2004 Stock Incentive Plan (2004 Plan)
under which it may grant stock options and restricted stock. The
Companys policy is to issue new shares to cover awards.
The total number of shares granted under the 2004 Plan and
previous stock incentive plans at December 31, 2008 was
493,894, which includes 281,279 shares granted under the
2004 Plan leaving 63,298 shares available for future
awards. Under the 2004 Plan, certain key employees have been
granted the option to purchase set amounts of common stock at
the market price on the day the option was granted. Optionees,
at their own discretion, may cover the cost of exercise through
the exchange, at then fair value, of already owned shares of the
Companys stock. Options are granted for a
10-year
period and vest on a pro rata basis over the initial three years
from grant. In addition to stock options, the Company has
granted restricted stock to certain key employees under the 2004
Plan. These restricted stock grants cliff vest at the end of a
three-year time period.
Activity on options and restricted stock granted under the 2004
Plan and prior plans is as follows. This information has been
adjusted for the 5% stock dividends paid on October 5, 2007
and September 1, 2006:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
|
|
Range of
|
|
|
Under
|
|
Average
|
|
Exercise
|
|
|
Option
|
|
Exercise Price
|
|
Price
|
|
|
December 31, 2005 outstanding
|
|
467,402
|
|
$11.86
|
|
$6.02-$25.94
|
Granted 2006
|
|
49,731
|
|
18.29
|
|
|
Forfeited
|
|
(6,528)
|
|
15.38
|
|
|
Exercised
|
|
(49,632)
|
|
9.76
|
|
|
|
|
December 31, 2006 outstanding
|
|
460,973
|
|
$12.73
|
|
$6.02-$25.94
|
Granted 2007
|
|
64,445
|
|
16.93
|
|
|
Forfeited
|
|
(4,349)
|
|
17.34
|
|
|
Exercised
|
|
(32,624)
|
|
8.90
|
|
|
|
|
December 31, 2007 outstanding
|
|
488,445
|
|
$13.50
|
|
$7.17-$25.94
|
Granted 2008
|
|
58,127
|
|
5.71
|
|
|
Forfeited
|
|
(5,021)
|
|
13.31
|
|
|
Exercised
|
|
(47,657)
|
|
7.56
|
|
|
|
|
December 31, 2008 outstanding
|
|
493,894
|
|
$13.16
|
|
$7.17-$25.94
|
|
|
60
Stock options outstanding and exercisable at December 31,
2008 are as follows:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
Average
|
|
|
Shares
|
|
Exercise Price
|
|
|
Outstanding at January 1, 2008
|
|
449,665
|
|
$14.67
|
Changes during the period:
|
|
|
|
|
Granted
|
|
26,056
|
|
12.74
|
Forfeited
|
|
(4,539)
|
|
14.78
|
Exercised
|
|
(40,032)
|
|
9.00
|
|
|
Outstanding at December 31, 2008
|
|
431,150
|
|
$15.08
|
|
|
Options exercisable at December 31, 2008
|
|
362,815
|
|
$14.23
|
Unexercisable options at December 31, 2008
|
|
68,335
|
|
$19.57
|
|
|
Restricted stock outstanding at December 31, 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
Average
|
|
|
Shares
|
|
Fair Value
|
|
|
Outstanding at January 1, 2008
|
|
38,780
|
|
$23.66
|
Changes during the period:
|
|
|
|
|
Granted
|
|
32,071
|
|
12.74
|
Vested
|
|
(7,625)
|
|
22.30
|
Forfeited
|
|
(482)
|
|
24.56
|
|
|
Outstanding at December 31, 2008
|
|
62,744
|
|
$18.23
|
|
|
At December 31, 2008, all restricted stock was unvested. No
options or restricted stock expired unexercised in 2008.
At December 31, 2008, 2007, and 2006, the weighted-average
remaining contractual life of outstanding options and restricted
stock was 4.0 years, 4.9 years, and 5.3 years,
respectively.
At December 31, 2008, 2007, and 2006, the number of options
exercisable was 362,815, 366,443, and 338,100, respectively, and
the weighted-average exercise price of those options was $14.23,
$12.61, and $11.98, respectively.
The aggregate intrinsic value of options outstanding,
exercisable, and unexercisable at December 31, 2008 was
($2.1) million, ($1.4) million, and ($634,000),
respectively. The weighted average remaining life of options
outstanding and options exercisable at December 31, 2008 is
4.9 and 4.1 years, respectively. The weighted average
remaining life of restricted stock outstanding at
December 31, 2008 is 2.1 years. No restricted stock is
exercisable.
61
At December 31, 2008, there were 63,298 additional shares
available for grant under the plan. The per share fair values of
stock options granted during 2008, 2007, and 2006, were
calculated on the date of grant using a Black-Scholes
option-pricing model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
Granted
|
|
Stock Options:
|
|
Nov. 2008
|
|
Nov. 2007
|
|
Nov. 2006
|
|
|
Expected option life (years)
|
|
8.4
|
|
8.3
|
|
7.4
|
Risk free rate
|
|
4.70%
|
|
4.37%
|
|
4.57%
|
Dividends per Share
|
|
$0.40
|
|
$0.66
|
|
$0.56
|
Expected volatility factor
|
|
30.21%
|
|
34.12%
|
|
37.44%
|
|
|
The expected life represents the weighted average period of time
that options granted are expected to be outstanding when
considering vesting periods and the exercise history of the
Company. The risk free rate is based upon the equivalent yield
of a United States Treasury zero-coupon issue with a term
equivalent to the expected life of the option. The expected
dividends are based on projected dividends for the Company at
the date of the option grant taking into account projected net
income growth, dividend pay-out ratios, and other factors. The
expected volatility is based upon the historical price
volatility of the Companys stock.
The weighted average fair value of stock option grants, the fair
value of shares vested during the period, and the intrinsic
value of options exercised during the years ended
December 31, 2008, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(Dollars in Thousands)
|
|
Options:
|
|
|
|
|
|
|
Weighted-average grant-date fair value of stock options granted:
|
|
$3.74
|
|
$7.55
|
|
$9.79
|
Total fair value of shares vested during the period:
|
|
296
|
|
342
|
|
256
|
Total intrinsic value of options exercised:
|
|
382
|
|
406
|
|
672
|
|
|
Restricted stock units:
|
|
|
|
|
|
|
Weighted-average grant-date fair value of stock options granted:
|
|
$12.74
|
|
$23.00
|
|
$26.44
|
|
|
The Company recognizes the fair value of the stock options and
restricted stock as expense over the required service period,
net of estimated forfeitures, using the straight line
attribution method for stock-based payment grants previously
granted but not fully vested at January 1, 2006 as well as
grants made after January 1, 2006 as prescribed in FASB
123R. As a result, the Company recognized expense of $296,000 on
the fair value of stock options and $301,000 on the fair value
of restricted stock for a total of $597,000 in stock-based
compensation expense for the year ending December 31, 2008.
The Company recognized expense of $342,000 on the fair value of
stock options and $236,000 on the fair value of restricted stock
for a total of $578,000 in stock-based compensation expense for
the year ending December 31, 2007.
The unamortized stock-based compensation expense and the
weighted average expense period remaining at December 31,
2008 are as follows:
|
|
|
|
|
|
|
|
|
|
Average Period
|
|
|
Unamortized
|
|
to Expense
|
|
|
Expense
|
|
(years)
|
|
|
|
(Dollars in Thousands)
|
|
Stock options
|
|
$340
|
|
1.8
|
Restricted stock
|
|
662
|
|
2.1
|
|
|
Total
|
|
$1,002
|
|
1.9
|
|
|
Proceeds from the exercise of stock options and vesting of
restricted stock in 2008, 2007 and 2006 were $373,000, $300,000
and $484,000 respectively. The Company withheld $345,000,
$227,000 and $270,000 to pay for stock option exercises or
income taxes that resulted from the exercise of stock options in
2008, 2007 and 2006, respectively. The intrinsic value of the
options that were
62
exercised during 2008, 2007 and 2006 was $382,000, $406,000 and
$672,000, respectively, which represents the difference between
the fair value of the options at the date of exercise and their
exercise price. A portion of these options were incentive stock
options that were exercised and held by the optionee and not
eligible for a tax deduction. At the date of exercise, the
intrinsic values of these options was $194,000, $145,000 and
$113,000 for 2008, 2007 and 2006, respectively. Thus, the
Companys tax deduction was based on options exercised and
sold during 2008, 2007 and 2006 with total intrinsic values of
$228,000, $261,000 and $559,000, respectively. The Company
recognized tax deductions of $66,000, $108,000 and $230,000
related to the exercise of these stock options during 2008, 2007
and 2006, respectively.
FASB Statement No. 123R requires that an entity that used
the intrinsic value method under APB 25 prior to implementation
of FASB Statement No. 123R must calculate the amount of
excess tax benefits available to offset a tax deficiency as the
net amount of excess tax benefits that would have been
recognized in additional paid in capital had the entity adopted
FASB Statement No. 123 for recognition purposes for awards
granted for reporting periods ended after December 14,
1994. The Company used the intrinsic value method to calculate
share-based compensation cost prior to January 1, 2006.
FASB Staff Position No. FAS No. 123(R)-3,
Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards
(FSP 123R-3), effective November 10,
2005, provides for a practical transition method that may be
elected to calculate the pool of excess tax benefits available
to absorb tax deficiencies upon the adoption of FASB 123R. The
Company has elected to use the long haul method to calculate the
beginning balance of the APIC pool as opposed to electing this
simplified method. At December 31, 2008, the amount of
excess tax benefits available to offset a tax deficiency is
$790,000.
|
|
NOTE 20
|
Commitments
and Contingent Liabilities
|
Rental expense under leases for equipment and premises was
$1.7 million, $2.2 million, and $1.9 million in
2008, 2007, and 2006, respectively. Required minimum rentals on
non-cancelable leases as of December 31, 2008, are as
follows:
|
|
|
|
Year Ending December 31:
|
|
(In Thousands)
|
|
2009
|
|
$844
|
2010
|
|
829
|
2011
|
|
734
|
2012
|
|
493
|
2013
|
|
352
|
Thereafter
|
|
5,089
|
|
|
Total
|
|
$8,341
|
|
|
Rental income under leases was $463,000, $134,000 and $108,000
in 2008, 2007, and 2006, respectively. Required minimum rentals
on non-cancelable leases as of December 31, 2008, are as
follows:
|
|
|
|
Year Ending December 31:
|
|
(In Thousands)
|
|
2009
|
|
$760
|
2010
|
|
156
|
2011
|
|
156
|
2012
|
|
156
|
2013
|
|
156
|
Thereafter
|
|
|
|
|
Total
|
|
$1,384
|
|
|
The Company purchased its main office facility for
$12.9 million on July 1, 2008. In this transaction,
the Company assumed an existing loan secured by the building in
an amount of approximately $5.0 million and took out a
long-term borrowing for $10 million to pay the remaining
amount of the purchase price and provide additional funds for
the Company. Approximately 40% of the building is leased to
other tenants and the Company will continue to occupy the
remaining 60% of the building. The Company does not expect that
the purchase of the main office facility will have a material
effect on its financial condition. Prior to the
63
purchase, the Company leased the main office facility from an
entity in which a former director has an interest. Rent expense
under this lease agreement was $582,000, $1.1 million, and
$975,000 for 2008, 2007, and 2006, respectively. The Company
believes that the lease agreement was at market terms.
At December 31, 2008, the Company held $12.6 million
as other real estate owned. The Company expects to expend
approximately $2.2 million during 2009 to complete
construction of these projects with an estimated completion date
of September 30, 2009.
The Company is self-insured for medical, dental, and vision plan
benefits provided to employees. The Company has obtained
stop-loss insurance to limit total medical claims in any one
year to $75,000 per covered individual and $2.3 million for
all medical claims. The Company has established a liability for
outstanding claims and incurred, but unreported, claims. While
management uses what it believes are pertinent factors in
estimating the liability, it is subject to change due to claim
experience, type of claims, and rising medical costs.
Off-Balance Sheet Financial Instruments: In the
ordinary course of business, the Company enters into various
types of transactions that involve financial instruments with
off-balance sheet risk. These instruments include commitments to
extend credit and standby letters of credit and are not
reflected in the accompanying balance sheets. These transactions
may involve to varying degrees credit and interest rate risk in
excess of the amount, if any, recognized in the balance sheets.
Management does not anticipate any loss as a result of these
commitments.
The Companys off-balance sheet credit risk exposure is the
contractual amount of commitments to extend credit and standby
letters of credit. The Company applies the same credit standards
to these contracts as it uses in its lending process.
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
|
|
(In Thousands )
|
|
Off-balance sheet commitments:
|
|
|
|
|
Commitments to extend credit
|
|
$134,455
|
|
$158,569
|
Standby letters of credit
|
|
12,752
|
|
28,216
|
|
|
Commitments to extend credit are agreements to lend to
customers. These commitments have specified interest rates and
generally have fixed expiration dates but may be terminated by
the Company if certain conditions of the contract are violated.
Although currently subject to draw down, many of the commitments
do not necessarily represent future cash requirements.
Collateral held relating to these commitments varies, but
generally includes real estate, inventory, accounts receivable,
and equipment.
Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a
third party. Credit risk arises in these transactions from the
possibility that a customer may not be able to repay the Company
upon default of performance. Collateral held for standby letters
of credit is based on an individual evaluation of each
customers creditworthiness.
|
|
NOTE 21
|
Regulatory
Matters
|
The Company and Northrim Bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and Northrim
Bank must meet specific capital guidelines that involve
quantitative measures of the Companys and Northrim
Banks assets, liabilities, and certain off-balance sheet
items as calculated under regulatory practices. The
Companys and Northrim Banks capital amounts and
classification are also subject to qualitative judgment by the
regulators about components, risk weightings, and other factors.
Federal banking agencies have established minimum amounts and
ratios of total and Tier I capital to risk-weighted assets,
and of Tier I capital to average assets. The regulations
set forth the definitions of capital, risk-weighted and average
assets. As of December 15, 2008, the most recent
notification from the FDIC categorized the Bank as
well-capitalized under the regulatory framework for prompt
corrective action. Management believes, as of December 31,
2008, that the Company and Northrim Bank met all capital
adequacy requirements.
The tables below illustrate the capital requirements for the
Company and the Bank and the actual capital ratios for each
entity that exceed these requirements. Management intends to
maintain a Tier 1 risk-based capital ratio for the Bank in
excess of 10% in 2009, exceeding the FDICs
well-capitalized capital requirement classification.
The dividends that the Bank pays to the Company are limited to
the extent necessary for the Bank to meet the regulatory
requirements of a well-capitalized bank. The capital
64
ratios for the Company exceed those for the Bank primarily
because the $18 million trust preferred securities
offerings that the Company completed in the second quarter of
2003 and in the fourth quarter of 2005 are included in the
Companys capital for regulatory purposes although they are
accounted for as a liability in its financial statements. The
trust preferred securities are not accounted for on the
Banks financial statements nor are they included in its
capital. As a result, the Company has $18 million more in
regulatory capital than the Bank at December 31, 2008 and
2007, which explains most of the difference in the capital
ratios for the two entities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
Actual
|
|
Adequately-Capitalized
|
|
Well-Capitalized
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
As of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets)
|
|
$123,430
|
|
13.90%
|
|
$71,039
|
|
|
³
8.0%
|
|
$88,799
|
|
³10.0%
|
Tier I Capital (to risk-weighted assets)
|
|
$112,310
|
|
12.65%
|
|
$35,514
|
|
|
³
4.0%
|
|
$53,271
|
|
³
6.0%
|
Tier I Capital (to average assets)
|
|
$112,310
|
|
11.54%
|
|
$38,937
|
|
|
³
4.0%
|
|
$48,672
|
|
³
5.0%
|
As of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets)
|
|
$120,170
|
|
13.57%
|
|
$70,845
|
|
|
³
8.0%
|
|
$88,556
|
|
³
10.0%
|
Tier I Capital (to risk-weighted assets)
|
|
$109,093
|
|
12.32%
|
|
$35,420
|
|
|
³
4.0%
|
|
$53,130
|
|
³
6.0%
|
Tier I Capital (to average assets)
|
|
$109,093
|
|
11.10%
|
|
$39,313
|
|
|
³
4.0%
|
|
$49,141
|
|
³
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northrim Bank
|
|
Actual
|
|
Adequately-Capitalized
|
|
Well-Capitalized
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
As of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets)
|
|
$115,537
|
|
13.04%
|
|
$70,882
|
|
³8.0%
|
|
$88,602
|
|
³10.0%
|
Tier I Capital (to risk-weighted assets)
|
|
$104,438
|
|
11.79%
|
|
$35,444
|
|
³4.0%
|
|
$53,165
|
|
³6.0%
|
Tier I Capital (to average assets)
|
|
$104,438
|
|
10.77%
|
|
$38,782
|
|
³4.0%
|
|
$48,478
|
|
³5.0%
|
As of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets)
|
|
$113,089
|
|
12.80%
|
|
$70,681
|
|
³8.0%
|
|
$88,351
|
|
³10.0%
|
Tier I Capital (to risk-weighted assets)
|
|
$102,037
|
|
11.55%
|
|
$35,337
|
|
³4.0%
|
|
$53,006
|
|
³6.0%
|
Tier I Capital (to average assets)
|
|
$102,037
|
|
10.43%
|
|
$39,132
|
|
³4.0%
|
|
$48,915
|
|
³5.0%
|
|
|
|
|
NOTE 22
|
Fair
Value Measurements
|
On January 1, 2008, the Company adopted the provisions
SFAS 159. In accordance with this statement, the Company,
at its option, can value assets and liabilities at fair value on
an
instrument-by-instrument
basis with changes in the fair value recorded in earnings. The
Company elected not to value any additional assets or
liabilities at fair value in accordance with SFAS 159.
On January 1, 2008, the Company also adopted the provisions
of SFAS 157. This statement defines fair value, establishes
a consistent framework for measuring fair value and expands
disclosure requirements for fair value measurement. This
statement applies whenever assets or liabilities are required or
permitted to be measured at fair value under currently existing
standards.
Fair
Value Hierarchy
In accordance with FASB Statement 157, 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. Level 1 also includes
U.S. Treasury and federal agency securities, which are
traded by dealers or brokers in active markets. Valuations are
obtained from readily available pricing sources for market
transactions involving identical assets or liabilities.
65
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
Companys 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.
Cash and Money Market Investments: 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: In 2008, 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 for
loan losses (see Note 7). Loans are valued using a
discounted cash flow methodology and are pooled based on similar
characteristics, such as underlying collateral, type of interest
rate (fixed or adjustable), types of amortization, and other
similar factors. A discount rate was developed based on the
relative risk of the cash flows, taking into account the loan
type, the maturity of the loans, liquidity risk and a required
return on debt and capital. An additional liquidity risk is
estimated primarily using observable, historical sales of loans
during periods of similar economic conditions. In accordance
with Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan
(SFAS 114), impaired loans are carried at
fair value. Specific valuation allowances are included in the
allowance for loan losses. The carrying amount of accrued
interest receivable approximates its fair value. In 2007, loans
were discounted using expected future cash flows, and impaired
loans were recorded as described above in accordance with
SFAS 114.
Purchased Receivables: Fair values for purchased
receivables are based on their carrying amounts due to their
short duration and repricing frequency.
Deposit Liabilities: 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. The carrying amount of accrued interest payable
approximates its fair value.
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 the
current discounted cash flows to maturity. Management utilized a
market approach to determine the appropriate discount rate for
junior subordinated debentures.
Assets subject to non-recurring adjustment to fair value:
The Company may be required to measure certain assets
such as equity method investments, intangible assets or 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. Effective January 1, 2009,
the Company will be required to disclose the fair value of these
non-financial assets and liabilities in accordance with FASB
Staff Position
157-2.
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 Companys entire holdings
of a particular financial instrument. Because no market exists
for a significant portion of the Companys 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.
66
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2008
|
|
2007
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
|
|
(In Thousands)
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
Cash and money market investments
|
|
$37,830
|
|
$37,830
|
|
$63,806
|
|
$63,806
|
Domestic certificates of deposit
|
|
9,500
|
|
9,500
|
|
|
|
|
Investment securities
|
|
152,444
|
|
152,515
|
|
161,713
|
|
161,761
|
Net loans
|
|
698,386
|
|
650,270
|
|
703,066
|
|
701,912
|
Purchased receivables
|
|
19,075
|
|
19,075
|
|
19,437
|
|
19,437
|
Accrued interest receivable
|
|
4,812
|
|
4,812
|
|
5,232
|
|
5,232
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$843,252
|
|
$845,560
|
|
$867,376
|
|
$866,299
|
Accrued interest payable
|
|
903
|
|
903
|
|
709
|
|
709
|
Borrowings
|
|
30,106
|
|
30,517
|
|
16,770
|
|
16,673
|
Junior subordinated debentures
|
|
18,558
|
|
8,211
|
|
18,558
|
|
23,135
|
Unrecognized Financial Instruments:
|
|
|
|
|
|
|
|
|
Commitments to extend credit(a)
|
|
$134,455
|
|
$1,345
|
|
$158,569
|
|
$1,586
|
Standby letters of credit(a)
|
|
12,752
|
|
128
|
|
28,216
|
|
282
|
|
|
|
|
|
(a)
|
|
Carrying amounts reflect the
notional amount of credit exposure under these financial
instruments.
|
The following table sets forth the balances of assets and
liabilities measured at fair value on a recurring basis (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
Signifcant Other
|
|
Significant
|
|
|
|
|
Identical Assets
|
|
Observable Inputs
|
|
Unobservable
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
Inputs (Level 3)
|
|
|
Available-for-sale securities
|
|
$141,010
|
|
|
|
$141,010
|
|
|
|
|
Total
|
|
$141,010
|
|
|
|
$141,010
|
|
|
|
|
As of and for the three months ending December 31, 2008, 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Signifcant Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Significant Unobservable
|
|
|
Total (gains)
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
Inputs (Level 3)
|
|
|
losses
|
|
|
|
|
Loans measured for
impairment1
|
|
$
|
35,062
|
|
|
|
|
|
|
$
|
21,075
|
|
|
$
|
13,987
|
|
|
$
|
(160
|
)
|
Other real estate
owned2
|
|
|
10,520
|
|
|
|
|
|
|
|
|
|
|
|
10,520
|
|
|
|
1,958
|
|
|
|
Total
|
|
$
|
45,582
|
|
|
|
|
|
|
$
|
21,075
|
|
|
$
|
24,507
|
|
|
$
|
1,798
|
|
|
|
|
|
|
1
|
|
Relates to certain impaired
collateral dependant loans. The impairment was measured based on
the fair value of collateral, in accordance with the provisions
of SFAS 114.
|
|
2
|
|
Relates to certain impaired other
real estate owned. This impairment arose from an adjustment to
the Companys estimate of the fair market value of these
properties based on changes in estimated costs to complete the
projects.
|
67
|
|
NOTE 23
|
Quarterly
Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2008 Quarter Ended
|
|
Dec. 31
|
|
Sept. 30
|
|
June 30
|
|
March 31
|
|
|
|
(In Thousands Except Per Share Amounts)
|
|
Total interest income
|
|
$13,864
|
|
$14,607
|
|
$14,887
|
|
$16,358
|
Total interest expense
|
|
2,807
|
|
3,511
|
|
3,421
|
|
4,163
|
|
|
Net interest income
|
|
11,057
|
|
11,096
|
|
11,466
|
|
12,195
|
Provision for loan losses
|
|
1,500
|
|
2,000
|
|
1,999
|
|
1,700
|
Other operating income
|
|
2,924
|
|
3,202
|
|
2,835
|
|
2,438
|
Other operating expense
|
|
10,661
|
|
9,895
|
|
10,402
|
|
9,481
|
|
|
Income before income taxes and minority interest
|
|
1,820
|
|
2,403
|
|
1,900
|
|
3,452
|
Minority interest in subsidiaries
|
|
99
|
|
102
|
|
94
|
|
75
|
|
|
Pre tax income
|
|
1,721
|
|
2,301
|
|
1,806
|
|
3,377
|
Income taxes
|
|
775
|
|
751
|
|
367
|
|
1,229
|
|
|
Net Income
|
|
$946
|
|
$1,550
|
|
$1,439
|
|
$2,148
|
|
|
Earnings per share, basic
|
|
$0.15
|
|
$0.24
|
|
$0.23
|
|
$0.34
|
|
|
Earnings per share, diluted
|
|
$0.14
|
|
$0.24
|
|
$0.23
|
|
$0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter Ended
|
|
Dec. 31
|
|
Sept. 30
|
|
June 30
|
|
March 31
|
|
|
|
(In Thousands Except Per Share Amounts)
|
|
Total interest income
|
|
$18,242
|
|
$18,470
|
|
$18,373
|
|
$17,982
|
Total interest expense
|
|
5,314
|
|
6,058
|
|
5,986
|
|
5,879
|
|
|
Net interest income
|
|
12,928
|
|
12,412
|
|
12,387
|
|
12,103
|
Provision for loan losses
|
|
3,000
|
|
725
|
|
1,333
|
|
455
|
Other operating income
|
|
2,730
|
|
2,809
|
|
2,726
|
|
1,689
|
Other operating expense
|
|
8,839
|
|
8,585
|
|
8,680
|
|
8,959
|
|
|
Income before income taxes and minority interest
|
|
3,819
|
|
5,911
|
|
5,100
|
|
4,378
|
Minority interest in subsidiaries
|
|
75
|
|
85
|
|
80
|
|
50
|
|
|
Pre tax income
|
|
3,744
|
|
5,826
|
|
5,020
|
|
4,328
|
Income taxes
|
|
1,583
|
|
2,200
|
|
1,878
|
|
1,599
|
|
|
Net Income
|
|
$2,161
|
|
$3,626
|
|
$3,142
|
|
$2,729
|
|
|
Earnings per share, basic
|
|
$0.34
|
|
$0.57
|
|
$0.49
|
|
$0.42
|
|
|
Earnings per share, diluted
|
|
$0.34
|
|
$0.56
|
|
$0.48
|
|
$0.42
|
|
|
|
|
NOTE 24
|
Disputes
and Claims
|
The Company from time to time may be involved with disputes,
claims, and litigation related to the conduct of its banking
business. In December of 2006, the Company became aware of a
lawsuit related to its purchase of NBG. A verdict in this matter
was entered in favor of the Company in July 2008.
68
|
|
NOTE 25
|
Parent
Company Financial Information
|
Condensed financial information for Northrim BanCorp, Inc.
(unconsolidated parent company only) is as follows:
|
|
|
|
|
|
|
|
Balance Sheets for December 31,
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
Assets
|
|
|
|
|
|
|
Cash
|
|
$5,160
|
|
$3,951
|
|
$12,629
|
Investment in Northrim Bank
|
|
114,623
|
|
112,184
|
|
97,806
|
Investment in NISC
|
|
2,025
|
|
1,795
|
|
2,530
|
Investment in NCT1
|
|
248
|
|
248
|
|
248
|
Investment in NST2
|
|
310
|
|
310
|
|
310
|
Due from NISC
|
|
382
|
|
530
|
|
110
|
Due from Northrim Building
|
|
|
|
312
|
|
|
Due from Northrim Bank
|
|
14
|
|
|
|
|
Other assets
|
|
678
|
|
1,001
|
|
414
|
|
|
Total Assets
|
|
$123,440
|
|
$120,331
|
|
$114,047
|
|
|
Liabilities
|
|
|
|
|
|
|
Junior subordinated debentures
|
|
$18,558
|
|
$18,558
|
|
$18,558
|
Other liabilities
|
|
234
|
|
382
|
|
71
|
|
|
Total Liabilities
|
|
18,792
|
|
18,940
|
|
18,629
|
Shareholders Equity
|
|
|
|
|
|
|
Common stock
|
|
6,331
|
|
6,300
|
|
6,114
|
Additional paid-in capital
|
|
51,458
|
|
50,798
|
|
46,379
|
Retained earnings
|
|
45,958
|
|
44,068
|
|
43,212
|
Accumulated other comprehensive
income- net
unrealized gains on available for sale investment securities
|
|
901
|
|
225
|
|
(287)
|
|
|
Total Shareholders Equity
|
|
104,648
|
|
101,391
|
|
95,418
|
|
|
Total Liabilities and Shareholders Equity
|
|
$123,440
|
|
$120,331
|
|
$114,047
|
|
|
|
|
|
|
|
|
|
|
Statements of Income For Years
Ended:
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
Income
|
|
|
|
|
|
|
Interest income
|
|
$115
|
|
$518
|
|
$578
|
Net income from Northrim Bank
|
|
7,813
|
|
13,365
|
|
14,432
|
Net loss from NISC
|
|
(24)
|
|
(95)
|
|
(170)
|
Other income
|
|
30
|
|
|
|
|
|
|
Total Income
|
|
7,934
|
|
13,788
|
|
14,840
|
Expense
|
|
|
|
|
|
|
Interest expense
|
|
998
|
|
1,421
|
|
1,360
|
Administrative and other expenses
|
|
1,765
|
|
1,691
|
|
1,262
|
|
|
Total Expense
|
|
2,763
|
|
3,112
|
|
2,622
|
Net Income Before Income Taxes
|
|
5,171
|
|
10,676
|
|
12,218
|
Income tax expense (benefit)
|
|
(912)
|
|
(982)
|
|
(756)
|
|
|
Net Income
|
|
$6,083
|
|
$11,658
|
|
$12,974
|
|
|
69
|
|
|
|
|
|
|
|
Statements of Cash Flows For Years
Ended:
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
Operating Activities:
|
|
|
|
|
|
|
Net income
|
|
$6,083
|
|
$11,658
|
|
$12,974
|
Adjustments to Reconcile Net Income to Net Cash:
|
|
|
|
|
|
|
Equity in undistributed earnings from subsidiaries
|
|
(7,789)
|
|
(13,270)
|
|
(9,512)
|
Stock-based compensation
|
|
597
|
|
578
|
|
390
|
Changes in other assets and liabilities
|
|
611
|
|
(1,027)
|
|
583
|
|
|
Net Cash Used from Operating Activities
|
|
(498)
|
|
(2,061)
|
|
4,435
|
Investing Activities:
|
|
|
|
|
|
|
Investment in Northrim Bank, NISC, NCT1 & NST2
|
|
5,795
|
|
140
|
|
(210)
|
|
|
Net Cash Used by Investing Activities
|
|
5,795
|
|
140
|
|
(210)
|
Financing Activities:
|
|
|
|
|
|
|
Dividends paid to shareholders
|
|
(4,182)
|
|
(3,542)
|
|
(2,768)
|
Proceeds from issuance of trust preferred securities
|
|
|
|
|
|
|
Proceeds from issuance of common stock and excess tax benefits
|
|
94
|
|
181
|
|
568
|
Repurchase of common stock
|
|
|
|
(3,396)
|
|
(410)
|
|
|
Net Cash Provided by Financing Activities
|
|
(4,088)
|
|
(6,757)
|
|
(2,610)
|
|
|
Net Increase by Cash and Cash Equivalents
|
|
1,209
|
|
(8,678)
|
|
1,615
|
|
|
Cash and Cash Equivalents at beginning of period
|
|
3,951
|
|
12,629
|
|
11,014
|
|
|
Cash and Cash Equivalents at end of period
|
|
$5,160
|
|
$3,951
|
|
$12,629
|
|
|
70
Annual
Report on
Form 10-K
Annual Report Under Section 13 of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2008.
Commission File Number 0-33501
Northrim BanCorp, Inc.
State of Incorporation: Alaska
Employer ID Number:
92-0175752
3111 C Street
Anchorage, Alaska 99503
Telephone Number:
(907) 562-0062
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
Northrim BanCorp, Inc. has filed all reports required to be
filed by Section 13 of the Securities and Exchange Act of
1934 during the preceding 12 months and has been subject to
such filing requirements for the past 90 days.
Northrim BanCorp, Inc. is an accelerated filer within the
meaning of
Rule 12b-2
promulgated under the Securities Exchange Act.
Northrim BanCorp, Inc. is not a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Northrim BanCorp, Inc. is required to file reports pursuant to
Section 13 of the Securities Exchange Act.
Northrim BanCorp, Inc. is not a shell company (as defined in
Rule 12b-2
of the Securities Exchange Act).
Disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K
(17 C.F.R. 229.405) is in our definitive proxy statement,
which is incorporated by reference in Part III of this
Form 10-K.
The aggregate market value of common stock held by
non-affiliates of Northrim BanCorp, Inc. at June 30, 2008,
was $110,642,670.
The number of shares of Northrim BanCorps common stock
outstanding at March 1, 2009, was 6,332,236.
This Annual Report on
Form 10-K
incorporates into a single document the requirements of the
accounting profession and the SEC. Only those sections of the
Annual Report required in the following cross reference index
and the information under the caption Forward Looking
Statements are incorporated into this
Form 10-K.
71
Index
|
|
|
|
|
|
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Part I
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Page
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Item 1.
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Business
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1-4, 7-26, 73-80
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General
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1-4, 73-80
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Investment Portfolio
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22-24, 40, 45-48, 65-67
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Loan Portfolio
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7-8, 16-22, 40-41, 48-50, 65-67
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Summary of Loan Loss Experience
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16-22, 40-41, 48-50, 65-67
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Deposits
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24-26, 54-55, 65-67
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Return on Equity and Assets
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5
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Short-term Borrowings
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25-26, 55, 65-67
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Item 1A.
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Risk Factors
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78-79
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Item 1B.
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Unresolved Staff Comments
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None
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Item 2.
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Properties
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80
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Item 3.
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Legal Proceedings
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68
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Item 4.
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Submission of Matters to a Vote of Security Holders
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None
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Part II
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Item 5.
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Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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26-30, 60
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Item 6.
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Selected Financial Data
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5-6
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Item 7.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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7-33
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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31-33
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Item 8.
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Financial Statements and Supplementary Data
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36-70
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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None
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Item 9A.
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Controls and Procedures
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33
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Item 9B.
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Other Information
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None
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Part III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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*
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Item 11.
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Executive Compensation
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*
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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*
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Item 13.
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Certain Relationships and Related Transactions
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*
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Item 14.
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Principal Accounting Fees and Services
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*
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Part IV
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Item 15.
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Exhibits, Financial Statement Schedules
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81-84
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*Northrims definitive proxy statement for the 2009 Annual
Shareholders Meeting is incorporated herein by reference
other than the section entitled Report of the Compensation
Committee on Executive Compensation, Report of the
Audit Committee, and Fees Billed by KPMG During
Fiscal Years 2008 and 2007.
72
General
Northrim BanCorp, Inc. (the Company) is a publicly
traded bank holding company with four wholly-owned subsidiaries,
Northrim Bank (the Bank), a state chartered,
full-service commercial bank; Northrim Investment Services
Company (NISC), which we formed in November 2002 to
hold the Companys 48% equity interest in Elliott Cove
Capital Management LLC (Elliot Cove), an investment
advisory services company; Northrim Capital Trust 1
(NCT1,) an entity that we formed in May of 2003 to
facilitate a trust preferred security offering by the Company,
Northrim Statutory Trust 2 (NST2), an entity
that we formed in December of 2005 to facilitate a trust
preferred security offering by the Company, and Northrim
Building LLC (NBL), which owns and operates the
Companys main office facility at 3111 C Street
in Anchorage. We also hold a 24% interest in the profits and
losses of a residential mortgage holding company, Residential
Mortgage Holding Company LLC (RML Holding Company)
through Northrim Banks wholly-owned subsidiary, Northrim
Capital Investments Co. (NCIC). The predecessor of
RML Holding Company, Residential Mortgage LLC (RML),
was formed in 1998 and has offices throughout Alaska. We also
operate in the Washington and Oregon market areas through
Northrim Funding Services (NFS), a division of the
Bank that was formed in 2004. In March and December of 2005,
NCIC purchased ownership interests totaling 50.1% in Northrim
Benefits Group, LLC (NBG), an insurance brokerage
company that focuses on the sale and servicing of employee
benefit plans. Finally, in the first quarter of 2006, through
NISC, we purchased a 24% interest in Pacific Wealth Advisors,
LLC (PWA), an investment advisory, trust and wealth
management business located in Seattle, Washington.
The Company is regulated by the Board of Governors of the
Federal Reserve System, and Northrim Bank is regulated by the
Federal Deposit Insurance Corporation, and the State of Alaska
Department of Community and Economic Development, Division of
Banking, Securities and Corporations. We began banking
operations in Anchorage in December 1990, and formed the Company
in connection with our reorganization into a holding company
structure; that reorganization was completed effective
December 31, 2001.
Competition
We operate in a highly competitive and concentrated banking
environment. We compete not only with other commercial banks,
but also with many other financial competitors, including credit
unions (including Alaska USA Federal Credit Union, one of the
nations largest credit unions), finance companies,
mortgage banks and brokers, securities firms, insurance
companies, private lenders, and other financial intermediaries,
many of which have a state-wide or regional presence, and in
some cases, a national presence. Many of our competitors have
substantially greater resources and capital than we do and offer
products and services that are not offered by us. Our non-bank
competitors also generally operate under fewer regulatory
constraints, and in the case of credit unions, are not subject
to income taxes. Credit unions in Alaska have a 35% share of
total statewide deposits of banks and credit unions. Recent
changes in their regulations have eliminated the common
bond of membership requirement and liberalized their
lending authority to include business and real estate loans on a
par with commercial banks. The differences in resources and
regulation may make it harder for us to compete profitably, to
reduce the rates that we can earn on loans and investments, to
increase the rates we must offer on deposits and other funds,
and adversely affect our financial condition and earnings.
Management believes that Wells Fargos acquisition of
National Bank of Alaska (NBA), which occurred in
2000 and was completed in 2001, opened up opportunities for us
to increase our market share in all of our markets. Long-time
NBA customers have stated that our expanded branch network and
product line are an excellent local alternative to an
out-of-state bank. The Bank completed an extensive and
comprehensive sales training program in 2003 that formed the
basis for an aggressive, targeted calling effort to sell the
benefits of banking with us to those potential customers. In
2007 and 2008, the Bank continued with its sales calling and
training efforts and plans to continue with this program in
2009. In addition, in the first part of 2005, the Bank launched
its High Performance Checking (HPC) product
consisting of several consumer accounts tailored to the needs of
specific segments of its market, including a Totally Free
Checking account. In 2007, the Bank introduced HPC for business,
which has provided it with the opportunity to increase its
business checking accounts. The Bank supported this product with
a targeted marketing program and extensive branch sales
promotions and plans to continue with these efforts in 2009.
In the late 1980s, eight of the 13 commercial banks and savings
and loan associations in Alaska failed, resulting in the largest
commercial banks gaining significant market share. Currently,
there are seven commercial banks operating in Alaska. Our
management believes that we have benefited from the
consolidation of larger financial institutions in Alaska as
customers have sought the responsive and personalized service
that we offer, resulting in consistency in achieving market
share growth. Our portfolio loans (excluding real estate loans
for sale) decreased by less than 1% from year-end 2007 to
year-end 2008 and our deposits decreased by 3% during the same
period. At June 30, 2008, the date of the most recently
available information, we had approximately a 24% share of the
Anchorage commercial bank deposits, approximately 7% in
Fairbanks, and 10% in the Matanuska Valley.
73
The following table sets forth market share data for the
commercial banks having a presence in the greater Anchorage area
as of June 30, 2008, the most recent date for which
comparative deposit information is available.
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Number of
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Market share of
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Financial institution
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branches
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Total deposits
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deposits
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(Dollars in Thousands)
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Northrim Bank
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8(1)
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$800,229
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24%
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Wells Fargo Bank Alaska
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14
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1,361,773
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41%
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First National Bank Alaska
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10
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756,542
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23%
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Key Bank
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4
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411,135
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12%
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Total
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38
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$3,329,679
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100%
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(1)
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Does not reflect our Fairbanks or
Wasilla branches
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Employees
and Key Personnel
We had 290 full-time equivalent employees at
December 31, 2008. None of our employees are covered by a
collective bargaining agreement. We consider our relations with
our employees to be satisfactory.
We will be dependent for the foreseeable future on the services
of R. Marc Langland, our Chairman of the Board, President and
Chief Executive Officer; Christopher N. Knudson, our Executive
Vice President and Chief Operating Officer; Joseph M.
Schierhorn, our Executive Vice President and Chief Financial
Officer, Joseph M. Beedle, our Executive Vice President and
Chief Lending Officer; Steven L. Hartung, our Executive Vice
President and Quality Assurance Officer; and Victor P. Mollozzi,
our Senior Vice President for Business and Community
Development. While we maintain keyman life insurance on the
lives of Messrs. Langland, Knudson, Schierhorn, Beedle, and
Mollozzi in the amounts of $2.5 million, $2.1 million,
$1 million, $2 million, and $1 million,
respectively, we may not be able to timely replace
Mr. Langland, Mr. Knudson, Mr. Schierhorn,
Mr. Beedle, or Mr. Mollozzi with a person of
comparable ability and experience should the need to do so
arise, causing losses in excess of the insurance proceeds.
Currently, we do not maintain keyman life insurance on the life
of Mr. Hartung.
Alaska
Economy
All of our operations are in the greater Anchorage, Matanuska
Valley, and Fairbanks, areas of Alaska. Because of our
geographic concentration, our operations and growth depend on
economic conditions in Alaska, generally, and the greater
Anchorage, Matanuska Valley, and Fairbanks areas in particular.
A material portion of our loans at December 31, 2008, were
secured by real estate located in greater Anchorage, Matanuska
Valley, and Fairbanks, Alaska. Moreover, 19% of our revenue was
derived from the residential housing market in the form of loan
fees and interest on residential construction and land
development loans and income from RML Holding Company, our
mortgage real estate affiliate. Real estate values generally are
affected by economic and other conditions in the area where the
real estate is located, fluctuations in interest rates, changes
in tax and other laws, and other matters outside of our control.
Any decline in real estate values in the greater Anchorage,
Matanuska Valley, and Fairbanks areas could significantly reduce
the value of the real estate collateral securing our real estate
loans and could increase the likelihood of defaults under these
loans. In addition, at December 31, 2008,
$293 million, or 41%, of our loan portfolio was represented
by commercial loans in Alaska. Commercial loans generally have
greater risk than real estate loans.
Alaskas residents are not subject to any state income or
state sales taxes, and for the past 25 years, have received
annual distributions payable in October of each year from the
Alaska Permanent Fund Corporation, which is supported by
royalties from oil production. The distribution was $2,069 per
eligible resident in 2008 for an aggregate distribution of
approximately $714 million. Additionally, the State of
Alaska distributed an energy rebate known as the Alaska Resource
Rebate of $1,200 per eligible resident in 2008 for an aggregate
distribution of approximately $985 million. The Anchorage
Economic Development Corporation estimates that, for most
Anchorage households, distributions from the Alaska Permanent
Fund exceed other taxes to which those households are subject
(primarily real estate taxes).
Alaska is strategically located on the Pacific Rim, nine hours
by air from 95% of the industrialized world, and has become a
worldwide cargo and transportation link between the United
States and international business in Asia and Europe.
Anchorages airport is now rated first in the nation in
terms of landed tonnage of international cargo. Key sectors of
the Alaska economy are the oil industry, government and military
spending, and the construction, fishing, forest products,
tourism, mining, air cargo, and transportation industries, as
well as medical services.
74
The petroleum industry plays a significant role in the economy
of Alaska. Royalty payments and tax revenue related to North
Slope oil fields provide over 86% of the revenue used to fund
state government operations primarily according to the State of
Alaska Department of Revenue. According to the State of Alaska
Department of Labor, employment in the oil and gas sector
increased by 8.6% in 2008 as the companies operating within the
state increased the size of their operations due in part to
record high oil prices. Oil prices have recently declined to the
$35 to $40 per barrel price range from the highs of $140 per
barrel attained in the summer months of 2008. In light of these
recent declines, Conoco Phillips announced that it would
decrease its capital spending worldwide by 18%, which may impact
Alaskan projects in a similar amount. Also, the Sate of Alaska
announced in January of 2009 that it approved Exxon Mobile
Corp.s plan to develop the Point Thomson oil and natural
gas field that is located in the northeastern boarder of the
North Slope of Alaska. According to local news sources, Point
Thomson is reported to contain approximately one quarter of the
35 trillion in known natural gas reserves that are located on
the North Slope of Alaska.
In 2008, there were several major developments in the process to
build a pipeline to transport natural gas from the North Slope
of Alaska to the Continental United States. This project is
estimated to cost in excess of $30 billion and would
provide Alaska with additional revenue from severance taxes on
the natural gas. Conoco Phillips and BP, two of the three oil
companies that own the natural gas, formed a joint venture and
committed to spend $600 million in feasibility to bring the
project to an open season in 2010. The State of Alaska also
granted a license to TransCanada, another competing company.
There are still significant differences between the state and
the oil companies that own the natural gas with regard to
taxation of that gas. Thus, there could be further delays in the
start of this project.
Tourism is another major employment sector of the Alaska
economy. The events of September 11, 2001 had a negative
effect on bookings for 2002. The industry reported further
declines in 2003 as a result of a slower national economy in the
first part of 2003. However, in 2006 and 2007, the industry
reported increases due in part to an improving national economy
and declines in the value of the U.S. dollar in relation to
other currencies that make travel to the U.S. less
expensive for some international visitors. In 2008, according to
the State of Alaska Department of Labor, tourism declined in
Alaska by .4% due in part to higher gasoline prices particularly
in the summer of 2008. Recent media reports indicate that cruise
ship operators are offering substantial discounts on their fares
for the 2009 season in the face of weakening demand.
In addition to the challenges in several of Alaskas major
industries, the state has faced a fiscal gap in
prior years because its operating expenditures have exceeded the
revenues it collects in the form of taxes and royalty payments
that have come mainly from the oil industry for several years.
The fiscal gap has been filled by the Constitutional Budget
Reserve fund (CBR) that was created for this
situation. Although the state has recently experienced budget
surpluses in 2005 through 2008, due to the recent rise in oil
prices, it still projects that the fiscal gap will continue to
widen in future years. Over the past several years, the public
and the legislature have debated a number of proposals to solve
the fiscal gap that include the following: 1) implementing
a personal income tax (currently Alaska has only a corporate
income tax), 2) assessing a state-wide sales tax (sales tax
rates vary by community, and Anchorage, Alaskas largest
city, does not have a sales tax), 3) utilizing a portion of
the earnings from the Alaska Permanent Fund, which would
decrease the size of the annual dividend paid to all Alaska
residents,
and/or
4) a reduction in state expenditures. While Alaska appears
to have the resources to solve the fiscal gap, political
decisions are required to solve the problem. We cannot predict
the type nor the timing of the solution and the ultimate impact
on the Alaska economy.
Supervision
and Regulation
The Company is a bank holding company within the meaning of the
Bank Holding Company Act of 1956 (the BHC Act)
registered with and subject to examination by the Board of
Governors of the Federal Reserve System (the FRB).
The Companys bank subsidiary is an Alaska-state chartered
commercial bank and is subject to examination, supervision, and
regulation by the Alaska Department of Commerce, Community and
Economic Development, Division of Banking, Securities and
Corporations (the Division). The FDIC insures
Northrim Banks deposits and in that capacity also
regulates Northrim Bank. The Companys affiliated
investment company, Elliott Cove, and its affiliated investment
advisory and wealth management company, Pacific Portfolio
Consulting LLC, are subject to and regulated under the
Investment Advisors Act of 1940 and applicable state investment
advisor rules and regulations. The Companys affiliated
trust company, Pacific Portfolio Trust Company, is
regulated as a non-depository trust company under the banking
laws of the State of Washington.
The Companys earnings and activities are affected by
legislation, by actions of the FRB, the Division, the FDIC and
other regulators, and by local legislative and administrative
bodies and decisions of courts in Alaska. For example, these
include limitations on the ability of Northrim Bank to pay
dividends to the Company, numerous federal and state consumer
protection laws imposing requirements on the making,
enforcement, and collection of consumer loans, and restrictions
on and regulation of the sale of mutual funds and other
uninsured investment products to customers.
Congress enacted major federal financial institution legislation
in 1999. Title I of the Gramm-Leach-Bliley Act (the
GLB Act), which became effective March 11,
2000, allows bank holding companies to elect to become financial
holding companies. In addition to the activities previously
permitted bank holding companies, financial holding companies
may engage in non-banking
75
activities that are financial in nature, such as securities,
insurance, and merchant banking activities, subject to certain
limitations. The Company may utilize the new structure to
accommodate an expansion of its products and services.
The activities of bank holding companies, such as the Company,
that are not financial holding companies, are generally limited
to managing or controlling banks. A bank holding company is
required to obtain the prior approval of the FRB for the
acquisition of more than 5% of the outstanding shares of any
class of voting securities or substantially all of the assets of
any bank or bank holding company. Nonbank activities of a bank
holding company are also generally limited to the acquisition of
up to 5% of the voting shares of a company and activities
previously determined by the FRB by regulation or order to be
closely related to banking, unless prior approval is obtained
from the FRB.
The GLB Act also included the most extensive consumer privacy
provisions ever enacted by Congress. These provisions, among
other things, require full disclosure of the Companys
privacy policy to consumers and mandate offering the consumer
the ability to opt out of having non-public personal
information disclosed to third parties. Pursuant to these
provisions, the federal banking regulators have adopted privacy
regulations. In addition, the states are permitted to adopt more
extensive privacy protections through legislation or regulation.
Additional legislation may be enacted or regulations imposed to
further regulate banking and financial services or to limit
finance charges or other fees or charges earned in such
activities. There can be no assurance whether any such
legislation or regulation will place additional limitations on
the Companys operations or adversely affect its earnings.
There are various legal restrictions on the extent to which a
bank holding company and certain of its nonbank subsidiaries can
borrow or otherwise obtain credit from banking subsidiaries or
engage in certain other transactions with or involving those
banking subsidiaries. With certain exceptions, federal law
imposes limitations on, and requires collateral for, extensions
of credit by insured depository institutions, such as Northrim
Bank, to their non-bank affiliates, such as the Company.
Subject to certain limitations and restrictions, a bank holding
company, with prior approval of the FRB, may acquire an
out-of-state bank. Banks in states that do not prohibit
out-of-state mergers may merge with the approval of the
appropriate federal banking agency. A state bank may establish a
de novo branch out of state if such branching is expressly
permitted by the other state.
Among other things, applicable federal and state statutes and
regulations which govern a banks activities relate to
minimum capital requirements, required reserves against
deposits, investments, loans, legal lending limits, mergers and
consolidations, borrowings, issuance of securities, payment of
dividends, establishment of branches and other aspects of its
operations. The Division and the FDIC also have authority to
prohibit banks under their supervision from engaging in what
they consider to be unsafe and unsound practices.
Specifically with regard to the payment of dividends, there are
certain limitations on the ability of the Company to pay
dividends to its shareholders. It is the policy of the FRB that
bank holding companies should pay cash dividends on common stock
only out of income available over the past year and only if
prospective earnings retention is consistent with the
organizations expected future needs and financial
condition. The policy provides that bank holding companies
should not maintain a level of cash dividends that undermines a
bank holding companys ability to serve as a source of
strength to its banking subsidiaries.
Various federal and state statutory provisions also limit the
amount of dividends that subsidiary banks can pay to their
holding companies without regulatory approval. Additionally,
depending upon the circumstances, the FDIC or the Division could
take the position that paying a dividend would constitute an
unsafe or unsound banking practice.
Under longstanding FRB policy, a bank holding company is
expected to act as a source of financial strength for its
subsidiary banks and to commit resources to support such banks.
The Company could be required to commit resources to its
subsidiary banks in circumstances where it might not do so,
absent such policy.
The Company and Northrim Bank are subject to risk-based capital
and leverage guidelines issued by federal banking agencies for
banks and bank holding companies. These agencies are required by
law to take specific prompt corrective actions with respect to
institutions that do not meet minimum capital standards and have
defined five capital tiers, the highest of which is
well-capitalized.
Northrim Bank is required to file periodic reports with the FDIC
and the Division and is subject to periodic examinations and
evaluations by those regulatory authorities. These examinations
must be conducted every 12 months, except that certain
well-capitalized banks may be examined every 18 months. The
FDIC and the Division may each accept the results of an
examination by the other in lieu of conducting an independent
examination.
In the liquidation or other resolution of a failed insured
depository institution, deposits in offices and certain claims
for administrative expenses and employee compensation are
afforded a priority over other general unsecured claims,
including non-deposit claims, and claims of a parent company
such as the Company. Such priority creditors would include the
FDIC, which succeeds to the position of insured depositors.
76
The Company is also subject to the information, proxy
solicitation, insider trading restrictions and other
requirements of the Securities Exchange Act of 1934, including
certain requirements under the Sarbanes-Oxley Act of 2002.
The Company is also subject to the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the USA Patriot
Act). Among other things, the USA Patriot Act requires
financial institutions, such as the Company and Northrim Bank,
to adopt and implement specific policies and procedures designed
to prevent and defeat money laundering. Management believes the
Company is in compliance with the USA Patriot Act as in effect
on December 31, 2008.
On October 3, 2008, the U.S. Congress passed, and the
President signed into law, the Emergency Economic Stabilization
Act of 2008 (the Stabilization Act). The
Stabilization Act authorizes the Secretary of the
U.S. Treasury and the FDIC to implement various temporary
emergency programs designed to strengthen the capital positions
of financial institutions and stimulate the availability of
credit within the U.S. financial system. Pursuant to the
Stabilization Act, the U.S. Treasury will have the
authority to, among other things, purchase up to
$700 billion of mortgages, mortgage-backed securities and
certain other financial instruments from financial institutions
for the purpose of stabilizing and providing liquidity to the
U.S. financial markets.
On October 14, 2008, the U.S. Treasury announced that
it will purchase equity interests in eligible financial
institutions that wish to participate. This program, known as
the Capital Purchase Program, allocates $250 billion from
the $700 billion authorized by the Stabilization Act to the
U.S. Treasury for the purchase of senior preferred shares
from qualifying financial institutions. Eligible institutions
will be able to sell equity interests to the U.S. Treasury
in amounts equal to between 1% and 3% of the institutions
risk-weighted assets. In conjunction with the purchase of
preferred stock, the U.S. Treasury will receive warrants to
purchase common stock from the participating institutions with
an aggregate market price equal to 15% of the preferred
investment. Participating financial institutions will be
required to adopt the U.S. Treasurys standards for
executive compensation and corporate governance for the period
during which the U.S. Treasury holds equity issued under
the Capital Purchase Program. Many financial institutions have
already announced that they will participate in the Capital
Purchase Program. At this time, we have elected not to
participate in the Capital Purchase Program.
Also on October 14, 2008, using the systemic risk exception
to the FDIC Improvement Act of 1991, the U.S. Treasury
authorized the FDIC to provide a 100% guarantee of newly-issued
senior unsecured debt and deposits in non-interest bearing
accounts at FDIC insured institutions. Initially, all eligible
financial institutions will automatically be covered under this
program, known as the Temporary Liquidity Guarantee Program,
without incurring any fees for a period of 30 days.
Coverage under the Temporary Liquidity Guarantee Program after
the initial
30-day
period is available to insured financial institutions at a cost
of 75 basis points per annum for senior unsecured debt and
10 basis points per annum for non-interest bearing
deposits. After the initial
30-day
period, institutions will continue to be covered under the
Temporary Liquidity Guarantee Program unless they inform the
FDIC that they have decided to opt out of the program. The
Company elected to participate in this program as it pertains to
the 100% guarantee of non-interest bearing accounts by the FDIC.
The Company elected to not participate in the part of the
program that guarantees newly issued senior secured debt.
Under the Troubled Asset Auction Program, another initiative
based on the authority granted by the Stabilization Act, the
U.S. Treasury, through a newly-created Office of Financial
Stability, will purchase certain troubled mortgage-related
assets from financial institutions in a reverse-auction format.
Troubled assets eligible for purchase by the Office of Financial
Stability include residential and commercial mortgages
originated on or before March 14, 2008, securities or
obligations that are based on such mortgages, and any other
financial instrument that the Secretary of the
U.S. Treasury determines, after consultation with the
Chairman of the Board of Governors of the Federal Reserve
System, is necessary to promote financial market stability.
Under the Stabilization Act, the U.S. Treasury is also
required to establish a program that will guarantee principal
of, and interest on, troubled assets originated or issued prior
to March 14, 2008, including mortgage-backed securities.
The program may take any form and may vary by asset class, but
it must be voluntary and self-funding. The U.S. Treasury
has the authority to set premiums to reflect the credit risk
characteristics of the insured assets. The U.S. Treasury
has solicited requests for comments on how the program should be
structured but no program has been implemented to date. The
Stabilization Act also temporarily increases the amount of
insurance coverage of deposit accounts held at FDIC-insured
depository institutions, including the Bank, from $100,000 to
$250,000. The increased coverage is effective during the period
from October 3, 2008 until December 31, 2009.
It is not clear at this time what impact the Stabilization Act,
the Capital Purchase Program, the Temporary Liquidity Guarantee
Program, the Troubled Asset Auction Program, other liquidity and
funding initiatives of the Federal Reserve and other agencies
that have been previously announced, and any additional programs
that may be initiated in the future will have on our future
financial condition and results of operations.
Our earnings are affected by general economic conditions and the
conduct of monetary policy by the U.S. government.
77
Risk
Factors
An investment in the Companys common stock is subject to
risks inherent to the Companys business. The material
risks and uncertainties that management believes affect the
Company are described below. Before making an investment
decision, you should carefully consider the risks and
uncertainties described below together with all of the other
information included or incorporated by reference in this
report. The risks and uncertainties described below are not the
only ones facing the Company. Additional risks and uncertainties
that management is not aware of or focused on or that management
currently deems immaterial may also impair the Companys
business operations. This report is qualified in its entirety by
these risk factors.
If any of the following risks actually occur, the Companys
financial condition and results of operations could be
materially and adversely affected. If this were to happen, the
value of the Companys common stock could decline
significantly, and you could lose all or part of your investment.
Effect of Recent Government Legislation: On
October 3, 2008, the President signed into law the
Emergency Economic Stabilization Act of 2008 (the EESA). The
legislation was the result of a proposal by Treasury Secretary
Henry Paulson to the U.S. Congress on September 20,
2008 in response to the financial crises affecting the banking
system and financial markets and going concern threats to
investment banks and other financial institutions. Pursuant to
the EESA, the U.S. Treasury will have the authority to,
among other things, invest in financial institutions and
purchase up to $700 billion of mortgages, mortgage-backed
securities and certain other financial instruments from
financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets. Pursuant
to this authority, the U.S. Treasury has announced its
Capital Purchase Program, under which it has begun to purchase
up to $250 billion of preferred stock in eligible
institutions to increase the flow of financing to
U.S. businesses and consumers and to support the
U.S. economy. In addition, other recent regulatory measures
designed to strengthen financial market stability include
actions enabling the FDIC to temporarily guarantee the
newly-issued senior debt of FDIC-insured institutions and their
holding companies, as well as deposits in noninterest-bearing
deposit transaction accounts, and the Federal Reserves
Commercial Paper Funding Facility, providing a backstop for the
commercial paper market of high quality issuers. There can be no
assurance, however, as to the actual impact that the EESA and
these related actions will have on the financial markets,
including the extreme levels of volatility and limited credit
availability currently being experienced. The failure of the
EESA and these related actions to help stabilize the financial
markets and a continuation or worsening of current financial
market conditions could materially and adversely affect our
business, financial condition, results of operations, access to
credit or the trading price of our securities.
Unprecedented Volatility in the Financial
Markets: Dramatic declines in the national housing
market over the past year, with falling home prices and
increasing foreclosures, unemployment and under-employment, have
negatively impacted the credit performance of mortgage loans and
resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities as well as
major commercial and investment banks. These write-downs,
initially of mortgage-backed securities but spreading to credit
default swaps and other derivative and cash securities, in turn,
have caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in
some cases, to fail. Reflecting concern about the stability of
the financial markets generally and the strength of
counterparties, many lenders and institutional investors have
reduced or ceased providing funding to borrowers, including to
other financial institutions. This market turmoil and tightening
of credit have led to an increased level of commercial and
consumer delinquencies, lack of consumer confidence, increased
market volatility and widespread reduction of business activity
generally. We do not expect that the difficult conditions in the
financial markets are likely to improve in the near future. A
worsening of these conditions would likely exacerbate the
adverse effects of these difficult market conditions on us and
others in the financial institutions industry. In particular, we
may face the following risks in connection with these events:
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We expect to face increased regulation of our industry,
including as a result of the EESA. Compliance with such
regulation may increase our costs and limit our ability to
pursue business opportunities.
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Competition in our industry could intensify as a result of the
increasing consolidation of financial services companies in
connection with current market conditions.
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We may be required to pay significantly higher FDIC premiums
because market developments have significantly depleted the
insurance fund of the FDIC and reduced the ratio of reserves to
insured deposits.
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The Residential Real Estate Portfolio is Expected to
Produce Lower Earnings: There has been a slowdown
in the residential real estate sales cycle in the Companys
major markets. As a result of the slower residential real estate
market, the Company expects that its level of lending in this
sector will decrease which will lead to a lower level of
earnings from this portion of its loan portfolio.
Adequacy of Loan Loss Allowance: We have
established a reserve for probable losses we expect to incur in
connection with loans in our credit portfolio. This allowance
reflects our estimate of the collectibility of certain
identified loans, as well as an overall risk assessment of total
loans outstanding. During 2008, we experienced an increase in
the amount of nonperforming loans as compared to 2007 and 2006.
Our determination of the amount of loan loss allowance is highly
subjective; although management personnel apply criteria such as
risk ratings and historical loss rates, these factors may not be
adequate predictors of future loan performance. Accordingly, we
cannot offer assurances that these estimates ultimately will
prove correct or that the loan loss allowance will be sufficient
to protect against losses that ultimately may occur. If our loan
loss allowance proves to be inadequate, we may suffer unexpected
charges to income, which would adversely impact our results of
operations and financial condition. Moreover, bank
78
regulators frequently monitor banks loan loss allowances,
and if regulators were to determine that the allowance is
inadequate, they may require us to increase the allowance, which
also would adversely impact our revenues and financial condition.
Changes in Market Interest Rates: Our
earnings are impacted by changing interest rates. Changes in
interest rates affect the demand for new loans, the credit
profile of existing loans, the rates received on loans and
securities, and rates paid on deposits and borrowings. The
relationship between the rates received on loans and securities
and the rates paid on deposits and borrowings is known as the
net interest margin. Given our current volume and mix of
interest bearing liabilities and interest-earning assets, net
interest margin could be expected to increase during times when
interest rates rise in a parallel shift along the yield curve
and, conversely, to decrease during times of similar falling
interest rates. Exposure to interest rate risk is managed by
monitoring the repricing frequency of our rate-sensitive assets
and rate-sensitive liabilities over any given period. Although
we believe the current level of interest rate sensitivity is
reasonable, significant fluctuations in interest rates could
potentially have an adverse affect on our business, financial
condition and results of operations.
Growth and Management: Our financial
performance and profitability will depend on our ability to
manage recent and possible future growth, including our
acquisition of Alaska First Bank & Trust, which we
acquired in the fourth quarter of 2007. Although we believe that
we have substantially integrated the business and operations of
past acquisitions, there can be no assurance that unforeseen
issues relating to the acquisitions will not adversely affect
us. The Companys opportunities for growth may be affected
by its focus on the reduction of its non-performing assets in
2009. In addition, any future acquisitions and continued growth
may present operating and other problems that could have an
adverse effect on our business, financial condition and results
of operations. Accordingly, there can be no assurance that we
will be able to execute our growth strategy or maintain the
level of profitability that we have experienced in the past.
Concentration: Substantially all of our
business is derived from the Anchorage, Matanuska Valley, and
Fairbanks, areas of Alaska. These areas rely primarily upon the
natural resources industries, particularly oil production, as
well as tourism, government and U.S. military spending for
their economic success. Our business is and will remain
sensitive to economic factors that relate to these industries
and local and regional business conditions. As a result, local
or regional economic downturns, or downturns that
disproportionately affect one or more of the key industries in
regions served by the Company, may have a more pronounced effect
upon its business than they might on an institution that is less
geographically concentrated. The extent of the future impact of
these events on economic and business conditions cannot be
predicted; however, prolonged or acute fluctuations could have a
material and adverse impact upon our results of operation and
financial condition.
The majority of the Companys lending has been with Alaska
businesses and individuals. At December 31, 2008,
approximately 69% and 30% of the Companys loans are
secured by real estate, or for general commercial uses,
including professional, retail, and small businesses,
respectively. Substantially all of these loans are
collateralized and repayment is expected from the
borrowers cash flow or, secondarily, the collateral. The
Companys exposure to credit loss, if any, is the
outstanding amount of the loan if the collateral is proved to be
of no value.
Regulation: We are subject to government
regulation that could limit or restrict our activities, which in
turn could adversely impact our operations. The financial
services industry is regulated extensively. Federal and state
regulation is designed primarily to protect the deposit
insurance funds and consumers, as well as our shareholders.
These regulations can sometimes impose significant limitations
on our operations. In addition, these regulations are constantly
evolving and may change significantly over time. Significant new
laws or changes in existing laws or repeal of existing laws may
cause our results to differ materially. Further, federal
monetary policy, particularly as implemented through the Federal
Reserve System, can significantly affect credit availability.
Federal legislation such as Sarbanes-Oxley can dramatically
shift resources and costs to ensure adequate compliance.
Competition: Competition may adversely affect
our performance. The financial services business in our market
areas is highly competitive. It is becoming increasingly
competitive due to changes in regulation, technological
advances, and the accelerating pace of consolidation among
financial services providers. We face competition both in
attracting deposits and in originating loans. We compete for
loans principally through the pricing of interest rates and loan
fees and the efficiency and quality of services. Increasing
levels of competition in the banking and financial services
industries may reduce our market share or cause the prices
charged for our services to fall. Our results may differ in
future periods depending upon the nature
and/or level
of competition.
Credit Risk: A source of risk arises from the
possibility that losses will be sustained if a significant
number of our borrowers, guarantors and related parties fail to
perform in accordance with the terms of their loans. We have
adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the
allowance for credit losses, which we believe are appropriate to
minimize this risk by assessing the likelihood of
nonperformance, tracking loan performance and diversifying our
credit portfolio. These policies and procedures, however, may
not prevent unexpected losses that could materially affect our
results of operations.
79
Properties
The following sets forth information about our branch locations:
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Locations
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Type
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Leased/Owned
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Midtown Financial Center: Northrim Headquarters
3111 C Street, Anchorage, AK
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Traditional
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Land leased; building owned
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SouthSide Financial Center
8730 Old Seward Highway, Anchorage, AK
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Traditional
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Land leased; building owned
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36th Avenue Branch
811 East 36th Avenue, Anchorage, AK
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Traditional
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Owned
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Huffman Branch
1501 East Huffman Road, Anchorage, AK
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Supermarket
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Leased
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Jewel Lake Branch
9170 Jewel Lake Road, Anchorage, AK
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Traditional
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Leased
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Seventh Avenue Branch
550 West Seventh Avenue, Anchorage, AK
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Traditional
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Leased
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West Anchorage Branch/Small Business Center
2709 Spenard Road, Anchorage, AK
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Traditional
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Owned
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Eagle River Branch
12812 Old Glenn Highway, Fire Lake Plaza, Eagle River, AK
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Traditional
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Leased
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Downtown Fairbanks Branch
714 Fourth Avenue, Suite 100, Fairbanks, AK
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Traditional
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Leased
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Fairbanks Financial Center
360 Merhar Avenue, Fairbanks, AK
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Traditional
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Owned
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Wasilla Financial Center
850 E. USA Circle, Suite A, Wasilla, AK
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Traditional
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Owned
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Financial
Statements and Exhibits
Financial Statements
The following financial statements of the Company, included in
the Annual Report to Shareholders for the year ended
December 31, 2008, are incorporated by reference in
Item 8:
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Income for the years ended
December 31, 2008, 2007, and 2006
Consolidated Statements of Changes in Shareholders Equity
and Comprehensive Income for the years ended December 31,
2008, 2007, and 2006
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007, and 2006
Notes to Consolidated Financial Statements
80
Exhibits
Index to Exhibits
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Exhibit
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Number
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Name of Document
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3.1
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Amended and Restated Articles of
Incorporation(1)
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3.2
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Amended and Restated
Bylaws(2)
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4.1
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Form of Common Stock
Certificate(1)
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4.2
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Pursuant to Section 6.0(b)(4)(iii)(A) of
Regulation S-K,
copies of instruments defining rights of holders of long-term
debt and preferred securities are not filed. The Company agrees
to furnish a copy thereof to the Securities and Exchange
Commission upon request.
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4.3
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Indenture dated as of December 16,
2005(5)
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4.4
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Form of Junior Subordinated Debt Security due
2036(5)
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10.1
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Employee Stock Option and Restricted Stock Award
Plan(1)
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10.2
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2000 Employee Stock Incentive
Plan(1)
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10.7
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Plan and Agreement of Reorganization between the Registrant and
Northrim Bank dated as of March 7,
2001(3)
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10.8
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Supplemental Executive Retirement Plan dated July 1, 1994,
as amended January 8,
2004(4)
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10.9
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Supplemental Executive Retirement Deferred Compensation
Plan(3)
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10.10
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2004 Stock Incentive
Plan(4)
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10.12
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Capital Securities Purchase Agreement dated December 14,
2005(5)
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10.13
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Amended and Restated Declaration of Trust Northrim
Statutory Trust 2 dated as of December 16, 2005(5)
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10.16
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Amended and Restated Employment Agreement with R. Marc
Langland(6)
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10.17
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Amended and Restated Employment Agreement with Joseph M.
Schierhorn(6)
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10.18
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Amended and Restated Employment Agreement with Christopher N.
Knudson(6)
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10.19
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Amended and Restated Employment Agreement with Joseph M.
Beedle(6)
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10.21
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Supplemental Executive Retirement Plan dated July 1, 1994,
as amended January 1,
2005(7)
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10.22
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Deferred Compensation Plan dated January 1, 1995, as
amended January 1,
2005(7)
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10.23
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Supplemental Executive Retirement Deferred Compensation Plan
dated February 1, 2002, as amended January 1,
2005(7)
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10.24
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Employment Agreement with Steven L.
Hartung(8)
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10.25
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Supplemental Executive Retirement Plan dated July 1, 1994,
as amended May 1, 2008, effective as of January 1,
2005(9)
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10.26
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Deferred Compensation Plan dated January 1, 1995, as
amended May 1, 2008 effective as of January 1,
2005(9)
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10.27
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Supplemental Executive Retirement Deferred Compensation Plan
dated February 1, 2002, as amended May 1, 2008
effective as of January 1,
2005(9)
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10.28
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Northrim Bank Executive Incentive Plan dated November 3,
1994(10)
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Subsidiaries
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Northrim Bank
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Northrim Investment Services Company
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Northrim Capital Trust 1
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23
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Consent of KPMG
LLP(10)
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24
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Power of
Attorney(10)
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31.1
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Certification of Chief Executive Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002(10)
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31.2
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Certification of Chief Financial Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002(10)
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32.1
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Certification of Chief Executive Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002(10)
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32.2
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Certification of the Chief Financial Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002(10)
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(1) |
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Incorporated by reference to the Companys
Form 8-A,
filed with the SEC on January 14, 2002 |
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(2) |
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Incorporated by reference to the Companys
Form 8-K,
filed with the SEC on September 7, 2007 |
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(3) |
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Incorporated by reference to the Companys
Form 10-K
for the year ended December 31, 2002, filed with the SEC on
March 19, 2003 |
81
|
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(4) |
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Incorporated by reference to the Companys
Form 10-K
for the year ended December 31, 2003, filed with the SEC on
March 15, 2004 |
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(5) |
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Incorporated by reference to the Companys
Form 10-K
for the year ended December 31, 2005, filed with the SEC on
March 16, 2006 |
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(6) |
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Incorporated by reference to the Companys
Form 10-K
for the year ended December 31, 2006, filed with the SEC on
March 16, 2007 |
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(7) |
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Incorporated by reference to the Companys
Form 10-Q
for the quarter ended September 30, 2007, filed with the
SEC on November 8, 2007 |
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(8) |
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Incorporated by reference to the Companys
Form 8-K,
filed with the SEC on January 15, 2008 |
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(9) |
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Incorporated by reference to the Companys
Form 8-K,
filed with the SEC on May 8, 2008 |
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(10) |
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Filed with this
Form 10-K |
82
Signatures
Pursuant to the requirements of Section 13 of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 12th day of March, 2009.
Northrim BanCorp, Inc.
R. Marc Langland
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated, on
the 12th day of March, 2009.
Principal Executive Officer:
R. Marc Langland
Chairman, President and Chief Executive Officer
Principal Financial Officer:
/s/ Joseph M. Schierhorn
Joseph M. Schierhorn
Executive Vice President, Chief
Financial Officer,
Compliance Manager
R. Marc Langland, pursuant to powers of attorney, which are
being filed with this Annual Report on
Form 10-K,
has signed this report on March 12, 2008, as
attorney-in-fact for the following directors who constitute a
majority of the Board of Directors.
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Larry S. Cash
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R. Marc Langland
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Mark G. Copeland
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Richard L. Lowell
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Ronald A. Davis
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Irene Sparks Rowan
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Anthony Drabek
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John C. Swalling
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Christopher N. Knudson
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David G. Wight
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R. Marc Langland,
as Attorney-in-fact
March 12, 2009
83
Investor
Information
Annual
Meeting
|
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Date:
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Thursday, May 14, 2009
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Time:
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9 a.m.
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Location:
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Hilton Anchorage Hotel
500 West Third Avenue
Anchorage, AK 99501
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Stock
Symbol
Northrim BanCorp, Inc.s stock is traded on the Nasdaq
Stock Market under the symbol, NRIM.
Auditor
KPMG LLP
Transfer
Agent and Registrar
American Stock Transfer & Trust Company:
1-800-937-5449
info@amstock.com
Legal
Counsel
Davis Wright Tremaine LLP
Information
Requests
Below are options for obtaining Northrims investor
information:
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Visit our home page, www.northrim.com, and click on the
For Investors section for stock information
and copies of earnings and dividend releases.
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If you would like to be added to Northrims investor
e-mail list
or have investor information mailed to you, send a request to
investors@nrim.com or call our Corporate Secretary at
(907) 261-3301.
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Written requests should be mailed to the following
address:
Corporate Secretary
Northrim Bank
P.O. Box 241489
Anchorage, Alaska
99524-1489
Telephone:
(907) 562-0062
Fax:
(907) 562-1758
E-mail:
investors@nrim.com
Web site:
http://www.northrim.com
84