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, 2006
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 if the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated
filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-Accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of common stock held by
non-affiliates of registrant at June 30, 2006, was
$133,680,506.
The number of shares of registrants common stock
outstanding at March 1, 2007, was 6,115,822.
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 3, 2007, 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
Northrims managements expectations about future
events and developments such as future operating results, growth
in loans and deposits, continued success of Northrims
style of banking, and the strength of the local economy. All
statements other than statements of historical fact, including
statements regarding industry prospects and future results of
operations or financial position, made in this report are
forward-looking. We use words such as anticipates,
believes, expects, intends
and similar expressions in part to help identify forward-looking
statements. Forward-looking statements reflect managements
current expectations and are inherently uncertain. Our actual
results may differ significantly from managements
expectations, and those variations may be both material and
adverse. Forward-looking statements are subject to various risks
and uncertainties that may cause our actual results to differ
materially and adversely from our expectations as indicated in
the forward-looking statements. These risks and uncertainties
include: the general condition of, and changes in, the Alaska
economy; factors that impact our net interest margins; and our
ability to maintain asset quality. Further, actual results may
be affected by our ability to compete on price and other factors
with other financial institutions; customer acceptance of new
products and services; the regulatory environment in which we
operate; and general trends in the local, regional and national
banking industry and economy. Many of these risks, as well as
other risks that may have a material adverse impact on our
operations and business, are identified in our filings with the
SEC. However, you should be aware that these factors are not an
exhaustive list, and you should not assume these are the only
factors that may cause our actual results to differ from our
expectations. In addition, you should note that we do not intend
to update any of the forward-looking statements or the
uncertainties that may adversely impact those statements.
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Northrim
BanCorp, Inc.
About the Company
Overview
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 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;
and Northrim Statutory Trust 2 (NST2), an
entity that we formed in December of 2005 to facilitate a trust
preferred security offering by the Company. 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, 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 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.
We have grown to be the third largest commercial bank in
Anchorage and Alaska in terms of deposits, with
$794.9 million in total deposits and $925.6 million in
total assets at December 31, 2006. Through our 10 branches,
we are accessible by approximately 65% 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 are also exploring 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. We plan to begin construction
of a second branch in the Fairbanks market in the second quarter
of 2007.
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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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1
Elliott
Cove Capital Management LLC
As of December 31, 2006, the Company owned a 47% 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 $617,000 as of
December 31, 2006.
As of December 31, 2006, there are 11 Northrim Bank
employees who are licensed as IARs and actively selling
the Elliott Cove product. We plan to continue to use the Elliott
Cove products to strengthen our existing customer relationships
and bring new customers into the Bank. In addition, as Elliott
Cove builds its assets under management, we expect that it will
reach a break-even point on a monthly basis on its operations in
2008.
Northrim
Funding Services
In the third quarter of 2004, we formed Northrim Funding
Services (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. During its second full
year of operations in 2006, the employees of NFS expanded the
base of their operations. In 2007, we expect NFS to continue to
penetrate its market and increase its market share in the
purchased receivables business.
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, we plan to continue to
support the HPC consumer and business checking products with the
same program of targeted marketing and branch promotions in an
effort to continue to expand our core deposits.
Business
Strategies
In addition to our acquisition strategy, we are pursuing a
strategy of aggressive internal growth. 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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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. 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.
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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
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lending, further diversifying our loan portfolio. 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.
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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. Since then, we have
continued with this sales training in all of our major customer
contact areas. 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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Services
We provide a wide range of banking services in South Central 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.
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, 65
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Chairman, President, &
CEO of the Company and the Bank, and Director, Alaska Air Group
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*Christopher N. Knudson, 53
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Executive Vice President and Chief
Operating Officer of the Company and the Bank
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Joseph M. Schierhorn, 49
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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, 55
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Executive Vice President of the
Company and Chief Lending Officer of the Bank
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Victor P. Mollozzi, 57
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Senior Vice President, Senior
Credit 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, 55
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President and CEO, RIM Architects
(Alaska), Inc.; CEO, RIM Architects (Guam), LLC.
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Mark G. Copeland, 64
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Owner and sole member of Strategic
Analysis, LLC, a management consulting firm
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Frank A. Danner, 73
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Secretary/Treasurer, IMEX, Ltd.
dba Dynamic Properties (real estate firm)
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Ronald A. Davis, 74
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Former Vice President, Acordia of
Alaska Insurance (full service insurance agency)
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Anthony Drabek, 59
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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, 66
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Former Chairman, Ribelin Lowell
Alaska USA Insurance Brokers, Inc. (insurance brokerage firm)
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Irene Sparks Rowan, 65
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Former Chairman and Director,
Klukwan, Inc. (Alaska Native Corporation) and its subsidiaries
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John C. Swalling, 57
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President, Swalling &
Associates, P.C. (accounting firm)
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David G. Wight, 66
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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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2006
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2005
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2004
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2003
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2002
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Unaudited
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(In Thousands Except Per Share Data)
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Net interest income
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$47,522
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$43,908
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$41,271
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$39,267
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$34,670
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Provision for loan losses
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2,564
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1,170
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1,601
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3,567
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3,095
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Other operating income
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7,658
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4,833
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3,792
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6,089
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5,199
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Other operating expense
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31,368
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29,477
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26,535
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24,728
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23,061
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Income before income taxes and
minority interest
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21,248
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18,094
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16,927
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17,061
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13,713
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Minority interest in subsidiaries
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296
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Pre tax income
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20,952
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18,094
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16,927
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17,061
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13,713
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Income taxes
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7,978
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6,924
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6,227
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6,516
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5,171
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Net income
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$12,974
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$11,170
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$10,700
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$10,545
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$8,542
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Earnings per share:
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Basic
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$2.12
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$1.78
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$1.68
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$1.68
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$1.33
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Diluted
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2.09
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1.72
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1.63
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1.61
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1.29
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Cash dividends per share
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0.47
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0.43
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0.38
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0.33
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0.20
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Assets
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$925,620
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$895,580
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$800,726
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$738,569
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$704,249
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Loans
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717,056
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705,059
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678,269
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601,119
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534,990
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Deposits
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794,904
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779,866
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699,061
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646,197
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626,415
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Long-term debt
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2,174
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2,574
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2,974
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3,374
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3,774
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Junior subordinated debentures
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18,558
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18,558
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8,000
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8,000
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Shareholders equity
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95,418
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84,474
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83,358
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75,285
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68,373
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Book value
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$15.61
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$13.86
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$13.01
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$11.82
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$10.66
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Tangible book value
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$14.48
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$12.65
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$11.97
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$10.73
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$9.51
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Net interest margin (tax
equivalent)
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5.89%
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5.66%
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5.88%
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6.04%
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5.82%
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Efficiency ratio
(cash)(1)
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55.97%
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59.72%
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58.07%
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53.71%
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56.92%
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Return on assets
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1.46%
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1.33%
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1.44%
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1.50%
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1.33%
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Return on equity
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14.45%
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13.17%
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13.50%
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14.89%
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13.32%
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Equity/assets
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10.31%
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9.44%
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10.41%
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10.19%
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9.71%
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Dividend payout ratio
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21.43%
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22.92%
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21.57%
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19.04%
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14.29%
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Nonperforming loans/portfolio loans
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0.92%
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0.86%
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0.97%
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1.72%
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1.09%
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Net charge-offs/average loans
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0.16%
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0.18%
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0.16%
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0.33%
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0.36%
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Allowance for loan
losses/portfolio loans
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1.69%
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1.52%
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1.59%
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1.70%
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1.61%
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Nonperforming assets/assets
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0.79%
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0.69%
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0.82%
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1.40%
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0.81%
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Number of banking offices
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10
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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)
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277
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272
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272
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268
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246
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(1) |
In managing our business, we review the efficiency ratio
exclusive of intangible asset amortization (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, noninterest
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.
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5
Reconciliation
of Selected Financial Data to GAAP Financial
Measures(2)
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Years ended December 31,
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2006
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2005
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2004
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2003
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2002
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Net interest
income(1)
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$47,522
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$43,908
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$41,271
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$39,267
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$34,670
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Noninterest income
|
|
|
7,658
|
|
|
|
4,833
|
|
|
|
3,792
|
|
|
|
6,089
|
|
|
|
5,199
|
|
Noninterest expense
|
|
|
31,368
|
|
|
|
29,477
|
|
|
|
26,535
|
|
|
|
24,728
|
|
|
|
23,061
|
|
Intangible asset amortization
|
|
|
482
|
|
|
|
368
|
|
|
|
368
|
|
|
|
368
|
|
|
|
368
|
|
|
|
Adjusted noninterest expense
|
|
|
$30,886
|
|
|
|
$29,109
|
|
|
|
$26,167
|
|
|
|
$24,360
|
|
|
|
$22,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
56.85%
|
|
|
|
60.48%
|
|
|
|
58.88%
|
|
|
|
54.52%
|
|
|
|
57.84%
|
|
Efficiency ratio (less intangible
asset amortization)
|
|
|
55.97%
|
|
|
|
59.72%
|
|
|
|
58.07%
|
|
|
|
53.71%
|
|
|
|
56.92%
|
|
Tax rate
|
|
|
38%
|
|
|
|
38%
|
|
|
|
37%
|
|
|
|
38%
|
|
|
|
38%
|
|
|
|
|
|
(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 four
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 and wealth management business
located in Seattle, Washington; and NCT1 and NST2, entities
formed to facilitate two trust preferred securities offerings.
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 benefits plans to businesses throughout
Alaska. We are headquartered in Anchorage and have 10 branch
locations, seven in Anchorage, and one each in Fairbanks, 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.
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 21% share
of the commercial bank deposit market in Anchorage, a 9% share
of the Fairbanks market, and a 10% share of the Matanuska Valley
market as of June 30, 2006.
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.
During the second quarter of 1999, we sold 1,842,900 shares
of our common stock in an underwritten common stock offering
that generated $18.5 million in net proceeds. We used the
proceeds to purchase the Bank of America branches and to provide
capital for additional growth.
At December 31, 2006, we had assets of $925.6 million
and gross loans of $717.1 million, an increase of 3% and
2%, respectively, over assets of $895.6 million and gross
loans of $705.1 million at December 31, 2005. Our net
income and diluted earnings per share for 2006 were
$13 million and $2.09, respectively, an increase of 16% and
22%, respectively, from $11.2 million and $1.72 at year end
2005. During the same time period, our net interest income
increased by $3.6 million, or 8%, to $47.5 million,
from $43.9 million for the year ended 2005. Our provision
for loan losses in 2006 increased by $1.4 million, or 119%
to $2.6 million, from $1.2 million in 2005, as our
nonperforming loans increased by $561,000, or 9% for 2006, from
$6.1 million in 2005 to $6.6 million for 2006. In
contrast, for 2006 our other operating income increased by
$2.8 million, or 58%, to $7.7 million from
$4.8 million in 2005. The growth in our net interest income
combined with the positive effects of the increases in our other
operating income was offset in part by an increase in other
operating expenses of $1.9 million, or 6%, to
$31.4 million in 2006 from $29.5 million for 2005,
which resulted in an increase in our net income and earnings per
share.
Results
of Operations
Net
Income
We earned net income of $13 million in 2006, compared to
net income of $11.2 million in 2005, and $10.7 million
in 2004. During these periods, net income per diluted share was
$2.09, $1.72, and $1.63, 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, earnings from our mortgage
affiliate and purchased receivables products, and other sources.
Our operating expenses consist in large part of compensation,
employee benefits expense, occupancy, and marketing expense.
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.
7
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 2006 was $47.5 million compared to
$43.9 million in 2005, and $41.3 million in 2004,
reflecting an increase in our interest-earning assets and the
general level of interest rates. Average interest-earning assets
increased $32.3 million, or 4%, in 2006 compared to an
increase in average interest-bearing liabilities in 2006 of
$36 million, or 6%. Average interest-earning assets
increased $74.1 million, or 11%, in 2005 compared to an
increase in average interest-bearing liabilities in 2005 of
$76.1 million, or 15%.
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, 2006, 2005, and 2004, average
interest-earning assets were $810.9 million,
$778.6 million, and $704.5 million, respectively.
During these same periods, net interest margins were 5.86%,
5.64%, 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 has a
higher fee base. Our average yield on earning-assets was 8.57%
in 2006, 7.55% in 2005, and 6.89% in 2004, while the average
cost of interest-bearing liabilities was 3.63% in 2006, 2.61% in
2005, and 1.48% in 2004.
Our net interest margin increased in 2006 from 2005 due to the
interaction of several factors. First, in 2006, the cost of
interest-bearing liabilities increased by 102 basis points
while the yield on interest-earning assets also increased by
102 basis points. During this time, the average balance of
our interest-bearing demand deposits increased by
$13 million to $78.9 million at December 31, 2006
from $65.9 million at December 31, 2005. The average
balance of our demand deposits and other noninterest-bearing
liabilities also increased by $5.5 million to
$193.5 million at December 31, 2006 from
$188 million at December 31, 2005. The increase in
these lower cost deposits in 2006 helped to contain the rate of
growth in the cost of interest-bearing liabilities. Second, the
102 basis point increase in the yield on earning assets in
2006 had a larger effect on net interest income because it was
applied to earning assets with an average balance of
$810.9 million versus the 102 basis point increase in
the cost of interest-bearing liabilities that was applied to an
average balance of $605.6 million. Finally, in 2006,
earning assets increased by $32.3 million, or 4% compared
to growth of $74.1 million, or 11% in 2005. However, during
these same time periods, net interest income increased by
$3.6 million, or 8% and $2.6 million, or 6%,
respectively in 2006 and 2005. The growth rate of net interest
income increased in 2006 while the rate of growth in earning
assets decreased, which contributed to the increase in the net
interest margin.
8
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,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
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)
|
|
$712,116
|
|
$65,347
|
|
9.18%
|
|
$698,240
|
|
$55,870
|
|
8.00%
|
|
$628,830
|
|
$45,898
|
|
7.30%
|
Securities
|
|
71,164
|
|
2,757
|
|
3.87%
|
|
61,125
|
|
2,202
|
|
3.60%
|
|
64,008
|
|
2,492
|
|
3.89%
|
Overnight investments
|
|
27,665
|
|
1,374
|
|
4.97%
|
|
19,232
|
|
709
|
|
3.69%
|
|
11,633
|
|
164
|
|
1.41%
|
|
|
Total interest-earning assets
|
|
810,945
|
|
69,478
|
|
8.57%
|
|
778,597
|
|
58,781
|
|
7.55%
|
|
704,471
|
|
48,554
|
|
6.89%
|
Noninterest-earning assets
|
|
77,920
|
|
|
|
|
|
63,810
|
|
|
|
|
|
54,788
|
|
|
|
|
|
|
Total assets
|
|
$888,865
|
|
|
|
|
|
$842,407
|
|
|
|
|
|
$759,259
|
|
|
|
|
|
|
Liabilities and Shareholders
Equity
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand accounts
|
|
$78,872
|
|
$830
|
|
1.05%
|
|
$65,890
|
|
$369
|
|
0.56%
|
|
$57,373
|
|
$221
|
|
0.39%
|
Money market accounts
|
|
151,871
|
|
6,053
|
|
3.99%
|
|
139,331
|
|
3,876
|
|
2.78%
|
|
126,567
|
|
1,527
|
|
1.21%
|
Savings accounts
|
|
254,209
|
|
10,113
|
|
3.98%
|
|
207,277
|
|
6,263
|
|
3.02%
|
|
139,876
|
|
2,290
|
|
1.64%
|
Certificates of deposit
|
|
94,595
|
|
3,320
|
|
3.51%
|
|
138,284
|
|
3,482
|
|
2.52%
|
|
155,134
|
|
2,671
|
|
1.72%
|
|
|
Total interest-bearing deposits
|
|
579,547
|
|
20,316
|
|
3.51%
|
|
550,782
|
|
13,990
|
|
2.54%
|
|
478,950
|
|
6,709
|
|
1.40%
|
Borrowings
|
|
26,052
|
|
1,640
|
|
6.30%
|
|
18,792
|
|
883
|
|
4.70%
|
|
14,525
|
|
574
|
|
3.95%
|
|
|
Total interest-bearing liabilities
|
|
605,599
|
|
21,956
|
|
3.63%
|
|
569,574
|
|
14,873
|
|
2.61%
|
|
493,475
|
|
7,283
|
|
1.48%
|
Demand deposits and other
noninterest-bearing liabilities
|
|
193,461
|
|
|
|
|
|
188,000
|
|
|
|
|
|
186,506
|
|
|
|
|
|
|
Total liabilities
|
|
799,060
|
|
|
|
|
|
757,574
|
|
|
|
|
|
679,981
|
|
|
|
|
Shareholders equity
|
|
89,805
|
|
|
|
|
|
84,833
|
|
|
|
|
|
79,278
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$888,865
|
|
|
|
|
|
$842,407
|
|
|
|
|
|
$759,259
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$47,522
|
|
|
|
|
|
$43,908
|
|
|
|
|
|
$41,271
|
|
|
|
|
Net interest
margin(3)
|
|
|
|
|
|
5.86%
|
|
|
|
|
|
5.64%
|
|
|
|
|
|
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 5.89%, 5.66%, 5.88%, 6.04%, and 5.82%,
respectively, for 2006, 2005, 2004, 2003, and 2002.
|
9
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 compared to 2005
|
|
2005 compared to 2004
|
|
|
|
Increase (decrease) due to
|
|
Increase (decrease) due to
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$1,129
|
|
$8,348
|
|
$9,477
|
|
$5,327
|
|
$4,645
|
|
$9,972
|
Securities
|
|
381
|
|
174
|
|
555
|
|
(109)
|
|
(181)
|
|
(290)
|
Overnight investments
|
|
371
|
|
294
|
|
665
|
|
157
|
|
388
|
|
545
|
|
|
Total interest income
|
|
$1,881
|
|
$8,816
|
|
$10,697
|
|
$5,375
|
|
$4,852
|
|
$10,227
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand accounts
|
|
$85
|
|
$376
|
|
$461
|
|
$37
|
|
$112
|
|
$148
|
Money market accounts
|
|
375
|
|
1,802
|
|
2,177
|
|
168
|
|
2,181
|
|
2,349
|
Savings accounts
|
|
1,605
|
|
2,245
|
|
3,850
|
|
1,441
|
|
2,532
|
|
3,973
|
Certificates of deposit
|
|
(1,292)
|
|
1,130
|
|
(162)
|
|
(250)
|
|
1,061
|
|
811
|
|
|
Total interest on deposits
|
|
773
|
|
5,554
|
|
6,326
|
|
1,396
|
|
5,885
|
|
7,281
|
Borrowings
|
|
403
|
|
354
|
|
757
|
|
188
|
|
121
|
|
309
|
|
|
Total interest expense
|
|
$1,176
|
|
$5,908
|
|
$7,083
|
|
$1,584
|
|
$6,006
|
|
$7,590
|
|
|
Other
Operating Income
Total other operating income increased $2.8 million, or
59%, in 2006, after increasing $1 million, or 27%, in 2005,
and decreasing $2.3 million, or 38%, in 2004. 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,
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(In Thousands)
|
|
Other Operating Income
|
|
|
|
|
|
|
|
|
|
|
Deposit service charges
|
|
$1,975
|
|
$1,800
|
|
$1,718
|
|
$1,805
|
|
$1,687
|
Purchased receivable income
|
|
1,855
|
|
993
|
|
201
|
|
35
|
|
|
Employee benefit plan income
|
|
1,113
|
|
|
|
|
|
|
|
|
Electronic banking fees
|
|
790
|
|
632
|
|
608
|
|
563
|
|
654
|
Equity in earnings from RML
|
|
649
|
|
493
|
|
438
|
|
2,785
|
|
1,917
|
Merchant credit card transaction
fees
|
|
531
|
|
444
|
|
414
|
|
363
|
|
423
|
Other transaction fees
|
|
227
|
|
214
|
|
204
|
|
247
|
|
283
|
Loan service fees
|
|
531
|
|
374
|
|
379
|
|
416
|
|
350
|
Equity in loss from Elliott Cove
|
|
(230)
|
|
(424)
|
|
(457)
|
|
(554)
|
|
(239)
|
Other income
|
|
217
|
|
298
|
|
136
|
|
74
|
|
11
|
|
|
Operating sources
|
|
7,658
|
|
4,824
|
|
3,641
|
|
5,734
|
|
5,086
|
Gain on sale of securities
available for sale, net
|
|
|
|
9
|
|
151
|
|
310
|
|
113
|
Gain on sale of other real estate
owned
|
|
|
|
|
|
|
|
45
|
|
|
|
|
Other sources
|
|
|
|
9
|
|
151
|
|
355
|
|
113
|
|
|
Total other operating income
|
|
$7,658
|
|
$4,833
|
|
$3,792
|
|
$6,089
|
|
$5,199
|
|
|
10
Total operating sources of other operating income in 2006
increased $2.8 million, or 59% over 2005 levels. In 2005,
this income increased $1.2 million, or 32%, and in 2004, it
decreased $2.1 million, or 37% as compared to 2003 levels.
The main reason for the increase in other operating income in
2006 was the increase in income from purchased receivables and
the consolidation of NBG into the Companys financial
statements.
Deposit service charges increased $175,000, or 10%, in 2006 as
compared to 2005, and they increased $118,000, or 5%, in 2005 as
compared to 2004 due to the increased personal account base that
resulted from the marketing of the HPC deposit product. The
Company began to market this product in the second quarter of
2005. As a result, the increase in deposit service charges was
larger in 2006 than it was in 2005 since 2006 reflected a full
year of activity with the HPC product.
Income from the Companys purchased receivable products
increased by $862,000, or 87%, in 2006 as compared to 2005, and
this income increased $792,000, or 394%, in 2005 as compared to
2004. The Company uses these products to purchase accounts
receivable from its customers and provide them with working
capital for their businesses. While the customers are
responsible for collecting these receivables, the Company
mitigates this risk with extensive monitoring of the
customers transactions and control of the proceeds from
the collection process. The Company earns income from the
purchased receivable product by charging finance charges to its
customers for the purchase of their accounts receivable. The
income from this product has grown as the Company has used it to
purchase more receivables from its customers. The Company
expects the income level from this product to show growth on a
year-over-year
comparative basis as the Company increases this line of business
at NFS as it continues to increase its market share.
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. In 2006, the Company included employee
benefit plan income from NBG of $1.1 million in its other
operating income. 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
$158,000, or 25%, in 2006 as compared to 2005, and these fees
increased by $24,000, or 4%, in 2005 as compared to 2004. As the
Company increased the number of its deposit accounts through the
marketing of the HPC product, it also sold additional services
to these new accounts, which helped it to increase its
electronic banking fees.
Included in operating sources of other operating income in 2006,
2005, and 2004 were $649,000, $493,000, and $438,000,
respectively, of income from our share of the earnings from RML.
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
2003, and 2002, declining mortgage interest rates generated a
significant increase in the demand for mortgage loans by
consumers both for the refinance of existing loans and the
purchase of new homes. Mortgage rates began to increase in the
third quarter of 2003 from the historic lows reached in the
second quarter. As a result, the refinance activity in the
mortgage industry began to decrease in the latter part of 2003.
Due to this trend of increasing long-term mortgage interest
rates and the costs associated with the merger of RML and PAM,
our share of the earnings from RML declined in 2004. In 2005 and
2006, RML Holding Company began to realize some efficiencies
from its merger and increased its income from its combined
operations.
Merchant credit card transaction fees increased by $87,000, or
20% in 2006 as compared to 2005, and these fees increased by
$30,000, or 7%, in 2005 as compared to 2004 as the Company
increased the sales volume of this product to its larger account
base.
Loan service fees increased by $157,000, or 42% in 2006 as
compared to 2005 as the Company increased the collection of late
fees on its loan portfolio. In contrast, loan service fees
decreased by $5,000, or 1%, in 2005 as compared to 2004.
Our share of the loss from Elliott Cove decreased to $230,000 in
2006, as compared to losses of $424,000 and $457,000,
respectively, in 2005 and 2004 as Elliott Cove increased its
assets under management, which provided it with increased
revenues.
Other income decreased by $81,000, or 27%, to $217,000 at
December 31, 2006 from $298,000 at December 31, 2005.
In the first quarter of 2006, through our subsidiary, NISC, the
Company purchased a 24% interest in PWA. PWA is a holding
company that owns Pacific Portfolio Consulting, LLC
(PPC) and Pacific Portfolio Trust Company
(PPTC). PPC is an investment advisory company with
an existing client base while PPTC is a
start-up
operation. In 2006, the Company incurred a loss of $126,000 on
its investment in PWA. The losses from PWA were partially offset
by increases in commissions that the Company receives for its
sales of
11
the Elliott Cove investment products, which were accounted for
as other operating income. Finally, the Company expects to incur
losses over the next several years as PWA builds the customer
base of its combined operations.
Included in other sources of income is gain on sale of other
real estate owned and gain on available for sale securities. No
net security gains were recorded in 2006, whereas $9,000 of net
gains was recorded in 2005, and $151,000 was recorded in 2004.
In 2005, this income decreased $142,000, or 94%; and in 2004, it
decreased $204,000, or 57%.
Expenses
Provision for Loan Losses: The provision for
loan losses in 2006 was $2.6 million, compared to
$1.2 million in 2005 and $1.6 million in 2004. We
increased the provision for loan losses in 2006 due to overall
loan growth and an increase in our nonperforming loans. In 2006,
nonperforming loans increased to $6.6 million from a
balance of $6.1 million at December 31, 2005. In
addition, net loan charge-offs were $1.1 million, or 0.16%
of average loans, in 2006 as compared to $1.2 million, or
0.18% of average loans, in 2005 and $1 million, or 0.16% of
average loans, in 2004. The allowance for loan losses also
increased in 2006 as a result of the increases in nonperforming
loans and was $12.1 million, or 1.69% of portfolio loans as
compared to $10.7 million, or 1.52% of portfolio loans at
December 31, 2005 and $10.8 million, or 1.59% of
portfolio loans, at December 31, 2004. Likewise, the
coverage ratio of the allowance for loan losses versus
nonperforming loans increased to 183% in 2006 as compared to a
coverage ratio of 176% in 2005 and 163% in 2004.
Other Operating Expense: Other operating
expense increased $1.9 million, or 6%, in 2006,
$2.9 million, or 11%, in 2005, and $1.8 million, or
7%, in 2004. The following table breaks out the other operating
expense categories:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(In Thousands)
|
|
Other Operating Expense
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel
expense
|
|
$19,277
|
|
$17,656
|
|
$15,708
|
|
$14,180
|
|
$13,023
|
Occupancy, net
|
|
2,503
|
|
2,417
|
|
2,130
|
|
2,000
|
|
2,040
|
Equipment, net
|
|
1,350
|
|
1,371
|
|
1,372
|
|
1,504
|
|
1,405
|
Marketing
|
|
1,641
|
|
1,657
|
|
1,201
|
|
1,205
|
|
1,136
|
Intangible asset amortization
|
|
482
|
|
368
|
|
368
|
|
368
|
|
368
|
Other expenses
|
|
6,115
|
|
6,008
|
|
5,756
|
|
5,471
|
|
5,089
|
|
|
Total other operating expense
|
|
$31,368
|
|
$29,477
|
|
$26,535
|
|
$24,728
|
|
$23,061
|
|
|
Salaries and other personnel expense increased
$1.6 million, or 9%, in 2006, $1.9 million, or 12%, in
2005, and $1.5 million, or 11%, in 2004, reflecting
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 2006, the increase
in the Companys salary costs was partially offset by a
$357,000 decrease in its health care costs. The Company does not
expect continuing declines in its health care costs. Moreover,
due to the tight labor market in the Companys major
markets and ongoing competition for its employees, the Company
expects further increases in salaries and benefits. In addition,
as noted above, the Company now accounts for NBG on a
consolidated basis. In 2006, the Company included $446,000 of
NBGs salary and benefit costs in its own salary and
benefit costs. Also, in the first quarter of 2006, the Company
adopted FASB Statement 123R, Share-Based Payment. As
a result, in 2006 the Company recorded $256,000 in additional
expense associated with its stock options.
Between 2006 and 2004, our occupancy expenses increased by
$373,000, or 18%, to $2.5 million from $2.1 million,
as we incurred higher costs in our new branch locations and
occupied additional space at our main Financial Center.
Marketing costs decreased by $16,000, or 1%, in 2006, increased
by $456,000, or 38%, in 2005, and decreased $4,000, or less than
1%, in 2004. The main reason for the increase in marketing
expenses in 2005 was the costs associated with marketing our HPC
product. Although the Company has incurred additional marketing
expenses due to promoting its HPC Program in 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. Moreover, the company
expects to incur increased marketing costs for the HPC for
business product that it will begin marketing in 2007. The
Company expects that the Bank will increase its deposit accounts
and balances as it continues to implement the HPC Program over
the next year. Furthermore, the Company expects that the
additional deposit accounts will continue to generate increased
fee income that will offset a majority of the increased
marketing costs associated with the HPC Program.
Intangible asset amortization increased by $114,000 or 31% to
$482,000 at December 31, 2006 from $368,000 at
December 31, 2005, as the Company began to amortize the
customer relationship intangible asset associated with NBG. As
noted
12
above, the Company purchased an additional 40.1% interest in NBG
in December of 2005, which increased its ownership interest in
this company to 50.1%. The Company has invested
$1.1 million in NBG since its initial investment in the
first quarter of 2005 and has attributed all of this investment
to an intangible asset represented by the value of the customer
relationships of NBG. The Company is amortizing the NBG
intangible asset over a ten-year period on a straight-line
basis. In 2006, the amortization expense on the NBG intangible
asset was $115,000, which accounts for the increase in
amortization expense in that year. 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. The other portion of intangible
asset amortization at December 31, 2006 pertains to the
core deposit intangible that was created when the Bank purchased
branches from Bank of America in 1999. The amortization on the
core deposit intangible will end in June 2007.
Other expenses, which includes professional fees, software
expenses, ATM and Visa processing fees and other operational
expenses, increased $107,000, or 2%, in 2006 as compared to 2005
and increased $252,000, or 4%, in 2005 as compared to 2004 due
to changes in a variety of expense accounts.
Income Taxes: The provision for income taxes
increased $1.1 million, or 15%, to $8 million in 2006,
increased $697,000, or 11%, to $6.9 million in 2005, and
decreased $289,000, or 4%, to $6.2 million in 2004. The
effective tax rate for 2006 and 2005 was 38%, compared to 37% in
2004. The effective tax rate in 2004 was lower than that for
2005 due in part to the favorable resolution of a dispute on a
prior years tax return recorded in 2004.
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 $13.9 million, or 2% greater in 2006
than in 2005. Average loans were $69.4 million, or 11%
greater in 2005 than in 2004. Loans comprised 88% of total
earning assets on average in 2006, 90% in 2005 and 89% in 2004.
The yield on loans averaged 9.18% in 2006, 8.00% in 2005, and
7.30% in 2004.
Growth in the loan portfolio during 2006 was $12 million,
or 2%. Commercial loans decreased $336,000, or less than 1%,
commercial real estate loans decreased $14.8 million, or
6%, and construction loans increased $21.5 million, or 16%,
in 2006. Installment and consumer loans increased
$5.6 million, or 15%. Funding for the growth in loans in
2006 came from an increase in interest-bearing liabilities and
from noninterest-bearing sources of funds and capital.
13
Nonperforming Loans; Real Estate
Owned: Nonperforming assets consist of nonaccrual
loans, accruing loans that are 90 days or more past due,
restructured loans, and real estate owned. We had real estate
owned property of $717,000 at December 31, 2006. The
following table sets forth information regarding our
nonperforming loans and total nonperforming assets:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(In Thousands)
|
|
Nonperforming loans
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$5,176
|
|
$5,090
|
|
$5,876
|
|
$7,426
|
|
$4,717
|
Accruing loans past due
90 days or more
|
|
708
|
|
981
|
|
290
|
|
2,283
|
|
1,019
|
Restructured loans
|
|
748
|
|
|
|
424
|
|
597
|
|
|
|
|
Total nonperforming loans
|
|
6,632
|
|
6,071
|
|
6,590
|
|
10,306
|
|
5,736
|
Real estate owned
|
|
717
|
|
105
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$7,349
|
|
$6,176
|
|
$6,590
|
|
$10,306
|
|
$5,736
|
|
|
Allowance for loan losses to
portfolio loans
|
|
1.69%
|
|
1.52%
|
|
1.59%
|
|
1.70%
|
|
1.61%
|
Allowance for loan losses to
nonperforming loans
|
|
183%
|
|
176%
|
|
163%
|
|
99%
|
|
148%
|
Nonperforming loans to portfolio
loans
|
|
0.92%
|
|
0.86%
|
|
0.97%
|
|
1.72%
|
|
1.09%
|
Nonperforming assets to total
assets
|
|
0.79%
|
|
0.69%
|
|
0.82%
|
|
1.40%
|
|
0.81%
|
|
|
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
$437,000, $353,000, and $658,000, in 2006, 2005, and 2004,
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, 2006, were
$6.6 million, or 0.92% of portfolio loans, an increase of
$561,000 from $6.1 million at December 31, 2005, and
an increase of $42,000 from $6.6 million at
December 31, 2004.
Potential Problem Loans: At December 31,
2006, management had identified potential problem loans of
$6.4 million as compared to potential problem loans of
$9.1 million at December 31, 2005. Loans in the amount
of $4.1 million were reported as potential problem loans at
December 31, 2005 and December 31, 2006. 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.
Analysis of Allowance for Loan Losses: The
allowance for loan losses is maintained at a level considered
adequate by management to provide for inherent loan losses based
on managements assessment of various factors affecting the
loan portfolio, including a review of problem loans, business
conditions, estimated collateral values, loss experience, credit
concentrations, and an overall evaluation of the quality of the
underlying collateral, and holding and disposal costs. The
allowance is increased by provisions charged to operations and
reduced by loans charged off, net of recoveries. Management
believes that at December 31, 2006, the allowance is
adequate to cover losses that are probable in light of our
current loan portfolio and existing economic conditions.
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.
14
The following table shows the allocation of the allowance for
loan losses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
% 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
|
|
$8,208
|
|
40%
|
|
$6,913
|
|
41%
|
|
$5,130
|
|
39%
|
|
$5,610
|
|
37%
|
|
$4,285
|
|
35%
|
Construction
|
|
330
|
|
21%
|
|
246
|
|
19%
|
|
276
|
|
18%
|
|
282
|
|
17%
|
|
1,327
|
|
15%
|
Real estate term
|
|
964
|
|
33%
|
|
1,214
|
|
35%
|
|
1,634
|
|
37%
|
|
413
|
|
40%
|
|
275
|
|
40%
|
Loans for sale
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
1%
|
Installment and other consumer
|
|
6
|
|
6%
|
|
37
|
|
5%
|
|
|
|
6%
|
|
3
|
|
6%
|
|
22
|
|
9%
|
Unallocated
|
|
2,617
|
|
0%
|
|
2,296
|
|
0%
|
|
3,724
|
|
|
|
3,878
|
|
|
|
2,567
|
|
|
|
|
Total
|
|
$12,125
|
|
100%
|
|
$10,706
|
|
100%
|
|
$10,764
|
|
100%
|
|
$10,186
|
|
100%
|
|
$8,476
|
|
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,
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(In Thousands)
|
|
Balance at beginning of period
|
|
|
$10,706
|
|
|
|
$10,764
|
|
|
|
$10,186
|
|
|
|
$8,476
|
|
|
|
$7,200
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
(2,545)
|
|
|
|
(1,552)
|
|
|
|
(2,067)
|
|
|
|
(2,067)
|
|
|
|
(1,791)
|
|
Construction loans
|
|
|
|
|
|
|
(100)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127)
|
|
|
|
(67)
|
|
Installment and other consumer
loans
|
|
|
(72)
|
|
|
|
(63)
|
|
|
|
(84)
|
|
|
|
(91)
|
|
|
|
(257)
|
|
|
|
Total charge-offs
|
|
|
(2,617)
|
|
|
|
(1,715)
|
|
|
|
(1,471)
|
|
|
|
(2,285)
|
|
|
|
(2,115)
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
1,086
|
|
|
|
418
|
|
|
|
200
|
|
|
|
279
|
|
|
|
168
|
|
Construction loans
|
|
|
|
|
|
|
15
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
355
|
|
|
|
15
|
|
|
|
|
|
|
|
111
|
|
|
|
48
|
|
Installment and other consumer
loans
|
|
|
31
|
|
|
|
39
|
|
|
|
63
|
|
|
|
38
|
|
|
|
80
|
|
|
|
Total recoveries
|
|
|
1,472
|
|
|
|
487
|
|
|
|
448
|
|
|
|
428
|
|
|
|
296
|
|
|
|
Charge-offs net of recoveries
|
|
|
(1,145)
|
|
|
|
(1,228)
|
|
|
|
(1,023)
|
|
|
|
(1,857)
|
|
|
|
(1,819)
|
|
|
|
Provision for loan losses
|
|
|
2,564
|
|
|
|
1,170
|
|
|
|
1,601
|
|
|
|
3,567
|
|
|
|
3,095
|
|
|
|
Balance at end of period
|
|
|
$12,125
|
|
|
|
$10,706
|
|
|
|
$10,764
|
|
|
|
$10,186
|
|
|
|
$8,476
|
|
|
|
Ratio of net charge-offs to
average loans outstanding during the period
|
|
|
0.16%
|
|
|
|
0.18%
|
|
|
|
0.16%
|
|
|
|
0.33%
|
|
|
|
0.36%
|
|
|
|
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 $16.5 million at
December 31, 2006. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Provision for Loan Losses.
15
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.
Loans Receivable: Loans receivable increased
to $717.1 million at December 31, 2006, compared to
$705.1 million and $678.3 million at December 31,
2005 and 2004, respectively. At December 31, 2006, 78% of
the portfolio was scheduled to mature or reprice in 2007 with
19% scheduled to mature or reprice between 2008 and 2011. 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,
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
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
|
|
|
$287,281
|
|
|
|
40.06%
|
|
|
|
$287,617
|
|
|
|
40.79%
|
|
|
|
$267,737
|
|
|
|
39.47%
|
|
|
|
$220,774
|
|
|
|
36.73%
|
|
|
|
$187,312
|
|
|
|
35.01%
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
153,059
|
|
|
|
21.35%
|
|
|
|
131,532
|
|
|
|
18.66%
|
|
|
|
122,873
|
|
|
|
18.12%
|
|
|
|
102,311
|
|
|
|
17.02%
|
|
|
|
82,739
|
|
|
|
15.47%
|
|
Real estate term
|
|
|
237,599
|
|
|
|
33.14%
|
|
|
|
252,395
|
|
|
|
35.80%
|
|
|
|
252,358
|
|
|
|
37.21%
|
|
|
|
239,545
|
|
|
|
39.85%
|
|
|
|
212,740
|
|
|
|
39.77%
|
|
Real estate loans for sale
|
|
|
|
|
|
|
0.00%
|
|
|
|
|
|
|
|
0.00%
|
|
|
|
|
|
|
|
0.00%
|
|
|
|
1,395
|
|
|
|
0.23%
|
|
|
|
7,437
|
|
|
|
1.39%
|
|
Installment and other consumer loans
|
|
|
42,140
|
|
|
|
5.88%
|
|
|
|
36,519
|
|
|
|
5.18%
|
|
|
|
38,166
|
|
|
|
5.63%
|
|
|
|
39,796
|
|
|
|
6.62%
|
|
|
|
47,415
|
|
|
|
8.86%
|
|
|
|
Total
|
|
|
720,079
|
|
|
|
100.42%
|
|
|
|
708,063
|
|
|
|
100.43%
|
|
|
|
681,134
|
|
|
|
100.42%
|
|
|
|
603,821
|
|
|
|
100.45%
|
|
|
|
537,643
|
|
|
|
100.50%
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned purchase discount
|
|
|
|
|
|
|
0.00%
|
|
|
|
|
|
|
|
0.00%
|
|
|
|
(44)
|
|
|
|
-0.01%
|
|
|
|
(44)
|
|
|
|
-0.01%
|
|
|
|
(44)
|
|
|
|
-0.01%
|
|
Unearned loan fees net of
origination costs
|
|
|
(3,023)
|
|
|
|
-0.42%
|
|
|
|
(3,004)
|
|
|
|
-0.43%
|
|
|
|
(2,821)
|
|
|
|
-0.42%
|
|
|
|
(2,658)
|
|
|
|
-0.44%
|
|
|
|
(2,609)
|
|
|
|
-0.49%
|
|
|
|
Net loans
|
|
|
$717,056
|
|
|
|
100.00%
|
|
|
|
$705,059
|
|
|
|
100.00%
|
|
|
|
$678,269
|
|
|
|
100.00%
|
|
|
|
$601,119
|
|
|
|
100.00%
|
|
|
|
$534,990
|
|
|
|
100.00%
|
|
|
|
The following table presents at December 31, 2006, the
aggregate maturity and repricing data of our loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
Within
|
|
1-5
|
|
Over 5
|
|
|
|
|
1 Year
|
|
Years
|
|
Years
|
|
Total
|
|
|
|
(In Thousands)
|
|
Commercial
|
|
|
$151,755
|
|
|
|
$87,093
|
|
|
|
$48,433
|
|
|
|
$287,281
|
|
Construction
|
|
|
140,775
|
|
|
|
10,656
|
|
|
|
1,628
|
|
|
|
153,059
|
|
Real estate term
|
|
|
59,140
|
|
|
|
70,870
|
|
|
|
107,589
|
|
|
|
237,599
|
|
Installment and other consumer
|
|
|
1,032
|
|
|
|
8,032
|
|
|
|
33,076
|
|
|
|
42,140
|
|
|
|
Total
|
|
|
$352,702
|
|
|
|
$176,651
|
|
|
|
$190,726
|
|
|
|
$720,079
|
|
|
|
Fixed interest rate
|
|
|
$130,689
|
|
|
|
$56,828
|
|
|
|
$55,869
|
|
|
|
$243,386
|
|
Floating interest rate
|
|
|
222,013
|
|
|
|
119,823
|
|
|
|
134,857
|
|
|
|
476,693
|
|
|
|
Total
|
|
|
$352,702
|
|
|
|
$176,651
|
|
|
|
$190,726
|
|
|
|
$720,079
|
|
|
|
16
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 40% of our total loans outstanding
as of December 31, 2006 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.
Construction Loans:
Land Development: We believe we are a major land
development and residential construction lender. At
December 31, 2006, we had $46.8 million of residential
subdivision land development loans outstanding, or 7% of total
loans.
One-to-Four-Family
Residences: We financed approximately one-third of the
single-family houses constructed in Anchorage in 2006. We
originated
one-to-four-family
residential construction loans to builders for construction of
homes. At December 31, 2006, we had $86.2 million of
one-to-four-family
residential and condominium construction loans, or 12% of total
loans. Of the homes under construction at December 31,
2006, for which these loans had been made, 36% were subject to
sale contracts between the builder and homebuyers who were
pre-qualified for loans, usually with other financial
institutions.
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.
Real Estate Loans for Sale: In 1998, our
wholly-owned subsidiary, NCIC, purchased a 30% profits and
losses interest of RML, a mortgage company with offices
throughout Alaska, in order for us to obtain a presence in the
residential mortgage market. As noted above, in the third
quarter of 2004, RML merged with PAM, another mortgage company.
As a result, we now own 24% of RML Holding Company, the holding
company for RML and PAM.
Commercial Real Estate: We believe we are an
active lender in the commercial real estate market. At
December 31, 2006, our commercial real estate loans were
$237.6 million, or 33% of our loan portfolio. 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 49% of these loans originated by Northrim resets
every one to five years based on the spread over an index rate,
normally prime or the respective Treasury rate.
We often 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 often 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.
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 18 to
Notes to Consolidated Financial Statements in our
Annual Report for the year ended December 31, 2006. See
also Liquidity and Capital Resources.
Investments
and Investment Activities
General: Our investment portfolio consists
primarily of U.S. Treasury and government sponsored entity
securities, and municipal securities. Investment securities
totaled $100.3 million at December 31, 2006, an
increase of $45.4 million, or 83%, from year-end 2005. The
average maturity of the investment portfolio was approximately
two years at December 31, 2006.
17
Investment securities designated as available for sale comprised
87% 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, 2006, $15.7 million in
securities were pledged for deposits and borrowings.
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
market 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.
The following tables set forth the composition of our investment
portfolio at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Market
|
December 31,
|
|
Cost
|
|
Value
|
|
|
|
(In Thousands)
|
|
Securities Available for
Sale:
|
|
|
|
|
|
|
|
|
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
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
$15,930
|
|
|
|
$15,761
|
|
Government Sponsored Entities
|
|
|
37,140
|
|
|
|
36,482
|
|
Mortgage-backed Securities
|
|
|
242
|
|
|
|
240
|
|
|
|
Total
|
|
|
$53,312
|
|
|
|
$52,483
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
$5,503
|
|
|
|
$5,481
|
|
Government Sponsored Entities
|
|
|
53,628
|
|
|
|
53,656
|
|
Mortgage-backed Securities
|
|
|
311
|
|
|
|
312
|
|
|
|
Total
|
|
|
$59,442
|
|
|
|
$59,449
|
|
|
|
Securities Held to
Maturity:
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
|
$11,776
|
|
|
|
$11,775
|
|
|
|
Total
|
|
|
$11,776
|
|
|
|
$11,775
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
|
$936
|
|
|
|
$957
|
|
|
|
Total
|
|
|
$936
|
|
|
|
$957
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
|
$724
|
|
|
|
$771
|
|
|
|
Total
|
|
|
$724
|
|
|
|
$771
|
|
|
|
18
For the periods ending December 31, 2006, 2005, and 2004,
we held Federal Home Loan Bank (FHLB) stock
with a book value approximately equal to its market value in the
amounts of $1.6 million, $1.6 million, and
$1.3 million, respectively.
Market 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, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
Within
|
|
1-5
|
|
5-10
|
|
Over 10
|
|
|
|
|
1 Year
|
|
Years
|
|
Years
|
|
Years
|
|
Total
|
|
|
|
(Dollars In Thousands)
|
|
Securities Available for
Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
$16,840
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$16,840
|
|
Weighted Average Yield
|
|
|
3.78%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
3.78%
|
|
Government Sponsored Entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
16,779
|
|
|
|
53,192
|
|
|
|
|
|
|
|
|
|
|
|
69,971
|
|
Weighted Average Yield
|
|
|
3.65%
|
|
|
|
4.96%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
4.65%
|
|
Mortgage-Backed Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
182
|
|
Weighted Average Yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
5.35%
|
|
|
|
5.35%
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
$33,619
|
|
|
|
$53,192
|
|
|
|
$
|
|
|
|
$182
|
|
|
|
$86,993
|
|
Weighted Average Yield
|
|
|
3.71%
|
|
|
|
4.96%
|
|
|
|
0.00%
|
|
|
|
5.35%
|
|
|
|
4.48%
|
|
Securities Held to
Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
$70
|
|
|
|
$10,351
|
|
|
|
$1,354
|
|
|
|
$
|
|
|
|
$11,775
|
|
Weighted Average Yield
|
|
|
4.12%
|
|
|
|
3.80%
|
|
|
|
3.76%
|
|
|
|
0.00%
|
|
|
|
3.80%
|
|
|
|
At December 31, 2006, 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 with
our Business
Manager®
and MedCash
Manager®
products and in Washington and Oregon through NFS.
Our purchased receivable balances increased in 2006 to
$21.2 million, as compared to $12.2 million in 2005.
The funding for this growth in purchased receivables came from
an increase in interest-bearing liabilities and from
noninterest-bearing sources of funds and capital.
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 increased 2% to $794.9 million at
December 31, 2006, compared with $779.9 million at
December 31, 2005, and $699.1 million at
December 31, 2004. Our deposits generally are expected to
fluctuate according to the level of our market share, economic
conditions, and normal seasonal trends.
19
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,
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
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
|
|
|
$78,872
|
|
|
|
1.05%
|
|
|
|
$65,890
|
|
|
|
0.56%
|
|
|
|
$57,373
|
|
|
|
0.39%
|
|
|
|
$52,955
|
|
|
|
0.39%
|
|
|
|
$49,198
|
|
|
|
0.72%
|
|
Money market accounts
|
|
|
151,871
|
|
|
|
3.99%
|
|
|
|
139,331
|
|
|
|
2.78%
|
|
|
|
126,567
|
|
|
|
1.21%
|
|
|
|
134,582
|
|
|
|
0.96%
|
|
|
|
131,227
|
|
|
|
1.57%
|
|
Savings accounts
|
|
|
254,209
|
|
|
|
3.98%
|
|
|
|
207,277
|
|
|
|
3.02%
|
|
|
|
139,876
|
|
|
|
1.64%
|
|
|
|
104,158
|
|
|
|
1.13%
|
|
|
|
82,061
|
|
|
|
1.84%
|
|
Certificates of deposit
|
|
|
94,595
|
|
|
|
3.51%
|
|
|
|
138,284
|
|
|
|
2.52%
|
|
|
|
155,134
|
|
|
|
1.72%
|
|
|
|
164,847
|
|
|
|
2.14%
|
|
|
|
172,531
|
|
|
|
3.50%
|
|
|
|
Total interest-bearing accounts
|
|
|
579,547
|
|
|
|
3.51%
|
|
|
|
550,782
|
|
|
|
2.54%
|
|
|
|
478,950
|
|
|
|
1.40%
|
|
|
|
456,542
|
|
|
|
1.36%
|
|
|
|
435,017
|
|
|
|
2.29%
|
|
Noninterest-bearing demand accounts
|
|
|
185,958
|
|
|
|
|
|
|
|
182,535
|
|
|
|
|
|
|
|
181,731
|
|
|
|
|
|
|
|
159,858
|
|
|
|
|
|
|
|
135,181
|
|
|
|
|
|
|
|
Total average deposits
|
|
|
$765,505
|
|
|
|
|
|
|
|
$733,317
|
|
|
|
|
|
|
|
$660,681
|
|
|
|
|
|
|
|
$616,400
|
|
|
|
|
|
|
|
$570,198
|
|
|
|
|
|
|
|
Certificates of Deposit: The only deposit
category with stated maturity dates is certificates of deposit.
At December 31, 2006, we had $85.9 million in
certificates of deposit, of which $59.4 million, or 69%,
are scheduled to mature in 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, 2006, was $207.5 million, an
increase of $9.5 million as compared to the balance of
$198 million at December 31, 2005.
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, 2006, we
did not hold any certificates of deposit for the Alaska
Permanent Fund.
Borrowings
FHLB: At December 31, 2006, our maximum
borrowing line from the FHLB was equal to $107 million,
approximately 12% of the Companys assets. At
December 31, 2006, there was $2.2 million outstanding
on the line. At December 31, 2005, there was
$2.6 million outstanding on the line and an additional
$15.5 million of the borrowing line was committed to secure
public deposits. FHLB advances are secured by a blanket pledge
of the Companys assets.
Other Short-term Borrowing: At
December 31, 2006, there were no short-term (original
maturity of one year or less) borrowings that exceeded 30% of
shareholders equity.
Contractual
Obligations
The following table references contractual obligations of the
Company for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Within
|
|
1-3
|
|
3-5
|
|
Over
|
|
|
December 31, 2006
|
|
1 Year
|
|
Years
|
|
Years
|
|
5 Years
|
|
Total
|
|
|
|
(In Thousands)
|
|
Long-term debt obligations
|
|
|
$400
|
|
|
|
$800
|
|
|
|
$800
|
|
|
|
$18,732
|
|
|
|
$20,732
|
|
Operating lease obligations
|
|
|
1,434
|
|
|
|
2,928
|
|
|
|
2,867
|
|
|
|
3,711
|
|
|
|
10,940
|
|
Other long-term liabilities
|
|
|
1,217
|
|
|
|
3,277
|
|
|
|
|
|
|
|
|
|
|
|
4,494
|
|
|
|
Total
|
|
|
$3,051
|
|
|
|
$7,005
|
|
|
|
$3,667
|
|
|
|
$22,443
|
|
|
|
$36,166
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Within
|
|
1-3
|
|
3-5
|
|
Over
|
|
|
December 31, 2005
|
|
1 Year
|
|
Years
|
|
Years
|
|
5 Years
|
|
Total
|
|
|
|
(In Thousands)
|
|
Long-term debt obligations
|
|
|
$400
|
|
|
|
$800
|
|
|
|
$800
|
|
|
|
$18,574
|
|
|
|
$20,574
|
|
Operating lease obligations
|
|
|
1,338
|
|
|
|
2,420
|
|
|
|
225
|
|
|
|
1,544
|
|
|
|
5,527
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$1,738
|
|
|
|
$3,220
|
|
|
|
$1,025
|
|
|
|
$20,118
|
|
|
|
$26,101
|
|
|
|
Long-term debt obligations consist of (a) $2.2 million
advance from the FHLB that was originated on May 7, 2002,
matures on May 7, 2012, and bears interest at 5.46%,
(b) $8.2 million junior subordinated debentures that
were originated on May 8, 2003, mature on May 15,
2033, and bear interest at a rate of LIBOR plus 3.15%, adjusted
quarterly, and (c) $10.3 million junior subordinated
debentures that were originated on December 16, 2005,
mature on December 15, 2035, and bear interest at a rate of
LIBOR plus 1.37%, adjusted quarterly. The operating lease
obligations are more fully described at Note 18 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 and a
$3 million interest in U.S.A. Institutional Tax Credit
Fund LVII L.P. (USA 57) in December 2006. The
investments in CharterMac and USA 57 will be funded in 2009 and
2010, respectively.
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, 2006, were $172 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, 2006, were $794.9 million.
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,
2006, our current assets were $459 million and our funds
available for borrowing under our existing lines of credit were
$166.4 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.
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. We purchased
550,942 shares of our stock under this program through
December 31, 2006 at a total cost of $10.8 million at
an average price of $19.64, which left a balance of
59,713 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.
21
The stock repurchase program had an effect on earnings per share
because it decreased the total number of shares outstanding in
2006, 2005, 2003, and 2002, by 17,500, 308,642, 155,800, and
69,000 shares respectively. The Company did not repurchase
any of its shares in 2004. The table below shows this effect on
diluted earnings per share as adjusted for the 5% stock dividend
in 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
Diluted EPS
|
|
EPS without
|
Years Ending:
|
|
as Reported
|
|
Stock Repurchase
|
|
2006
|
|
|
$2.09
|
|
|
|
$1.92
|
|
2005
|
|
|
$1.72
|
|
|
|
$1.64
|
|
2004
|
|
|
$1.63
|
|
|
|
$1.57
|
|
2003
|
|
|
$1.61
|
|
|
|
$1.57
|
|
2002
|
|
|
$1.29
|
|
|
|
$1.28
|
|
|
|
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 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 $665,000 in 2006.
At December 31, 2006, the securities had an interest rate
of 8.52%.
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
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 $654,000 in 2006. At December 31, 2006, the
securities had an interest rate of 6.73%.
Our shareholders equity at December 31, 2006, was
$95.4 million, as compared to $84.5 million at
December 31, 2005. The Company earned net income of
$13 million during 2006, issued 38,000 shares through
the exercise of stock options, and repurchased
17,500 shares of its common stock under the Companys
publicly announced repurchase program. In addition, on
September 1, 2006, the Company paid a 5% stock dividend to
shareholders of record as of August 18, 2006. As a result,
the Company issued 290,727 of its shares along with a cash
dividend of $2,000 to pay for fractional shares. At
December 31, 2006, the Company had 6.1 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
leverage capital. We believe as of December 31, 2006, 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 June 15, 2006, 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. The capital ratios 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
2005 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
22
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately -
|
|
|
Well -
|
|
|
Actual
|
|
|
Actual
|
|
December 31, 2006
|
|
Capitalized
|
|
|
Capitalized
|
|
|
Ratio BHC
|
|
|
Ratio Bank
|
|
|
|
Tier 1 risk-based capital
|
|
|
4.00%
|
|
|
|
6.00%
|
|
|
|
12.95%
|
|
|
|
11.09%
|
|
Total risk-based capital
|
|
|
8.00%
|
|
|
|
10.00%
|
|
|
|
14.21%
|
|
|
|
12.35%
|
|
Leverage ratio
|
|
|
4.00%
|
|
|
|
5.00%
|
|
|
|
11.71%
|
|
|
|
10.06%
|
|
|
|
(See Note 19 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, 2006, the number of shareholders of record of
our common stock was 187.
We began paying regular cash dividends of $0.05 per share
in the second quarter of 1996. In the second quarters of 2006,
2005, and 2004, we paid cash dividends of $0.125, $0.11, and
$0.095 per share, respectively. Cash dividends totaled
$2.8 million, $2.6 million, and $2.3 million in
2006, 2005, and 2004, respectively. On January 11, 2007,
the Board of Directors approved payment of a $0.125 per
share dividend on February 9, 2007, to shareholders of
record on January 29, 2007. On August 3, 2006, the
Board of Directors approved payment of a 5% stock dividend on
September 1, 2006, of the Companys common stock as of
the close of business August 18, 2006. 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. Prices have been adjusted for applicable stock
dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
21.77
|
|
|
$
|
23.90
|
|
|
$
|
27.33
|
|
|
$
|
27.68
|
|
Low
|
|
$
|
20.70
|
|
|
$
|
21.37
|
|
|
$
|
22.04
|
|
|
$
|
25.89
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
23.98
|
|
|
$
|
23.81
|
|
|
$
|
23.90
|
|
|
$
|
24.29
|
|
Low
|
|
$
|
22.10
|
|
|
$
|
21.02
|
|
|
$
|
22.27
|
|
|
$
|
22.14
|
|
|
|
23
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, 2001, and
ending December 31, 2006. 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, 2001, and that all dividends were
reinvested.
Total
Return Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
|
Northrim BanCorp, Inc.
|
|
|
100.00
|
|
|
|
95.91
|
|
|
|
166.68
|
|
|
|
173.87
|
|
|
|
175.88
|
|
|
|
213.55
|
|
Russell 3000
|
|
|
100.00
|
|
|
|
78.46
|
|
|
|
102.83
|
|
|
|
115.11
|
|
|
|
122.16
|
|
|
|
141.35
|
|
SNL $500M-$1B Bank Index
|
|
|
100.00
|
|
|
|
127.67
|
|
|
|
184.09
|
|
|
|
208.62
|
|
|
|
217.57
|
|
|
|
247.44
|
|
|
|
24
Repurchase
of Securities
The Company did not repurchase any of its common stock in the
fourth quarter of 2006.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
Number of securities
|
|
|
|
remaining available for
|
|
|
to be issued
|
|
Weighted-average
|
|
future issuance under
|
|
|
upon exercise of
|
|
exercise price of
|
|
equity compensation plans
|
|
|
outstanding options,
|
|
outstanding options,
|
|
(Excluding Securities
|
|
|
warrants and rights
|
|
warrants and rights
|
|
Reflected in Column
|
Plan Category
|
|
(a)
|
|
(b)
|
|
(a))
|
|
Equity compensation plans approved
by security holders
|
|
|
439,027
|
|
|
|
$13.37
|
|
|
|
173,734
|
|
|
|
Total
|
|
|
439,027
|
|
|
|
$13.37
|
|
|
|
173,734
|
|
|
|
Recent
Accounting Pronouncements
Between February of 2006 and December of 2006, the Financial
Accounting Standards Board (FASB) issued Statement
No. 155, Accounting for Certain Hybrid Financial
Instruments, Statement No. 156, Accounting for
Servicing of Financial Assets, an amendment of FASB Statement
No. 140, Statement No. 157, Fair Value
Measurements, Statement No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132R, and FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109. The Company believes the
adoption of these Statements will have no impact on its
financial statements.
In December 2004, the FASB issued Statement No. 123R,
Share-Based Payment, which is a revision of FASB
Statement No. 123, Accounting for Stock-Based
Compensation. This Statement establishes standards for the
accounting for transactions in which an entity exchanges its
equity instruments for goods or services primarily in
share-based payment transactions with its employees. This
Statement supersedes the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related
implementation guidance.
As of January 1, 2006, the Company adopted FASB
No. 123R according to the modified prospective method,
which requires measurement of compensation cost from
January 1, 2006 for all unvested stock-based awards at fair
value on the date of grant and recognition of the compensation
associated with these stock-based awards over the service period
for the awards that are expected to vest. In accordance with the
modified prospective transition method, results for prior
periods have not been restated.
The adoption of FASB No. 123R resulted in additional stock
compensation expense of $256,000 for the year ending
December 31, 2006. The Company recognized a tax benefit of
$74,000 related to stock compensation expense on non-qualified
stock options.
The fair value of restricted stock units is determined based on
the number of shares granted and the quoted price of the
Companys stock on the date of grant, and the fair value of
stock options is determined using the Black-Scholes valuation
model, which is consistent with the Companys valuation
techniques previously utilized for options in footnote
disclosures required under FASB 123R. The Company recognizes the
fair value of the restricted stock units and stock options as
expense over the required service period, net of estimated
forfeitures, using the straight line attribution method for
stock-based payment grants previously granted but not fully
vested at January 1, 2006 as well as grants made after
January 1, 2006 as prescribed in FASB 123R. As a result,
the Company recognized expense of $134,000 on the fair value of
restricted stock units and $256,000 on the fair value of stock
options for a total of $390,000 in stock-based compensation
expense for the year ending December 31, 2006.
Prior to January 1, 2006, the Company accounted for
stock-based awards using the intrinsic value method, which
followed the recognition and measurement principles of APB
Opinion No. 25.
25
Outlined below are valuation assumptions used in the
Black-Scholes valuation model for stock options that were used
in estimating the fair value for each stock option granted in
November of 2006 and 2005 and in December of 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
Options:
|
|
Nov. 2006
|
|
Nov. 2005
|
|
Dec. 2004
|
|
Expected option life (years)
|
|
|
7.4
|
|
|
|
7.5
|
|
|
|
7.7
|
|
Risk free rate
|
|
|
4.57%
|
|
|
|
4.45%
|
|
|
|
4.09%
|
|
Dividends per share
|
|
|
$0.56
|
|
|
|
$0.50
|
|
|
|
$0.44
|
|
Expected volatility factor
|
|
|
37.44%
|
|
|
|
37.06%
|
|
|
|
39.28%
|
|
|
|
The expected life represents the weighted average period of time
that options granted are expected to be outstanding when
considering vesting periods and the exercise history of the
Company. The risk free rate is based upon the equivalent yield
of a United States Treasury zero-coupon issue with a term
equivalent to the expected life of the option. The expected
dividends are based on projected dividends for the Company at
the date of the option grant taking into account projected net
income growth, dividend pay-out ratios, and other factors. The
expected volatility is based upon the historical price
volatility of the Companys stock. See Note 17
Options for additional information.
Fair
Value Disclosures Prior to FASB 123R
Adoption
Stock-based compensation for the period prior to January 1,
2006 was determined using the intrinsic value method. The
following table illustrates the effect on net income and
earnings per share as if the fair value based method under
FASB 123R had been applied to all outstanding and unvested
awards in periods prior to January 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Net income (in thousands)
|
|
|
As reported
|
|
|
|
$11,170
|
|
|
|
$10,700
|
|
Less stock-based employee
compensation
|
|
|
|
|
|
|
(173)
|
|
|
|
(163)
|
|
|
|
Net income
|
|
|
Pro forma
|
|
|
|
$10,997
|
|
|
|
$10,537
|
|
|
|
Earnings per share, basic
|
|
|
As reported
|
|
|
|
$1.78
|
|
|
|
$1.68
|
|
|
|
|
Pro forma
|
|
|
|
$1.75
|
|
|
|
$1.65
|
|
Earnings per share, diluted
|
|
|
As reported
|
|
|
|
$1.72
|
|
|
|
$1.63
|
|
|
|
|
Pro forma
|
|
|
|
$1.70
|
|
|
|
$1.60
|
|
|
|
Prior to the adoption of FASB 123R, the Company presented any
tax benefits of deductions resulting from the exercise of stock
options within operating cash flows in the condensed
consolidated statements of cash flow. FASB 123R requires
tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options (excess tax
benefits) to be classified and reported as both an
operating cash outflow and a financing cash inflow upon adoption
of FASB 123R. Accordingly, the Company has recognized these
excess tax benefits in the condensed statement of cash flow for
the year ended December 31, 2006.
FASB Staff Position No. FAS No. 123(R)-3,
Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards
(FSP 123R-3),
effective November 10, 2005, provides for a practical
transition method that may be elected to calculate the pool of
excess tax benefits available to absorb tax deficiencies upon
the adoption of FASB 123R. The method comprises a
computational component that establishes the beginning balance
of the additional paid in capital (APIC) pool
related to employee compensation and a simplified method to
determine the subsequent impact on the APIC pool of awards that
are fully vested and outstanding upon the adoption of
FASB 123R. 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.
26
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, such as early
withdrawal of time deposits and prepayment of loans, 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.
27
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, 2006. 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, 2006
|
|
|
Within 1 year
|
|
1-5 years
|
|
³5 years
|
|
Total
|
|
|
|
(In Thousands)
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments
|
|
|
$18,717
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$18,717
|
|
Investment securities
|
|
|
33,690
|
|
|
|
63,543
|
|
|
|
3,092
|
|
|
|
100,325
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
239,215
|
|
|
|
43,966
|
|
|
|
1,429
|
|
|
|
284,610
|
|
Real estate construction
|
|
|
150,808
|
|
|
|
506
|
|
|
|
1,628
|
|
|
|
152,942
|
|
Real estate term
|
|
|
153,748
|
|
|
|
75,337
|
|
|
|
6,238
|
|
|
|
235,323
|
|
Installment and other consumer
|
|
|
15,549
|
|
|
|
14,829
|
|
|
|
11,650
|
|
|
|
42,028
|
|
|
|
Total interest-earning assets
|
|
|
$611,727
|
|
|
|
$198,181
|
|
|
|
$24,037
|
|
|
|
$833,945
|
|
Percent of total interest-earning
assets
|
|
|
73%
|
|
|
|
24%
|
|
|
|
3%
|
|
|
|
100%
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand accounts
|
|
|
$89,476
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$89,476
|
|
Money market accounts
|
|
|
157,345
|
|
|
|
|
|
|
|
|
|
|
|
157,345
|
|
Savings accounts
|
|
|
255,822
|
|
|
|
|
|
|
|
|
|
|
|
255,822
|
|
Certificates of deposit
|
|
|
59,357
|
|
|
|
26,537
|
|
|
|
24
|
|
|
|
85,918
|
|
FHLB advances
|
|
|
|
|
|
|
|
|
|
|
2,174
|
|
|
|
2,174
|
|
Other borrowings
|
|
|
4,328
|
|
|
|
|
|
|
|
|
|
|
|
4,328
|
|
Junior subordinated debentures
|
|
|
18,558
|
|
|
|
|
|
|
|
|
|
|
|
18,558
|
|
|
|
Total interest-bearing liabilities
|
|
|
$584,886
|
|
|
|
$26,537
|
|
|
|
$2,198
|
|
|
|
$613,621
|
|
Percent of total interest-bearing
liabilities
|
|
|
95%
|
|
|
|
4%
|
|
|
|
0%
|
|
|
|
100%
|
|
|
|
Interest sensitivity gap
|
|
|
$26,841
|
|
|
|
$171,644
|
|
|
|
$21,839
|
|
|
|
$220,324
|
|
Cumulative interest sensitivity gap
|
|
|
$26,841
|
|
|
|
$198,485
|
|
|
|
$220,324
|
|
|
|
|
|
Cumulative interest sensitivity
gap as a percentage of total assets
|
|
|
3%
|
|
|
|
21%
|
|
|
|
24%
|
|
|
|
|
|
|
|
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.
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
28
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, 2006, we expect an increase in net interest
income of $250,000 million and a decrease of
$292,000 million in net interest income over a
12-month
period, if interest rates decreased or increased an immediate
100 basis points, respectively.
Critical
Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles involves the use of
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses during the reporting
period. Actual results could differ from those estimates.
Our estimate for the loan loss reserve is based on our
assessment of various factors affecting the loan portfolio,
including a review of problem loans, business conditions,
estimated collateral values, loss experience, credit
concentrations, and an overall evaluation of the quality of the
underlying collateral, and holding and disposal costs. While we
believe that we have used 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.
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, 2006. 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, 2006, the
Company maintained effective internal control over financial
reporting.
The Companys registered public accounting firm has issued
an attestation report on managements assessment of the
Companys internal control over financial reporting. This
report follows below.
29
Report of
Independent Registered Public Accounting Firm
The Board of Directors of
Northrim BanCorp, Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Effectiveness of
Internal Control Over Financial Reporting, that Northrim
BanCorp, Inc. and subsidiaries (the Company) maintained
effective internal control over financial reporting as of
December 31, 2006, 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. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of 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, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and 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, managements assessment that Northrim
BanCorp, Inc. and subsidiaries maintained effective internal
control over financial reporting as of December 31, 2006,
is fairly stated, in all material respects, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Also, in our opinion, Northrim
BanCorp, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
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, 2006 and 2005, 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, 2006, and
our report dated February 16, 2007 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Anchorage, Alaska
February 16, 2007
30
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, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, 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), the
effectiveness of Northrim BanCorp, Incs internal control
over financial reporting as of December 31, 2006, 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
February 16, 2007 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
/s/ KPMG LLP
Anchorage, Alaska
February 16, 2007
31
Consolidated
Financial Statements
NORTHRIM BANCORP, INC.
Consolidated Balance Sheets
December 31, 2006 and 2005
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
(In Thousands Except Share Amounts)
|
|
Assets
|
|
|
|
|
Cash and due from banks
(Note 2)
|
|
$25,565
|
|
$28,854
|
Money market investments
(Note 3)
|
|
18,717
|
|
60,836
|
Investment securities held to
maturity (Note 4)
|
|
11,776
|
|
936
|
Investment securities available
for sale (Note 4)
|
|
86,993
|
|
52,483
|
Investment in Federal Home
Loan Bank stock (Note 4)
|
|
1,556
|
|
1,556
|
|
|
Total Portfolio Investments
|
|
100,325
|
|
54,975
|
Loans (Note 5)
|
|
717,056
|
|
705,059
|
Allowance for loan losses
(Note 6)
|
|
(12,125)
|
|
(10,706)
|
|
|
Net Loans
|
|
704,931
|
|
694,353
|
Purchased receivables
|
|
21,183
|
|
12,198
|
Accrued interest receivable
|
|
4,916
|
|
4,397
|
Premises and equipment, net
(Note 7)
|
|
12,874
|
|
10,603
|
Intangible assets (Notes 1
and 8)
|
|
6,903
|
|
7,385
|
Other assets (Notes 1 and 8)
|
|
30,206
|
|
21,979
|
|
|
Total Assets
|
|
$925,620
|
|
$895,580
|
|
|
Liabilities
|
|
|
|
|
Deposits:
|
|
|
|
|
Demand
|
|
$206,343
|
|
$196,616
|
Interest-bearing demand
|
|
89,476
|
|
75,988
|
Savings
|
|
48,330
|
|
46,790
|
Alaska CDs
|
|
207,492
|
|
197,989
|
Money market
|
|
157,345
|
|
151,903
|
Certificates of deposit less than
$100,000 (Note 9)
|
|
57,601
|
|
59,331
|
Certificates of deposit greater
than $100,000 (Note 9)
|
|
28,317
|
|
51,249
|
|
|
Total Deposits
|
|
794,904
|
|
779,866
|
Borrowings (Note 10)
|
|
6,502
|
|
8,415
|
Junior subordinated debentures
(Note 11)
|
|
18,558
|
|
18,558
|
Other liabilities
|
|
10,209
|
|
4,267
|
|
|
Total Liabilities
|
|
830,173
|
|
811,106
|
|
|
Minority interest in subsidiaries
|
|
29
|
|
|
|
|
|
|
|
Shareholders Equity
(Note 16 and 17)
|
|
|
|
|
Common stock, $1 par value,
10,000,000 shares authorized,
6,114,247 and 5,803,487 shares issued and outstanding
at December 31, 2006 and 2005, respectively
|
|
6,114
|
|
5,803
|
Additional paid-in capital
|
|
46,379
|
|
39,161
|
Retained earnings
|
|
43,212
|
|
39,999
|
Accumulated other comprehensive
income-
net unrealized gains/losses on available for sale on investment
securities
|
|
(287)
|
|
(489)
|
|
|
Total Shareholders Equity
|
|
95,418
|
|
84,474
|
|
|
Commitments and contingencies
(Notes 2, 4, 10, 15, 18, 19, and 22)
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$925,620
|
|
$895,580
|
|
|
See accompanying notes to the consolidated financial statements.
32
NORTHRIM
BANCORP, INC.
Consolidated Statements of Income
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands Except Per Share Amounts)
|
|
Interest Income
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$65,347
|
|
$55,870
|
|
$45,898
|
Interest on investment
securities-available for sale (Note 4)
|
|
2,396
|
|
2,171
|
|
2,400
|
Interest on investment
securities-held to maturity (Note 4)
|
|
403
|
|
31
|
|
92
|
Interest on money market
investments
|
|
1,375
|
|
709
|
|
164
|
|
|
Total Interest Income
|
|
69,521
|
|
58,781
|
|
48,554
|
Interest Expense
|
|
|
|
|
|
|
Interest expense on deposits and
borrowings (Note 12)
|
|
21,999
|
|
14,873
|
|
7,283
|
|
|
Net Interest Income
|
|
47,522
|
|
43,908
|
|
41,271
|
Provision for loan losses
(Note 6)
|
|
2,564
|
|
1,170
|
|
1,601
|
|
|
Net Interest Income After
Provision for Loan Losses
|
|
44,958
|
|
42,738
|
|
39,670
|
Other Operating Income
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
1,975
|
|
1,800
|
|
1,718
|
Purchased receivable income
|
|
1,855
|
|
993
|
|
201
|
Employee benefit plan income
|
|
1,113
|
|
|
|
|
Equity in earnings from mortgage
affiliate
|
|
649
|
|
493
|
|
438
|
Equity in loss from Elliott Cove
|
|
(230)
|
|
(424)
|
|
(457)
|
Other income
|
|
2,296
|
|
1,971
|
|
1,892
|
|
|
Total Other Operating Income
|
|
7,658
|
|
4,833
|
|
3,792
|
|
|
Other Operating Expense
|
|
|
|
|
|
|
Salaries and other personnel
expense
|
|
19,277
|
|
17,656
|
|
15,708
|
Occupancy, net
|
|
2,503
|
|
2,417
|
|
2,130
|
Equipment expense
|
|
1,350
|
|
1,371
|
|
1,372
|
Marketing expense
|
|
1,641
|
|
1,657
|
|
1,201
|
Intangible asset amortization
expense
|
|
482
|
|
368
|
|
368
|
Other expense
|
|
6,115
|
|
6,008
|
|
5,756
|
|
|
Total Other Operating Expense
|
|
31,368
|
|
29,477
|
|
26,535
|
|
|
Income Before Income Taxes and
Minority Interest
|
|
21,248
|
|
18,094
|
|
16,927
|
Minority interest in subsidiaries
|
|
296
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
20,952
|
|
18,094
|
|
16,927
|
Provision for income taxes
(Note 13)
|
|
7,978
|
|
6,924
|
|
6,227
|
|
|
Net Income
|
|
$12,974
|
|
$11,170
|
|
$10,700
|
|
|
Earnings Per Share, Basic
|
|
$2.12
|
|
$1.78
|
|
$1.68
|
|
|
Earnings Per Share, Diluted
|
|
$2.09
|
|
$1.72
|
|
$1.63
|
|
|
Weighted Average
Shares Outstanding, Basic
|
|
6,120,002
|
|
6,286,774
|
|
6,383,281
|
|
|
Weighted Average
Shares Outstanding, Diluted
|
|
6,205,826
|
|
6,481,794
|
|
6,584,146
|
|
|
See accompanying notes to the consolidated financial statements.
33
NORTHRIM
BANCORP, INC.
Consolidated Statements of Changes in
Shareholders Equity and Comprehensive Income
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
other
|
|
|
|
|
Number
|
|
Par
|
|
paid-in
|
|
Retained
|
|
comprehensive
|
|
|
|
|
of shares
|
|
value
|
|
capital
|
|
earnings
|
|
income
|
|
Total
|
|
|
|
(In Thousands)
|
|
Balance as of January 1, 2004
|
|
|
6,050
|
|
|
|
$6,050
|
|
|
|
$45,615
|
|
|
|
$22,997
|
|
|
|
$623
|
|
|
|
$75,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,308)
|
|
|
|
|
|
|
|
(2,308)
|
|
Exercise of Stock Options
|
|
|
39
|
|
|
|
39
|
|
|
|
(150)
|
|
|
|
|
|
|
|
|
|
|
|
(111)
|
|
Excess tax benefits from
share-based payment arrangements
|
|
|
|
|
|
|
|
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
|
411
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding
(gain/loss) on available for sale investment securities, net of
related income tax effect (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(619)
|
|
|
|
(619)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,700
|
|
|
|
|
|
|
|
10,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,081
|
|
|
|
Balance as of December 31,
2004
|
|
|
6,089
|
|
|
|
$6,089
|
|
|
|
$45,876
|
|
|
|
$31,389
|
|
|
|
$4
|
|
|
|
$83,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,560)
|
|
|
|
|
|
|
|
(2,560)
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
Exercise of stock options
|
|
|
23
|
|
|
|
23
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
Excess tax benefits from
share-based payment arrangements
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
Treasury stock buy-back
|
|
|
(309)
|
|
|
|
(309)
|
|
|
|
(7,029)
|
|
|
|
|
|
|
|
|
|
|
|
(7,338)
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding
(gain/loss) on available for sale investment securities, net of
related income tax effect (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(493)
|
|
|
|
(493)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,170
|
|
|
|
|
|
|
|
11,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,677
|
|
|
|
Balance as of December 31,
2005
|
|
|
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 (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
See accompanying notes to the consolidated financial statements.
34
NORTHRIM
BANCORP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
Operating Activities:
|
|
|
|
|
|
|
Net income
|
|
$12,974
|
|
$11,170
|
|
$10,700
|
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
|
|
|
|
|
|
|
Security (gains), net
|
|
|
|
(9)
|
|
(151)
|
Depreciation and amortization of
premises and equipment
|
|
1,116
|
|
1,244
|
|
1,142
|
Amortization of software
|
|
354
|
|
544
|
|
558
|
Intangible asset amortization
|
|
482
|
|
368
|
|
368
|
Amortization of investment security
premium, net of discount accretion
|
|
(133)
|
|
|
|
151
|
Deferred tax (benefit)
|
|
(1,826)
|
|
(821)
|
|
(1,260)
|
Stock-based compensation
|
|
390
|
|
68
|
|
|
Excess tax benefits from
share-based payment arrangements
|
|
(230)
|
|
(140)
|
|
(411)
|
Deferral of loan fees and costs, net
|
|
19
|
|
183
|
|
163
|
Provision for loan losses
|
|
2,564
|
|
1,170
|
|
1,601
|
Earnings in excess of distributions
from RML
|
|
(124)
|
|
(11)
|
|
(71)
|
Equity in loss from Elliott Cove
|
|
230
|
|
424
|
|
457
|
Minority interest in subsidiaries
|
|
296
|
|
|
|
|
(Increase) in accrued interest
receivable
|
|
(519)
|
|
(719)
|
|
(378)
|
(Increase) in other assets
|
|
(7,234)
|
|
(494)
|
|
(656)
|
Increase (decrease) of other
liabilities
|
|
6,160
|
|
578
|
|
296
|
|
|
Net Cash Provided by Operating
Activities
|
|
14,519
|
|
13,555
|
|
12,509
|
|
|
Investing Activities:
|
|
|
|
|
|
|
Investment in securities:
|
|
|
|
|
|
|
Purchases of investment
securities
available-for-sale
|
|
(40,643)
|
|
(10,874)
|
|
(28,341)
|
Purchases of investment
securities
held-to-maturity
|
|
(10,905)
|
|
(277)
|
|
|
Proceeds from sales/maturities of
securities
available-for-sale
|
|
6,608
|
|
17,012
|
|
38,559
|
Proceeds from calls/maturities of
securities
held-to-maturity
|
|
65
|
|
65
|
|
220
|
Investment in Federal Home
Loan Bank stock, net
|
|
|
|
(254)
|
|
244
|
Investment in purchased
receivables, net
|
|
(8,985)
|
|
(10,007)
|
|
(1,729)
|
Investments in loans:
|
|
|
|
|
|
|
Sales of loans and loan
participations
|
|
22,601
|
|
25,116
|
|
20,036
|
Loans made, net of repayments
|
|
(35,762)
|
|
(53,317)
|
|
(98,373)
|
Investment in Elliott Cove
|
|
(210)
|
|
(150)
|
|
(250)
|
Investment in NBG
|
|
|
|
(1,146)
|
|
|
Subscription in PWA
|
|
|
|
(2,015)
|
|
|
Loan to Elliott Cove, net of
repayments
|
|
58
|
|
(575)
|
|
(250)
|
Loan to PWA, net of repayments
|
|
385
|
|
(385)
|
|
|
Purchases of premises and equipment
|
|
(3,387)
|
|
(1,264)
|
|
(618)
|
|
|
Net Cash Used by Investing
Activities
|
|
(70,175)
|
|
(38,071)
|
|
(70,502)
|
|
|
Financing Activities:
|
|
|
|
|
|
|
Increase in deposits
|
|
15,038
|
|
80,805
|
|
52,864
|
Increase (decrease) in borrowings
|
|
(1,913)
|
|
1,937
|
|
1,335
|
Distributions to minority interests
|
|
(267)
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
338
|
|
129
|
|
(111)
|
Excess tax benefits from
share-based payment arrangements
|
|
230
|
|
140
|
|
411
|
Proceeds from issuance of junior
subordinated debentures
|
|
|
|
10,000
|
|
|
Repurchase of common stock
|
|
(410)
|
|
(7,338)
|
|
|
Cash dividends paid
|
|
(2,768)
|
|
(2,560)
|
|
(2,308)
|
|
|
Net Cash Provided by Financing
Activities
|
|
10,248
|
|
83,113
|
|
52,191
|
|
|
Net Increase (Decrease) by Cash and
Cash Equivalents
|
|
(45,408)
|
|
58,597
|
|
(5,802)
|
Cash and cash equivalents at
beginning of period
|
|
89,690
|
|
31,093
|
|
36,895
|
|
|
Cash and Cash Equivalents at End of
Year
|
|
$44,282
|
|
$89,690
|
|
$31,093
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
Income taxes paid
|
|
$9,296
|
|
$7,550
|
|
$6,825
|
Interest paid
|
|
$21,891
|
|
$14,741
|
|
$7,766
|
Conversion of Elliott Cove loan to
equity
|
|
$
|
|
$
|
|
$625
|
|
|
See
accompanying notes to the consolidated financial statements.
35
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 and wealth management business located in Seattle,
Washington; 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. 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.
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.
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, and
federal funds sold.
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 net
amount in a separate component of other comprehensive income,
unless an unrealized loss is deemed other than temporary. The
gain or loss on
available-for-sale
securities sold is 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 for securities with similar attributes 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 and Loan Fees: Loans are carried
at their principal amount outstanding, adjusted for the net of
unamortized fees and related direct loan origination costs.
Interest income on loans is accrued and recognized on the
principal amount outstanding except 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. 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.
36
Allowance for Loan Losses: The allowance for
loan losses is a management estimate of the reserve necessary to
absorb probable losses in the Companys loan portfolio. The
Company charges off the balance of a loan or writes down a
portion of a loan when it identifies a loss in the respective
loan. In determining the adequacy of the allowance, management
evaluates prevailing economic conditions, results of regular
examinations and evaluations of the quality of the loan
portfolio by external parties, actual loan loss experience, the
extent of existing risks in the loan portfolio, commitments to
lend other funds, and other pertinent factors. Future additions
to the allowance may be necessary based on changes in economic
conditions and other factors used in evaluating the loan
portfolio. Additionally, various regulatory agencies, as an
integral part of their examination process, periodically review
the allowance for loan losses. Such agencies may require
additions to the allowance based on their judgments of
information available to them at the time of their examination.
The allowance for impaired loans is based on discounted cash
flows using the loans initial effective interest rate or
the fair value of the collateral for certain collateral
dependent loans.
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.
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
11 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. In accordance with Statements of Financial
Accounting Standards (SFAS) No. 142 Goodwill and
Other Intangible Assets, management reviews goodwill
annually for impairment by reviewing a number of key market
indicators. In addition, the Company amortizes its core deposit
intangible over 8 years using a straight-line method.
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. These assets are carried at
amortized cost and are amortized using the straight-line method
over their estimated useful life or the term of the agreement.
Also included in other assets is the deferred tax asset and the
Companys investments in RML Holding Company, Elliott Cove,
NBG, and three low income housing partnerships. These
partnerships include Related Corporate Partners XXII, L.P.,
(RCP), CharterMac Corporate Partners XXXIII, L.P.,
(CharterMac) and U.S.A. Institutional Tax Credit
Fund LVII L.P. (USA 57). These entities are all
Delaware limited partnerships. The Company purchased a
$3 million interest in each of these partnerships in
January 2003, September 2006 and December 2006, respectively.
Other Real Estate: Other real estate
represents properties acquired through foreclosure or its
equivalent. Prior to foreclosure, the carrying value is adjusted
to the lower of cost or fair market value of the real estate to
be acquired by a charge to the allowance for loan loss. Any
subsequent reduction in the carrying value is charged against
earnings.
Advertising: Advertising, promotion and
marketing costs are expensed as incurred. For the periods ending
December 31, 2006, 2005, and 2004, the Company reported
total expenses of $1.6 million, $1.7 million, and
$1.2 million, respectively.
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 17, are considered to
be common stock equivalents. Incremental shares were 92,782,
178,681, and 191,300 for 2006, 2005, and 2004, respectively. On
September 1, 2006, the Company paid a 5% stock dividend to
shareholders of record as of August 18, 2006. As a result,
the Company issued 290,727 of its shares along with a cash
dividend of $2,000 to pay for fractional shares.
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. In accordance with FASB Statement
No. 148, Accounting for Stock-Based
Compensation
37
Transition and Disclosure, the Company has elected the
modified prospective method for recognition of compensation cost
associated with stock options and has elected to recognize
compensation expense for options with pro-rata vesting using the
straight-line method. Accordingly, results for prior periods
have not been restated. Prior to January 1, 2006 the
Company accounted for its stock options in accordance with the
provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, for
the years ending December 31, 2005 and 2004, compensation
expense is calculated using the intrinsic-value-based method of
accounting. Under this method, expense is recorded on the date
of grant only if the current market price of the underlying
stock exceeds the exercise price.
The following table illustrates the effect on net income if the
fair-value-based method had been applied to all outstanding and
unvested awards in each period in which the
intrinsic-value-based method of accounting was applied:
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Net income (in thousands)
|
|
As reported
|
|
$11,170
|
|
$10,700
|
Less stock-based employee
compensation
|
|
|
|
(173)
|
|
(163)
|
|
|
Net income
|
|
Pro forma
|
|
$10,997
|
|
$10,537
|
|
|
Earnings per share, basic
|
|
As reported
|
|
$1.78
|
|
$1.68
|
|
|
Pro forma
|
|
$1.75
|
|
$1.65
|
Earnings per share, diluted
|
|
As reported
|
|
$1.72
|
|
$1.63
|
|
|
Pro forma
|
|
$1.70
|
|
$1.60
|
|
|
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.
Reclassifications: Certain reclassifications
have been made to prior year amounts, due primarily to
aggregation, to maintain consistency with the current year with
no impact on net income or total shareholders equity.
Segments: The Company has identified only one
reportable segment.
Geographic Concentration and Alaska
Economy: The Companys growth and operations
depend upon the economic conditions of Alaska and the specific
markets it serves. The economy in Alaska is dependent upon the
natural resources industries, in particular oil production, as
well as tourism, government, and U.S. military spending.
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 the
Company serves eventually could have a positive or negative
impact on the Company.
Consolidation Policy: The consolidated
financial statements include the financial information for
Northrim BanCorp, Inc. and its wholly-owned subsidiaries that
include Northrim Bank, 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.
NOTE 2
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, 2006, was $0.
NOTE 3
Money Market Investments
Money market investment balances are as follows:
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
|
|
(In Thousands)
|
|
Interest bearing deposits at
Federal Home Loan Bank (FHLB)
|
|
$18,717
|
|
$54,036
|
Fed funds sold
|
|
|
|
6,800
|
|
|
Total
|
|
$18,717
|
|
$60,836
|
|
|
All money market investments had a
one-day
maturity.
38
NOTE 4
Investment Securities
The carrying values and approximate market values of investment
securities are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Market
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In Thousands)
|
|
2006:
|
|
|
|
|
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$16,860
|
|
$
|
|
$20
|
|
$16,840
|
Government Sponsored Entities
|
|
70,438
|
|
16
|
|
483
|
|
69,971
|
Mortgage-backed Securities
|
|
183
|
|
|
|
1
|
|
182
|
|
|
Total
|
|
$87,481
|
|
$16
|
|
$504
|
|
$86,993
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$11,776
|
|
$32
|
|
$33
|
|
$11,775
|
|
|
Federal Home Loan Bank Stock
|
|
$1,556
|
|
$
|
|
$
|
|
$1,556
|
|
|
2005:
|
|
|
|
|
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$15,930
|
|
$
|
|
$169
|
|
$15,761
|
Government Sponsored Entities
|
|
37,140
|
|
|
|
659
|
|
36,482
|
Mortgage-backed Securities
|
|
242
|
|
|
|
2
|
|
240
|
|
|
Total
|
|
$53,312
|
|
$
|
|
$830
|
|
$52,483
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$936
|
|
$28
|
|
$7
|
|
$957
|
|
|
Federal Home Loan Bank Stock
|
|
$1,556
|
|
$
|
|
$
|
|
$1,556
|
|
|
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,
2006 and 2005 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)
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$5,862
|
|
$5
|
|
$10,978
|
|
$15
|
|
$16,840
|
|
$20
|
Government Sponsored Entities
|
|
|
|
|
|
39,966
|
|
483
|
|
39,966
|
|
483
|
Mortgage-backed Securities
|
|
|
|
|
|
182
|
|
1
|
|
182
|
|
1
|
|
|
Total
|
|
$5,862
|
|
$5
|
|
$51,126
|
|
$499
|
|
$56,988
|
|
$504
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$8,105
|
|
$30
|
|
$274
|
|
$3
|
|
$8,379
|
|
$33
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$4,883
|
|
$53
|
|
$10,878
|
|
$116
|
|
$15,761
|
|
$169
|
Government Sponsored Entities
|
|
10,519
|
|
176
|
|
25,963
|
|
483
|
|
36,482
|
|
659
|
Mortgage-backed Securities
|
|
240
|
|
2
|
|
|
|
|
|
240
|
|
2
|
|
|
Total
|
|
$15,642
|
|
$231
|
|
$36,841
|
|
$599
|
|
$52,483
|
|
$830
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$270
|
|
$7
|
|
|
|
|
|
$270
|
|
$7
|
|
|
The unrealized losses on investments in U.S. Treasury and
government sponsored entities were caused by interest rate
increases. At December 31, 2006, there were fifteen of
these securities in an unrealized loss position of $504,000. 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.
The amortized cost and market values of debt securities at
December 31, 2006, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
|
|
|
Over
|
|
Amortized
|
|
Market
|
|
|
1 Year
|
|
1-5 Years
|
|
5-10 Years
|
|
10 Years
|
|
Cost
|
|
Value
|
|
|
|
(In Thousands)
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$16,860
|
|
$
|
|
$
|
|
$
|
|
$16,860
|
|
$16,840
|
Government Sponsored Entities
|
|
16,902
|
|
53,536
|
|
|
|
|
|
70,438
|
|
69,971
|
Mortgage-backed Securities
|
|
|
|
|
|
|
|
183
|
|
183
|
|
182
|
|
|
Total
|
|
$33,762
|
|
$53,536
|
|
$
|
|
$183
|
|
$87,481
|
|
$86,993
|
|
|
Weighted Average Yield
|
|
3.71%
|
|
4.96%
|
|
0.00%
|
|
5.35%
|
|
4.48%
|
|
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities
|
|
$70
|
|
$10,357
|
|
$1,349
|
|
$
|
|
$11,776
|
|
$11,775
|
|
|
Weighted Average Yield
|
|
4.12%
|
|
3.80%
|
|
3.76%
|
|
0.00%
|
|
3.80%
|
|
|
|
|
40
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)
|
|
2006:
|
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
$
|
|
$
|
|
$
|
Held-to-Maturity
Securities
|
|
$
|
|
$
|
|
$
|
2005:
|
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
$6,148
|
|
$44
|
|
$35
|
Held-to-Maturity
Securities
|
|
$
|
|
$
|
|
$
|
2004:
|
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
$3,789
|
|
$151
|
|
$
|
Held-to-Maturity
Securities
|
|
$
|
|
$
|
|
$
|
|
|
The Company pledged $15.7 million and $20.9 million of
investment securities at December 31, 2006, and 2005,
respectively, as collateral for public deposits and borrowings.
A summary of taxable interest income on available for sale
investment securities is as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
|
U.S. Treasury
|
|
$438
|
|
$472
|
|
$67
|
Government Sponsored Entities
|
|
1,948
|
|
1,688
|
|
2,319
|
Other
|
|
10
|
|
11
|
|
14
|
|
|
Total
|
|
$2,396
|
|
$2,171
|
|
$2,400
|
|
|
Included in investment securities is a required investment in
stock of the FHLB. The amount of the required investment is
based on the Companys capital stock and lending activity,
and amounted to $1.6 million for both 2006 and 2005.
41
NOTE 5
Loans
The composition of the loan portfolio is presented below:
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
|
|
(In Thousands)
|
|
Commercial
|
|
$287,281
|
|
$287,617
|
Real estate construction
|
|
153,059
|
|
131,532
|
Real estate term
|
|
237,599
|
|
252,395
|
Installment and other consumer
|
|
42,140
|
|
36,519
|
|
|
Sub-total
|
|
720,079
|
|
708,063
|
Less: Unearned origination fees,
net of origination costs
|
|
(3,023)
|
|
(3,004)
|
|
|
Total loans
|
|
717,056
|
|
705,059
|
Allowance for loan losses
|
|
(12,125)
|
|
(10,706)
|
|
|
Net Loans
|
|
$704,931
|
|
$694,353
|
|
|
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, 2006, approximately 71% and 27% 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.
Non-accrual loans totaled $5.2 million and
$5.1 million at December 31, 2006, and 2005,
respectively. Interest income which would have been earned on
non-accrual loans for 2006, 2005, and 2004 amounted to $437,000,
$353,000, and $658,000, respectively. There are no commitments
to lend additional funds to borrowers whose loans are in a
non-accrual status or are troubled debt restructurings.
At December 31, 2006, and 2005, the recorded investment in
loans that are considered to be impaired was $32 million
and $18.3 million, respectively, (of which
$5.2 million and $5 million, respectively, were on a
non-accrual basis). A specific allowance of $4.3 million
was established for the $32 million of impaired loans. The
average recorded investment in impaired loans during the years
ended December 31, 2006, and 2005, was approximately
$32.2 million and $18.1 million, respectively. For the
years ended December 31, 2006, 2005, and 2004, the Company
recognized interest income on these impaired loans of
$2.5 million, $945,000, and $117,000, respectively.
At December 31, 2006, and 2005, there were no loans pledged
as collateral to secure public deposits.
At December 31, 2006, and 2005, the Company serviced
$97 million and $90 million of loans, respectively,
which had been sold to various investors without recourse. At
December 31, 2006, and 2005, the Company held
$1.1 million and $734,000, respectively, in trust for these
loans for the payment of such items as taxes, insurance, and
maintenance costs.
42
Maturities and sensitivity of accrual loans to changes in
interest rates as of December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
Within
|
|
|
|
Over
|
|
|
|
|
1 Year
|
|
1-5 Years
|
|
5 Years
|
|
Total
|
|
|
|
(In Thousands)
|
|
Commercial
|
|
$149,325
|
|
$86,951
|
|
$48,334
|
|
$284,610
|
Construction
|
|
140,658
|
|
10,656
|
|
1,628
|
|
152,942
|
Real estate term
|
|
58,131
|
|
70,772
|
|
106,420
|
|
235,323
|
Installment and other consumer
|
|
1,032
|
|
8,032
|
|
32,964
|
|
42,028
|
|
|
Total
|
|
$349,146
|
|
$176,411
|
|
$189,346
|
|
$714,903
|
|
|
Fixed interest rate
|
|
$130,312
|
|
$56,601
|
|
$54,489
|
|
$241,402
|
Floating interest rate
|
|
218,834
|
|
119,810
|
|
134,857
|
|
473,501
|
|
|
Total
|
|
$349,146
|
|
$176,411
|
|
$189,346
|
|
$714,903
|
|
|
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,
|
|
2006
|
|
2005
|
|
|
|
(In Thousands)
|
|
Balance, beginning of the year
|
|
$2,995
|
|
$3,132
|
Loans made
|
|
11,520
|
|
16,848
|
Repayments or change to
nondirector status
|
|
13,392
|
|
16,985
|
|
|
Balance, end of year
|
|
$1,123
|
|
$2,995
|
|
|
The Companys unfunded loan commitments to these directors
or their related interests on December 31, 2006, and 2005,
were $3.4 million and $1.5 million, respectively.
43
NOTE 6
Allowance for Loan Losses
The following is a detail of the allowance for loan losses:
|
|
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
|
Balance, beginning of the year
|
|
$10,706
|
|
$10,764
|
|
$10,186
|
Provision charged to operations
|
|
2,564
|
|
1,170
|
|
1,601
|
Charge-offs:
|
|
|
|
|
|
|
Commercial
|
|
(2,544)
|
|
(1,552)
|
|
(1,387)
|
Construction
|
|
|
|
(100)
|
|
|
Real estate
|
|
|
|
|
|
|
Installment and other consumer
|
|
(72)
|
|
(63)
|
|
(84)
|
|
|
Total Charge-offs
|
|
(2,616)
|
|
(1,715)
|
|
(1,471)
|
|
|
Recoveries:
|
|
|
|
|
|
|
Commercial
|
|
1,086
|
|
418
|
|
200
|
Construction
|
|
|
|
15
|
|
185
|
Real estate
|
|
354
|
|
15
|
|
|
Installment and other consumer
|
|
31
|
|
39
|
|
63
|
|
|
Total Recoveries
|
|
1,471
|
|
487
|
|
448
|
|
|
Charge-offs net of recoveries
|
|
(1,145)
|
|
(1,228)
|
|
(1,023)
|
|
|
Balance, End of Year
|
|
$12,125
|
|
$10,706
|
|
$10,764
|
|
|
At December 31, 2006, the allowance for loan losses was
$12.1 million as compared to balances of $10.7 million
and $10.8 million, respectively, at December 31, 2005
and 2004. The increase in the allowance for the loan losses
between December 31, 2006 and December 31, 2005 was
caused in part by an increase in loans measured for impairment
that increased to $32 million at December 31, 2006
from $18.3 million at December 31, 2005, as well as
growth in the loan portfolio.
NOTE 7
Premises and Equipment
The following summarizes the components of premises and
equipment:
|
|
|
|
|
|
|
|
December 31,
|
|
Useful Life
|
|
2006
|
|
2005
|
|
|
|
|
|
(In Thousands)
|
|
Land
|
|
|
|
$1,443
|
|
$1,443
|
Vehicle
|
|
3 years
|
|
61
|
|
61
|
Furniture and equipment
|
|
3-7 years
|
|
9,608
|
|
8,915
|
Tenant improvements
|
|
2-11 years
|
|
7,307
|
|
4,839
|
Buildings
|
|
39 years
|
|
6,865
|
|
6,848
|
|
|
Total Premises and Equipment
|
|
|
|
25,284
|
|
22,106
|
Accumulated depreciation and
amortization
|
|
|
|
(12,410)
|
|
(11,503)
|
|
|
Total Premises and Equipment, Net
|
|
|
|
$12,874
|
|
$10,603
|
|
|
During 1991, the Company purchased the building in which it
operates and simultaneously sold the building to a partnership,
in which three of the Companys directors had an
approximate 54% ownership interest. The net gain on the sale of
the building, $176,000, was being amortized over the lease term;
approximately $12,000 was recognized in 2004, at which time the
gain was fully amortized.
44
NOTE 8
Other Assets
A summary of intangible assets and other assets is as follows:
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
|
|
(In Thousands)
|
|
Intangible assets:
|
|
|
|
|
Goodwill
|
|
$5,735
|
|
$5,735
|
Core deposits intangible
|
|
163
|
|
531
|
NBG customer relationships
|
|
1,005
|
|
1,119
|
|
|
Total
|
|
$6,903
|
|
$7,385
|
|
|
Prepaid expenses
|
|
$719
|
|
$572
|
Software
|
|
553
|
|
466
|
Deferred taxes, net
|
|
10,560
|
|
8,838
|
Note receivable from Elliott Cove
|
|
617
|
|
1,060
|
Investment in Elliott Cove
|
|
80
|
|
101
|
Investment in PWA
|
|
1,894
|
|
2,015
|
Investment in RML Holding Company
|
|
4,327
|
|
4,203
|
Investment in Low Income Housing
Partnerships
|
|
8,220
|
|
2,440
|
Other assets
|
|
3,236
|
|
2,284
|
|
|
Total
|
|
$30,206
|
|
$21,979
|
|
|
As part of the acquisition of branches from Bank of America in
1999, the Company recorded goodwill and a core deposit
intangible (CDI). The CDI is net of accumulated
amortization of $2.8 million and $2.4 million for the
periods ending December 31, 2006, and 2005, respectively.
The Company intends to continue amortizing the CDI through June
of 2007, which will be the remainder of its useful life.
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
NBG intangible asset over a ten-year period on a straight-line
basis. In 2006, the amortization expense on the NBG intangible
asset was $115,000.
The Company recorded amortization expense of its intangible
assets of $482,000, $368,000, and $368,000 in 2006, 2005, and
2004, respectively. The increase in the amortization expense in
2006 resulted from the additional amortization expense on the
NBG intangible asset. The amortization expense that is required
on these assets as of December 31, 2006, is as follows:
|
|
|
|
Year Ending December 31:
|
|
(In Thousands)
|
|
2007
|
|
$278
|
2008
|
|
115
|
2009
|
|
115
|
2010
|
|
115
|
2011
|
|
115
|
Thereafter
|
|
430
|
|
|
Total
|
|
$1,168
|
|
|
45
As of December 31, 2006, the Company owns a 47% 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 $617,000 as of
December 31, 2006.
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, 2006. 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.
Below is summary balance sheet and income statement information
for RML Holding Company.
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
|
|
(In Thousands)
|
|
Assets
|
|
|
|
|
Current assets
|
|
$53,072
|
|
$70,315
|
Long-term assets
|
|
6,455
|
|
5,958
|
|
|
Total Assets
|
|
$59,527
|
|
$76,273
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current liabilities
|
|
$41,980
|
|
$58,285
|
Long-term liabilities
|
|
964
|
|
1,906
|
|
|
Total Liabilities
|
|
42,944
|
|
60,191
|
|
|
Shareholders Equity
|
|
16,583
|
|
16,082
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$59,527
|
|
$76,273
|
|
|
Income/expense
|
|
|
|
|
Gross income
|
|
$17,036
|
|
$15,819
|
Total expense
|
|
14,403
|
|
13,107
|
Joint venture allocations
|
|
102
|
|
(522)
|
|
|
Net Income
|
|
$2,735
|
|
$2,190
|
|
|
In December of 2006, September of 2006 and January of 2003 the
Company made investments of $3 million each in USA 57,
CharterMac and RCP, 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.
NOTE 9
Deposits
The aggregate amount of certificates of deposit in amounts of
$100,000 or more at December 31, 2006, and 2005, was
$28.3 million and $51.2 million, respectively.
46
At December 31, 2006, 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)
|
|
2007
|
|
$59,357
|
2008
|
|
16,852
|
2009
|
|
9,425
|
2010
|
|
146
|
2011
|
|
114
|
Thereafter
|
|
24
|
|
|
Total
|
|
$85,918
|
|
|
At December 31, 2006, 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
compared to 2005 where the Company held $15 million of
these types of deposits.
NOTE 10
Borrowings
The Company has a line of credit with the FHLB of Seattle
approximating 12% of assets, or $107 million at
December 31, 2006. The line is secured by a blanket pledge
of the Companys assets. At December 31, 2006, and
2005, there was $2.2 million and $18.1 million
committed on the line, respectively. At December 31, 2005,
there was $2.6 million outstanding on the line and an
additional $15.5 million of the borrowing line was
committed to secure public deposits. The outstanding balances on
the FHLB line of credit at December 31, 2006, and 2005, of
$2.2 million and $2.6 million, respectively, have a
maturity date of May 7, 2012.
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, 2006, and 2005, was $1 million.
The Federal Reserve Bank is holding $55.5 million of loans
as collateral to secure advances made through the discount
window on December 31, 2006. There were no discount window
advances outstanding at December 31, 2006.
Securities sold under agreements to repurchase were
$3.3 million with an interest rate of 3.69%, and
$4.9 million with an interest rate of 2.28%, at
December 31, 2006, and 2005, respectively. The average
balance outstanding of securities sold under agreement to
repurchase during 2006 and 2005 was $3.3 million and
$2.8 million, respectively, and the maximum outstanding at
any month-end was $6.7 million and $5.4 million,
respectively. The securities sold under agreement to repurchase
are held by the Federal Home Loan Bank under the
Companys control.
NOTE 11
Junior Subordinated Debentures
In May of 2003, the Company formed a wholly-owned Delaware
statutory business trust subsidiary, Northrim Capital
Trust 1 (the Trust), which issued
$8 million of guaranteed undivided beneficial interests in
the Companys Junior Subordinated Deferrable Interest
Debentures (Trust Preferred Securities). These
debentures qualify as Tier 1 capital under Federal Reserve
Board guidelines. All of the common securities of the Trust are
owned by the Company. The proceeds from the issuance of the
common securities and the Trust Preferred Securities were
used by the Trust to purchase $8.2 million of junior
subordinated debentures of the Company. The Trust Preferred
Securities of the Trust are not consolidated in the
Companys financial statements in accordance with FASB
Interpretation No. 46R (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 8.52% at December 31,
2006. The interest cost to the Company on these debentures was
$665,000 in 2006 and $523,000 in 2005. The Company has entered
into contractual arrangements which, taken collectively, fully
and unconditionally guarantee payment of: (i) accrued and
unpaid distributions required to be paid on the
Trust Preferred Securities; (ii) the redemption price
with respect to any Trust Preferred Securities called for
redemption by the Trust and (iii) payments due upon a
voluntary or involuntary dissolution, winding up or liquidation
of the Trust. The Trust Preferred Securities are
mandatorily redeemable upon maturity of the debentures on
May 15, 2033, or upon earlier redemption as provided in the
indenture. The Company has the right to redeem the debentures
purchased by the Trust in whole or in part, on or after
May 15, 2008. As specified in the indenture, if the
debentures are redeemed prior to maturity, the redemption price
will be the principal amount and any accrued but unpaid interest.
47
In December of 2005, the Company formed a wholly-owned
Connecticut statutory business trust subsidiary, Northrim
Statutory Trust 2 (the Trust 2), which
issued $10 million of guaranteed undivided beneficial
interests in the Companys Junior Subordinated Deferrable
Interest Debentures (Trust Preferred Securities
2). These debentures qualify as Tier 1 capital under
Federal Reserve Board guidelines. All of the common securities
of Trust 2 are owned by the Company. The proceeds from the
issuance of the common securities and the Trust Preferred
Securities 2 were used by Trust 2 to purchase
$10.3 million of junior subordinated debentures of the
Company. The Trust Preferred Securities of the Trust 2
are not consolidated in the Companys financial statements
in accordance with 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 6.73% at December 31,
2006. The interest cost to the Company on these debentures was
$654,000 in 2006 and $26,000 in 2005. The Company has entered
into contractual arrangements which, taken collectively, fully
and unconditionally guarantee payment of: (i) accrued and
unpaid distributions required to be paid on the
Trust Preferred Securities 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.
NOTE 12
Interest Expense
Interest expense on deposits and borrowings is presented below:
|
|
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
|
Interest-bearing demand accounts
|
|
$830
|
|
$369
|
|
$221
|
Money market accounts
|
|
6,053
|
|
3,876
|
|
1,527
|
Savings accounts
|
|
10,113
|
|
6,263
|
|
2,290
|
Certificates of deposit greater
than $100,000
|
|
1,425
|
|
2,170
|
|
1,620
|
Certificates of deposit less than
$100,000
|
|
1,897
|
|
1,312
|
|
1,051
|
Borrowings
|
|
1,681
|
|
883
|
|
574
|
|
|
Total
|
|
$21,999
|
|
$14,873
|
|
$7,283
|
|
|
48
NOTE 13
Income Taxes
Components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Tax
|
|
Deferred
|
|
Total
|
December 31,
|
|
|
|
Expense
|
|
(Benefit)
|
|
Expense
|
|
|
|
|
|
(In Thousands)
|
|
2006:
|
|
Federal
|
|
$7,828
|
|
($1,436)
|
|
$6,392
|
|
|
State
|
|
2,012
|
|
(426)
|
|
1,586
|
|
|
Total
|
|
|
|
$9,840
|
|
($1,862)
|
|
$7,978
|
|
|
2005:
|
|
Federal
|
|
$6,148
|
|
($639)
|
|
$5,509
|
|
|
State
|
|
1,597
|
|
(182)
|
|
1,415
|
|
|
Total
|
|
|
|
$7,745
|
|
($821)
|
|
$6,924
|
|
|
2004:
|
|
Federal
|
|
$6,139
|
|
($998)
|
|
$5,141
|
|
|
State
|
|
1,348
|
|
(262)
|
|
1,086
|
|
|
Total
|
|
|
|
$7,487
|
|
($1,260)
|
|
$6,227
|
|
|
The actual expense for 2006, 2005, and 2004, differs from the
expected tax expense (computed by applying the
U.S. Federal Statutory Tax Rate of 35% for the year ended
December 31, 2006, 2005, and 2004) as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
|
Computed expected
income tax expense
|
|
$7,333
|
|
$6,333
|
|
$5,924
|
State income taxes, net
|
|
1,031
|
|
920
|
|
706
|
Other
|
|
(386)
|
|
(329)
|
|
(403)
|
|
|
Total
|
|
$7,978
|
|
$6,924
|
|
$6,227
|
|
|
The components of the deferred tax asset are as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
|
Provision for loan losses
|
|
$7,113
|
|
$5,796
|
|
$5,612
|
Loan fees, net of costs
|
|
1,240
|
|
1,227
|
|
1,150
|
Unrealized gain on
available-for-sale
investment securities
|
|
201
|
|
341
|
|
(3)
|
Depreciation
|
|
826
|
|
678
|
|
386
|
Other, net
|
|
1,180
|
|
796
|
|
528
|
|
|
Net Deferred Tax Asset
|
|
$10,560
|
|
$8,838
|
|
$7,673
|
|
|
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.
49
NOTE 14
Comprehensive Income
At December 31, 2006, 2005, and 2004, 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)
|
|
2006:
|
|
|
|
|
|
|
Unrealized net holding losses on
investment securities arising during 2006
|
|
$342
|
|
($140)
|
|
$202
|
Plus: Reclassification adjustment
for net realized gains included in net income
|
|
|
|
|
|
|
|
|
Net unrealized losses
|
|
$342
|
|
($140)
|
|
$202
|
|
|
2005:
|
|
|
|
|
|
|
Unrealized net holding losses on
investment securities arising during 2005
|
|
($828)
|
|
$340
|
|
($488)
|
Plus: Reclassification adjustment
for net realized gains included in net income
|
|
(9)
|
|
4
|
|
(5)
|
|
|
Net unrealized losses
|
|
($837)
|
|
$344
|
|
($493)
|
|
|
2004:
|
|
|
|
|
|
|
Unrealized net holding losses on
investment securities arising during 2004
|
|
($900)
|
|
$370
|
|
($530)
|
Plus: Reclassification adjustment
for net realized gains included in net income
|
|
(151)
|
|
62
|
|
(89)
|
|
|
Net unrealized losses
|
|
($1,051)
|
|
$432
|
|
($619)
|
|
|
NOTE 15
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 matches 25%
up to 6% of the employee contribution. 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 $727,000,
$773,000, and $619,000, in 2006, 2005, and 2004, 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 $255,000, $165,000, and
$161,000, in 2006, 2005, and 2004, respectively and included
these expenses in salaries and other personal expense in the
Consolidated Statements of Income. At December 31, 2006 and
2005, the balance of the accrued liability for this plan was
included in other liabilities and totaled $1.4 million and
$1.1 million, respectively.
In February of 2002, the Company implemented a non-qualified
deferred compensation plan in which certain of the executive
officers participate. Contributions to this plan totaled
$381,000, $268,000, and $119,000 in 2006, 2005, and 2004
respectively and included these expenses in salaries and other
personal expense in the Consolidated Statements of Income. At
December 31, 2006 and 2005, the balance of the accrued
liability for this plan was included in other liabilities and
totaled $1.1 million and $702,000, respectively.
50
NOTE 16
Common Stock
Quarterly cash dividends were paid aggregating to
$2.8 million, $2.6 million, and $2.3 million, or
$0.47 per share, $0.43 per share, and $0.38 per
share, in 2006, 2005, and 2004, respectively. On
January 11, 2007, the Board of Directors declared a
$0.125 per share cash dividend payable on February 9,
2007, to shareholders of record on January 29, 2007.
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. We purchased
550,942 shares of our stock under this program through
December 31, 2006 at a total cost of $10.8 million at
an average price of $19.64, which left a balance of
59,713 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.
On September 1, 2006, the Company paid a 5% stock dividend
to shareholders of record as of August 18, 2006. As a
result, the Company issued 290,727 of its shares along with a
cash dividend of $2,000 to pay for fractional shares.
NOTE 17
Options
The Company has set aside 315,000 shares of authorized
stock for the 2004 Stock Incentive Plan (2004 Plan)
under which it may grant stock options and restricted stock
units. The Companys policy is to issue new shares to cover
awards. The total number of shares under the 2004 Plan and
previous stock incentive plans at December 31, 2006 was
439,027, which includes 141,266 shares granted under the
2004 Plan leaving 173,734 shares available for future
awards. This information has been adjusted for the 5% stock
dividend paid on September 1, 2006. Under the 2004 Plan,
certain key employees have been granted the option to purchase
set amounts of common stock at the market price on the day the
option was granted. Optionees, at their own discretion, may
cover the cost of exercise through the exchange, at then fair
market value, of already owned shares of the Companys
stock. Options are granted for a
10-year
period and vest on a pro rata basis over the initial three years
from grant. In addition to stock options, the Company has
granted restricted stock units to certain key employees under
the 2004 Plan. These restricted stock grants cliff vest at the
end of a three-year time period.
51
Options
and Restricted Stock Outstanding
Activity on options and restricted stock units granted under the
2004 Plan and prior plans is as follows. This information has
been adjusted for the 5% stock dividend paid on
September 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Shares
|
|
Average
|
|
Range of
|
|
|
Under
|
|
Exercise
|
|
Exercise
|
|
|
Option
|
|
Price
|
|
Price
|
|
|
December 31, 2003 outstanding
|
|
443,058
|
|
$9.90
|
|
$6.32-$22.01
|
|
|
|
|
|
|
|
Granted 2004
|
|
52,295
|
|
18.87
|
|
|
Forfeited
|
|
(7,085)
|
|
12.74
|
|
|
Exercised
|
|
(62,950)
|
|
6.41
|
|
|
|
|
December 31, 2004 outstanding
|
|
425,319
|
|
$11.48
|
|
$6.32-$22.01
|
|
|
|
|
|
|
|
Granted 2005
|
|
48,709
|
|
19.43
|
|
|
Forfeited
|
|
(3,004)
|
|
16.93
|
|
|
Exercised
|
|
(25,873)
|
|
9.15
|
|
|
|
|
December 31, 2005 outstanding
|
|
445,150
|
|
$12.45
|
|
$6.32-$22.01
|
|
|
|
|
|
|
|
Granted 2006
|
|
47,363
|
|
19.30
|
|
|
Forfeited
|
|
(6,217)
|
|
16.15
|
|
|
Exercised
|
|
(47,269)
|
|
10.25
|
|
|
|
|
December 31, 2006 outstanding
|
|
439,027
|
|
$13.37
|
|
$7.52-$27.24
|
|
|
Stock options outstanding and exercisable at December 31,
2006 are as follows:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Number of
|
|
Exercise
|
|
|
Shares
|
|
Price
|
|
|
Outstanding at January 1, 2006
|
|
429,662
|
|
$12.90
|
Changes during the period:
|
|
|
|
|
Granted
|
|
33,554
|
|
27.24
|
Exercised
|
|
(47,269)
|
|
10.25
|
Forfeited
|
|
(4,910)
|
|
20.45
|
|
|
Outstanding at December 31,
2006
|
|
411,037
|
|
$14.28
|
|
|
Options exercisable at
December 31, 2006
|
|
338,100
|
|
$11.98
|
Unexercisable options at
December 31, 2006
|
|
72,937
|
|
$24.92
|
|
|
52
Restricted stock grants outstanding at December 31, 2006
are as follows:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
Average Fair
|
|
|
Shares
|
|
Value
|
|
|
Outstanding at January 1, 2006
|
|
15,488
|
|
$22.77
|
Changes during the period:
|
|
|
|
|
Granted
|
|
13,809
|
|
26.44
|
Vested
|
|
|
|
|
Forfeited
|
|
(1,307)
|
|
22.77
|
|
|
Outstanding at December 31,
2006
|
|
27,990
|
|
$24.58
|
|
|
At December 31, 2006, all restricted stock units were
unexercisable Restricted stock units will start to vest in
December of 2007. No options or restricted stock units expired
unexercised in 2006.
At December 31, 2006, 2005, and 2004, the weighted-average
remaining contractual life of outstanding options and restricted
stock units was 5.3 years, 5.8 years, and
6.4 years, respectively.
At December 31, 2006, 2005, and 2004, the number of options
exercisable was 338,100, 327,707, and 303,714, respectively, and
the weighted-average exercise price of those options was $11.98,
$10.75, and $9.78, respectively.
The aggregate intrinsic value of options outstanding,
exercisable, and unexercisable at December 31, 2006 was
$5.1 million, $4.9 million, and $123,000,
respectively. The weighted average remaining life of options
outstanding and options exercisable at December 31, 2006 is
5.5 and 4.7 years, respectively. The weighted average
remaining life of restricted stock units outstanding at
December 31, 2006 is 2 years. No units are exercisable.
At December 31, 2006, there were 173,734 additional shares
available for grant under the plan. The per share fair value of
stock options granted during 2006, 2005, and 2004, were
calculated on the date of grant using a Black-Scholes
option-pricing model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
Granted
|
|
Options:
|
|
Nov. 2006
|
|
Nov. 2005
|
|
Dec. 2004
|
|
|
Expected option life (years)
|
|
7.4
|
|
7.5
|
|
7.7
|
Risk free rate
|
|
4.57%
|
|
4.45%
|
|
4.09%
|
Dividends per Share
|
|
$0.56
|
|
$0.50
|
|
$0.44
|
Expected volatility factor
|
|
37.44%
|
|
37.06%
|
|
39.28%
|
|
|
The expected life represents the weighted average period of time
that options granted are expected to be outstanding when
considering vesting periods and the exercise history of the
Company. The risk free rate is based upon the equivalent yield
of a United States Treasury zero-coupon issue with a term
equivalent to the expected life of the option. The expected
dividends are based on projected dividends for the Company at
the date of the option grant taking into account projected net
income growth, dividend pay-out ratios, and other factors. The
expected volatility is based upon the historical price
volatility of the Companys stock.
53
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, 2006, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars in Thousands)
|
|
Options:
|
|
|
|
|
|
|
Weighted-average grant-date fair
value of stock options granted:
|
|
$9.79
|
|
$8.28
|
|
$8.49
|
Total fair value of shares vested
during the period:
|
|
256
|
|
173
|
|
163
|
Total intrinsic value of options
exercised:
|
|
672
|
|
340
|
|
999
|
|
|
|
|
|
|
|
|
|
Restricted stock units:
|
|
|
|
|
|
|
Weighted-average grant-date fair
value of stock options granted:
|
|
$26.44
|
|
$20.21
|
|
$21.88
|
Total fair value of shares vested
during the period:
|
|
|
|
|
|
|
Total intrinsic value of options
exercised:
|
|
|
|
|
|
|
|
|
The Company recognizes the fair value of the stock options and
restricted stock units 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 $256,000 on
the fair value of stock options and $134,000 on the fair value
of restricted stock units for a total of $390,000 in stock-based
compensation expense for the year ending December 31, 2006.
The Company recognized $68,000 on the fair value of restricted
stock units in stock-based compensation expense for the year
ending December 31, 2005.
The unamortized stock-based payment and the weighted average
expense period remaining at December 31, 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
Average Period
|
|
|
Unamortized
|
|
to Expense
|
|
|
Expense
|
|
(years)
|
|
|
|
(Dollars in Thousands)
|
|
Stock options
|
|
$632
|
|
1.8
|
Restricted stock
|
|
455
|
|
2.0
|
|
|
Total
|
|
$1,087
|
|
1.8
|
|
|
The Company withheld $270,000 to pay for stock option exercises
or income taxes that resulted from the exercise of stock options
for the year ended December 31, 2006. The Company
recognized a $230,000 tax deduction related to the exercise of
these stock options during the year ending December 31,
2006. The intrinsic value of the options that were exercised
during 2006 was $672,000, which represents the difference
between the fair market value of the options at the date of
exercise and their exercise price. A portion of these options
with an intrinsic value of $113,000 at the date of exercise was
incentive stock options that were exercised and held by the
optionee and not eligible for a tax deduction. Thus, the
Companys tax deduction was based on options exercised and
sold during 2006 with a total intrinsic value of $559,000.
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, 2006, the amount of excess tax
benefits available to offset a tax deficiency is $711,000.
54
NOTE 18
Commitments and Contingent Liabilities
Rental expense under leases for equipment and premises was
$1.9 million, $1.7 million, and $1.6 million in
2006, 2005, and 2004, respectively. Required minimum rentals on
non-cancelable leases as of December 31, 2006, are as
follows:
|
|
|
|
Year Ending December 31:
|
|
(In Thousands)
|
|
2007
|
|
$1,434
|
2008
|
|
1,462
|
2009
|
|
1,466
|
2010
|
|
1,455
|
2011
|
|
1,412
|
Thereafter
|
|
3,711
|
|
|
Total
|
|
$10,940
|
|
|
The Company leases the main office facility from an entity in
which a director has an interest. Rent expense under this lease
agreement was $975,000, $929,000, and $810,000 for 2006, 2005,
and 2004, respectively. The Company believes that the lease
agreement is at market terms.
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
$2.1 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,
|
|
2006
|
|
2005
|
|
|
|
(In Thousands)
|
|
Off-balance sheet commitments:
|
|
|
|
|
Commitments to extend credit
|
|
$144,364
|
|
$151,316
|
Standby letters of credit
|
|
27,685
|
|
20,788
|
|
|
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 19
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
55
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, 2006, 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,
2006, 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. 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 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 and
$8 million more in regulatory capital than the Bank at
December 31, 2006 and 2005, respectively, 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,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted
assets)
|
|
$116,991
|
|
14.21%
|
|
$65,864
|
|
|
8.0%
|
|
$82,330
|
|
10.0%
|
Tier I Capital (to
risk-weighted assets)
|
|
$106,674
|
|
12.95%
|
|
$32,949
|
|
|
4.0%
|
|
$49,424
|
|
6.0%
|
Tier I Capital (to average
assets)
|
|
$106,674
|
|
11.71%
|
|
$36,439
|
|
|
4.0%
|
|
$45,548
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted
assets)
|
|
$106,587
|
|
13.35%
|
|
$63,872
|
|
|
8.0%
|
|
$79,840
|
|
10.0%
|
Tier I Capital (to
risk-weighted assets)
|
|
$96,598
|
|
12.10%
|
|
$31,933
|
|
|
4.0%
|
|
$47,900
|
|
6.0%
|
Tier I Capital (to average
assets)
|
|
$96,598
|
|
10.81%
|
|
$35,744
|
|
|
4.0%
|
|
$44,680
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northrim Bank
|
|
Actual
|
|
Adequately-Capitalized
|
|
Well-Capitalized
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(In Thousands)
|
|
As of December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted
assets)
|
|
$101,520
|
|
12.35%
|
|
$65,762
|
|
8.0%
|
|
$82,202
|
|
10.0%
|
Tier I Capital (to
risk-weighted assets)
|
|
$91,220
|
|
11.09%
|
|
$32,902
|
|
4.0%
|
|
$49,353
|
|
6.0%
|
Tier I Capital (to average
assets)
|
|
$91,220
|
|
10.06%
|
|
$36,270
|
|
4.0%
|
|
$45,338
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted
assets)
|
|
$92,004
|
|
11.57%
|
|
$63,616
|
|
8.0%
|
|
$79,519
|
|
10.0%
|
Tier I Capital (to
risk-weighted assets)
|
|
$82,056
|
|
10.32%
|
|
$31,805
|
|
4.0%
|
|
$47,707
|
|
6.0%
|
Tier I Capital (to average
assets)
|
|
$82,056
|
|
9.24%
|
|
$35,522
|
|
4.0%
|
|
$44,403
|
|
5.0%
|
|
|
NOTE 20
Fair Value of Financial Instruments
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: The
carrying amounts reported in the balance sheet represent their
fair values.
56
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 market value.
Loans: For variable-rate loans that reprice
frequently, fair values are based on carrying amounts. An
estimate of the fair value of the remaining portfolio is based
on discounted cash flow analyses applied to pools of similar
loans, using weighted average coupon rate, weighted average
maturity, and interest rates currently being offered for similar
loans. The carrying amount of accrued interest receivable
approximates its fair value.
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: 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: The junior
subordinated debentures have variable rates that adjust on a
quarterly basis, thus their carrying amounts approximate their
fair values.
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.
57
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
(In Thousands)
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
Cash and money market investments
|
|
$44,282
|
|
$44,282
|
|
$89,690
|
|
$89,690
|
Investment securities
|
|
100,325
|
|
100,324
|
|
54,975
|
|
54,996
|
Net loans
|
|
704,931
|
|
698,346
|
|
694,353
|
|
686,984
|
Purchased receivables
|
|
21,183
|
|
21,183
|
|
12,198
|
|
12,198
|
Accrued interest receivable
|
|
4,916
|
|
4,916
|
|
4,397
|
|
4,397
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$794,904
|
|
$794,520
|
|
$779,866
|
|
$779,677
|
Accrued interest payable
|
|
577
|
|
577
|
|
469
|
|
469
|
Borrowings
|
|
6,502
|
|
6,395
|
|
8,415
|
|
8,271
|
Junior subordinated debentures
|
|
18,558
|
|
18,558
|
|
18,558
|
|
18,558
|
|
|
|
|
|
|
|
|
|
Unrecognized Financial
Instruments:
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$144,364
|
|
$1,444
|
|
$151,316
|
|
$1,513
|
Standby letters of credit
|
|
27,685
|
|
277
|
|
20,788
|
|
208
|
|
|
NOTE 21
Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
2006 Quarter Ended
|
|
Dec. 31
|
|
Sept. 30
|
|
June 30
|
|
March 31
|
|
|
|
(In Thousands Except Per Share Amounts)
|
|
Total interest income
|
|
$18,653
|
|
$17,841
|
|
$16,963
|
|
$16,064
|
Total interest expense
|
|
5,893
|
|
5,904
|
|
5,437
|
|
4,765
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
12,760
|
|
11,937
|
|
11,526
|
|
11,299
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
800
|
|
850
|
|
860
|
|
54
|
Other operating income
|
|
2,076
|
|
2,203
|
|
1,951
|
|
1,428
|
Other operating expense
|
|
8,028
|
|
7,661
|
|
7,715
|
|
7,964
|
|
|
Income before income taxes and
minority interest
|
|
6,008
|
|
5,629
|
|
4,902
|
|
4,709
|
Minority interest in subsidiaries
|
|
78
|
|
70
|
|
103
|
|
45
|
|
|
Pre tax income
|
|
5,930
|
|
5,559
|
|
4,799
|
|
4,664
|
Income taxes
|
|
2,241
|
|
2,108
|
|
1,860
|
|
1,769
|
|
|
Net Income
|
|
$3,689
|
|
$3,451
|
|
$2,939
|
|
$2,895
|
|
|
Earnings per share, basic
|
|
$0.60
|
|
$0.56
|
|
$0.48
|
|
$0.47
|
|
|
Earnings per share, diluted
|
|
$0.59
|
|
$0.56
|
|
$0.47
|
|
$0.47
|
|
|
58
|
|
|
|
|
|
|
|
|
|
2005 Quarter Ended
|
|
Dec. 31
|
|
Sept. 30
|
|
June 30
|
|
March 31
|
|
|
|
(In Thousands Except Per Share Amounts)
|
|
Total interest income
|
|
$16,344
|
|
$15,047
|
|
$14,078
|
|
$13,312
|
Total interest expense
|
|
4,730
|
|
3,910
|
|
3,403
|
|
2,83
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
11,614
|
|
11,137
|
|
10,675
|
|
10,482
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
642
|
|
428
|
|
100
|
|
|
Other operating income
|
|
1,426
|
|
1,494
|
|
1,065
|
|
848
|
Other operating expense
|
|
7,371
|
|
7,605
|
|
7,373
|
|
7,128
|
|
|
Income before income taxes
|
|
5,027
|
|
4,598
|
|
4,267
|
|
4,202
|
Income taxes
|
|
1,935
|
|
1,756
|
|
1,611
|
|
1,622
|
|
|
Net Income
|
|
$3,092
|
|
$2,842
|
|
$2,656
|
|
$2,580
|
|
|
Earnings per share, basic
|
|
$0.51
|
|
$0.46
|
|
$0.42
|
|
$0.40
|
|
|
Earnings per share, diluted
|
|
$0.49
|
|
$0.44
|
|
$0.40
|
|
$0.39
|
|
|
The sum may not necessarily tie to Consolidated Statements of
Income due to rounding.
NOTE 22
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. The Company believes
that this claim is without merit and intends to vigorously
defend against it. In the opinion of management, the resolution
of these matters will not have a material effect on the
Companys financial position, results of operations, and
cash flows.
59
NOTE 23
Parent Company Financial Information
Condensed financial information
for Northrim BanCorp, Inc. (unconsolidated parent company only)
is as follows:
|
|
|
|
|
|
|
|
Balance Sheets for
December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
Assets
|
|
|
|
|
|
|
Cash
|
|
$12,629
|
|
$11,014
|
|
$8,735
|
Investment in Northrim Bank
|
|
97,806
|
|
87,922
|
|
80,797
|
Investment in NISC
|
|
2,530
|
|
2,484
|
|
552
|
Investment in NCT1
|
|
248
|
|
248
|
|
248
|
Investment in NST2
|
|
310
|
|
310
|
|
|
Other assets
|
|
440
|
|
891
|
|
252
|
|
|
Total Assets
|
|
$113,963
|
|
$102,869
|
|
$90,584
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Junior subordinated debentures
|
|
$18,558
|
|
$18,558
|
|
$8,248
|
Taxes payable and other payables
|
|
(84)
|
|
(252)
|
|
(1,084)
|
Other liabilities
|
|
71
|
|
89
|
|
62
|
|
|
Total Liabilities
|
|
18,395
|
|
18,395
|
|
7,226
|
Shareholders Equity
|
|
|
|
|
|
|
Common stock
|
|
6,114
|
|
5,803
|
|
6,089
|
Additional paid-in capital
|
|
46,379
|
|
39,161
|
|
45,876
|
Retained earnings
|
|
43,212
|
|
39,999
|
|
31,389
|
Accumulated other comprehensive
income-
net unrealized gains on available for sale investment securities
|
|
(287)
|
|
(489)
|
|
4
|
|
|
Total Shareholders Equity
|
|
95,418
|
|
84,474
|
|
83,358
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$113,963
|
|
$102,869
|
|
$90,584
|
|
|
|
|
|
|
|
|
|
|
Statements of Income for Years
Ended:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
Income
|
|
|
|
|
|
|
Interest income
|
|
$578
|
|
$229
|
|
$177
|
Net income from Northrim Bank
|
|
14,432
|
|
12,118
|
|
11,659
|
Net loss from NISC
|
|
(170)
|
|
(233)
|
|
(269)
|
Other income
|
|
|
|
|
|
1
|
|
|
Total Income
|
|
14,840
|
|
12,114
|
|
11,568
|
Expense
|
|
|
|
|
|
|
Interest expense
|
|
1,360
|
|
565
|
|
387
|
Administrative and other expenses
|
|
1,262
|
|
846
|
|
954
|
|
|
Total Expense
|
|
2,622
|
|
1,411
|
|
1,341
|
Net Income Before Income Taxes
|
|
12,218
|
|
10,703
|
|
10,227
|
Income tax expense (benefit)
|
|
(756)
|
|
(467)
|
|
(473)
|
|
|
Net Income
|
|
$12,974
|
|
$11,170
|
|
$10,700
|
|
|
60
|
|
|
|
|
|
|
|
Statements of Cash Flows for Years
Ended:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In Thousands)
|
|
Operating Activities:
|
|
|
|
|
|
|
Net income
|
|
$12,974
|
|
$11,170
|
|
$10,700
|
Adjustments to Reconcile Net
Income to Net Cash:
|
|
|
|
|
|
|
Equity in undistributed earnings
from subsidiaries
|
|
(9,512)
|
|
(7,385)
|
|
(8,015)
|
Stock-based compensation
|
|
390
|
|
68
|
|
|
Changes in other assets and
liabilities
|
|
583
|
|
220
|
|
398
|
|
|
Net Cash Used from Operating
Activities
|
|
4,435
|
|
4,073
|
|
3,083
|
Investing Activities:
|
|
|
|
|
|
|
Investment in NISC &
NCT1 & NST2
|
|
(210)
|
|
(2,165)
|
|
(250)
|
|
|
Net Cash Used by Investing
Activities
|
|
(210)
|
|
(2,165)
|
|
(250)
|
Financing Activities:
|
|
|
|
|
|
|
Dividends paid to shareholders
|
|
(2,768)
|
|
(2,560)
|
|
(2,308)
|
Proceeds from issuance of trust
preferred securities
|
|
|
|
10,000
|
|
|
Proceeds from issuance of common
stock and excess tax benefits
|
|
568
|
|
269
|
|
300
|
Repurchase of common stock
|
|
(410)
|
|
(7,338)
|
|
|
|
|
Net Cash Provided by Financing
Activities
|
|
(2,610)
|
|
371
|
|
(2,008)
|
|
|
Net Increase by Cash and Cash
Equivalents
|
|
1,615
|
|
2,279
|
|
825
|
|
|
Cash and Cash Equivalents at
beginning of period
|
|
11,014
|
|
8,735
|
|
7,910
|
|
|
Cash and Cash Equivalents at end
of period
|
|
$12,629
|
|
$11,014
|
|
$8,735
|
|
|
61
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, 2006.
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, 2006,
was $133,680,506.
The number of shares of Northrim BanCorps common stock
outstanding at March 1, 2007, was 6,115,822.
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.
62
Index
|
|
|
|
|
|
|
Part I
|
|
Page
|
|
|
|
|
|
|
Item 1.
|
|
Business
|
|
1-4,
7-21, 61-68
|
|
|
|
|
|
|
|
General
|
|
1-4,
61-68
|
|
|
|
|
|
|
|
Investment Portfolio
|
|
17-19,
39-41, 55-56
|
|
|
|
|
|
|
|
Loan Portfolio
|
|
13-17,
41-42
|
|
|
|
|
|
|
|
Summary of Loan Loss Experience
|
|
13-17,
41-43
|
|
|
|
|
|
|
|
Deposits
|
|
19-20,
45-46
|
|
|
|
|
|
|
|
Return on Equity and Assets
|
|
5
|
|
|
|
|
|
|
|
Short-term Borrowings
|
|
20, 46
|
|
|
|
|
|
Item 1A.
|
|
Risk Factors
|
|
67-68
|
|
|
|
|
|
Item 1B.
|
|
Unsolved Staff Comments
|
|
None
|
|
|
|
|
|
Item 2.
|
|
Properties
|
|
69
|
|
|
|
|
|
Item 3.
|
|
Legal Proceedings
|
|
58
|
|
|
|
|
|
Item 4.
|
|
Submission of Matters to a Vote of
Security Holders
|
|
None
|
|
|
|
|
|
Part
II
|
|
|
|
|
|
Item 5.
|
|
Market for Registrants
Common Equity and, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
|
21-25,
50
|
|
|
|
|
|
Item 6.
|
|
Selected Financial Data
|
|
5-6
|
|
|
|
|
|
Item 7.
|
|
Managements Discussion and
Analysis of Financial Condition and Results of Operations
|
|
7-29
|
|
|
|
|
|
Item 7A.
|
|
Quantitative and Qualitative
Disclosures about Market Risk
|
|
27-29
|
|
|
|
|
|
Item 8.
|
|
Financial Statements and
Supplementary Data
|
|
32-60
|
|
|
|
|
|
Item 9.
|
|
Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
|
|
None
|
|
|
|
|
|
Item 9A.
|
|
Conclusion Regarding the
Effectiveness of Disclosure Controls and Procedures
|
|
29
|
|
|
|
|
|
|
|
Managements Report on
Internal Control Over Financial Reporting
|
|
29
|
|
|
|
|
|
|
|
Report of Independent Registered
Public Accounting Firm: Effectiveness of Internal Control Over
Financial Reporting
|
|
30
|
|
|
|
|
|
Item 9B.
|
|
Other Information
|
|
None
|
|
|
|
|
|
Part III
|
|
|
|
|
|
Item 10.
|
|
Directors and Executive Officers
of the Registrant
|
|
*
|
|
|
|
|
|
Item 11.
|
|
Executive Compensation
|
|
*
|
|
|
|
|
|
Item 12.
|
|
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
|
|
*
|
|
|
|
|
|
Item 13.
|
|
Certain Relationships, Related
Transactions and Director Independence
|
|
*
|
|
|
|
|
|
Item 14.
|
|
Principal Accountant Fees and
Services
|
|
*
|
|
|
|
|
|
Part IV
|
|
|
|
|
|
Item 15.
|
|
Exhibits, Financial Statement
Schedules
|
|
70-71
|
*Northrims definitive proxy statement for the 2007 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, with attached Charter of the Audit
Committee, and Fees Billed by KPMG During Fiscal Years
2006 and 2005.
63
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 47% 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,
and Northrim Statutory Trust 2 (NST2), an
entity that we formed in December of 2005 to facilitate a trust
preferred security offering by the Company. 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, has opened up new 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 2006, the Bank
continued with its sales calling and training efforts and plans
to continue with this program in 2007. In addition, in the first
part of 2005, the Bank launched its High Performance Checking
product consisting of several consumer accounts tailored to the
needs of specific segments of its market, including a Totally
Free Checking account. The Bank supported this product with a
targeted marketing program and extensive branch sales promotions
and plans to continue with these efforts in 2007 and also
promote a High Performance business checking product.
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 eight 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. Both our portfolio loans (excluding real estate
loans for sale) and deposits increased 2% from year-end 2005 to
year-end 2006. At June 30, 2006, the date of the most
recently available information, we had approximately a 21% share
of the Anchorage commercial bank deposits, approximately 9% in
Fairbanks, and 10% in the Matanuska Valley.
64
The following table sets forth market share data for the
commercial banks having a presence in the greater Anchorage area
as of June 30, 2006, the most recent date for which
comparative deposit information is available.
|
|
|
|
|
|
|
|
Market Share in Greater Anchorage Area
|
|
|
|
Number of
|
|
Total
|
|
Market share
|
Financial institution
|
|
branches
|
|
deposits
|
|
of deposits
|
|
|
|
(Dollars in thousands)
|
|
Northrim Bank
|
|
8(1)
|
|
$656,735
|
|
21%
|
Wells Fargo Bank Alaska
|
|
14
|
|
1,260,082
|
|
40%
|
First National Bank Alaska
|
|
10
|
|
805,796
|
|
25%
|
Key Bank
|
|
4
|
|
411,111
|
|
13%
|
Alaska First Bank & Trust
|
|
2
|
|
45,917
|
|
1%
|
|
|
Total
|
|
47
|
|
$3,179,641
|
|
100%
|
|
|
(1) Does not reflect our Fairbanks or Wasilla branches
Employees
and Key Personnel
We had 277 full-time equivalent employees at
December 31, 2006. 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; Victor P. Mollozzi, our
Senior Vice President and Senior Credit Officer; and Robert L.
Shake, our Senior Vice President and Executive Loan Manager.
While we maintain keyman life insurance on the lives of
Messrs. Langland, Knudson, Schierhorn, Beedle, Mollozzi,
and Shake in the amounts of $2.5 million,
$2.1 million, $1 million, $2 million,
$1 million, and $1 million, respectively, we may not
be able to timely replace Mr. Langland, Mr. Knudson,
Mr. Schierhorn, Mr. Mollozzi, or Mr. Shake 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, 2006, were
secured by real estate located in greater Anchorage, Matanuska
Valley, and Fairbanks, Alaska. Moreover, 30% 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, 2006,
$287.3 million, or 40%, 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 24 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
$1,107 per eligible resident in 2006 for an aggregate
distribution of approximately $667 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
65
industry, government and military spending, and the
construction, fishing, forest products, tourism, mining, air
cargo, and transportation industries, as well as medical
services.
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. Although oil prices increased to
above $60 per barrel during 2006, the states largest
producers, ConocoPhillips and British Petroleum, both kept
exploration drilling at approximately the same levels as they
were in 2005. In addition, 2002 marked the entry of several
independent and international oil companies onto the North Slope
of Alaska that now include EnCana, Armstrong Resources, Pioneer,
Tailsman, and Winstar Petroleum. Also, Shell Oil recently
returned to Alaska with plans to explore several large regions
of the state. Several of the independents drilled wells over the
last several years and have plans to continue with their
drilling efforts in 2007. Finally, British Petroleum increased
their capital spending on maintenance of the Prudhoe Bay oil
field due to environmental concerns. As a result, total spending
and employment by the industry appears to have increased in 2006.
Another major development in the petroleum industry in 2004 was
passage of legislation by the United States Congress that
provides incentives for the construction of 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 $20 billion and would provide Alaska with
additional revenue from severance taxes on the natural gas. The
oil companies that own the natural gas, namely ConocoPhillips,
Exxon, and British Petroleum negotiated a contract with the
State of Alaska in 2006. However, that contract was never
finally approved by the state. The current state administration
is in the process of drafting legislation to establish
guidelines for negotiating a new pipeline construction contract,
which could further delay 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 2005 and 2006, the industry
reported increases due in part to an improving national economy.
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 2004, 2005, and 2006 due to the recent rise in oil
prices and projects a larger budget surplus for the fiscal year
ending June 30, 2007, it still projects that the fiscal gap
will continue to widen in future years and that the CBR could be
depleted within several 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, is subject to and regulated
under the Investment Advisors Act of 1940 and applicable state
investment advisor rules and regulations.
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 activities that are financial in
nature, such as securities, insurance, and merchant banking
activities, subject to certain limitations. It is likely that
the Company will utilize the new structure to accommodate an
expansion of its products and services.
66
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 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.
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.
67
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, 2006.
Our earnings are affected by general economic conditions and the
conduct of monetary policy by the U.S. government.
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.
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. 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 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.
Growth and Management: Our financial
performance and profitability will depend on our ability to
manage recent and possible future growth. 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. 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.
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 decrease during times when
interest rates rise in a parallel shift along the yield curve
and, conversely, to increase during times of similar falling
interest rates. Exposure to interest rate risk is managed by
monitoring the re-pricing 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.
Geographic 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.
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
68
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 insure 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.
69
Properties
The following sets forth information about our branch locations:
|
|
|
|
|
Locations
|
|
Type
|
|
Leased/Owned
|
|
|
|
|
|
|
Midtown Financial Center: Northrim
Headquarters3111 C Street, Anchorage, AK
|
|
Traditional
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Leased
|
|
|
|
|
|
SouthSide Financial Center8730 Old
Seward Highway, Anchorage, AK
|
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Traditional
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Land leased; building owned
|
|
|
|
|
|
36th Avenue Branch811 East
36th Avenue, Anchorage, AK
|
|
Traditional
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|
Owned
|
|
|
|
|
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Huffman Branch1501 East Huffman
Road, Anchorage, AK
|
|
Supermarket
|
|
Leased
|
|
|
|
|
|
Jewel Lake Branch9170 Jewel Lake
Road, Anchorage, AK
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|
Traditional
|
|
Leased
|
|
|
|
|
|
Seventh Avenue Branch550 West
Seventh Avenue, Anchorage, AK
|
|
Traditional
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|
Leased
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|
|
|
|
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West Anchorage Branch/Small
Business Center2709 Spenard Road, Anchorage, AK
|
|
Traditional
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Owned
|
|
|
|
|
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Eagle River Branch12812 Old Glenn
Highway, Fire Lake Plaza, Eagle River, AK
|
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Traditional
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Leased
|
|
|
|
|
|
Fairbanks Financial Center714
Fourth Avenue, Suite 100, Fairbanks, AK
|
|
Traditional
|
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Leased
|
|
|
|
|
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Wasilla Financial
Center850 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, 2006, are incorporated by reference in
Item 8:
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Income for the years ended
December 31, 2006, 2005, and 2004
Consolidated Statements of Changes in Shareholders Equity
and Comprehensive Income for the years ended December 31,
2006, 2005, and 2004
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005, and 2004
Notes to Consolidated Financial Statements
70
Exhibits
Index to Exhibits
|
|
|
Exhibit
|
|
|
Number
|
|
Name of Document
|
|
3.1
|
|
Amended and Restated Articles of
Incorporation(1)
|
3.2
|
|
Bylaws(1)
|
4.1
|
|
Form of Common Stock
Certificate(1)
|
4.2
|
|
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
|
4.3
|
|
Indenture dated as of
December 16,
2006(5)
|
4.4
|
|
Form of Junior Subordinated Debt
Security due
2036(5)
|
10.1
|
|
Employee Stock Option and
Restricted Stock Award
Plan(1)
|
10.2
|
|
2000 Employee Stock Incentive
Plan(1)
|
10.7
|
|
Plan and Agreement of
Reorganization between the Registrant and Northrim Bank dated as
of March 7,
2001(2)
|
10.8
|
|
Supplemental Executive Retirement
Plan dated July 1, 1994, as amended January 8,
2004(3)
|
10.9
|
|
Supplemental Executive Retirement
Deferred Compensation
Plan(2)
|
10.10
|
|
2004 Stock Incentive
Plan(3)
|
10.11
|
|
Employment Agreement with Robert
Shake(4)
|
10.12
|
|
Capital Securities Purchase
Agreement dated December 14,
2005(5)
|
10.13
|
|
Amended and Restated Declaration of
Trust Northrim Statutory Trust 2 dated as of
December 16,
2005(5)
|
10.14
|
|
Amended and Restated Employment
Agreement with Joseph M.
Beedle(6)
|
10.15
|
|
Amended and Restated Employment
Agreement with R. Marc
Langland(7)
|
10.16
|
|
Amended and Restated Employment
Agreement with R. Marc
Langland(8)
|
10.17
|
|
Amended and Restated Employment
Agreement with Joseph M.
Schierhorn(8)
|
10.18
|
|
Amended and Restated Employment
Agreement with Christopher N.
Knudson(8)
|
10.19
|
|
Amended and Restated Employment
Agreement with Joseph M.
Beedle(8)
|
10.20
|
|
Amended and Restated Employment
Agreement with Victor P.
Mollozzi(8)
|
21
|
|
Subsidiaries
|
|
|
Northrim Bank
|
|
|
Northrim Investment
Services Company
|
|
|
Northrim Capital
Trust 1
|
23
|
|
Consent of KPMG
LLP(8)
|
24
|
|
Power of
Attorney(8)
|
31.1
|
|
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(8)
|
31.2
|
|
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(8)
|
32.1
|
|
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(8)
|
32.2
|
|
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(8)
|
|
|
|
(1) |
|
Incorporated by reference to the Companys
Form 8-A,
filed with the SEC on January 14, 2002
|
(2) |
|
Incorporated by reference to the Companys
Form 10-K
for the year ended December 31, 2002, filed with the SEC on
March 19, 2003
|
(3) |
|
Incorporated by reference to the Companys
Form 10-K
for the year ended December 31, 2003, filed with the SEC on
March 15, 2004
|
(4) |
|
Incorporated by reference to the Companys
Form 10-K
for the year ended December 31, 2004, filed with the SEC on
March 15, 2005
|
(5) |
|
Incorporated by reference to the Companys
Form 10-K
for the year ended December 31, 2005, filed with the SEC on
March 16, 2006
|
(6) |
|
Incorporated by reference to the Companys
Form 8-K,
filed with the SEC on May 19, 2006
|
(7) |
|
Incorporated by reference to the Companys
Form 8-K,
filed with the SEC on June 2, 2006
|
(8) |
|
Filed with this
Form 10-K |
71
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, 2007.
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, 2007.
Principal Executive Officer:
/s/ R. Marc Langland
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, 2007, as
attorney-in-fact
for the following directors who constitute a majority of the
Board of Directors.
|
|
|
Larry S. Cash
Mark G. Copeland
Frank A. Danner
Anthony Drabek
Christopher N. Knudson
|
|
R. Marc Langland
Richard L. Lowell
Irene Sparks Rowan
John C. Swalling
David G. Wight
|
R. Marc Langland
as
Attorney-in-fact
March 12, 2007
72
Investor
Information
Annual
Meeting
|
|
|
Date:
|
|
Thursday, May 3, 2007
|
Time:
|
|
9 a.m.
|
Location:
|
|
Hilton Anchorage Hotel
500 West Third Avenue
Anchorage, AK 99501
|
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:
|
|
|
Visit our home page, www.northrim.com, and click on the
For Investors section for stock information
and copies of earnings and dividend releases.
|
|
|
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.
|
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
73