NORTHRIM BANCORP INC
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Washington, D.C. 20549
Form 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended: December 31, 2010 | ||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to |
Commission file number: 0-33501
Northrim Bancorp,
Inc.
(Exact name of registrant as
specified in its charter)
|
Alaska
(State of Incorporation) |
92-0175752
(I.R.S. Employer Identification No.) |
3111 C Street,
Anchorage, Alaska 99503
(Address of principal executive
offices) (Zip Code)
(907)
562-0062
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, $1.00 par value
(Title of Class)
The NASDAQ Stock Market, LLC
(Name of Exchange on Which
Listed)
Securities registered pursuant to Section 12(g) of the
Act: N/A
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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. Yes
o
No
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer
o
|
Accelerated filer þ |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller Reporting company 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 the voting and non-voting common
equity held by non-affiliates of the registrant as of
June 30, 2010 (the last business day of the
registrant’s most recently completed second fiscal quarter)
was $94,761,114.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable date. 6,429,476 shares of Common Stock,
$1.00 par value, as of March 14, 2011.
DOCUMENTS
INCORPORATED BY REFERENCE
The registrant’s Proxy Statement on Schedule 14A,
relating to the registrant’s annual meeting of shareholders
to be held on May 19, 2011, is incorporated by reference
into Part III of this
Form 10-K.
Northrim
BanCorp, Inc.
Annual Report on Form 10-K
December 31, 2010
Table of Contents
Annual Report on Form 10-K
December 31, 2010
Table of Contents
i
Table of Contents
| Item 1. | Business |
The disclosures in this Item are qualified by the “Risk
Factors” set forth in Item 1A, and the section
entitled “Note Regarding Forward-Looking Statements”
included in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
in this report, and any other cautionary statements contained or
incorporated by reference herein.
General
Northrim
BanCorp, Inc.
Northrim BanCorp, Inc. (the “Company”) is a publicly
traded bank holding company headquartered in Anchorage, Alaska.
The Company’s common stock trades on the Nasdaq Stock
Market under the symbol, “NRIM.” The Company is
regulated by the Board of Governors of the Federal Reserve
System. We began banking operations in Anchorage in December
1990, and formed the Company as an Alaska corporation in
connection with our reorganization into a holding company
structure; that reorganization was completed effective
December 31, 2001.
Subsidiaries
The Company has four wholly-owned subsidiaries:
| • | Northrim Bank (the “Bank”), a state chartered, full-service commercial bank headquartered in Anchorage, Alaska. The 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. The Bank has ten branch locations; seven in Anchorage, one in Fairbanks, and one each in Eagle River and Wasilla. We also operate in the Washington and Oregon market areas through Northrim Funding Services (“NFS”), a division of the Bank that was formed in 2004. We offer a wide array of commercial and consumer loan and deposit products, investment products, and electronic banking services over the Internet; | |
| • | Northrim Investment Services Company (“NISC”) was formed in November 2002 to hold the Company’s 48% equity interest in Elliott Cove Capital Management LLC, (“Elliott Cove”), an investment advisory services company. In the first quarter of 2006, through NISC, we purchased a 24% interest in Pacific Wealth Advisors, LLC (“PWA”), an investment advisory, trust, and wealth management business located in Seattle, Washington; | |
| • | Northrim Capital Trust 1 (“NCT1”), an entity that we formed in May of 2003 to facilitate a trust preferred securities offering by the Company; and | |
| • | Northrim Statutory Trust 2 (“NST2”), an entity that we formed in December of 2005 to facilitate a trust preferred securities offering by the Company. |
The Bank has two wholly-owned subsidiaries:
| • | Northrim Capital Investments Co. (“NCIC”) is a wholly-owned subsidiary of the Bank, which holds a 24% interest in the profits and losses of a residential mortgage holding company, Residential Mortgage Holding Company LLC (“RML”). The predecessor of RML, Residential Mortgage LLC, was formed in 1998 and has offices throughout Alaska. RML also operates in real estate markets in the states of Washington and South Carolina through joint ventures. 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; and | |
| • | Northrim Building LLC (“NBL”) is a wholly-owned subsidiary of the Bank that owns and operates the Company’s main office facility at 3111 C Street in Anchorage. |
Segments
The Company’s major line of business is commercial banking.
Management has determined that the Company operates as a single
operating segment based on accounting principles generally
accepted in the United States (“GAAP”). Measures of
the Company’s revenues, profit or loss, and total assets
are included in this report in Item 8, “Financial
Statements and Supplementary Data”, and incorporated herein
by reference.
1
Table of Contents
Overview
and Business Strategy
We have grown to be the fourth largest commercial bank in Alaska
and the third largest in Anchorage in terms of deposits, with
$892.1 million in total deposits and $1.1 billion in
total assets at December 31, 2010. Through our 10 branches,
we are accessible to approximately 70% of the Alaska population.
| • | Anchorage: We have two major financial centers in Anchorage, four smaller branches, and one supermarket branch. We continue to explore future branching opportunities in this market. | |
| • | Fairbanks: We opened our financial center in Fairbanks, Alaska’s second largest city, in mid-1996. This branch has given us a strong foothold in Interior Alaska, and management believes that there is significant potential to increase our share of that market. In the second quarter of 2008, we opened another branch in Fairbanks that is located within a large newly developed retail area. In the third quarter of 2010, we consolidated the operations of our Fairbanks branches into the facility that was completed in 2008. | |
| • | 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. | |
| • | 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. |
One of our major objectives is to increase our market share in
Anchorage, Fairbanks, and the Matanuska Valley, Alaska’s
three largest urban areas. We estimate that we hold a 17% share
of the commercial bank deposit market in Anchorage, 8% share of
the Fairbanks market, and a 10% share of the Matanuska Valley
market as of June 30, 2010. 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:
| • | Pursuing Strategic Opportunities for Additional Growth: We expect to seek opportunities to further our growth while maintaining a high level of credit quality. We plan to affect our growth strategy through a combination of growth at existing branch locations, new branch openings, primarily in Anchorage, Wasilla and Fairbanks, and strategic banking and non-banking acquisitions in the future. We believe that our Bank of America branch acquisition in 1999 significantly strengthened our local market position and enabled us to further capitalize on expansion opportunities resulting from the demand for a locally based banking institution providing a high level of service. Not only did the acquisition increase our size, number of branch offices, and lending capacity, but it also expanded our consumer lending, further diversifying our loan portfolio. Although to a lesser degree than the Bank of America branch acquisition, we believe that our October 2007 acquisition of Alaska First Bank & Trust, N.A. also strengthened our position in the Anchorage market. We expect to continue seeking similar opportunities to further our growth and increase our market share in the areas we serve. | |
| • | Improving Credit Quality: In 2007, we formed a Quality Assurance department to provide independent, detailed financial analysis of our largest, most complex loans. In addition, this department, along with the Chief Lending Officer and others in the Loan Administration department, has developed processes to analyze and manage various concentrations of credit within the overall loan portfolio. The Loan Administration department has also enhanced the procedures and processes for the analysis and reporting of problem loans along with the development of strategies to resolve them. In 2011, we plan to continue with these initiatives. In addition, we will continue to devote resources towards the reduction of our nonperforming assets and substandard loans. | |
| • | 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. We had 268 full-time equivalent employees at December 31, 2010. None of our employees are covered by a collective bargaining agreement. We consider our relations with our employees to be satisfactory. 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. | |
| • | 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 through 2010, we continued to market the HPC products through a targeted mailing program and branch promotions, which |
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Table of Contents
| helped us to increase the number of these accounts. In 2011, we plan to continue to support the HPC consumer and business checking products. |
| • | 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 increased and may continue to increase lending and core deposit volumes. | |
| • | Providing Competitive and Responsive Real Estate Lending: We are a significant land development and residential construction lender and an active lender in the commercial real estate market in our Alaskan markets. We believe that our willingness to provide these services in a professional and responsive manner has contributed significantly to our growth. Because of our relatively small size, our experienced senior management can be more involved with serving customers and making credit decisions, allowing us to compete more favorably for lending relationships. In 2011, we will continue to make a substantial effort to decrease our loans measured for impairment and other real estate owned (“OREO”), many of which consist of residential construction and land development loans. As a result of these efforts and continued projected slowness in the residential real estate market, we expect our loan balances in the residential construction sector to remain stable in 2011. |
We provide a wide range of banking services in Southcentral and
Interior Alaska to businesses, professionals, and individuals
with high service expectations.
Deposit Services:
Our deposit services
include noninterest-bearing checking accounts and
interest-bearing time deposits, checking accounts, and savings
accounts. Our interest-bearing accounts generally earn interest
at rates established by management based on competitive market
factors and management’s 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 deposit services and products are:
| • | An indexed money market deposit account; | |
| • | 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; | |
| • | An indexed CD that allows additional deposits, quarterly withdrawals without penalty, and tailored maturity dates; and | |
| • | Arrangements to courier noncash deposits from our customers to their branch. |
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). See “Loans” In Item 7 of
this report.
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.
Elliott
Cove Capital Management LLC
As of December 31, 2010, we owned a 48% equity interest in
Elliott Cove, an investment advisory services company, through
our wholly - owned subsidiary, NISC. Elliott Cove began
active operations in the fourth quarter of 2002 and has had
operating 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
$542,000 as of December 31, 2010.
As of March 14, 2011, there are four Northrim Bank
employees who are licensed as Investment Advisor Representatives
and actively selling the Elliott Cove investment products. We
plan to continue to use the Elliott Cove products to strengthen
our existing customer relationships and bring new customers into
the Bank.
3
Table of Contents
Northrim
Funding Services
In the third quarter of 2004, we formed NFS as a division of the
Bank. NFS is based in Bellevue, Washington and provides
short-term working capital to customers in the states of
Washington and Oregon by purchasing their accounts receivable.
In 2011, we expect NFS to continue to penetrate these markets
and increase market share in the purchased receivables business
and to continue to contribute to the Company’s net income.
Alaska
Economy
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, fishing, forest products and mining
as well as tourism, government, and U.S. military spending.
According to the State of Alaska Department of Revenue,
approximately 87% of the unrestricted revenues that fund the
Alaska state government are generated 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.
Alaska has weathered the “Great Recession” better than
many other states in the nation, due largely to a natural
resources based economy which continues to benefit from rising
commodities and energy prices. According to the Legislative
Finance Division of the State of Alaska as of August 9,
2010, Alaska has more than $12 billion in liquid reserves,
a projected fiscal 2011 surplus of more than $2 billion and
a Permanent Fund balance of $38.5 billion, which pays an
annual dividend to every Alaskan citizen. According to a
December 2010 ranking by the Sovereign Wealth
Fund Institute, Alaska’s Permanent Fund ranks
11th in the world by assets among oil-funded Sovereign
Wealth Funds and 19th among all sovereign wealth funds.
In 2010, employment in Alaska rose by a modest 1,900 jobs, or
0.6%, according to the preliminary report from the Alaska
Department of Labor. Alaska’s unemployment rate was 8% in
November 2010 as compared to 9.8% for the United States. This
marks the 25th consecutive month that Alaska’s
unemployment rate has been lower than the national average.
Substantially all of the Company’s 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, 2010, were secured by real estate located in
greater Anchorage, Matanuska Valley, and Fairbanks, Alaska.
Moreover, 10% 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, 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. Since 2007 the Anchorage area and Fairbanks real
estate markets have experienced a significant slowdown. Any
further 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, 2010,
$257 million, or 38%, of our loan portfolio was represented
by commercial loans in Alaska. Commercial loans generally have
greater risk than real estate loans.
Alaska’s residents are not subject to any state income or
state sales taxes, and for the past 27 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 $1,281 per
eligible resident in 2010 for an aggregate distribution of
approximately $858 million. The Anchorage Economic
Development Corporation estimates that, for most Anchorage
households, distributions from the Alaska Permanent Fund exceed
other Alaska taxes to which those households are subject
(primarily real estate taxes).
Alaska is strategically located on the Pacific Rim, within nine
hours by air from 95% of the industrialized world, and Anchorage
has become a worldwide cargo and transportation link between the
United States and international business in Asia and Europe. Key
sectors of the Alaska economy are the oil industry, government
and military spending, and the construction, fishing, forest
products, tourism, mining, air cargo, and transportation
industries, as well as medical services.
The petroleum industry plays a significant role in the economy
of Alaska. Royalty payments and tax revenue related to North
Slope oil fields provide 87% of the unrestricted revenue used
primarily to fund state government operations according to the
State of Alaska Department of Revenue. State revenues are
sensitive to volatile oil prices and production levels have been
in decline for 20 years; however, high oil prices have been
sustained for several years now, despite the global recession.
This has allowed the state government to continue to increase
operating and capital budgets and add to its reserves. The
long-run growth of the Alaska economy will most likely be
determined by large scale natural resource development projects.
Several multi-billion dollar projects are progressing or can
potentially advance in the near term. Some of these projects
include: a large diameter natural gas pipeline extending through
Canada; related gas exploration at Point Thomson by Exxon and
partners; exploration for new wells offshore in the Outer
Continental Shelf by Shell and Conoco Phillips; potential oil
and gas activities in the Arctic National Wildlife Refuge;
copper, gold and molybdenum production at the Pebble and Donlon
Creek mines; and energy development in the National Petroleum
4
Table of Contents
Reserve Alaska. Because of their size, each of these projects
faces tremendous challenges. Contentious political decisions
need to be made by government regulators, issues need to be
resolved in the court system, and multi-billion dollar financial
commitments need to be made by the private sector if they are to
advance. If none of these projects moves forward in the next ten
years, then state revenues will decline with falling oil
production from older fields on the North Slope. The decline in
state revenues will likely have a negative effect on
Alaska’s economy.
Progress on these issues is critical to Alaska’s economy.
Exxon’s development plan entails spending a total of
$1.3 billion in the state in six years on Point Thomson.
Much of this money will be spent on local oil field service
companies. This gas field would also help the prospects of the
natural gas pipeline project. It is estimated to have 9 trillion
cubic feet of natural gas reserves and smaller amounts of oil.
Success on this field could impact the development of other
fields on the North Slope. They are needed together to produce
the volume of gas required to reach a profitable economies of
scale that can overcome the high production and transportation
costs to bring this energy thousands of miles to market.
Tourism is another major employment sector of the Alaska
economy. In 2010, according to the Alaska Travel Industry
Association (“ATIA”), several cruise lines chose to
deploy ships out of Alaska waters for the 2010 summer season
which negatively impacted Alaska. However, the ATIA has recently
reported that visitor numbers in 2010 increased slightly over
2009, and that increased tourism advertising is planned for 2011.
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
nation’s 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. According to information published by the State
of Alaska Department of Commerce, credit unions in Alaska have a
37% share of total statewide deposits held in banks and credit
unions. Recent changes in credit union 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.
In the late 1980s, eight of the thirteen 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.
At June 30, 2010, the date of the most recently available
information, we had approximately a 17% share of the Anchorage
commercial bank deposits, approximately 8% in Fairbanks, and 10%
in the Matanuska Valley.
The following table sets forth market share data for the
commercial banks having a presence in the greater Anchorage area
as of June 30, 2010, the most recent date for which
comparative deposit information is available.
|
Number of
|
Market Share of
|
|||||||||||
| Financial Institution | Branches | Total Deposits | Deposits | |||||||||
| (Dollars in Thousands) | ||||||||||||
|
Northrim Bank
|
8 | (1) | $ | 728,841 | 17 | % | ||||||
|
Wells Fargo Bank Alaska
|
14 | 1,990,627 | 46 | % | ||||||||
|
First National Bank Alaska
|
10 | 924,999 | 21 | % | ||||||||
|
Key Bank
|
4 | 695,568 | 16 | % | ||||||||
|
Total
|
36 | $ | 4,340,035 | 100 | % | |||||||
| (1) | Does not reflect our Fairbanks or Wasilla branches |
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 Company’s 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
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Table of Contents
“Division”). The FDIC insures Northrim Bank’s
deposits and in that capacity also regulates Northrim Bank. The
Company’s affiliated investment company, Elliott Cove, and
its affiliated investment advisory and wealth management
company, Pacific Portfolio Consulting LLC, are subject to and
regulated under the Investment Advisors Act of 1940 and
applicable state investment advisor rules and regulations. The
Company’s affiliated trust company, Pacific Portfolio
Trust Company, is regulated as a non-depository trust
company under the banking laws of the State of Washington.
The Company’s 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. 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. The Company may
utilize the new structure to accommodate an expansion of its
products and services.
The activities of bank holding companies, such as the Company,
that are not financial holding companies, are generally limited
to managing or controlling banks. A bank holding company is
required to obtain the prior approval of the FRB for the
acquisition of more than 5% of the outstanding shares of any
class of voting securities or substantially all of the assets of
any bank or bank holding company. Nonbank activities of a bank
holding company are also generally limited to the acquisition of
up to 5% of the voting shares of a company and activities
previously determined by the FRB by regulation or order to be
closely related to banking, unless prior approval is obtained
from the FRB.
The GLB Act also included the most extensive consumer privacy
provisions ever enacted by Congress. These provisions, among
other things, require full disclosure of the Company’s
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.
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 bank’s 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
organization’s 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 company’s 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
6
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respect to institutions that do not meet minimum capital
standards and have defined five capital tiers, the highest of
which is “well-capitalized.” Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Company and Northrim Bank must meet specific capital
guidelines that involve quantitative measures of the
Company’s and the Bank’s assets, liabilities, and
certain off-balance sheet items as calculated under regulatory
practices. The Company’s and the Bank’s 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, 2010, 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, 2010, that the Company and Northrim Bank met
all capital adequacy requirements for a
“well-capitalized” institution.
Under the regulations adopted by the federal regulatory
authorities, a bank will be:
(i) “well-capitalized” if the institution has a
total risk-based capital ratio of 10.0% or greater, a
Tier 1 risk-based capital ratio of 6.0% or greater, and a
leverage ratio of 5.0% or greater, and is not subject to any
order or written directive by any such regulatory authority to
meet and maintain a specific capital level for any capital
measure; (ii) “adequately capitalized” if the
institution has a total risk-based capital ratio of 8.0% or
greater, a Tier 1 risk-based capital ratio of 4.0% or
greater, and a leverage ratio of 4.0% or greater and is not
“well-capitalized”;
(iii) “undercapitalized” if the institution has a
total risk-based capital ratio that is less than 8.0%, a
Tier 1 risk-based capital ratio of less than 4.0% or a
leverage ratio of less than 4.0%; (iv) “significantly
undercapitalized” if the institution has a total risk-based
capital ratio of less than 6.0%, a Tier 1 risk-based
capital ratio of less than 3.0% or a leverage ratio of less than
3.0%; and (v) “critically undercapitalized” if
the institution’s tangible equity is equal or less than
2.0% of average quarterly tangible assets. An institution may be
downgraded to, or deemed to be in, a capital category that is
lower than indicated by its capital ratios if it is determined
to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain
matters.
Banks that are downgraded from “well-capitalized” to
“adequately capitalized” face significant additional
restrictions. For example, an “adequately capitalized”
status affects a bank’s ability to accept brokered deposits
and enter into reciprocal Certificate of Deposit Account
Registry System (“CDARS”) contracts without the prior
approval of the FDIC, and may cause greater difficulty obtaining
retail deposits. CDARS is a network of approximately 3,000 banks
throughout the United States. The CDARS system was founded in
2003 and allows participating banks to exchange FDIC insurance
coverage so that 100% of the balance of their customers’
certificates of deposit are fully subject to FDIC insurance. The
system also allows for investment of banks’ own investment
dollars in the form of domestic certificates of deposit. Banks
in the “adequately capitalized” classification may
have to pay higher interest rates to continue to attract those
deposits, and higher deposit insurance rates for those deposits.
This status also affects a bank’s eligibility for a
streamlined review process for acquisition proposals.
Management intends to maintain a Tier 1 risk-based capital
ratio for the Bank in excess of 10% in 2011, exceeding the
FDIC’s “well-capitalized” capital requirement
classification. The dividends that the Bank pays to the Company
are limited to the extent necessary for the Bank to meet the
regulatory requirements of a “well-capitalized” bank.
The capital 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 Company’s 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 Bank’s financial statements nor are they included in
its capital (although the Company did contribute to the Bank a
portion of the cash proceeds from the sale of those securities).
As a result, the Company has $18 million more in regulatory
capital than the Bank at December 31, 2010 and 2009, which
explains most of the difference in the capital ratios for the
two entities.
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.
7
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The Bank is subject to the Community Reinvestment Act of 1977
(“CRA”). The CRA requires that the Bank help meet the
credit needs of the communities it serves, including low and
moderate income neighborhoods, consistent with the safe and
sound operation of the institution. The FDIC assigns one of four
possible ratings to the Bank’s CRA performance and makes
the rating and the examination reports publicly available. The
four possible ratings are outstanding, satisfactory, needs to
improve and substantial noncompliance. A financial
institution’s CRA rating can affect an institution’s
future business. For example, a federal banking agency will take
CRA performance into consideration when acting on an
institution’s application to establish or move a branch, to
merge or to acquire assets or assume liabilities of another
institution. In its most recent CRA examination, Northrim Bank
received a “Satisfactory” rating from the FDIC.
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, 2010.
On October 3, 2008, the U.S. Congress passed, and the
President signed into law, the Emergency Economic Stabilization
Act of 2008 (the “Stabilization Act”). Among other
things, the Stabilization Act temporarily increased the amount
of insurance coverage of deposit accounts held at FDIC-insured
depository institutions, including the Bank, from $100,000 to
$250,000. This coverage was permanently increased effective in
July 2010.
On October 14, 2008, using the systemic risk exception to
the FDIC Improvement Act of 1991, the U.S. Treasury
authorized the FDIC to provide a 100% guarantee of newly-issued
senior unsecured debt and deposits in non-interest bearing
transaction accounts at FDIC insured institutions. The Company
elected to participate in this program as it pertains to the
100% guarantee of non-interest bearing transaction accounts by
the FDIC. Banks participating in the transaction account
guarantee program are required to pay an additional
10 basis points in insurance fees on the amounts guaranteed
by the program. This transaction account guarantee program is
scheduled to expire on January 1, 2013. The Company elected
not to participate in the part of the program that guarantees
newly-issued senior unsecured debt.
Under the Troubled Asset Auction Program, another initiative
based on the authority granted by the Stabilization Act, the
U.S. Treasury, through a newly-created Office of Financial
Stability, has purchased certain troubled mortgage-related
assets from financial institutions in a reverse-auction format.
Troubled assets eligible for purchase by the Office of Financial
Stability include residential and commercial mortgages
originated on or before March 14, 2008, securities or
obligations that are based on such mortgages, and any other
financial instrument that the Secretary of the
U.S. Treasury determines, after consultation with the
Chairman of the Board of Governors of the Federal Reserve
System, is necessary to promote financial market stability.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank Act”) was signed into law
which, among other things, limits the ability of certain bank
holding companies to treat trust preferred security debt
issuances as Tier 1 capital. This law may require many
banks to raise new Tier 1 capital and will effectively
close the trust-preferred securities markets from offering new
issuances in the future. Since the Company had less than
$15 billion in assets at December 31, 2009, under the
Dodd-Frank Act, the Company will be able to continue to include
its existing trust preferred securities in Tier 1 capital.
Available
Information
The Company’s annual report on
Form 10-K
and quarterly reports on
Form 10-Q,
as well as its
Form 8-K
filings, which are filed with the Securities and Exchange
Commission (“SEC”), are accessible free of charge at
our Website at
http://www.northrim.com
as soon as reasonably practicable after filing with the SEC. By
making this reference to our Website, the Company does not
intend to incorporate into this report any information contained
in the Website. The Website should not be considered part of
this report.
The SEC maintains a Website at
http://www.sec.gov
that contains reports, proxy and information statements, and
other information regarding issuers including the Company that
file electronically with the SEC.
| Item 1A. | Risk Factors |
An investment in the Company’s common stock is subject to
risks inherent to the Company’s 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 Company’s
business operations. This report is qualified in its entirety by
these risk factors.
8
Table of Contents
If any of the following risks actually occur, the Company’s
financial condition and results of operations could be
materially and adversely affected. If this were to happen, the
value of the Company’s common stock could decline
significantly, and you could lose all or part of your investment.
We
operate in a highly regulated environment and changes of or
increases in banking or other laws and regulations or
governmental fiscal or monetary policies could adversely affect
us.
We are subject to extensive regulation, supervision and
examination by federal and state banking authorities. In
addition, as a publicly-traded company, we are subject to
regulation by the Securities and Exchange Commission. Any change
in applicable regulations or federal or state legislation or in
policies or interpretations or regulatory approaches to
compliance and enforcement, income tax laws and accounting
principles could have a substantial impact on us and our
operations. Changes in laws and regulations may also increase
our expenses by imposing additional fees or taxes or
restrictions on our operations. Additional legislation and
regulations that could significantly affect our authority and
operations may be enacted or adopted in the future, which could
have a material adverse effect on our financial condition and
results of operations. Failure to appropriately comply with any
such laws, regulations or principles could result in sanctions
by regulatory agencies, or damage to our reputation, all of
which could adversely affect our business, financial condition
or results of operations.
In that regard, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) was enacted in
July 2010. Among other provisions, the new legislation creates a
new Bureau of Consumer Financial Protection with broad powers to
regulate consumer financial products such as credit cards and
mortgages, creates a Financial Stability Oversight Council
comprised of the heads of other regulatory agencies, will lead
to new capital requirements from federal banking agencies,
places new limits on electronic debt card interchange fees, and
will require the Securities and Exchange Commission and national
stock exchanges to adopt significant new corporate governance
and executive compensation reforms. The new legislation and
regulations are expected to increase the overall costs of
regulatory compliance and limit certain sources of revenue.
Further, regulators have significant discretion and authority to
prevent or remedy practices that they deem to be unsafe or
unsound, or violations of laws or regulations by financial
institutions and holding companies in the performance of their
supervisory and enforcement duties. Recently, these powers have
been utilized more frequently due to the serious national
economic conditions we are facing. The exercise of regulatory
authority may have a negative impact on our financial condition
and results of operations. Additionally, our business is
affected significantly by the fiscal and monetary policies of
the U.S. federal government and its agencies, including the
Federal Reserve Board.
We cannot accurately predict the full effects of recent
legislation or the various other governmental, regulatory,
monetary, and fiscal initiatives which have been and may be
enacted on the financial markets and on the Company. The terms
and costs of these activities, or the failure of these actions
to help stabilize the financial markets, asset prices, market
liquidity, and a continuation or worsening of current financial
market and economic conditions could materially and adversely
affect our business, financial condition, results of operations,
and the trading price of our common stock.
We may be
adversely impacted by the unprecedented volatility in the
financial markets.
Dramatic declines in the national housing market in 2008 and
2009, with falling home prices and increasing foreclosures,
unemployment and under-employment have negatively impacted the
credit performance of mortgage loans and resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities as well as major commercial and
investment banks. These write-downs, initially of
mortgage-backed securities but spreading to credit default swaps
and other derivative and cash securities, in turn, have caused
many financial institutions to seek additional capital, to merge
with larger and stronger institutions and, in some cases, to
fail. Reflecting concern about the stability of the financial
markets generally and the strength of counterparties, many
lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial
institutions. This market turmoil and tightening of credit have
led to an increased level of commercial and consumer
delinquencies, lack of consumer confidence, increased market
volatility, and widespread reduction of business activity
generally. Our financial performance generally, and in
particular the ability of borrowers to pay interest on and repay
principal of outstanding loans and the value of collateral
securing those loans, is highly dependent upon the business
environment in the markets where we operate. Similarly,
declining real estate values can adversely impact the carrying
value of real estate secured loans. The downturn in the economy,
the slowdown in the real estate market, and declines in some
real estate values had a direct and adverse effect on our
financial condition and results of operations in 2008 and 2009.
While we experienced some stabilization in the economy in 2010,
we do not expect that the difficult conditions in the financial
markets are likely to improve significantly in the near future.
A worsening of these conditions would likely exacerbate the
adverse effects of these difficult market
9
Table of Contents
conditions on us and others in the financial institutions
industry. In particular, we may face the following risks in
connection with these events:
| • | We expect to face continued increased regulation of our industry, including as a result of the Stabilization Act and Dodd Frank legislation. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities. | |
| • | Competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions. | |
| • | We have been required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. |
Declines
in the residential housing market would have a negative impact
on our residential housing market income.
The Company earns revenue from the residential housing market in
the form of interest income and fees on loans and earnings from
RML. A slowdown in the residential sales cycle in our major
markets and a constriction in the availability of mortgage
financing have negatively impacted real estate sales, which has
resulted in customers’ inability to repay loans. In 2011,
the Company expects that its revenues from the residential
housing market in the form of interest income and fees on loans
and earnings from RML will be lower than 2010 because of a
decline in refinance activity at RML and a flat residential
housing market; however, declines in these areas may have a
material adverse effect on our financial condition through a
decline in interest income and fees.
Our loan
loss allowance may not be adequate to cover future loan losses,
which may adversely affect our earnings.
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 collectability 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
net income and financial condition.
We have a
significant concentration in real estate lending. The sustained
downturn in real estate within our markets has had and is
expected to continue to have a negative impact on our results of
operations.
Approximately 71% of the Bank’s loan portfolio at
December 31, 2010 consisted of loans secured by commercial
and residential real estate located in Alaska. In recent years
the slowdown in the residential sales cycle in our major markets
and a constriction in the availability of mortgage financing
have negatively impacted residential real estate sales, which
has resulted in customers’ inability to repay loans. During
2008, we experienced a significant increase in non-performing
assets relating to our real estate lending, primarily in our
residential real estate portfolio. Although non-performing
assets decreased from December 31, 2008 to
December 31, 2010, we will see a further increase in
non-performing assets if more borrowers fail to perform
according to loan terms and if we take possession of real estate
properties. Additionally, if real estate values decline, the
value of real estate collateral securing our loans could be
significantly reduced. If any of these effects continue or
become more pronounced, loan losses will increase more than we
expect and our financial condition and results of operations
would be adversely impacted.
Further, approximately 46% of the Bank’s loan portfolio at
December 31, 2010 consisted of commercial real estate
loans. Nationally, delinquencies in these types of portfolios
have increased significantly in recent years. While our
investments in these types of loans have not been as adversely
impacted as residential construction and land development loans,
there can be no assurance that the credit quality in these
portfolios will remain stable. Commercial construction and
commercial real estate loans typically involve larger loan
balances to single borrowers or groups of related borrowers.
Consequently, an adverse development with respect to one
commercial loan or one credit relationship exposes us to
significantly greater risk of loss compared to an adverse
development with respect to a consumer loan. These trends may
continue and may result in losses that exceed the estimates that
are currently included in our loan loss allowance, which could
adversely affect our financial conditions and results of
operations.
Real
estate values may continue to decrease leading to additional and
greater than anticipated loan charge-offs and valuation write
downs on our other real estate owned (“OREO”)
properties.
Real estate owned by the Bank and not used in the ordinary
course of its operations is referred to as “other real
estate owned” or “OREO” property. We foreclose on
and take title to the real estate serving as collateral for
defaulted loans as part of our
10
Table of Contents
business. At December 31, 2010, the Bank held
$10.4 million of OREO properties, many of which relate to
residential construction and land development loans. Increased
OREO balances lead to greater expenses as we incur costs to
manage and dispose of the properties. Our ability to sell OREO
properties is affected by public perception that banks are
inclined to accept large discounts from market value in order to
quickly liquidate properties. Any decrease in market prices may
lead to OREO write downs, with a corresponding expense in our
statement of operations. We evaluate OREO property values
periodically and write down the carrying value of the properties
if the results of our evaluations require it. Further
write-downs on OREO or an inability to sell OREO properties
could have a material adverse effect on our results of
operations and financial condition.
Changes
in market interest rates could adversely impact the
Company.
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. Exposure to interest rate risk is managed
by monitoring the repricing frequency of our rate-sensitive
assets and rate-sensitive liabilities over any given period.
Although we believe the current level of interest rate
sensitivity is reasonable, significant fluctuations in interest
rates could potentially have an adverse affect on our business,
financial condition and results of operations.
Our
financial performance depends on our ability to manage recent
and possible future growth.
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. 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.
Our
concentration of operations in the Anchorage, Matanuska Susitna
Valley, and Fairbanks areas of Alaska makes us more sensitive to
downturns in those areas.
Substantially all of our business is derived from the Anchorage,
Matanuska Valley, and Fairbanks areas of Alaska. The majority of
our lending has been with Alaska businesses and individuals. At
December 31, 2010, approximately 71% of the Bank’s
loans are secured by real estate and 29% are 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. Our
exposure to credit loss, if any, is the outstanding amount of
the loan if the collateral is proved to be of no value. These
areas rely primarily upon the natural resources industries,
particularly oil production, as well as tourism, government and
U.S. military spending for their economic success. Our
business is and will remain sensitive to economic factors that
relate to these industries and local and regional business
conditions. As a result, local or regional economic downturns,
or downturns that disproportionately affect one or more of the
key industries in regions served by the Company, may have a more
pronounced effect upon its business than they might on an
institution that is less geographically concentrated. The extent
of the future impact of these events on economic and business
conditions cannot be predicted; however, prolonged or acute
fluctuations could have a material and adverse impact upon our
results of operation and financial condition.
The
financial services business is intensely competitive and our
success will depend on our ability to compete
effectively.
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.
Improvements in technology, communications, and the internet
have intensified competition. As a result, our competitive
position could be weakened, which could adversely affect our
financial condition and results of operations.
We may be
unable to attract and retain key employees and
personnel.
We will be dependent for the foreseeable future on the services
of R. Marc Langland, our Chairman of the Board and Chief
Executive Officer of the Company; Joseph M. Beedle, our
President of Northrim Bank; Christopher N. Knudson, our
Executive Vice President and Chief Operating Officer; Joseph M.
Schierhorn, our Executive Vice President and Chief Financial
Officer; Steven L. Hartung, our Executive Vice President and
Chief Credit Officer. While we maintain Keyman life insurance on
the lives of Messrs. Langland, Beedle, Knudson, and
Schierhorn in the amounts of $2.5 million, $2 million,
$2.1 million, and $1 million,
11
Table of Contents
respectively, we may not be able to timely replace
Mr. Langland, Mr. Beedle, Mr. Knudson, or
Mr. Schierhorn 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. The
unexpected loss of key employees could have a material adverse
effect on our business and possibly result in reduced revenues
and earnings.
A failure
of a significant number of our borrowers, guarantors and related
parties to perform in accordance with the terms of their loans
would have an adverse impact on our results of
operations.
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, 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.
| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. | Properties |
The following sets forth information about our branch locations:
| Locations | Type | Leased/Owned | ||
|
Midtown Financial Center: Northrim Headquarters
3111 C Street, Anchorage, AK |
Traditional |
Land leased;
building owned |
||
|
SouthSide Financial Center
8730 Old Seward Highway, Anchorage, AK |
Traditional |
Land leased;
building owned |
||
|
36th Avenue Branch
811 East 36th Avenue, Anchorage, AK |
Traditional | Owned | ||
|
Huffman Branch
1501 East Huffman Road, Anchorage, AK |
Supermarket | Leased | ||
|
Jewel Lake Branch
9170 Jewel Lake Road, Anchorage, AK |
Traditional | Leased | ||
|
Seventh Avenue Branch
517 West Seventh Avenue, Suite 300, Anchorage, AK |
Traditional | Leased | ||
|
West Anchorage Branch/Small Business Center
2709 Spenard Road, Anchorage, AK |
Traditional | Owned | ||
|
Eagle River Branch
12812 Old Glenn Highway, Eagle River, AK |
Traditional | Leased | ||
|
Fairbanks Financial Center
360 Merhar Avenue, Fairbanks, AK |
Traditional | Owned | ||
|
Wasilla Financial Center
850 E. USA Circle, Suite A, Wasilla, AK |
Traditional | Owned | ||
| Item 3. | Legal Proceedings |
The Company from time to time may be involved with disputes,
claims, and litigation related to the conduct of its banking
business. Management does not expect that the resolution of
these matters will have a material effect on the Company’s
business, financial position, results of operations, or cash
flows.
12
Table of Contents
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
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
March 14, 2011, the number of shareholders of record of our
common stock was 153.
The following are high and low sales prices as reported by
Nasdaq. Prices do not include retail markups, markdowns or
commissions.
|
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
2010
|
||||||||||||||||
|
High
|
$ | 17.20 | $ | 17.58 | $ | 17.96 | $ | 19.32 | ||||||||
|
Low
|
$ | 15.38 | $ | 15.48 | $ | 15.35 | $ | 16.49 | ||||||||
|
2009
|
||||||||||||||||
|
High
|
$ | 11.70 | $ | 15.23 | $ | 15.83 | $ | 17.30 | ||||||||
|
Low
|
$ | 6.86 | $ | 9.65 | $ | 13.31 | $ | 14.92 | ||||||||
In 2010 we paid cash dividends of $0.10 per share in the first
and second quarters and $0.12 per share in the third and fourth
quarters. In 2009 we paid cash dividends of $0.10 per share each
quarter. Cash dividends totaled $2.8 million,
$2.6 million, and $4.2 million in 2010, 2009, and
2008, respectively. On February 18, 2011, the Board of
Directors approved payment of a $0.12 per share dividend on
March 18, 2011, to shareholders of record on March 10,
2011. The Company and the Bank are subject to restrictions on
the payment of dividends pursuant to applicable federal and
state banking regulations. 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. Given the fact that the Bank
remains “well-capitalized”, the Company expects to
receive dividends from the Bank.
Repurchase
of Securities
The Company did not repurchase any of its common stock during
the fourth quarter of 2010.
Equity
Compensation Plan Information
The following table sets forth information regarding securities
authorized for issuance under the Company’s equity plans as
of December 31, 2010. Additional information regarding the
Company’s equity plans is presented in Note 18 of the
Notes to Consolidated Financial Statements
included in
Item 8 of this report.
|
Number of Securities
|
||||||||||||||
|
Number of Securities to be
|
Weighted-Average Exercise
|
Remaining Available for
|
||||||||||||
|
Issued Upon Exercise of
|
Price of Outstanding
|
Future Issuance Under
|
||||||||||||
|
Outstanding Options,
|
Options, Warrants and
|
Equity Compensation Plans
|
||||||||||||
|
Warrants and Rights
|
Rights
|
(Excluding Securities
|
||||||||||||
| Plan Category | (a) | (b) | Reflected in Column (a)) | |||||||||||
|
Equity compensation plans
approved by security holders |
351,703 | $13.70 | 300,545 | |||||||||||
|
Total
|
351,703 | $13.70 | 300,545 | |||||||||||
13
Table of Contents
Stock
Performance Graph
The graph shown below depicts the total return to shareholders
during the period beginning after December 31, 2005, and
ending December 31, 2010. 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
Company’s common stock and each of the three indices was
$100 on December 31, 2005, and that all dividends were
reinvested.
Total
Return Performance
| Period Ending | ||||||||||||
| Index | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | ||||||
|
Northrim BanCorp, Inc.
|
100.00 | 121.42 | 104.43 | 52.43 | 88.55 | 103.99 | ||||||
|
Russell 3000
|
100.00 | 115.71 | 121.66 | 76.27 | 97.89 | 114.46 | ||||||
|
SNL Bank $1B-$5B
|
100.00 | 115.72 | 84.29 | 69.91 | 50.11 | 56.81 | ||||||
14
Table of Contents
| Item 6. | Selected Financial Data |
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||
|
Unaudited
|
||||||||||
| (In Thousands Except Per Share Amounts) | ||||||||||
|
Net interest income
|
$44,213 | $46,421 | $45,814 | $49,830 | $47,522 | |||||
|
Provision for loan losses
|
5,583 | 7,066 | 7,199 | 5,513 | 2,564 | |||||
|
Other operating income
|
12,377 | 13,084 | 11,354 | 9,844 | 7,766 | |||||
|
Other operating expense
|
37,624 | 41,357 | 40,394 | 34,953 | 31,476 | |||||
|
Income before income taxes
|
13,383 | 11,082 | 9,575 | 19,208 | 21,248 | |||||
|
Income taxes
|
3,918 | 2,967 | 3,122 | 7,260 | 7,978 | |||||
|
Net Income
|
9,465 | 8,115 | 6,453 | 11,948 | 13,270 | |||||
|
Less: Net income attributable to noncontrolling interest
|
399 | 388 | 370 | 290 | 296 | |||||
|
Net income attributable to Northrim Bancorp
|
$9,066 | $7,727 | $6,083 | $11,658 | $12,974 | |||||
|
Earnings per share:
|
||||||||||
|
Basic
|
$1.42 | $1.22 | $0.96 | $1.82 | $2.02 | |||||
|
Diluted
|
1.40 | 1.20 | 0.95 | 1.80 | 1.99 | |||||
|
Cash dividends per share
|
0.44 | 0.40 | 0.66 | 0.57 | 0.45 | |||||
|
Assets
|
$1,054,529 | $1,003,029 | $1,006,392 | $1,014,714 | $925,620 | |||||
|
Portfolio loans
|
671,812 | 655,039 | 711,286 | 714,801 | 717,056 | |||||
|
Deposits
|
892,136 | 853,108 | 843,252 | 867,376 | 794,904 | |||||
|
Long-term debt
|
4,766 | 4,897 | 15,986 | 1,774 | 2,174 | |||||
|
Junior subordinated debentures
|
18,558 | 18,558 | 18,558 | 18,558 | 18,558 | |||||
|
Shareholders’ equity
|
117,122 | 111,020 | 104,648 | 101,391 | 95,418 | |||||
|
Book value per share
|
$18.21 | $17.42 | $16.53 | $16.09 | $15.61 | |||||
|
Tangible book value per share
|
$16.86 | $16.01 | $15.06 | $14.51 | $14.48 | |||||
|
Net interest margin (tax
equivalent)
(1)
|
4.92% | 5.33% | 5.26% | 5.89% | 5.89% | |||||
|
Efficiency
ratio
(2)
|
65.96% | 68.96% | 70.05% | 58.01% | 56.06% | |||||
|
Return on assets
|
0.90% | 0.79% | 0.62% | 1.24% | 1.46% | |||||
|
Return on equity
|
7.87% | 7.08% | 5.85% | 11.70% | 14.45% | |||||
|
Equity/assets
|
11.11% | 11.07% | 10.40% | 10.00% | 10.31% | |||||
|
Dividend payout ratio
|
31.41% | 33.18% | 68.93% | 30.54% | 21.43% | |||||
|
Nonperforming loans/portfolio loans
|
1.70% | 2.67% | 3.66% | 1.59% | 0.92% | |||||
|
Net charge-offs/average loans
|
0.66% | 1.00% | 0.86% | 0.86% | 0.16% | |||||
|
Allowance for loan losses/portfolio loans
|
2.14% | 2.00% | 1.81% | 1.64% | 1.69% | |||||
|
Nonperforming assets/assets
|
2.07% | 3.47% | 3.84% | 1.56% | 0.79% | |||||
|
Tax rate
|
29% | 27% | 34% | 38% | 38% | |||||
|
Number of banking offices
|
10 | 11 | 11 | 10 | 10 | |||||
|
Number of employees (FTE)
|
268 | 295 | 290 | 302 | 277 | |||||
| (1) | Tax-equivalent net interest margin is a non-GAAP performance measurement in which interest income on non-taxable investments and loans is presented on a tax-equivalent basis using a combined federal and state statutory rate of 41.11% in both 2010 and 2009. |
| (2) | In managing our business, we review the efficiency ratio exclusive of intangible asset amortiztion (see definition in table below), which is not defined in accounting principles generally accepted in the United States (“GAAP”). The efficiency ratio is calculated by dividing noninterest expense, exclusive of intangible asset amortization, by the sum of net interest income and noninterest income. Other companies may define or calculate this data differently. We believe this presentation provides investors with a more accurate picture of our operating efficiency. In this presentation, noninterest expense is adjusted for intangible asset amortization. For additional information see the “Noninterest Expense” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this report. |
15
Table of Contents
Reconciliation
of Selected Financial Data to GAAP Financial Measures
(1)
| Years Ended December 31, | 2010 | 2009 | 2008 | 2007 | 2006 | |||||
| (In Thousands) | ||||||||||
|
Net interest
income
(2)
|
$44,213 | $46,421 | $45,814 | $49,830 | $47,522 | |||||
|
Noninterest income
|
12,377 | 13,084 | 11,354 | 9,844 | 7,766 | |||||
|
Noninterest expense
|
37,624 | 41,357 | 40,394 | 34,953 | 31,476 | |||||
|
Less intangible asset amortization
|
299 | 323 | 347 | 337 | 482 | |||||
|
Adjusted noninterest expense
|
$37,325 | $41,034 | $40,047 | $34,616 | $30,994 | |||||
|
Efficiency ratio
|
65.96% | 68.96% | 70.05% | 58.01% | 56.06% | |||||
| (1) | These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report. |
| (2) | Amount represents net interest income before provision for loan losses. |
16
Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This discussion highlights key information as determined by
management but may not contain all of the information that is
important to you. For a more complete understanding, the
following should be read in conjunction with the Company’s
audited consolidated financial statements and the notes thereto
as of December 31, 2010, 2009, and 2008 included elsewhere
in this report.
Note
Regarding Forward-Looking Statements
This annual report on
Form 10-K
includes forward-looking statements, which are not historical
facts. These forward-looking statements describe
management’s expectations about future events and
developments such as future operating results, growth in loans
and deposits, continued success of the Company’s style of
banking, and the strength of the local economy. All statements
other than statements of historical fact, including statements
regarding industry prospects and future results of operations or
financial position, made in this report are forward-looking. We
use words such as “anticipate,” “believe,”
“expect,” “intend” and similar expressions
in part to help identify forward-looking statements.
Forward-looking statements reflect management’s current
plans and expectations and are inherently uncertain. Our actual
results may differ significantly from management’s
expectations, and those variations may be both material and
adverse. Forward-looking statements are subject to various risks
and uncertainties that may cause our actual results to differ
materially and adversely from our expectations as indicated in
the forward-looking statements. These risks and uncertainties
include: the general condition of, and changes in, the Alaska
economy; factors that impact our net interest margin; and our
ability to maintain asset quality. Further, actual results may
be affected by competition on price and other factors with other
financial institutions; customer acceptance of new products and
services; the regulatory environment in which we operate; and
general trends in the local, regional and national banking
industry and economy. Many of these risks, as well as other
risks that may have a material adverse impact on our operations
and business, are identified Item 1A. Risk Factors, and 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, other than as required by law.
Executive
Overview
| • | The Company’s net income increased 17% to $9.1 million, or $1.40 per diluted share, for the year ended December 31, 2010 from $7.7 million, or $1.20 per diluted share, for the year ended December 31, 2009, reflecting continuing improvement in credit quality, increased gains from sales of other real estate owned (OREO), and lower expenses. | |
| • | Our provision for loan losses in 2010 decreased by $1.5 million, or 21%, to $5.6 million from $7.1 million in 2009 as our net charge-offs decreased from $6.9 million in 2009 to $4.3 million in 2010. In addition our nonperforming loans at December 31, 2010 decreased by $6.1 million, or 35%, from $17.5 million at December 31, 2009 to $11.4 million. | |
| • | Other operating expenses decreased $3.7 million, or 9% in 2010 to $37.6 million from $41.3 million in 2009 primarily due to decreased expenses related to other real estate owned and increased gains on sale and rental income from other real estate owned. The gains on sale and rental income generated from other real estate owned are included as negative expense items in the non-interest expense section of the Consolidated Statement of Income. | |
| • | The Company continued to maintain strong capital ratios with Tier 1 Capital/risk adjusted assets of 14.08% at December 31, 2010 as compared to 13.98% a year ago. The Company’s tangible common equity to tangible assets at year end 2010 was 10.36%, up from 10.26% at year end 2009. | |
| • | Nonperforming assets were reduced 37% year-over-year to $21.8 million at December 31, 2010 or 2.07% of total assets, compared to $34.8 million or 3.47% of total assets at December 31, 2009. | |
| • | The allowance for loan losses (“Allowance”) totaled 2.14% of total portfolio loans at December 31, 2010, compared to 2.00% at December 31, 2009. The Allowance to nonperforming loans also increased to 126.21% at December 31, 2010 from 74.94% at December 31, 2009. | |
| • | The cash dividend paid on December 17, 2010, rose 20% to $0.12 per diluted share from $0.10 per diluted share paid in the fourth quarter of 2009. |
The Company’s total assets grew 5% to $1.1 billion at
December 31, 2010 from $1.0 billion at
December 31, 2009, with an increase in overnight and
portfolio investments offsetting reductions in other real estate
owned and relatively flat loan growth. While loans increased 3%
at December 31, 2010, average loans were down 6% year over
year at $646.7 million for 2010, reflecting soft demand in
the commercial lending market in Alaska.
17
Table of Contents
Critical
Accounting Estimates
The preparation of the consolidated financial statements
requires us to make a number of estimates and assumptions that
affect the reported amounts and disclosures in the consolidated
financial statements. On an ongoing basis, we evaluate our
estimates and assumptions based upon historical experience and
various other factors and circumstances. We believe that our
estimates and assumptions are reasonable; however, actual
results may differ significantly from these estimates and
assumptions which could have a material impact on the carrying
value of assets and liabilities at the balance sheet dates and
on our results of operations for the reporting periods.
The accounting policies that involve significant estimates and
assumptions by management, which have a material impact on the
carrying value of certain assets and liabilities, are considered
critical accounting policies. We believe that our most critical
accounting policies upon which our financial condition depends,
and which involve the most complex or subjective decisions or
assessments are as follows:
Allowance for loan losses:
The Company
maintains an Allowance to reflect inherent losses from its loan
portfolio as of the balance sheet date. In determining its total
Allowance, the Company first estimates a specific allocated
allowance for impaired loans. This analysis is based upon a
specific analysis for each impaired loan that is collateral
dependent, including appraisals on loans secured by real
property, management’s assessment of the current market,
recent payment history, and an evaluation of other sources of
repayment. The Company obtains appraisals on real and personal
property that secure its loans during the loan origination
process in accordance with regulatory guidance and its loan
policy. The Company obtains updated appraisals on loans secured
by real or personal property based upon its assessment of
changes in the current market or particular projects or
properties, information from other current appraisals, and other
sources of information. The Company uses the information
provided in these updated appraisals along with its evaluation
of all other information available on a particular property as
it assesses the collateral coverage on its performing and
nonperforming loans and the impact that may have on the adequacy
of its Allowance.
The Company then estimates a general allocated allowance for all
other loans that were not impaired as of the balance sheet date
using a formula-based approach that includes average historical
loss factors that are adjusted for qualitative factors. The
Company has identified the following segments and classes of
loans not considered impaired for purposes of establishing the
allocated portion of the general reserve of the Allowance. The
Company first disaggregates the overall loan portfolio in the
following segments: commercial, real estate construction, real
estate term, and home equity lines and other consumer loans.
Then the Company further disaggregates each segment into the
following classes, which are also known as risk classifications:
excellent, good, satisfactory, watch, special mention,
substandard, doubtful and loss. After the portfolio has been
disaggregated into these segments and classes, the Company
calculates a general reserve for each segment and class based on
the average three year loss history for each segment and class.
This general reserve is then adjusted for qualitative factors,
by segment and class. Qualitative factors are based on
management’s assessment of current trends that may cause
losses inherent in the current loan portfolio to differ
significantly from historical losses. Some factors that
management considers in determining the qualitative adjustment
to the general reserve include, national and local economic
trends, business conditions, underwriting policies and
standards, trends in local real estate markets, effects of
various political activities, peer group data, and internal
factors such as underwriting policies and expertise of the
Company’s employees.
Finally, the Company assesses the overall adequacy of the
Allowance based on several factors including the level of the
Allowance as compared to total loans and nonperforming loans in
light of current economic conditions. This portion of the
Allowance is deemed “unallocated” because it is not
allocated to any segment or class of the loan portfolio. This
portion of the Allowance provides for coverage of credit losses
inherent in the loan portfolio but not captured in the credit
loss factors that are utilized in the risk rating-based
component or in the specific impairment component of the
Allowance and acknowledges the inherent imprecision of all loss
prediction models.
The unallocated portion of the Allowance is based upon
management’s evaluation of various factors that are not
directly measured in the determination of the allocated portions
of the Allowance. Such factors include uncertainties in
identifying triggering events that directly correlate to
subsequent loss rates, uncertainties in economic conditions,
risk factors that have not yet manifested themselves in loss
allocation factors, and historical loss experience data that may
not precisely correspond to the current portfolio. In addition,
the unallocated reserve may be further adjusted based upon the
direction of various risk indicators. Examples of such factors
include the risk as to current and prospective economic
conditions, the level and trend of charge offs or recoveries,
and the risk of heightened imprecision or inconsistency of
appraisals used in estimating real estate values. Although this
allocation process may not accurately predict credit losses by
loan type or in aggregate, the total allowance for credit losses
is available to absorb losses that may arise from any loan type
or category. Due to the subjectivity involved in the
determination of the unallocated portion of the Allowance, the
relationship of the unallocated component to the total Allowance
may fluctuate from period to period.
Based on our methodology and its components, management believes
the resulting Allowance is adequate and appropriate for the risk
identified in the Company’s loan portfolio. Given current
processes employed by the Company, management believes the
18
Table of Contents
risk ratings and inherent loss rates currently assigned are
appropriate. It is possible that others, given the same
information, may at any point in time reach different reasonable
conclusions that could be material to the Company’s
financial statements. In addition, current risk ratings and fair
value estimates of collateral are subject to change as we
continue to review loans within our portfolio and as our
borrowers are impacted by economic trends within their market
areas. Although we have established an Allowance that we
consider adequate, there can be no assurance that the
established Allowance will be sufficient to offset losses on
loans in the future.
Goodwill and other intangibles:
Net assets of
entities acquired in purchase transactions are recorded at fair
value at the date of acquisition. Identified intangibles are
amortized over the period benefited either on a straight-line
basis or on an accelerated basis depending on the nature of the
intangible. Goodwill is not amortized, although it is reviewed
for impairment on an annual basis or at an interim date if
events or circumstances indicate a potential impairment.
Goodwill impairment testing is performed at the reporting unit
level. The Company has only one reporting unit.
Under applicable accounting standards, goodwill impairment
analysis is a two-step test. The first step, used to identify
potential impairment, involves comparing each reporting
unit’s fair value to its carrying value including goodwill.
If the fair value of a reporting unit exceeds its carrying
value, applicable goodwill is considered not to be impaired. If
the carrying value exceeds fair value, there is an indication of
impairment and the second step is performed to measure the
amount of impairment.
The second step involves calculating an implied fair value of
goodwill for each reporting unit for which the first step
indicated impairment. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill
recognized in a business combination, which is the excess of the
fair value of the reporting unit, as determined in the first
step, over the aggregate fair values of the individual assets,
liabilities and identifiable intangibles as if the reporting
unit was being acquired in a business combination. If the
implied fair value of goodwill in the “pro forma”
business combination accounting as described above exceeds the
goodwill assigned to the reporting unit, there is no impairment.
If the goodwill assigned to a reporting unit exceeds the implied
fair value of the goodwill, an impairment charge is recorded for
the excess. An impairment loss recognized cannot exceed the
amount of goodwill, and the loss establishes a new basis in the
goodwill. Subsequent reversal of goodwill impairment losses is
not permitted under applicable accounting standards.
At December 31, 2010, the Company performed its annual
impairment test and concluded that no potential impairment
existed at that time. The Company continues to monitor the
Company’s goodwill for potential impairment on an ongoing
basis. No assurance can be given that we will not charge
earnings during 2011 for goodwill impairment, if, for example,
our stock price declines significantly, although there are many
factors that we analyze in determining the impairment of
goodwill.
Valuation of other real estate owned:
Other
real estate owned represents properties acquired through
foreclosure or its equivalent. Prior to foreclosure, the
carrying value is adjusted to the fair value, less cost to sell,
of the real estate to be acquired by an adjustment to the
allowance for loan loss. The amount by which the fair value less
cost to sell is greater than the carrying amount of the loan
plus amounts previously charged off is recognized in earnings up
to the original cost of the asset. Any subsequent reduction in
the carrying value at acquisition is charged against earnings.
Reductions in the carrying value of other real estate owned
subsequent to acquisition are determined based on
management’s estimate of the fair value of individual
properties. Significant inputs into this estimate include
estimated costs to complete projects as well as our assessment
of current market conditions.
Results
of Operations
Net
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, sales of employee benefit
plans, purchased receivables products, electronic banking
income, and earnings from our mortgage affiliate. Our operating
expenses consist in large part of compensation, employee
benefits expense, occupancy, insurance expense, expenses related
to OREO, marketing, and professional and outside services.
Interest income and cost of funds are affected significantly by
general economic conditions, particularly changes in market
interest rates, and by government policies and the actions of
regulatory authorities.
We earned net income of $9.1 million in 2010, compared to
net income of $7.7 million in 2009, and $6.1 million
in 2008. During these periods, net income per diluted share was
$1.40, $1.20, and $0.95, respectively. The increase in 2010 was
due to decreases in other operating expenses and the provision
for loan losses of $3.7 million and $1.5 million,
respectively. These decreases were partially offset by decreases
in net interest income and other operating income of
$2.2 million and $681,000, respectively, as well as an
increase in the provision for income taxes of $951,000.
19
Table of Contents
Net
Interest Income
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 2010 was $44.2 million, compared to $46.4 million
in 2009 and $45.8 million in 2008. The decrease in 2010 was
primarily due to lower average loan balances, coupled with a
slightly lower yield on loans in 2010 as compared to 2009 which
was only partially offset by decreased interest expense from
lower average interest rates on both deposits and borrowings.
The slight increase in 2009 was the result of decreased interest
expense over and above the decrease in interest income as
compared to 2008 which was largely due to decreases in interest
rates.
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, 2010, 2009, and 2008, average
interest-earning assets were $904.2 million,
$876.1 million, and $876.9 million, respectively.
During these same periods, net interest margins were 4.89%,
5.30%, and 5.22%, respectively, which reflects the changes in
our balance sheet mix. Our average yield on interest-earning
assets was 5.50% in 2010, 6.11% in 2009, and 6.81% in 2008,
while the average cost of interest-bearing liabilities was 0.88%
in 2010, 1.14% in 2009, and 2.11% in 2008.
Our net interest margin decreased in 2010 from 2009 mainly due
to the fact that in 2010, the mix of average interest-earning
assets included lower average loan balances and higher average
balances in securities and short term investments as compared to
2009. Loans have a significantly higher yield than securities
and short term investments, so the shift in average balances in
these asset categories significantly impacts the overall yield
on interest-earnings assets. Net interest margin increased in
2009 from 2008 mainly due to the fact that the cost of
interest-bearing liabilities decreased by 97 basis points
while the yield on interest-earning assets decreased by
70 basis points. This decrease was further amplified due to
the decrease in the average balance of our interest-bearing
deposits in 2009 as compared to 2008.
20
Table of Contents
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, | 2010 | 2009 | 2008 | |||||||||||||||
|
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)
|
$646,677 | $44,926 | 6.95% | $688,347 | $48,830 | 7.09% | $702,117 | $53,287 | 7.59% | |||||||||
|
Securities
|
187,155 | 4,594 | 2.45% | 144,713 | 4,499 | 3.11% | 134,705 | 5,493 | 4.08% | |||||||||
|
Short term investments
|
70,336 | 178 | 0.25% | 43,041 | 161 | 0.37% | 40,082 | 936 | 2.34% | |||||||||
|
Total interest-earning assets
|
904,168 | 49,698 | 5.50% | 876,101 | 53,490 | 6.11% | 876,904 | 59,716 | 6.81% | |||||||||
|
Noninterest-earning assets
|
106,398 | 105,578 | 108,140 | |||||||||||||||
|
Total assets
|
$1,010,566 | $981,679 | $985,044 | |||||||||||||||
|
Liabilities and Shareholders’ Equity:
|
||||||||||||||||||
|
Deposits:
|
||||||||||||||||||
|
Interest-bearing demand accounts
|
$125,360 | $176 | 0.14% | $115,065 | $170 | 0.15% | $97,171 | $578 | 0.59% | |||||||||
|
Money market accounts
|
132,264 | 673 | 0.51% | 127,651 | 740 | 0.58% | 187,779 | 3,306 | 1.76% | |||||||||
|
Savings accounts
|
183,636 | 1,120 | 0.61% | 169,812 | 1,240 | 0.73% | 187,225 | 3,444 | 1.84% | |||||||||
|
Certificates of deposit
|
147,081 | 2,704 | 1.84% | 173,777 | 3,651 | 2.10% | 145,153 | 4,851 | 3.34% | |||||||||
|
Total interest-bearing deposits
|
588,341 | 4,673 | 0.79% | 586,305 | 5,801 | 0.99% | 617,328 | 12,179 | 1.97% | |||||||||
|
Borrowings
|
34,341 | 812 | 2.36% | 35,935 | 1,268 | 3.53% | 41,567 | 1,723 | 4.15% | |||||||||
|
Total interest-bearing liabilities
|
622,682 | 5,485 | 0.88% | 622,240 | 7,069 | 1.14% | 658,895 | 13,902 | 2.11% | |||||||||
|
Demand deposits and other noninterest-bearing liabilities
|
272,645 | 250,342 | 222,247 | |||||||||||||||
|
Total liabilities
|
895,327 | 872,582 | 881,142 | |||||||||||||||
|
Shareholders’ equity
|
115,239 | 109,097 | 103,902 | |||||||||||||||
|
Total liabilities and shareholders’ equity
|
$1,010,566 | $981,679 | $985,044 | |||||||||||||||
|
Net interest income
|
$44,213 | $46,421 | $45,814 | |||||||||||||||
|
Net interest
margin
(3)
|
4.89% | 5.30% | 5.22% | |||||||||||||||
| (1) | Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totalled $2.6 million, $2.7 million and $3.1 million for 2010, 2009 and 2008, respectively. | |
| (2) | Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loans were $13.8 million, $19.1 million, and $13.2 million in 2010, 2009 and 2008, respectively. | |
| (3) | The net interest margin on a tax equivalent basis was 4.92%, 5.33%, and 5.26%, respectively, for 2010, 2009, and 2008. |
21
Table of Contents
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.
| 2010 compared to 2009 | 2009 compared to 2008 | |||||||||||
| Increase (decrease) due to | Increase (decrease) due to | |||||||||||
| Volume | Rate | Total | Volume | Rate | Total | |||||||
| (In Thousands) | ||||||||||||
|
Interest Income:
|
||||||||||||
|
Loans
|
$(2,911) | $(993) | $(3,904) | $(1,029) | $(3,428) | $(4,457) | ||||||
|
Securities
|
337 | (243) | 95 | 452 | (1,446) | (994) | ||||||
|
Short term investments
|
35 | (18) | 17 | 75 | (850) | (775) | ||||||
|
Total interest income
|
$(2,538) | $(1,254) | $(3,792) | $(502) | $(5,724) | $(6,226) | ||||||
|
Interest Expense:
|
||||||||||||
|
Deposits:
|
||||||||||||
|
Interest-bearing demand accounts
|
$13 | $(7) | $6 | $132 | $(540) | $(408) | ||||||
|
Money market accounts
|
29 | (95) | (67) | (829) | (1,737) | (2,566) | ||||||
|
Savings accounts
|
118 | (238) | (120) | (294) | (1,911) | (2,205) | ||||||
|
Certificates of deposit
|
(522) | (425) | (947) | 1,363 | (2,562) | (1,199) | ||||||
|
Total interest on deposits
|
(362) | (766) | (1,128) | 372 | (6,750) | (6,378) | ||||||
|
Borrowings
|
(54) | (401) | (456) | (216) | (238) | (454) | ||||||
|
Total interest expense
|
$(416) | $(1,168) | $(1,584) | $156 | $(6,988) | $(6,832) | ||||||
Provision
for Loan Losses
The provision for loan losses in 2010 was $5.6 million,
compared to $7.1 million in 2009 and $7.2 million in
2008. We decreased the provision for loan losses in 2010
primarily because net charge offs decreased from
$6.9 million in 2009 to $4.3 million in 2010.
Additionally, impaired loans decreased to $18.3 million at
December 31, 2010 from $46.3 million at
December 31, 2009. These decreases were partially offset in
the provision for loans losses by an increase in gross loans,
which grew to $671.8 million at December 31, 2010 from
$655 million at December 31, 2009. We decreased the
provision for loan losses slightly in 2009 due to decreases in
nonperforming loans and impaired loans. Nonperforming loans
decreased $8.5 million to $17.5 million at
December 31, 2009 from $26 million at
December 31, 2008, and impaired loans decreased by
$33.4 million to $46.3 million at December 31,
2009 from $79.7 million at December 31, 2008. See the
“Allowance for Loan Loss” section under
“Financial Condition” for further discussion of these
decreases. In addition, net loan charge-offs were 0.66%, 1% and
0.86% of average loans in 2010, 2009, and 2008, respectively.
See Note 6 of the Notes to Consolidated Financial
Statements included in Item 8 of this report for further
discussion of the change in the Allowance.
22
Table of Contents
Other
Operating Income
Total other operating income decreased $681,000, or 5%, in 2010,
after increasing $1.7 million, or 15%, in 2009. 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, | 2010 | $ Change | % Change | 2009 | $ Change | % Change | 2008 | |||||||
| (In Thousands) | ||||||||||||||
|
Other Operating Income
|
||||||||||||||
|
Deposit service charges
|
$2,636 | $(347) | -12% | $2,983 | $(300) | -9% | $3,283 | |||||||
|
Employee benefit plan income
|
1,900 | 161 | 9% | 1,739 | 288 | 20% | 1,451 | |||||||
|
Purchased receivable income
|
1,839 | (267) | -13% | 2,106 | (454) | -18% | 2,560 | |||||||
|
Electronic banking fees
|
1,758 | 216 | 14% | 1,542 | 349 | 29% | 1,193 | |||||||
|
Equity in earnings from RML
|
1,401 | (948) | -40% | 2,349 | 1,754 | 295% | 595 | |||||||
|
Rental income
|
810 | (40) | -5% | 850 | 387 | 84% | 463 | |||||||
|
Merchant credit card transaction fees
|
484 | 78 | 19% | 406 | (45) | -10% | 451 | |||||||
|
Loan service fees
|
401 | (107) | -21% | 508 | 32 | 7% | 476 | |||||||
|
Equity in loss from Elliott Cove
|
(1) | 114 | -99% | (115) | (9) | 8% | (106) | |||||||
|
Other income
|
500 | 4 | 1% | 496 | (346) | -41% | 842 | |||||||
|
Operating sources
|
11,728 | (1,136) | -9% | 12,864 | 1,656 | 15% | 11,208 | |||||||
|
Gain on sale of securities available for sale, net
|
649 | 429 | 195% | 220 | 74 | 51% | 146 | |||||||
|
Other sources
|
649 | 429 | 195% | $220 | 74 | 51% | 146 | |||||||
|
Total other operating income
|
$12,377 | $(707) | -5% | $13,084 | $1,730 | 15% | $11,354 | |||||||
2010
Compared to 2009
Other operating income decreased in 2010 primarily due to the
decreases in earnings from RML, deposit service charges, and
purchased receivable income. Earnings from RML have fluctuated
with activity in the housing market, which has been affected by
local economic conditions and changes in mortgage interest
rates. Earnings from RML decreased in 2010 as refinance
activity, which reached nearly record highs in 2009, began to
slow. The Company expects that its income from RML will decrease
in 2011 as compared to 2010 as the refinance activity continues
to decrease. Deposit service charges decreased in 2010 because
of decreases in fees collected on nonsufficient funds
transactions due to a decrease in the number of overdraft
transactions processed in 2010 as compared to 2009. The Company
expects continued decreases in deposit services charges in 2011
due to recent changes in regulations that restrict the
Company’s ability to assess service charges on
point-of-sale
transactions unless its customers request this service. This
legislation was effective starting in the third quarter of 2010.
Lastly, although year end purchased receivable balances in 2010
exceed those of 2009, income from the Company’s purchased
receivable products decreased in 2010 due to decreases in the
average purchased receivable balances outstanding during the
year. The Company expects the income level from this product to
increase as the Company adds new customers in this line of
business.
The decreases in other operating income noted above were
partially offset by increases in net gains on the sale of
securities available for sale, electronic banking fees, and
employee benefit plan income. The increase in the Company’s
electronic banking fees in 2010 resulted from additional fees
collected from increased
point-of-sale
transactions.
Point-of-sale
fees have increased as overall usage of this type of transaction
has increased. The Company expects income from electronic
banking fees to decrease in the future due to restrictions on
point-of-sale
revenues contained in the recently passed Dodd-Frank Act.
Finally, the Company owns 50.1% of NBG through its wholly-owned
subsidiary NCIC. As such, the Company consolidates the balance
sheet and income statement of NBG into its financial statements.
The increase in income from employee benefit plan income from
NBG in 2010 is a reflection of NBG’s ability to continue to
provide additional products and services to an increasing client
base. We expect employee benefit plan income from NBG to
continue to increase as NBG’s business continues to grow.
2009
Compared to 2008
Other operating income increased in 2009 primarily due to
increased earnings from RML. As noted above, earnings from RML
have fluctuated with activity in the housing market, and 2009
marked a near record year for refinance activity in the
Anchorage area. Other significant increases in other operating
income in 2009 included increased rental income and electronic
banking fees. The increase in rental income was the result of
the purchase of the Company’s main office facility through
NBL in July 2008. Similar
23
Table of Contents
to 2010, increased electronic banking fees resulted from an
increase in
point-of-sale
transactions in 2009 as compared to the prior year.
The increases in other income in 2009 noted above were partially
offset by decreases in service charge income, purchased
receivable income, and other income. The decrease in service
charge income in 2009 was primarily the result of a decrease in
fees collected on nonsufficient funds transactions due to a
decrease in the number of overdraft transactions processed in
2009. Purchased receivable income decreased in 2009 primarily
due to the fact that in the second quarter of 2009, two of the
Company’s purchased receivable customers sold all or a
portion of their businesses and used those proceeds to repay
substantially all of their purchased receivable balances. Other
income decreased in 2009 as a result of decreases in the
Company’s commissions from the sale of Elliott Cove
products and losses incurred by the Company’s affiliate PWA.
Other
Operating Expense
Other operating expense decreased $3.7 million, or 9%, in
2010, and increased $963,000, or 2%, in 2009. The following
table breaks out the other operating expense categories:
| Years Ended December 31, | 2010 | $ Change | % Change | 2009 | $ Change | % Change | 2008 | |||||||
| (In Thousands) | ||||||||||||||
|
Other Operating Expense
|
||||||||||||||
|
Salaries and other personnel expense
|
$21,637 | $(537) | -2% | $22,174 | $1,178 | 6% | $20,996 | |||||||
|
Occupancy
|
3,704 | 17 | 0% | 3,687 | 288 | 8% | 3,399 | |||||||
|
Insurance expense
|
1,902 | (813) | -30% | 2,715 | 936 | 53% | 1,779 | |||||||
|
Marketing
|
1,782 | 465 | 35% | 1,317 | (241) | -15% | 1,558 | |||||||
|
Professional and outside services
|
1,315 | (483) | -27% | 1,798 | (60) | -3% | 1,858 | |||||||
|
Equipment
|
1,116 | (102) | -8% | 1,218 | (15) | -1% | 1,233 | |||||||
|
Software expense
|
741 | (78) | -10% | 819 | (20) | -2% | 839 | |||||||
|
Amortization of low income housing tax investments
|
861 | 79 | 10% | 782 | 83 | 12% | 699 | |||||||
|
Internet banking expense
|
622 | 64 | 11% | 558 | 46 | 9% | 512 | |||||||
|
Impairment on purchased receivables, net
|
402 | 236 | 142% | 166 | (27) | -14% | 193 | |||||||
|
Intangible asset amortization
|
299 | (24) | -7% | 323 | (24) | -7% | 347 | |||||||
|
OREO expense, net rental income and gains on sale:
|
||||||||||||||
|
OREO operating expense
|
882 | 109 | 14% | 773 | 172 | 29% | 601 | |||||||
|
Impairment on OREO
|
246 | (579) | -70% | 825 | (1,133) | -58% | 1,958 | |||||||
|
Rental income on OREO
|
(610) | (584) | 2246% | (26) | (25) | 2500% | (1) | |||||||
|
Gains on sale of OREO
|
(1,663) | (1,210) | 267% | (453) | (408) | 907% | (45) | |||||||
|
Subtotal
|
(1,145) | (2,264) | -202% | 1,119 | (1,394) | -55% | 2,513 | |||||||
|
Prepayment penalty on long term debt
|
- | (718) | -100% | 718 | 718 | NA | — | |||||||
|
Other expenses
|
4,388 | 425 | 11% | 3,963 | (505) | -11% | 4,468 | |||||||
|
Total other operating expense
|
$37,624 | $(3,733) | -9% | $41,357 | $963 | 2% | $40,394 | |||||||
2010
Compared to 2009
Other operating expense decreased in 2010 primarily due to
decreased net costs related to OREO properties, and decreased
insurance expense, prepayment penalties for long term debt,
salaries and other personnel expenses, and professional and
outside services. Gains on the sale of OREO increased
significantly in 2010 due to an increase in overall sales
activity and $422,000 in previously deferred gain that was
recognized in 2010 related to one commercial property that was
sold in 2007. Rental income on OREO also increased significantly
in 2010 as the result of the transfer of a large condominium
development into OREO in December 2009. Impairment expense on
OREO decreased significantly in 2010. Impairment charges arise
from adjustments to the Company’s estimate of the fair
value of certain properties based on changes in estimated costs
to complete the projects and overall market conditions in the
Anchorage, Matanuska-Susitna Valley, and Fairbanks markets.
Insurance expense decreased in 2010 mainly due to decreased FDIC
insurance premiums that was primarily the result of the one time
special assessment that the Company incurred in the second
quarter of 2009, as well as a decrease in the rate assessed on
the Company in 2010. Prepayment penalties on long term debt
decreased in 2010 because the Company did not prepay any debt in
2010. Salaries and other personnel expense decreased in 2010
primarily due to a decrease in the Company’s workforce.
Additionally, stock-based compensation expense decreased in 2010
24
Table of Contents
due to decreases in the number of stock options vested in 2010
as compared to 2009. Lastly, professional and outside services
decreased in 2010 due to decreases in audit and accounting
consulting fees.
The decreases in operating expenses were partially offset by
increases in marketing expense and in other expenses. Marketing
costs increased in 2010 due to increases in advertising expenses
and charitable contributions. Other expenses increased due to
increased hardware costs related to the Company’s telephone
system, the reserve for unfunded commitments, operational
losses, and losses on the sale of repossessed assets.
2009
Compared to 2008
Other operating expenses increased in 2009 primarily due to
increased salaries and other personnel expenses, insurance
expense, and prepayment penalties on long term debt. Salaries
and other personnel expense increased in 2009 as a result of an
increase in deferred compensation expense as the Company’s
liability under this plan increased due to market increases on
plan assets. The Company incurs a liability to pay deferred
compensation according to the level of assets held in variable
annuity life insurance plans on certain key executives. As the
value of these assets increased in 2009, the Company’s
liability and expenses for that plan also increased during the
year. Additionally, group medical and dental costs increased in
2009 due to increased medical claims. Lastly, stock-based
compensation expense increased in 2009 due to increases in the
weighted average fair values for restricted stock units.
Insurance expense increased in 2009, as noted above, primarily
due to the increase in FDIC insurance expense, which was
partially offset by a decrease in Keyman insurance expense that
arose from increases in the cash surrender value of assets held
under the Company’s policies. Finally, the Company incurred
a prepayment penalty when it paid off two long term borrowings
from the Federal Home Loan Bank of Seattle totaling
$9.9 million in September of 2009. The borrowing had an
average remaining life of over 8 years. There were no early
payoffs of borrowings in 2010 or 2008. See the
“Borrowings” section under “Liabilities”
below for further discussion of the payoff of long term debit in
2009.
The increases in other operating expenses were partially offset
by net costs related to OREO and other expenses. Net costs
related to OREO decreased primarily due to the decrease in
impairment on OREO in 2009 as compared to 2008. Additionally,
gains on the sale of OREO in 2009 increased due to an increase
in sales volume. Other expenses decreased in 2009 primarily due
to decreased costs related to taxes, insurance, and other loan
collateral expenses associated with the loan collection process.
Additionally, ATM and debit card processing expenses decreased
as compared to 2008.
Income
Taxes
The provision for income taxes increased $951,000, or 32%, to
$3.9 million in 2010. This increase is due primarily to the
21% increase in income before income taxes. Additionally, the
effective tax rate increased to 29% in 2010 from 27% in 2009.
This increase is the result of a decrease in tax exempt income
on investments and tax credits relative to the level of taxable
income. The provision for income taxes decreased $155,000, or
less than 1%, to $3.0 million in 2009. The effective tax
rate for 2009 decreased to 27% in 2009 from 33% in 2008. The
decrease in the tax rate for 2009 was primarily due to increased
tax exempt income on investments and tax credits relative to the
level of taxable income.
Financial
Condition
Investment
Securities Portfolio
Our investment portfolio consists primarily of government
sponsored entity securities, corporate bonds, and municipal
securities. Investment securities totaled $222.1 million at
December 31, 2010, reflecting an increase of
$34.7 million, or 19%, from year-end 2009 as our deposits
have continued to increase while loan demands remains relatively
flat. The average maturity of the investment portfolio was
approximately two years at December 31, 2010.
The composition our investment securities portfolio reflects
management’s investment strategy of maintaining an
appropriate level of liquidity while providing a relatively
stable source of interest income. The investment securities
portfolio also mitigates interest rate and credit risk inherent
in the loan portfolio, while providing a vehicle for the
investment of available funds, a source of liquidity (by
pledging as collateral or through repurchase agreements), and
collateral for certain public funds deposits.
Our investment portfolio is divided into two classes: securities
available for sale and securities held to maturity. Available
for sale securities are carried at fair value with any
unrealized gains or losses reflected as an adjustment to
shareholders’ equity. Securities held to maturity are
carried at amortized cost. Investment securities designated as
available for sale comprised 96% 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, 2010 and 2009, $26.2 million and
$17.7 million in securities were pledged for deposits and
borrowings, respectively.
25
Table of Contents
Pledged securities increased at December 31, 2010 as
compared to December 31, 2009 because the Company had
higher balances in securities sold under repurchase agreements,
which are secured by pledged securities, at December 31,
2010.
The following tables set forth the composition of our investment
portfolio at the dates indicated:
|
Amortized
|
||||
| December 31, | Cost | Fair Value | ||
| (In thousands) | ||||
|
Securities Available for Sale:
|
||||
|
2010:
|
||||
|
U.S. Treasury & government sponsored entities
|
$164,604 | $164,685 | ||
|
Muncipal Securities
|
9,503 | 9,624 | ||
|
U.S. Agency Mortgage-backed Securities
|
71 | 73 | ||
|
Corporate Bonds
|
38,732 | 39,628 | ||
|
Total
|
$212,910 | $214,010 | ||
|
2009:
|
||||
|
U.S. Treasury & government sponsored entities
|
$141,371 | $142,000 | ||
|
Muncipal Securities
|
6,184 | 6,270 | ||
|
U.S. Agency Mortgage-backed Securities
|
85 | 87 | ||
|
Corporate Bonds
|
28,242 | 29,802 | ||
|
Total
|
$175,882 | $178,159 | ||
|
2008:
|
||||
|
U.S. Treasury & government sponsored entities
|
$110,882 | $112,584 | ||
|
Muncipal Securities
|
5,054 | 4,881 | ||
|
U.S. Agency Mortgage-backed Securities
|
345 | 361 | ||
|
Corporate Bonds
|
23,203 | 23,184 | ||
|
Total
|
$139,484 | $141,010 | ||
|
Securities Held to Maturity:
|
||||
|
2010:
|
||||
|
Municipal Securities
|
$6,125 | $6,286 | ||
|
Total
|
$6,125 | $6,286 | ||
|
2009:
|
||||
|
Municipal Securities
|
$7,285 | $7,516 | ||
|
Total
|
$7,285 | $7,516 | ||
|
2008:
|
||||
|
Municipal Securities
|
$9,431 | $9,502 | ||
|
Total
|
$9,431 | $9,502 | ||
For the periods ending December 31, 2010 and 2009, we held
Federal Home Loan Bank (“FHLB”) stock with a book
value approximately equal to its market value in the amounts of
$2.0 million for each year. The Company evaluated its
investment in FHLB stock for
other-than-temporary
impairment as of December 31, 2010, consistent with its
accounting policy. Based on the Company’s evaluation of the
underlying investment, including the long-term nature of the
investment, the liquidity position of the FHLB of Seattle, the
actions being taken by the FHLB of Seattle to address its
regulatory capital situation, and the Company’s intent and
26
Table of Contents
ability to hold the investment for a period of time sufficient
to recover the par value, the Company did not recognize an
other-than-temporary
impairment loss. Even though the Company did not recognize an
other-than-temporary
impairment loss during the twelve-month period ending
December 31, 2010, continued deterioration in the FHLB of
Seattle’s financial position may result in future
impairment losses.
The following table sets forth the market value, maturities and
weighted average pretax yields of our investment portfolio for
the periods indicated as of December 31, 2010:
| Maturity | ||||||||||||||||||
|
Within
|
Over
|
|||||||||||||||||
| 1 Year | 1-5 Years | 5-10 Years | 10 Years | Total | ||||||||||||||
| (In Thousands) | ||||||||||||||||||
|
Securities Available for Sale:
|
||||||||||||||||||
|
U.S. Treasury & government sponsored entities
|
||||||||||||||||||
|
Balance
|
$32,124 | $132,561 | $— | $— | $164,685 | |||||||||||||
|
Weighted Average Yield
|
2.50% | 0.93% | 0.00% | 0.00% | 1.24% | |||||||||||||
|
Municipal Securities
|
||||||||||||||||||
|
Balance
|
— | 3,108 | 4,309 | 2,207 | 9,624 | |||||||||||||
|
Weighted Average Yield
|
0.00% | 2.33% | 4.32% | 4.75% | 3.77% | |||||||||||||
|
U.S. Agency Mortgage-backed Securities
|
||||||||||||||||||
|
Balance
|
— | — | 73 | — | 73 | |||||||||||||
|
Weighted Average Yield
|
0.00% | 0.00% | 4.45% | 0.00% | 4.45% | |||||||||||||
|
Corporate Bonds
|
||||||||||||||||||
|
Balance
|
10,109 | 14,929 | 14,590 | — | 39,628 | |||||||||||||
|
Weighted Average Yield
|
5.18% | 2.67% | 2.17% | 0.00% | 3.13% | |||||||||||||
|
Total
|
||||||||||||||||||
|
Balance
|
42,233 | 150,598 | 18,972 | 2,207 | 214,010 | |||||||||||||
|
Weighted Average Yield
|
3.14% | 1.13% | 2.66% | 4.75% | 1.70% | |||||||||||||
|
Securities Held to Maturity:
|
||||||||||||||||||
|
Municipal Securities
|
||||||||||||||||||
|
Balance
|
$2,325 | $1,532 | $2,429 | $— | $6,286 | |||||||||||||
|
Weighted Average Yield
|
3.84% | 4.15% | 4.16% | 0.00% | 4.04% | |||||||||||||
At December 31, 2010, we held no securities of any single
issuer (other than government sponsored entities) that exceeded
10% of our shareholders’ equity.
Loans
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.
All of our loans and credit lines are subject to approval
procedures and amount limitations. These limitations apply to
the borrower’s 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 $21 million at
December 31, 2010. At December 31, 2010, the Company
had four relationships whose total direct and indirect
commitments exceeded $21 million; however, no individual
direct relationship exceeded the limit. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Provision for
Loan Losses.”
27
Table of Contents
Our lending operations are guided by loan policies, which
outline the basic policies and procedures by which lending
operations are conducted. Generally, the policies address our
desired loan types, target markets, underwriting and collateral
requirements, terms, interest rate and yield considerations, and
compliance with laws and regulations. The policies are reviewed
and approved annually by the Board of Directors. We supplement
our own supervision of the loan underwriting and approval
process with periodic loan reviews by experienced officers who
examine quality, loan documentation, and compliance with laws
and regulations. Our Quality Assurance department also provides
independent, detailed financial analysis of our largest, most
complex loans. In addition, the department, along with the Chief
Lending Officer and others in the Loan Administration
department, has developed processes to analyze and manage
various concentrations of credit within the overall loan
portfolio. The Loan Administration department has also enhanced
the procedures and processes for the analysis and reporting of
problem loans along with the development of strategies to
resolve them. Finally, our Internal Audit department also
performs an independent review of each loan portfolio for
compliance with loan policy as well as a review of credit
quality. The Internal Audit review follows the FDIC sampling
guidelines, and a review of each portfolio is performed on an
annual basis.
Loans increased to $671.8 million at December 31,
2010, compared to $655 million at December 31, 2009,
and $711.3 million December 31, 2008. Though average
loan balances for 2010 decreased from 2009, generally year end
loan volumes were either up or consistent with 2009 across all
categories. Total loans represented 64% and 65% of total assets
at December 31, 2010 and 2009, respectively.
The following table sets forth at the dates indicated our loan
portfolio composition by type of loan, excluding loans held for
sale:
| December 31, | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||||||
|
Percent
|
Percent
|
Percent
|
Percent
|
Percent
|
||||||||||||||||||||||||||||||||||||
| Amount | of total | Amount | of total | Amount | of total | Amount | of total | Amount | of total | |||||||||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Commercial loans
|
$256,971 | 38.25% | $248,205 | 37.89% | $293,249 | 41.23% | $284,956 | 39.87% | $287,281 | 40.06% | ||||||||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||||||||||||||
|
Construction
|
62,620 | 9.32% | 62,573 | 9.55% | 100,438 | 14.12% | 138,070 | 19.32% | 153,059 | 21.35% | ||||||||||||||||||||||||||||||
|
Real estate term
|
312,128 | 46.46% | 301,816 | 46.08% | 268,864 | 37.80% | 243,245 | 34.03% | 237,599 | 33.14% | ||||||||||||||||||||||||||||||
|
Home equity lines and other consumer
|
43,264 | 6.44% | 45,243 | 6.91% | 51,447 | 7.23% | 51,274 | 7.17% | 42,140 | 5.88% | ||||||||||||||||||||||||||||||
|
Total
|
674,983 | 100.47% | 657,837 | 100.43% | 713,998 | 100.39% | 717,545 | 100.38% | 720,079 | 100.42% | ||||||||||||||||||||||||||||||
|
Less:
|
||||||||||||||||||||||||||||||||||||||||
|
Unearned loan fees net of origination costs
|
(3,171) | -0.47% | (2,798) | -0.43% | (2,712) | -0.39% | (2,744) | -0.38% | (3,023) | -0.42% | ||||||||||||||||||||||||||||||
|
Net loans
|
$671,812 | 100.00% | $655,039 | 100.00% | $711,286 | 100.00% | $714,801 | 100.00% | $717,056 | 100.00% | ||||||||||||||||||||||||||||||
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 38%
of our total loans outstanding as of December 31, 2010 and
reprice more frequently than other types of loans, such as real
estate loans. More frequent repricing means that interest cash
flows from commercial loans are more sensitive to changes in
interest rates. In a rising interest rate environment, our
philosophy is to emphasize the pricing of loans on a floating
rate basis, which allows these loans to reprice more frequently
and to contribute positively to our net interest margin. The
majority of these loans reprice to an index based upon the prime
rate of interest. In 2008, the Company began to implement floors
in its loans as they were originated or renewed during the year.
Commercial Real Estate:
We are an active lender in
the commercial real estate market. At December 31, 2010,
our commercial real estate loans were $312.1 million, or
46% 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 67% of these
loans originated by Northrim resets every one to five years
based on the spread over an index rate, and 7% reset on either a
daily or monthly basis. The indices for these loans have
historically been prime or the respective Treasury rate. In
2008, the Company began to use the interest rates of the Federal
Home Loan Bank of Seattle as an additional index. In addition,
the Company began to implement floors in its interest rates for
loans originated or renewed during the year.
28
Table of Contents
We may sell all or a portion of our commercial real estate loans
to two State of Alaska entities that were established to provide
long-term financing in the State, AIDEA, and the Alaska Housing
Finance Corporation (“AHFC”). We may sell up to a 90%
loan participation to AIDEA. AIDEA’s 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 AIDEA’s 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.
Construction Loans:
We 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.
Additionally, we provide land development and residential
subdivision construction loans. We originate
one-to-four-family
residential and condominium construction loans to builders for
construction of homes.
The Company’s construction loans remained consistent in
2010 and 2009 at $62.6 million, down from
$100.4 million in 2008 due to the continued decrease in new
construction activity. The Company expects continued slowness in
residential construction in 2011 and a decrease in its
construction loan balances due in part to several commercial
real estate construction loans that are expected to convert to
term real estate loans once construction is complete in 2011.
However, due to its efforts to maintain market share, it expects
its construction loan totals to remain constant in 2011.
Home Equity Lines and Other Consumer
Loans:
We provide personal loans for automobiles,
recreational vehicles, boats, and other larger consumer
purchases. We provide both secured and unsecured consumer credit
lines to accommodate the needs of our individual customers, with
home equity lines of credit serving as the major product in this
area.
Maturities and Sensitivities of Loans to Change in
Interest Rates:
The following table presents the
aggregate maturity data of our loan portfolio, excluding loans
held for sale, at December 31, 2010:
| Maturity | ||||||||||||||||
|
Within
|
Over
|
|||||||||||||||
| 1 Year | 1-5 Years | 5 Years | Total | |||||||||||||
| (In Thousands) | ||||||||||||||||
|
Commercial
|
$104,722 | $102,984 | $49,265 | $256,971 | ||||||||||||
|
Construction
|
49,855 | 221 | 12,544 | 62,620 | ||||||||||||
|
Real estate term
|
33,246 | 72,111 | 206,771 | 312,128 | ||||||||||||
|
Home equity lines and other consumer
|
1,203 | 8,733 | 33,328 | 43,264 | ||||||||||||
|
Total
|
$189,026 | $184,049 | $301,908 | $674,983 | ||||||||||||
|
Fixed interest rate
|
$94,020 | $90,309 | $65,598 | $249,927 | ||||||||||||
|
Floating interest rate
|
95,006 | 93,740 | 236,310 | 425,056 | ||||||||||||
|
Total
|
$189,026 | $184,049 | $301,908 | $674,983 | ||||||||||||
At December 31, 2010, 58% of the portfolio was scheduled to
mature or reprice in 2011 with 36% scheduled to mature or
reprice between 2012 and 2015.
Loans Held for Sale:
During 2009, the Company
entered into an agreement to purchase residential loans from our
mortgage affiliate, RML, in anticipation of higher than normal
refinance activity in the Anchorage market. The Company then
sold these loans in the secondary market. All loans purchased
and sold in 2010 and 2009 were newly originated loans that did
not affect nonperforming loans. The Company purchased
$70.4 million and sold $64.9 million in residential
loans during 2010 and recognized $23,000 in gains related to
these transactions in the 2010. The Company purchased and sold
$75.1 million in residential loans during 2009 and
recognized $64,000 in gains related to these transactions in the
2009. There were $5.6 million in loans held for sale as of
December 31, 2010 and none held at December 31, 2009.
29
Table of Contents
Nonperforming
Assets
Nonperforming assets consist of nonaccrual loans, accruing loans
that are 90 days or more past due, restructured loans, and
other real estate owned. The following table sets forth
information regarding our nonperforming loans and total
nonperforming assets:
| December 31, | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||
| (In Thousands) | ||||||||||||||||||
|
Nonperforming loans
|
||||||||||||||||||
|
Nonaccrual loans
|
$11,414 | $12,738 | $20,593 | $9,673 | $5,176 | |||||||||||||
|
Accruing loans past due 90 days or more
|
— | 1,000 | 5,411 | 1,665 | 708 | |||||||||||||
|
Troubled debt restructuring
|
— | 3,754 | — | — | 748 | |||||||||||||
|
Total nonperforming loans
|
$11,414 | $17,492 | $26,004 | $11,338 | $6,632 | |||||||||||||
|
Real estate owned & repossessed assets
|
10,403 | 17,355 | 12,617 | 4,445 | 717 | |||||||||||||
|
Total nonperforming assets
|
$21,817 | $34,847 | $38,621 | $15,783 | $7,349 | |||||||||||||
|
Allowance for loan losses to portfolio loans
|
2.14% | 2.00% | 1.81% | 1.64% | 1.69% | |||||||||||||
|
Allowance for loan losses to nonperforming loans
|
126% | 75% | 50% | 104% | 183% | |||||||||||||
|
Nonperforming loans to portfolio loans
|
1.70% | 2.67% | 3.66% | 1.59% | 0.92% | |||||||||||||
|
Nonperforming assets to total assets
|
2.07% | 3.47% | 3.84% | 1.56% | 0.79% | |||||||||||||
Nonaccrual, Accruing Loans 90 Days or More Past Due, and
Troubled Debt Restructuring (“TDR”):
The
Company’s financial statements are prepared on the accrual
basis of accounting, including recognition of interest income on
its loan portfolio, unless a loan is placed on a nonaccrual
basis. Loans are placed on a nonaccrual basis when management
believes serious doubt exists about the collectability of
principal or interest. Our policy generally is to discontinue
the accrual of interest on all loans 90 days or more past
due unless they are well secured and in the process of
collection. Cash payments on nonaccrual loans are directly
applied to the principal balance. The amount of unrecognized
interest on nonaccrual loans was $1.2 million,
$1.4 million, and $1.9 million, in 2010, 2009, and
2008, respectively. There was no interest income included in net
income for the years ended 2010, 2009 or 2008 related to
nonaccrual loans. The Company had one relationship that
represented more than 10% of nonaccrual loans as of
December 31, 2010.
TDRs are those loans for which concessions, including the
reduction of interest rates below a rate otherwise available to
that borrower, have been granted due to the borrower’s
weakened financial condition. Interest on TDRs 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. The Company had no loans classified as TDRs as of
December 31, 2010 or December 31, 2008. At
December 31, 2009 the Company had one $3.8 million
loan classified as a TDR for a commercial relationship that had
been restructured in the third quarter of 2009. When this loan
was restructured, it was converted into two separate loans. One
of the loans was charged off, and the other loan was made at
market terms. The second loan returned to performing status in
2010.
Total nonperforming loans at December 31, 2010 decreased
$6.1 million from December 31, 2009 and decreased
$8.5 million at December 31, 2009 from
December 31, 2008. The decrease in nonperforming loans at
December 31, 2010 as compared to December 31, 2009 is
due to a $3.8 million decrease in TDRs, a $1.3 million
decrease in nonaccrual loans, and a $1 million decrease in
accruing loans past due 90 days or more. The decrease in
nonperforming loans at December 31, 2009 as compared to
December 31, 2008 is due to a $7.9 million decrease in
nonaccrual loans and a $4.4 million decrease in accruing
loans past due 90 days or more.
Loans Measured for Impairment, Other Real Estate Owned and
Repossessed Assets, and Potential Problem Loans:
At
December 31, 2010, the Company had $18.3 million in
loans measured for impairment and $10.4 million in OREO and
repossessed assets as compared to $46.3 million and
$17.4 million at December 31, 2009, respectively.
Repossessed assets of $48,000 are recorded in other assets in
the Consolidated Balance Sheet.
At December 31, 2010, management had identified potential
problem loans of $8.8 million as compared to potential
problem loans of $17 million at December 31, 2009.
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. The
$8.2 million decrease in potential problem loans at
December 31, 2010 from December 31, 2009 is primarily
30
Table of Contents
due to the transfer of one land development project, one
commercial real estate property and one commercial loan to
nonaccrual status in 2010. Charge offs, pay downs, and upgrades,
which were only partially offset by $2.7 million in
additions in 2010, also contributed to the decrease in 2010.
At December 31, 2010 and 2009 the Company held
$10.4 million and $17.4 million, respectively, as OREO
and repossessed assets. At December 31, 2010, OREO and
repossessed assets consist of $4.7 million in condominiums,
$4.4 million in residential lots in various stages of
development, $1.2 million in single family residences,
$99,000 in commercial property and $48,000 in artwork. All OREO
property is located in Alaska. The Bank initiates foreclosure
proceedings to recover and sell collateral pledged by a debtor
to secure a loan based on various events of default and
circumstances related to loans that are secured by either
commercial or residential real property. These events and
circumstances include delinquencies, the Company’s
relationship with the borrower, and the borrower’s ability
to repay the loan via a source other than the collateral. If the
loan has not yet matured, the debtors may cure the events of
default up to the time of sale to retain their interest in the
collateral. Failure to cure the defaults will result in the
debtor losing ownership interest in the property, which is taken
by the creditor, or high bidder at a foreclosure sale.
During 2010, additions to OREO totaled $3.1 million and
included $1.7 million in residential lots,
$1.2 million in single family residences, $189,000 in
condominiums, and $252,000 in other properties. During 2010, the
Company received approximately $11.1 million in proceeds
for the sale of OREO which included $8.8 million from the
sale of condominiums, $1.8 million from the sale of
residential lots, $228,000 from the sale of single family
residences, and $319,000 from the sale of other properties.
The Company recognized $1.3 million in gains and $120,000
in losses on the sale of seventy-nine individual OREO properties
in 2010. The Company also recognized $522,000 in gains on sales
previously deferred, for a net gain of $1.7 million for the
year ended December 31, 2010. The Company had deferred
$153,000 in gains on the sale of OREO properties at
December 31, 2010. The Company recognized $548,000 in gains
and $101,000 in losses on the sale of fifty individual OREO
properties in 2009. The Company also amortized $6,000 in
deferred gain on a 2007 sale for a net gain of $453,000 for the
year ended December 31, 2009. The Company had deferred
$522,000 in gains on the sale of OREO properties at
December 31, 2009.
The Company made loans to facilitate the sale of OREO of
$6.1 million and $2.6 million in 2010 and 2009. The
Company did not make any loans to facilitate the sale of OREO in
2008. Our underwriting policies and procedures for loans to
facilitate the sale of other real estate owned are no different
than our standard loan policies and procedures.
The Company recognized impairments of $250,000, $825,000 and
$2 million in 2010, 2009, and 2008, respectively, due to
adjustments to the Company’s estimate of the fair value of
certain properties based on changes in estimated costs to
complete the projects and changes in the Anchorage and Fairbanks
real estate markets.
The following summarizes OREO activity for the periods indicated:
| December 31, | 2010 | 2009 | 2008 | |||||||
| (In Thousands) | ||||||||||
|
Balance, beginning of the year
|
$17,355 | $12,617 | $4,445 | |||||||
|
Transfers from loans
|
2,841 | 12,441 | 9,395 | |||||||
|
Investment in other real estate owned
|
235 | 1,699 | 3,273 | |||||||
|
Proceeds from the sale of other real estate owned
|
(11,124) | (9,120) | (2,583) | |||||||
|
Gain on sale of other real estate owned, net
|
1,663 | 453 | 45 | |||||||
|
Deferred gain on sale of other real estate owned
|
(369) | 90 | — | |||||||
|
Impairment on other real estate owned
|
(246) | (825) | (1,958) | |||||||
|
Balance, End of Year
|
$10,355 | $17,355 | $12,617 | |||||||
Allowance
for Loan Losses and Reserve for Unfunded
Commitments
The Company maintains an Allowance to reflect losses inherent in
the loan portfolio. The Allowance is increased by provisions for
loan losses and loan recoveries and decreased by loan
charge-offs. The size of the Allowance is determined through
quarterly assessments of probable estimated losses in the loan
portfolio. Our methodology for making such assessments and
determining the adequacy of the Allowance includes the following
key elements:
| • | A specific allocation for impaired loans. Management determined the fair value of the majority of these loans based on the underlying collateral values. This analysis is based upon a specific analysis for each impaired loan, including appraisals on loans secured by real property, management’s assessment of the current market, recent payment history, and an |
31
Table of Contents
| evaluation of other sources of repayment. In-house evaluations of fair value are used in the impairment analysis in some situations. Inputs to the in-house evaluation process include information about sales of comparable properties in the appropriate markets and changes in tax assessed values. The Company obtains appraisals on real and personal property that secure its loans during the loan origination process in accordance with regulatory guidance and its loan policy. The Company obtains updated appraisals on loans secured by real or personal property based upon its assessment of changes in the current market or particular projects or properties, information from other current appraisals, and other sources of information. Appraisals may be adjusted downward by the Company based on our evaluation of the facts and circumstances on a case by case basis. External appraisals may be discounted when management believes that the absorption period used in the appraisal is unrealistic, when expected liquidation costs exceed those included in the appraisal, or when management’s evaluation of deteriorating market conditions warrant an adjustment. Additionally, the Company may also adjust appraisals in the above circumstances between appraisal dates. The Company uses the information provided in these updated appraisals along with its evaluation of all other information available on a particular property as it assesses the collateral coverage on its performing and nonperforming loans and the impact that may have on the adequacy of its Allowance. The specific allowance for impaired loans, as well as the overall Allowance, may increase based on the Company’s assessment of updated appraisals. See Note 21 of the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of the Company’s estimation of the fair value of impaired loans. |
When the Company determines that a loss has occurred on an
impaired loan, a charge-off equal to the difference between
carrying value and fair value is recorded. If a specific
allowance is deemed necessary for a loan, and then that loan is
partially charged off, the loan remains classified as a
nonperforming loan after the charge-off is recognized. Loans
measured for impairment based on collateral value and all other
loans measured for impairment are accounted for in the same way.
The total charge-off rate for nonperforming loans as of
December 31, 2010 and 2009 was 24% and 18%, respectively.
| • | A general allocation. The Company has identified segments and classes of loans not considered impaired for purposes of establishing the general allocation allowance. The Company determined the disaggregation of the loan portfolio into segments and classes based on our assessment of how different pools of loans with like characteristics in the portfolio behave over time. This determination is based on historical experience and management’s assessment of how current facts and circumstances are expected to affect the loan portfolio. |
The Company first disaggregates the loan portfolio into the
following segments: commercial, construction, real estate term,
and home equity lines and other consumer loans. Then the Company
further disaggregates each of these segments into the following
classes, which are also known as risk classifications:
excellent, good, satisfactory, watch, special mention,
substandard, doubtful, and loss. The Company had
$62.6 million in construction loans at December 31,
2010, and $20.8 million of those loans have interest
reserves as of December 31, 2010. Management does not
consider construction loans with interest reserves to be a
material component of the portfolio for purposes of the
Allowance calculation.
After the portfolio has been disaggregated into segments and
classes, the Company calculates a general reserve for each
segment and class based on the average three year loss history
for each segment and class. This general reserve is then
adjusted for qualitative factors by segment and class.
| • | An unallocated reserve. The unallocated portion of the Allowance provides for other credit losses inherent in our loan portfolio that may not have been contemplated in the specific and general components of the Allowance, and it acknowledges the inherent imprecision of all loss prediction models. The unallocated component is reviewed periodically based on trends in credit losses and overall economic conditions. |
At December 31, 2010, the unallocated allowance as a
percentage of the total Allowance was 14%. The unallocated
allowance as a percentage of the total Allowance was 55% at
December 31, 2009 and 41% at December 31, 2008 as
reported in the Company’s
Form 10-K
for the year ended December 31, 2009. The decrease in the
unallocated allowance as a percentage of the total Allowance at
December 31, 2010 is due in part to an enhancement to the
Company’s methodology. The Company refined its method of
estimating the Allowance in the third quarter of 2010. The
Company elected this enhanced method of estimating the Allowance
because we believe that it more accurately allocates expected
losses by loan segment and class. The Company performed a
retrospective review of the Allowance as of December 31,
2009, March 31, 2010 and June 30, 2010 and determined
that this refinement does not have an effect on the
Company’s financial position, results of operations, or
earnings per share for any period; rather, the refined method of
estimating the Allowance changes how the total Allowance is
allocated among the Company’s loan types and the
unallocated portion of the Allowance.
32
Table of Contents
The following table summarizes what the comparative data
regarding the Allowance would have looked like at the periods
indicated if the Company had used the enhanced methodology to
calculate the Allowance at December 31, 2009:
| December 31, 2010 | December 31, 2009 | |||||||||||||||
|
Impaired
|
Formula-based
|
Impaired
|
Formula-based
|
|||||||||||||
| Allowance applicable to: | Total | Loans | Amounts | Other | Total | Loans | Amounts | Other | ||||||||
| (In Thousands) | ||||||||||||||||
|
Commercial
|
$6,374 | $274 | $6,100 | $— | $4,964 | $850 | $4,114 | $— | ||||||||
|
Construction
|
1,035 | 73 | 962 | — | 2,156 | 869 | 1,287 | — | ||||||||
|
Real estate term
|
4,270 | 36 | 4,234 | — | 2,680 | 143 | 2,537 | — | ||||||||
|
Home equity lines and other consumer
|
741 | — | 741 | — | 501 | 1 | 500 | — | ||||||||
|
Unallocated
|
1,986 | — | — | 1,986 | 2,807 | — | — | 2,807 | ||||||||
|
Total
|
$14,406 | $383 | $12,037 | $1,986 | $13,108 | $1,863 | $8,438 | $2,807 | ||||||||
Under the enhanced methodology, the unallocated allowance as a
percentage of the total Allowance at December 31, 2010 is
14%, and at December 31, 2009 it would have been 21%. The
decrease in the unallocated allowance in 2010 as compared to
2009 under the enhanced methodology is due to a decrease in
management’s assessment of the overall inherent risk in the
portfolio. Nonperforming assets decreased to $21.8 million
at December 31, 2010 from $34.8 million at
December 31, 2009 and $38.6 million at
December 31, 2008. Additionally, the net charge off rate
decreased to 0.66% for 2010 from 1.00% in 2009 and 0.86% in 2008.
The following table shows the allocation of the Allowance for
the periods indicated and includes allocations calculated under
the enhanced methodology for 2010. Allocations shown for 2009,
2008, 2007 and 2006 were calculated using the legacy methodology
and were reported as such in prior years:
|
|
||||||||||||||||||||||||||||||||||||||||
| December 31, | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
% of Total
|
% of Total
|
% of Total
|
% of Total
|
% of Total
|
||||||||||||||||||||||||||||||||||||
| Allowance applicable to: | Amount | Loans (1) | Amount | Loans (1) | Amount | Loans (1) | Amount | Loans (1) | Amount | Loans (1) | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Commercial
|
$6,374 | 38% | $3,962 | 38% | $5,558 | 41% | $6,496 | 40% | $8,208 | 40% | ||||||||||||||||||||||||||||||
|
Construction
|
1,035 | 9% | 1,365 | 9% | 1,736 | 14% | 940 | 19% | 330 | 21% | ||||||||||||||||||||||||||||||
|
Real estate term
|
4,270 | 46% | 565 | 47% | 306 | 38% | 1,661 | 34% | 964 | 33% | ||||||||||||||||||||||||||||||
|
Home equity lines and other consumer
|
741 | 7% | 50 | 6% | 61 | 7% | 16 | 7% | 6 | 6% | ||||||||||||||||||||||||||||||
|
Unallocated
|
1,986 | 0% | 7,166 | 0% | 5,239 | 0% | 2,622 | 0% | 2,617 | 0% | ||||||||||||||||||||||||||||||
|
Total
|
$14,406 | 100% | $13,108 | 100% | $12,900 | 100% | $11,735 | 100% | $12,125 | 100% | ||||||||||||||||||||||||||||||
| (1) | Represents percentage of this category of loans to total loans. |
33
Table of Contents
The following table sets forth information regarding changes in
our Allowance for the periods indicated:
| December 31, | 2010 | 2009 | 2008 | 2007 | 2006 | |||||
| (In Thousands) | ||||||||||
|
Balance at beginning of period
|
$13,108 | $12,900 | $11,735 | $12,125 | $10,706 | |||||
|
Charge-offs:
|
||||||||||
|
Commercial loans
|
(3,919) | (3,372) | (4,187) | (4,291) | (2,545) | |||||
|
Construction loans
|
(1,519) | (1,308) | (1,004) | (2,982) | — | |||||
|
Real estate loans
|
(342) | (2,478) | (1,402) | (599) | — | |||||
|
Home equity and other consumer loans
|
(322) | (509) | (132) | (45) | (72) | |||||
|
Total charge-offs
|
(6,102) | (7,667) | (6,725) | (7,917) | (2,617) | |||||
|
Recoveries:
|
||||||||||
|
Commercial loans
|
1,490 | 736 | 577 | 1,723 | 1,086 | |||||
|
Construction loans
|
4 | 7 | 61 | 50 | — | |||||
|
Real estate loans
|
232 | 11 | 3 | — | 355 | |||||
|
Home equity and other consumer loans
|
91 | 55 | 50 | 21 | 31 | |||||
|
Total recoveries
|
1,817 | 809 | 691 | 1,794 | 1,472 | |||||
|
Charge-offs net of recoveries
|
(4,285) | (6,858) | (6,034) | (6,123) | (1,145) | |||||
|
Allowance aquired with Alaska First acquisition
|
— | — | — | 220 | — | |||||
|
Provision for loan losses
|
5,583 | 7,066 | 7,199 | 5,513 | 2,564 | |||||
|
Balance at end of period
|
$14,406 | $13,108 | $12,900 | $11,735 | $12,125 | |||||
|
Ratio of net charge-offs to average loans outstanding during the
period
|
0.66% | 1.00% | 0.86% | 0.86% | 0.16% | |||||
The decrease in real estate charge-offs in 2010 as compared to
2009 and the increase in 2009 as compared to 2008 is related to
one borrower. The increase in real estate charge-offs in 2008 as
compared to 2007 related to two borrowers. The decrease in the
provision for loan losses in 2010 as compared to 2009 is due
primarily to the decrease in net charge-offs for the year. This
was partially offset by an increase in the provision for loan
losses to account for the increase in gross loans.
While management believes that it uses the best information
available to determine the Allowance, unforeseen market
conditions and other events could result in adjustment to the
Allowance, and net income could be significantly affected if
circumstances differed substantially from the assumptions used
in making the final determination.
Purchased
Receivables
We purchase accounts receivable from our business customers and
provide them with short-term working capital. We provide this
service to our customers in Alaska and in Washington and Oregon
through NFS. Our purchased receivable 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.
Our purchased receivable balances increased in 2010 to
$16.5 million, as compared to $7.3 million in 2009.
This increase is primarily due to a large funding for one
purchased receivable customer that occurred in the fourth
quarter of 2010. The Company expects that purchased receivable
balances will increase in the future as NFS continues to expand
its customer base.
Deposits
Deposits are our primary source of funds. Total deposits
increased 5% to $892.1 million at December 31, 2010
from $853.1 million at December 31, 2009. Our deposits
generally are expected to fluctuate according to the level of
our market share, economic conditions, and normal seasonal
trends.
34
Table of Contents
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, | 2010 | 2009 | 2008 | |||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
| balance | rate paid | balance | rate paid | balance | rate paid | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
|
Interest-bearing demand accounts
|
$125,360 | 0.14% | $115,065 | 0.15% | $97,171 | 0.59% | ||||||||||||||||||
|
Money market accounts
|
132,264 | 0.51% | 127,651 | 0.58% | 187,779 | 1.76% | ||||||||||||||||||
|
Savings accounts
|
183,636 | 0.61% | 169,812 | 0.73% | 187,225 | 1.84% | ||||||||||||||||||
|
Certificates of deposit
|
147,081 | 1.84% | 173,777 | 2.10% | 145,153 | 3.34% | ||||||||||||||||||
|
Total interest-bearing accounts
|
588,341 | 0.79% | 586,305 | 0.99% | 617,328 | 1.97% | ||||||||||||||||||
|
Noninterest-bearing demand accounts
|
264,853 | 241,547 | 212,447 | |||||||||||||||||||||
|
Total average deposits
|
$853,194 | $827,852 | $829,775 | |||||||||||||||||||||
Certificates of Deposit:
The only deposit category
with stated maturity dates is certificates of deposit. At
December 31, 2010, we had $138.2 million in
certificates of deposit, of which $103.7 million, or 75%,
are scheduled to mature in 2011. At December 31, 2010, the
Company’s certificates of deposit decreased to
$138.2 million as compared to $144.9 million at
December 31, 2009 as customers moved from certificates of
deposit to other interest-bearing accounts. The aggregate amount
of certificates of deposit in amounts of $100,000 or more at
December 31, 2010, and 2009, was $84.3 million and
$80.2 million, respectively. The following table sets forth
the amount outstanding of certificates of deposits in amounts of
$100,000 or more by time remaining until maturity and percentage
of total deposits:
| Year Ending December 31, 2010 | ||||||||
|
Time Certificates of Deposits
|
||||||||
| of $100,000 or More | ||||||||
|
Percent of
|
||||||||
|
Total
|
||||||||
| Amount | Deposits | |||||||
| (In Thousands) | ||||||||
|
Amounts maturing in:
|
||||||||
|
Three months or less
|
$18,412 | 22% | ||||||
|
Over 3 through 6 months
|
10,502 | 12% | ||||||
|
Over 6 through 12 months
|
34,848 | 41% | ||||||
|
Over 12 months
|
20,553 | 24% | ||||||
|
Total
|
$84,315 | 100% | ||||||
The Company is also a member of the Certificate of Deposit
Account Registry System (“CDARS”) which is a network
of approximately 3,000 banks throughout the United States. The
CDARS system was founded in 2003 and allows participating banks
to exchange FDIC insurance coverage so that 100% of the balance
of their customers’ certificates of deposit are fully
subject to FDIC insurance. At December 31, 2010, the
Company had no CDARS certificates of deposits as compared to
$3.3 million at December 31, 2009.
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, 2010, was $100.3 million, a
decrease of $4.5 million as compared to the balance of
$104.8 million at December 31, 2009 as customers moved
from the Alaska CD account to other interest-bearing accounts.
35
Table of Contents
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. We did not hold any certificates
of deposit for the Alaska Permanent Fund at December 31,
2010 or 2009.
Borrowings
FHLB:
At December 31, 2010, our maximum
borrowing line from the FHLB was $120.3 million,
approximately 11% of the Company’s assets, subject to the
FHLB’s collateral requirements. FHLB advances are dependent
on the availability of acceptable collateral such as marketable
securities or real estate loans, although all FHLB advances are
secured by a blanket pledge of the Company’s assets. There
was no outstanding balance on this line at December 31,
2010 or 2009. At December 31, 2008 there was
$11.0 million outstanding on the line. The decrease in the
outstanding balance of the line at December 31, 2009 as
compared to December 31, 2008 was the result of the early
pay off of the advances in September 2009. The advances had a
blended rate of 5.05% and an average remaining life of over
8 years and resulted in a prepayment penalty of $718,000 in
2009.
Federal Reserve Bank:
The Company entered into a
note agreement with the Federal Reserve Bank on
December 27, 1996 for the payment of tax deposits. See
“Other Short-term Borrowings” below for additional
detail regarding this agreement.
The Federal Reserve Bank is holding $91.2 million of loans
as collateral to secure advances made through the discount
window on December 31, 2010. There were no discount window
advances outstanding at December 31, 2010 and 2009.
Other Long-term Borrowings:
The Company purchased
its main office facility for $12.9 million on July 1,
2008. In this transaction, the Company, through NBL, assumed an
existing loan secured by the building in an amount of
approximately $5.1 million. At December 31, 2010, the
outstanding balance on this loan was $4.8 million. This
loan has a maturity date of April 1, 2014.
Other Short-term Borrowings:
The Company entered
into a note agreement with the Federal Reserve Bank on
December 27, 1996 for the payment of tax deposits. Under
this agreement, the Company takes in tax payments from customers
and reports these payments to the Federal Reserve Bank. The
Federal Reserve has the option to call the tax deposits at any
time. The balance at December 31, 2010, and 2009, was
$620,000 and $690,000, respectively, which was secured by
investment securities.
Securities sold under agreements to repurchase were
$12.9 million and $6.7 million, respectively, for
December 31, 2010 and 2009. The average balance outstanding
of securities sold under agreements to repurchase during 2010
and 2009 was $10.2 million and $4.3 million,
respectively, and the maximum outstanding at any month-end was
$14.2 million and $9.1 million, respectively, during
the same time periods. The securities sold under agreements to
repurchase are held by the Federal Home Loan Bank under the
Company’s control.
The Company did not have any other short-term borrowings at
December 31, 2010 and December 31, 2009. There were no
short-term (original maturity of one year or less) borrowings
for which the average balance outstanding during 2010, 2009 and
2008 exceeded 30% of shareholders’ equity at
December 31, 2010, December 31, 2009, and
December 31, 2008.
36
Table of Contents
Contractual
Obligations
The following table references contractual obligations of the
Company for the periods indicated:
| Payments Due by Period | ||||||||||||||||||
|
Within
|
Over
|
|||||||||||||||||
| 1 Year | 1-3 Years | 3-5 Years | 5 Years | Total | ||||||||||||||
| (In Thousands) | ||||||||||||||||||
|
December 31, 2010:
|
||||||||||||||||||
|
Certificates of deposit
|
$103,704 | $34,137 | $332 | $— | $138,173 | |||||||||||||
|
Short-term debt obligations
|
13,494 | — | — | — | 13,494 | |||||||||||||
|
Long-term debt obligations
|
141 | 304 | 4,321 | — | 4,766 | |||||||||||||
|
Junior subordinated debentures
|
— | — | — | 18,558 | 18,558 | |||||||||||||
|
Operating lease obligations
|
748 | 1,076 | 781 | 4,381 | 6,986 | |||||||||||||
|
Other long-term liabilities
|
317 | — | — | — | 317 | |||||||||||||
|
Total
|
$118,404 | $35,517 | $5,434 | $22,939 | $182,294 | |||||||||||||
|
December 31, 2009:
|
||||||||||||||||||
|
Certificates of deposit
|
$100,099 | $44,251 | $479 | $22 | $144,851 | |||||||||||||
|
Short-term debt obligations
|
7,423 | — | — | — | 7,423 | |||||||||||||
|
Long-term debt obligations
|
132 | 287 | 4,478 | — | 4,897 | |||||||||||||
|
Junior subordinated debentures
|
— | — | — | 18,558 | 18,558 | |||||||||||||
|
Operating lease obligations
|
888 | 1,450 | 863 | 4,735 | 7,936 | |||||||||||||
|
Other long-term liabilities
|
412 | — | — | — | 412 | |||||||||||||
|
Total
|
$108,954 | $45,988 | $5,820 | $23,315 | $184,077 | |||||||||||||
Long-term debt obligations consist of (a) $4.8 million
amortizing note that was assumed by NBL on July 1, 2008,
when the Company’s main office facility was purchased that
matures on April 1, 2014 and bears interest at 5.95%,
(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
90-day
LIBOR
plus 3.15%, adjusted quarterly, and (c) $10.3 million
junior subordinated debentures that were originated on
December 16, 2005, mature on March 15, 2036, and bear
interest at a rate of
90-day
LIBOR
plus 1.37%, adjusted quarterly. The operating lease obligations
are more fully described in Note 20 of the Company’s
Financial Statements attached to this 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 U.S.A.
Institutional Tax Credit Fund LVII L.P. (“USA
57”) in December 2006. The investment in USA 57 is expected
to be fully funded in 2011.
Off-Balance
Sheet Arrangements — Commitments and Contingent
Liabilities
The Company is a party to financial instruments with off-balance
sheet risk. Among the off-balance sheet items entered into in
the ordinary course of business are commitments to extend credit
and the issuance of letters of credit. These instruments
involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized on the balance
sheet. Certain commitments are collateralized. 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.
As of December 31, 2010 we had commitments to extend credit
of $181.3 million which were not reflected on our balance
sheet. 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.
Collateral held relating to these commitments varies, but
generally includes real estate, inventory, accounts receivable,
and equipment. Our exposure to credit loss under commitments to
extend credit is represented by the amount of these commitments.
Since many of the commitments are expected to expire without
being drawn upon, these total commitment amounts do not
necessarily represent future cash requirements. For additional
information regarding the Company’s off-balance sheet
arrangement, see Note 19 and “Liquidity and Capital
Resources” below.
As of December 31, 2010 we had standby letters of credit of
$19.1 million which were not reflected on our balance
sheet. Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer
to a third
37
Table of Contents
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
customer’s creditworthiness.
Our total unfunded lending commitments at December 31,
2010, which includes commitments to extend credit and standby
letters of credit, were $200.4 million, and we do not
expect that all of these loans are likely to be fully drawn upon
at any one time. The Company has established a reserve for
losses related to these commitments that is recorded in other
liabilities on the consolidated balance sheets.
Liquidity
and Capital Resources
The Company is a single bank holding company and its primary
ongoing source of liquidity is from dividends received from the
Bank. Such dividends arise from the cash flow and earnings of
the Bank. Banking regulations and regulatory authorities may
limit the amount of, or require the Bank to obtain certain
approvals before paying dividends to the Company. Given that the
Bank is currently “well-capitalized”, the Company
expects to continue to receive dividends from the Bank.
The Bank manages its liquidity through its Asset and Liability
Committee. 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 commitments to fund
loans and letters of credit at December 31, 2010, were
$200.4 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, 2010, were $892.1 million.
As shown in the Consolidated Statements of Cash Flows, net cash
provided by operating activities was $18.3 million,
$10 million, and $16.3 million for 2010, 2009 and
2008, respectively. The primary source of cash provided by
operating activities was positive net income in each of these
periods. Net cash of $60.9 million and $27 million was
used in investing activities in 2010 and 2008 as the Company
invested available cash primarily in available for sale
securities. Net cash provided by investing activities was
$30.4 million in 2009 as the Company collected funds from
loan pay offs. The $41.9 million of cash provided by
financing activities in 2010 primarily consisted of the
$39 million increase in deposits during 2010. Net cash used
in financing activities in 2009 of $11.5 million was the
result of the pay down of borrowings taken on in 2008, which was
partially offset by increased deposit balances. Net cash used in
financing activities in 2008 of $15.2 million resulted from
decreases in deposits and securities sold under repurchase
agreements in 2008, which was partially offset by increased
borrowings.
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,
2010, our current assets were $318.4 million and our funds
available for borrowing under our existing lines of credit were
$192.3 million. Given these sources of liquidity and our
expectations for customer demands for cash and for our operating
cash needs, we believe our sources of liquidity to be sufficient
in the foreseeable future. However, continued deterioration in
the FHLB of Seattle’s financial position may result in
impairment in the value of our FHLB stock, the requirement that
the Company contribute additional funds to recapitalize the FHLB
of Seattle, or a reduction in the Company’s ability to
borrow funds from the FHLB of Seattle, impairing the
Company’s ability to meet liquidity demands.
On February 18, 2011, the Board of Directors approved
payment of a $0.12 per share dividend on March 18, 2011, to
shareholders of record on March 10, 2011. This dividend is
consistent with the Company’s dividends that were declared
and paid in 2010.
In September 2002, our Board of Directors approved a plan
whereby we would periodically repurchase for cash up to
approximately 5%, or 306,372, of our shares of common stock in
the open market. In August of 2004, the Board of Directors
amended the stock repurchase plan and increased the number of
shares available under the program by 5% of total shares
outstanding, or 304,283 shares. In June of 2007, the Board
of Directors amended the stock repurchase plan and increased the
number of shares available under the program by 5% of total
shares outstanding, or 305,029 shares. We have purchased
688,442 shares of our stock under this program through
December 31, 2010 at a total cost of $14.2 million at
an average price of $20.65, which leaves a balance of
227,242 shares available under the stock repurchase
program. 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.
38
Table of Contents
The stock repurchase program had an effect on earnings per share
because it decreased the total number of shares outstanding in
2007 and 2006 by 137,500 and 17,500 shares respectively.
The Company did not repurchase any of its shares in 2010, 2009
or 2008. The table below shows this effect on diluted earnings
per share.
|
Diluted
|
||||
|
Diluted EPS
|
EPS without
|
|||
| Years Ending: | as Reported | Stock Repurchase | ||
|
|
||||
|
2010
|
$1.40 | $1.25 | ||
|
2009
|
$1.20 | $1.08 | ||
|
2008
|
$0.95 | $0.85 | ||
|
2007
|
$1.80 | $1.64 | ||
|
2006
|
$1.99 | $1.83 | ||
On May 8, 2003, the Company’s newly formed subsidiary,
Northrim Capital Trust 1, issued trust preferred securities
in the principal amount of $8 million. These securities
carry an interest rate of
90-day
LIBOR
plus 3.15% per annum that was initially set at 4.45% adjusted
quarterly. The securities have a maturity date of May 15,
2033, and are callable by the Company on or after May 15,
2008. These securities are treated as Tier 1 capital by the
Company’s regulators for capital adequacy calculations. The
interest cost to the Company of the trust preferred securities
was $283,000 in 2010. At December 31, 2010, the securities
had an interest rate of 3.44%.
On December 16, 2005, the Company’s newly formed
subsidiary, Northrim Statutory Trust 2, issued trust
preferred securities in the principal amount of
$10 million. These securities carry an interest rate of
90-day
LIBOR
plus 1.37% per annum that was initially set at 5.86% adjusted
quarterly. The securities have a maturity date of March 15,
2036, and are callable by the Company on or after March 15,
2011. These securities are treated as Tier 1 capital by the
Company’s regulators for capital adequacy calculations. The
interest cost to the Company of these securities was $173,000 in
2010. At December 31, 2010, the securities had an interest
rate of 1.67%.
Our shareholders’ equity at December 31, 2010, was
$117.1 million, as compared to $111 million at
December 31, 2009. The Company earned net income of
$9.1 million during 2010 and issued 56,000 shares
through the exercise of stock options. The Company did not
repurchase any shares of its common stock in 2010. At
December 31, 2010, the Company had 6.4 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, 2010, that
the Company and Northrim Bank met all applicable capital
adequacy requirements for a “well-capitalized”
institution by regulatory standards.
The FDIC has in place qualifications for banks to be classified
as “well-capitalized.” As of December 15, 2010,
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 Bank’s classification.
The table below illustrates the capital requirements for the
Company and the Bank and the actual capital ratios for each
entity that exceed these requirements. Based on recent turmoil
in the financial markets and the elevated level of the
Company’s loans measured for impairment and OREO,
management intends to maintain a Tier 1 risk-based capital
ratio for the Bank in excess of 10% in 2011, exceeding the
FDIC’s “well-capitalized” capital requirement
classification. 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 2006 are included in the
Company’s capital for regulatory purposes although they are
accounted for as a long-term debt in our financial statements.
The trust preferred securities are not
39
Table of Contents
accounted for on the Bank’s financial statements nor are
they included in its capital. As a result, the Company has
$18 million more in regulatory capital than the Bank, which
explains most of the difference in the capital ratios for the
two entities.
|
Actual
|
||||||||||||||||
|
Adequately -
|
Well -
|
Ratio
|
Actual
|
|||||||||||||
| December 31, 2010 | Capitalized | Capitalized | BHC | Ratio Bank | ||||||||||||
|
Tier 1 risk-based capital
|
4.00% | 6.00% | 14.08% | 13.11% | ||||||||||||
|
Total risk-based capital
|
8.00% | 10.00% | 15.33% | 14.36% | ||||||||||||
|
Leverage ratio
|
4.00% | 5.00% | 12.15% | 11.30% | ||||||||||||
(See Note 20 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 institution’s
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.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The disclosures in this item are qualified by the Risk Factors
set forth in Item 1A and the Section entitled “Note
Regarding Forward-Looking Statements” included in
Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations in this report and
any other cautionary statements contained herein.
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, thereby allowing quicker repricings and
maximizing net interest income. 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 income
range without exceeding earnings risk parameters.
Our excess liquidity not needed for current operations has
generally been invested in short-term assets or securities,
primarily securities issued by government sponsored entities.
The securities portfolio contributes to our profits and plays an
important part in the overall interest rate management. The
primary tool used to manage interest rate risk is determination
of mix, maturity, and repricing characteristics of the loan
portfolios. The loan and securities portfolios must be used in
combination with management of deposits and borrowing
liabilities and other asset/liability techniques to actively
manage the applicable components of the balance sheet. In doing
so, we estimate our future needs, taking into consideration
historical periods of high loan demand and low deposit balances,
estimated loan and deposit increases, and estimated interest
rate changes.
Although analysis of interest rate gap (the difference between
the repricing of interest-earning assets and interest-bearing
liabilities during a given period of time) is one standard tool
for the measurement of exposure to interest rate risk, we
believe that because interest rate gap analysis does not address
all factors that can affect earnings performance it should not
be used as the primary indicator of exposure to interest rate
risk and the related volatility of net interest income in a
changing interest rate environment. Interest rate gap analysis
is primarily a measure of liquidity based upon the amount of
change in principal amounts of assets and liabilities
outstanding, as opposed to a measure of changes in the overall
net interest margin.
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, 2010. The amounts in the table are derived
from internal data based upon
40
Table of Contents
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, 2010 | ||||||||||||||
| Within 1 year | 1-5 years | ³ 5 years | Total | |||||||||||
| (In Thousands) | ||||||||||||||
|
Interest -Earning Assets:
|
||||||||||||||
|
Overnight investments
|
$50,080 | $— | $— | $50,080 | ||||||||||
|
Investment securities
|
68,309 | 142,863 | 10,966 | 222,138 | ||||||||||
|
Loans:
|
||||||||||||||
|
Commercial
|
190,396 | 59,375 | 1,993 | 251,764 | ||||||||||
|
Real estate construction
|
47,718 | 807 | 11,806 | 60,331 | ||||||||||
|
Real estate term
|
130,865 | 171,168 | 6,568 | 308,601 | ||||||||||
|
Loans held for sale
|
5,558 | — | — | 5,558 | ||||||||||
|
Home equity line and other consumer
|
16,611 | 14,210 | 12,052 | 42,873 | ||||||||||
|
Total interest-earning assets
|
$509,537 | $388,423 | $43,385 | $941,345 | ||||||||||
|
Percent of total interest-earning assets
|
54% | 41% | 5% | 100% | ||||||||||
|
Interest-Bearing Liabilities:
|
||||||||||||||
|
Interest-bearing demand accounts
|
$138,072 | $— | $— | $138,072 | ||||||||||
|
Money market accounts
|
149,104 | — | — | 149,104 | ||||||||||
|
Savings accounts
|
177,726 | — | — | 177,726 | ||||||||||
|
Certificates of deposit
|
101,707 | 36,466 | — | 138,173 | ||||||||||
|
Short-term borrowings
|
13,495 | — | — | 13,495 | ||||||||||
|
Long-term borrowings
|
1,208 | 3,557 | — | 4,765 | ||||||||||
|
Junior subordinated debentures
|
18,558 | — | — | 18,558 | ||||||||||
|
Total interest-bearing liabilities
|
$599,870 | $40,023 | $— | $639,893 | ||||||||||
|
Percent of total interest-bearing liabilities
|
94% | 6% | 0% | 100% | ||||||||||
|
Interest sensitivity gap
|
$(90,333) | $348,400 | $43,385 | $301,452 | ||||||||||
|
Cumulative interest sensitivity gap
|
$(90,333) | $258,067 | $301,452 | |||||||||||
|
Cumulative interest sensitivity gap as a percentage of total
assets
|
-9% | 24% | 29% | |||||||||||
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 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
41
Table of Contents
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.
As indicated in the table above, at December 31, 2010, the
Company’s interest-bearing liabilities reprice or mature
faster than the Company’s earning assets by a margin of
$90.3 million over the next 12 months. Based on the
results of the simulation models at December 31, 2010, we
expect an increase in net interest income of $385,000 over a
12-month
period if interest rates decreased an immediate 100 basis
points. The results were limited since interest rates were
already at a low point and a further decrease resulted in some
indexes being nonexistent. Conversely, we expect a slight
decrease of $120,000 in net interest income over a
12-month
period if interest rates increased an immediate 100 basis
points. The decrease in net interest income of $120,000 in a
100 basis point immediate increase in interest rates showed
that loans priced with floors will not experience the full
impact of a 100 basis point increase until interest rates
increase beyond 100 basis points.
42
Table of Contents
| Item 8. | Financial Statements and Supplementary Data |
The following reports, audited consolidated financial statements
and the notes thereto are set forth in this Annual Report on
Form 10-K
on the pages indicated:
| 44 | ||
| 46 | ||
|
For the Years Ended December 2010, 2009 and 2008:
|
||
| 47 | ||
| 48 | ||
| 49 | ||
| 50 |
43
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors of
Northrim BanCorp, Inc.:
We have audited the accompanying consolidated balance sheet of
Northrim BanCorp, Inc. and subsidiaries (the
“Company”) as of December 31, 2010, and the
related consolidated statements of operations,
shareholders’ equity and comprehensive income, and cash
flows for the year ended December 31, 2010. We also have
audited the Company’s internal control over financial
reporting as of December 31, 2010, based on criteria
established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these consolidated
financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on these financial statements and an
opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audits in accordance with auditing standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the
consolidated financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risks.
Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinion.
A company’s 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 company’s
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
company’s 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, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Northrim BanCorp, Inc. and
subsidiaries as of December 31, 2010, and the results of
their operations and their cash flows for the year ended
December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, Northrim BanCorp, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
/s/ Moss Adams LLP
Bellingham, Washington
March 14, 2011
44
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors
Northrim BanCorp, Inc.:
We have audited the accompanying balance sheet of Northrim
BanCorp, Inc. and subsidiaries (the Company) as of
December 31, 2009 and the related consolidated statements
of income, shareholders’ equity and comprehensive income
and cash flows for each of the years in the two-year period
ended December 31, 2009. These consolidated financial
statements are the responsibility of the Company’s
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, 2009 and the results of their operations and
their cash flows for each of the years in the two-year period
ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles.
/s/ KPMG LLP
Anchorage, Alaska
March 15, 2010
45
Table of Contents
Consolidated
Financial Statements
NORTHRIM BANCORP, INC.
December 31, 2010 and 2009
|
|
||||
| 2010 | 2009 | |||
|
|
||||
| (In Thousands Except Share Amounts) | ||||
|
Assets
|
||||
|
Cash and due from banks
|
$15,953 | $19,395 | ||
|
Overnight investments
|
50,080 | 47,326 | ||
|
Investment securities available for sale
|
214,010 | 178,159 | ||
|
Investment securities held to maturity
|
6,125 | 7,285 | ||
|
Total Portfolio Investments
|
220,135 | 185,444 | ||
|
Investment in Federal Home Loan Bank stock, at cost
|
2,003 | 2,003 | ||
|
Loans held for sale
|
5,558 | — | ||
|
Loans
|
671,812 | 655,039 | ||
|
Allowance for loan losses
|
(14,406) | (13,108) | ||
|
Net Loans
|
662,964 | 641,931 | ||
|
Purchased receivables, net
|
16,531 | 7,261 | ||
|
Accrued interest receivable
|
3,401 | 3,986 | ||
|
Premises and equipment, net
|
29,048 | 28,523 | ||
|
Goodwill and intangible assets
|
8,697 | 8,996 | ||
|
Other real estate owned
|
10,355 | 17,355 | ||
|
Other assets
|
35,362 | 40,809 | ||
|
Total Assets
|
$1,054,529 | $1,003,029 | ||
|
Liabilities
|
||||
|
Deposits:
|
||||
|
Demand
|
$289,061 | $276,532 | ||
|
Interest-bearing demand
|
138,072 | 134,899 | ||
|
Savings
|
77,411 | 66,647 | ||
|
Alaska CDs
|
100,315 | 104,840 | ||
|
Money market
|
149,104 | 125,339 | ||
|
Certificates of deposit less than $100,000
|
53,858 | 64,652 | ||
|
Certificates of deposit greater than $100,000
|
84,315 | 80,199 | ||
|
Total Deposits
|
892,136 | 853,108 | ||
|
Securities sold under repurchase agreements
|
12,874 | 6,733 | ||
|
Other borrowings
|
5,386 | 5,587 | ||
|
Junior subordinated debentures
|
18,558 | 18,558 | ||
|
Other liabilities
|
8,453 | 8,023 | ||
|
Total Liabilities
|
937,407 | 892,009 | ||
|
Commitments and contingencies
|
— | — | ||
|
Shareholders’ Equity
|
||||
|
Preferred Stock, $1 par value, 2,500,000 shares
authorized, none issued or outstanding
|
||||
|
Common stock, $1 par value, 10,000,000 shares
authorized, 6,427,237 and 6,371,455 shares issued and
outstanding at December 31, 2010 and 2009, respectively
|
6,427 | 6,371 | ||
|
Additional paid-in capital
|
52,658 | 52,139 | ||
|
Retained earnings
|
57,339 | 51,121 | ||
|
Accumulated other comprehensive income
|
648 | 1,341 | ||
|
Total Northrim Bancorp Shareholders’ Equity
|
117,072 | 110,972 | ||
|
Noncontrolling interest
|
50 | 48 | ||
|
Total Shareholder’s Equity
|
117,122 | 111,020 | ||
|
Total Liabilities and Shareholders’ Equity
|
$1,054,529 | $1,003,029 | ||
See accompanying notes to the consolidated financial statements.
46
Table of Contents
NORTHRIM
BANCORP, INC.
Years Ended December 31, 2010, 2009 and 2008
| 2010 | 2009 | 2008 | ||||
| (In Thousands Except Per Share Amounts) | ||||||
|
Interest Income
|
||||||
|
Interest and fees on loans
|
$44,926 | $48,830 | $53,287 | |||
|
Interest on investment securities-available for sale
|
4,316 | 4,134 | 5,066 | |||
|
Interest on investment securities-held to maturity
|
278 | 365 | 427 | |||
|
Interest on overnight investments
|
178 | 103 | 429 | |||
|
Interest on domestic certificates of deposit
|
— | 58 | 507 | |||
|
Total Interest Income
|
49,698 | 53,490 | 59,716 | |||
|
Interest Expense
|
||||||
|
Interest expense on deposits, borrowings and junior subordinated
debentures
|
5,485 | 7,069 | 13,902 | |||
|
Net Interest Income
|
44,213 | 46,421 | 45,814 | |||
|
Provision for loan losses
|
5,583 | 7,066 | 7,199 | |||
|
Net Interest Income After Provision for Loan Losses
|
38,630 | 39,355 | 38,615 | |||
|
Other Operating Income
|
||||||
|
Service charges on deposit accounts
|
2,636 | 2,983 | 3,283 | |||
|
Employee benefit plan income
|
1,900 | 1,739 | 1,451 | |||
|
Purchased receivable income
|
1,839 | 2,106 | 2,560 | |||
|
Electronic banking income
|
1,758 | 1,542 | 1,193 | |||
|
Equity in earnings from RML
|
1,401 | 2,349 | 595 | |||
|
Gain on sale of securities
|
649 | 220 | 146 | |||
|
Equity in earnings (loss) from Elliott Cove
|
(1) | (115) | (106) | |||
|
Other income
|
2,195 | 2,260 | 2,232 | |||
|
Total Other Operating Income
|
12,377 | 13,084 | 11,354 | |||
|
Other Operating Expense
|
||||||
|
Salaries and other personnel expense
|
21,637 | 22,174 | 20,996 | |||
|
Occupancy
|
3,704 | 3,687 | 3,399 | |||
|
Insurance expense
|
1,902 | 2,715 | 1,779 | |||
|
Marketing expense
|
1,782 | 1,317 | 1,558 | |||
|
Professional and outside services
|
1,315 | 1,798 | 1,858 | |||
|
Equipment expense
|
1,116 | 1,218 | 1,233 | |||
|
Software expense
|
920 | 979 | 1,015 | |||
|
Amortization of low income housing tax investments
|
869 | 790 | 707 | |||
|
Operational losses, net
|
803 | 497 | 561 | |||
|
Internet banking expense
|
622 | 558 | 512 | |||
|
Impairment on purchased receivables, net
|
402 | 166 | 193 | |||
|
Intangible asset amortization expense
|
299 | 323 | 347 | |||
|
OREO expense, net rental income and gains on sale
|
(1,145) | 1,119 | 2,513 | |||
|
Prepayment penalty on long term debt
|
— | 718 | — | |||
|
Other expense
|
3,398 | 3,298 | 3,723 | |||
|
Total Other Operating Expense
|
37,624 | 41,357 | 40,394 | |||
|
Income Before Provision for Income Taxes
|
13,383 | 11,082 | 9,575 | |||
|
Provision for income taxes
|
3,918 | 2,967 | 3,122 | |||
|
Net Income
|
9,465 | 8,115 | 6,453 | |||
|
Less: Net income attributable to the noncontrolling interest
|
399 | 388 | 370 | |||
|
Net income attributable to Northrim Bancorp
|
$9,066 | $7,727 | $6,083 | |||
|
Earnings Per Share, Basic
|
$1.42 | $1.22 | $0.96 | |||
|
Earnings Per Share, Diluted
|
$1.40 | $1.20 | $0.95 | |||
|
Weighted Average Shares Outstanding, Basic
|
6,398,329 | 6,345,948 | 6,358,595 | |||
|
Weighted Average Shares Outstanding, Diluted
|
6,480,905 | 6,417,057 | 6,388,681 | |||
See accompanying notes to the consolidated financial statements.
47
Table of Contents
NORTHRIM
BANCORP, INC.
Shareholders’ Equity and Comprehensive Income
Years Ended December 31, 2010, 2009 and 2008
|
Accumulated
|
||||||||||||||
| Common Stock |
Additional
|
Other
|
||||||||||||
|
Number
|
Par
|
Paid-in
|
Retained
|
Comprehensive
|
Noncontrolling
|
|||||||||
| of Shares | Value | Capital | Earnings | Income | Interest | Total | ||||||||
| (In Thousands) | ||||||||||||||
|
Balance as of January 1, 2008
|
6,300 | $6,300 | $50,798 | $44,068 | $225 | $24 | $101,415 | |||||||
|
Cash dividend declared
|
— | — | — | (4,193) | — | — | (4,193) | |||||||
|
Stock option expense
|
— | — | 597 | — | — | — | 597 | |||||||
|
Exercise of stock options
|
31 | 31 | (3) | — | — | — | 28 | |||||||
|
Excess tax benefits from share-based payment arrangements
|
— | — | 66 | — | — | — | 66 | |||||||
|
Distributions to noncontrolling interest
|
— | — | — | — | — | (358) | (358) | |||||||
|
Comprehensive income:
|
||||||||||||||
|
Change in unrealized holding gain/(loss) on available for sale
investment securities, net of related income tax effect
|
— | — | — | — | 676 | — | 676 | |||||||
|
Net Income attributable to the noncontrolling interest
|
370 | 370 | ||||||||||||
|
Net Income attributable to Northrim Bancorp
|
— | — | — | 6,083 | — | — | 6,083 | |||||||
|
Total Comprehensive Income
|
6,759 | |||||||||||||
|
Balance as of December 31, 2008
|
6,331 | $6,331 | $51,458 | $45,958 | $901 | $36 | $104,684 | |||||||
|
Cash dividend declared
|
— | — | — | (2,564) | — | — | (2,564) | |||||||
|
Stock option expense
|
— | — | 648 | — | — | — | 648 | |||||||
|
Exercise of stock options
|
40 | 40 | 7 | — | — | — | 47 | |||||||
|
Excess tax benefits from share-based payment arrangements
|
— | — | 26 | — | — | — | 26 | |||||||
|
Distributions to noncontrolling interest
|
— | — | — | — | — | (376) | (376) | |||||||
|
Comprehensive income:
|
||||||||||||||
|
Change in unrealized holding gain/(loss) on available for sale
investment securities, net of related income tax effect
|
— | — | — | — | 440 | — | 440 | |||||||
|
Net Income attributable to the noncontrolling interest
|
388 | 388 | ||||||||||||
|
Net Income attributable to Northrim Bancorp
|
— | — | — | 7,727 | — | — | 7,727 | |||||||
|
Total Comprehensive Income
|
8,167 | |||||||||||||
|
Balance as of December 31, 2009
|
6,371 | $6,371 | $52,139 | $51,121 | $1,341 | $48 | $111,020 | |||||||
|
Cash dividend declared
|
— | — | — | (2,848) | — | — | (2,848) | |||||||
|
Stock option expense
|
— | — | 466 | — | — | — | 466 | |||||||
|
Exercise of stock options
|
56 | 56 | (132) | — | — | — | (76) | |||||||
|
Excess tax benefits from share-based payment arrangements
|
— | — | 185 | — | — | — | 185 | |||||||
|
Distributions to noncontrolling interest
|
— | — | — | — | — | (397) | (397) | |||||||
|
Comprehensive income:
|
||||||||||||||
|
Change in unrealized holding gain/(loss) on available for sale
investment securities, net of related income tax effect
|
— | — | — | — | (693) | — | (693) | |||||||
|
Net Income attributable to the noncontrolling interest
|
— | — | — | — | — | 399 | 399 | |||||||
|
Net Income attributable to Northrim Bancorp
|
— | — | — | 9,066 | — | — | 9,066 | |||||||
|
Total Comprehensive Income
|
8,373 | |||||||||||||
|
Balance as of December 31, 2010
|
6,427 | $6,427 | $52,658 | $57,339 | $648 | $50 | $117,122 | |||||||
See accompanying notes to the consolidated financial statements.
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NORTHRIM
BANCORP, INC.
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009 and 2008
| 2010 | 2009 | 2008 | ||||
| (In Thousands) | ||||||
|
Operating Activities:
|
||||||
|
Net income
|
$9,465 | $8,115 | $6,453 | |||
|
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
|
||||||
|
Security gains
|
(649) | (220) | (146) | |||
|
Depreciation and amortization of premises and equipment
|
1,582 | 1,635 | 1,384 | |||
|
Amortization of software
|
179 | 160 | 176 | |||
|
Intangible asset amortization
|
299 | 323 | 347 | |||
|
Amortization of investment security premium, net of discount
accretion
|
376 | 300 | 72 | |||
|
Deferred tax liability (benefit)
|
5,777 | (1,496) | (3,638) | |||
|
Stock-based compensation
|
466 | 648 | 597 | |||
|
Excess tax benefits from share-based payment arrangements
|
(185) | (26) | (66) | |||
|
Deferral of loan fees and costs, net
|
373 | 86 | (32) | |||
|
Provision for loan losses
|
5,583 | 7,066 | 7,199 | |||
|
Gain on sale of loans held for sale
|
(23) | (64) | — | |||
|
Purchases of loans held for sale
|
(70,385) | (75,096) | — | |||
|
Proceeds from the sale of loans held for sale
|
64,850 | 75,160 | — | |||
|
Purchased receivable recovery
|
402 | 166 | 193 | |||
|
Gain on sale of other real estate owned
|
(1,663) | (453) | (45) | |||
|
Impairment on other real estate owned
|
246 | 825 | 1,958 | |||
|
Distributions (proceeds) in excess of earnings from RML
|
(851) | (492) | 49 | |||
|
Equity in loss from Elliott Cove
|
1 | 115 | 106 | |||
|
Loss on prepayment of borrowings
|
— | 718 | — | |||
|
Decrease in accrued interest receivable
|
585 | 826 | 420 | |||
|
(Increase) decrease in other assets
|
926 | (6,503) | 1,985 | |||
|
Decrease of deferred gain on sales of other real estate owned
|
369 | 90 | — | |||
|
Increase (decrease) of other liabilities
|
595 | (1,901) | (748) | |||
|
Net Cash Provided by Operating Activities
|
18,318 | 9,982 | 16,264 | |||
|
Investing Activities:
|
||||||
|
Investment in securities:
|
||||||
|
Purchases of investment securities —
available-for-sale
|
(236,299) | (158,405) | (134,237) | |||
|
Purchases of investment securities —
held-to-maturity
|
(792) | (1,217) | (1,001) | |||
|
Proceeds from maturities of securities —
available-for-sale
|
171,145 | 114,375 | 119,093 | |||
|
Proceeds from sales of securities —
available-for-sale
|
28,667 | 7,551 | 23,371 | |||
|
Proceeds from calls/maturities of securities —
held-to-maturity
|
1,684 | 3,360 | 3,265 | |||
|
Proceeds from maturities of domestic certificates of deposit
|
— | 14,500 | 55,500 | |||
|
Purchases of domestic certificates of deposit
|
— | (5,000) | (65,000) | |||
|
(Investment in) repayment from purchased receivables
|
(9,672) | 11,648 | 169 | |||
|
Loan paydowns, net of new advances
|
(24,272) | 36,862 | (11,882) | |||
|
Proceeds from sale of other real estate owned
|
11,124 | 9,120 | 2,583 | |||
|
Investment in other real estate owned
|
(235) | (1,699) | (3,273) | |||
|
Investment in Elliott Cove
|
(100) | — | (100) | |||
|
Loan to Elliott Cove, net of repayments
|
135 | (121) | 108 | |||
|
Purchases of premises and equipment
|
(2,107) | (425) | (15,496) | |||
|
Purchases of software, net of disposals
|
(212) | (103) | (106) | |||
|
Net Cash Provided (Used) by Investing Activities
|
(60,934) | 30,446 | (27,006) | |||
|
Financing Activities:
|
||||||
|
Increase (decrease) in deposits
|
39,028 | 9,856 | (24,124) | |||
|
Increase (decrease) in securities sold under repurchase
agreements
|
6,141 | 5,103 | (12,366) | |||
|
Proceeds from borrowings
|
— | — | 27,490 | |||
|
Paydowns on borrowings
|
(201) | (23,607) | (1,788) | |||
|
Distributions to noncontrolling interest
|
(397) | (376) | (358) | |||
|
Proceeds from issuance of common stock
|
— | 47 | 28 | |||
|
Excess tax benefits from share-based payment arrangements
|
185 | 26 | 66 | |||
|
Cash dividends paid
|
(2,828) | (2,586) | (4,182) | |||
|
Net Cash Provided (Used) by Financing Activities
|
41,928 | (11,537) | (15,234) | |||
|
Net Increase (Decrease) by Cash and Cash Equivalents
|
(688) | $28,891 | (25,976) | |||
|
Cash and Cash Equivalents at Beginning of Year
|
66,721 | 37,830 | 63,806 | |||
|
Cash and Cash Equivalents at End of Year
|
$66,033 | $66,721 | $37,830 | |||
|
Supplemental Information:
|
||||||
|
Income taxes paid
|
$2,769 | $5,536 | $5,657 | |||
|
Interest paid
|
$5,579 | $7,578 | $13,708 | |||
|
Transfer of loans to other real estate owned
|
$2,841 | $12,441 | $9,395 | |||
|
Loans made to facilitate sales of other real estate owned
|
$6,092 | $2,597 | $— | |||
|
Cash dividends declared but not paid
|
$20 | $26 | $39 | |||
See accompanying notes to the consolidated financial statements.
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Table of Contents
Notes to
Consolidated Financial Statements
Northrim BanCorp, Inc. (the “Company”), is a publicly
traded bank holding company and is the parent company of
Northrim Bank (the “Bank”), a commercial bank that
provides personal and business banking services through
locations in Anchorage, Eagle River, Wasilla, and Fairbanks,
Alaska, and a factoring division in Bellevue, Washington. The
Bank differentiates itself with a “Customer First
Service” philosophy. Affiliated companies include Elliott
Cove Capital Management, LLC (“Elliott Cove”),
Residential Mortgage Holding Company, LLC (“RML”)
Northrim Benefits Group, LLC (“NBG”), and Pacific
Wealth Advisors, LLC (“PWA”).
Method of Accounting:
The Company prepares its
consolidated financial statements in conformity with accounting
principles generally accepted in the United States and
prevailing practices within the banking industry. The Company
utilizes the accrual method of accounting which recognizes
income and gains when earned and expenses and losses when
incurred. The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in
the United States (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements, and the reported amounts of income, gains, expenses,
and losses during the reporting periods. Actual results could
differ from those estimates. Significant estimates include the
allowance for loan losses (“Allowance”), valuation of
goodwill and other intangibles, and valuation of other real
estate owned (“OREO”). The consolidated financial
statements include the financial information for Northrim
BanCorp, Inc. and its majority-owned subsidiaries that include
Northrim Bank, Northrim Building LLC (“NBL”), and
Northrim Investment Services Company (“NISC”). All
intercompany balances have been eliminated in consolidation. The
Company accounts for its investments in RML, Elliott Cove, and
PWA using the equity method. Noncontrolling interest relates to
the minority ownership in NBG.
Reclassifications:
Certain reclassifications have
been made to prior year amounts to maintain consistency with the
current year with no impact on net income or total
shareholders’ equity.
Segments:
Management has determined that the
Company operates as a single operating segment. This
determination is based on the fact that management and the board
reviews financial information and assesses resource allocation
on a consolidated basis. Additionally, the aggregate revenue
earned through, and total assets of, the insurance brokerage,
mortgage lending and wealth management activities are less than
10% of the Company’s consolidated total revenue and total
assets.
Cash and Cash Equivalents:
For purposes of
reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, interest-bearing deposits with
other banks, banker’s acceptances, commercial paper,
securities purchased under agreement to resell, federal funds
sold, and securities with maturities of less than 90 days
at acquisition.
Investment Securities:
Securities available for
sale are stated at fair value with unrealized holding gains and
losses, net of tax, excluded from earnings and reported as a
separate component of other comprehensive income, unless an
unrealized loss is deemed other than temporary. Gains and losses
on available for sale securities sold are determined on a
specific identification basis.
Held to maturity securities are stated at cost, adjusted for
amortization of premium and accretion of discount on a
level-yield basis. The Company has the ability and intent to
hold these securities to maturity.
A decline in the market value of any available for sale or held
to maturity security below cost that is deemed other than
temporary results in a charge to earnings and the establishment
of a new cost basis for the security. Unrealized investment
securities losses are evaluated at least quarterly on a specific
identification basis to determine whether such declines in value
should be considered “other than temporary” and
therefore be subject to immediate loss recognition in income.
Although these evaluations involve significant judgment, an
unrealized loss in the fair value of a debt security is
generally deemed to be temporary when the fair value of the
security is below the carrying value primarily due to changes in
interest rates and there has not been significant deterioration
in the financial condition of the issuer. The Company does not
intend to sell, nor is it more likely than not that it will be
required to sell, securities whose market value is less than
carrying value. Because it is more likely than not that the
Company will hold these investments until a market price
recovery or maturity, these investments are not considered other
than temporarily impaired. 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.
Federal Home Loan Bank Stock:
The Company’s
investment in Federal Home Loan Bank (“FHLB”) stock is
carried at par value because the shares can only be redeemed
with the FHLB at par. The Company in required to maintain a
minimum level of investment in FHLB stock based on the
Company’s capital stock and lending activity. Stock
redemptions are at the discretion of the FHLB or of
50
Table of Contents
the Company, upon five years’ prior notice for FHLB
Class B stock. FHLB stock is carried at cost and is subject
to recoverability testing at least annually.
Loans Held for Sale:
Loans held for sale includes
mortgage loans and are reported at the lower of cost or market
value. Cost generally approximates market value, given the short
duration of these assets. Gains or losses on the sale of loans
that are held for sale are recognized at the time of sale and
determined by the difference between net sale proceeds and the
net book value of the loans.
Loans:
Loans are carried at their principal amount
outstanding, net of unamortized fees and direct loan origination
costs. Interest income on loans is accrued and recognized on the
principal amount outstanding except for loans in a nonaccrual
status. All classes of loans are placed on nonaccrual when
management believes doubt exists as to the collectability of the
interest or principal. Cash payments received on nonaccrual
loans are directly applied to the principal balance. Generally,
a loan may be returned to accrual status when the delinquent
principal and interest are brought current in accordance with
the terms of the loan agreement and certain ongoing performance
criteria have been met.
The Company considers a loan to be impaired when it is probable
that it will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Once a loan is
determined to be impaired, the impairment is measured based on
the present value of the expected future cash flows discounted
at the loan’s effective interest rate, except that if the
loan is collateral dependant, the impairment is measured by
using the fair value of the loan’s collateral.
Nonperforming loans greater than $50,000 are individually
evaluated for impairment based upon the borrower’s overall
financial condition, resources, and payment record, and the
prospects for support from any financially responsible
guarantors.
The Company uses either in-house evaluations or external
appraisals to estimate the fair value of collateral-dependent
loans as of each reporting date. The Company’s
determination of which method to use is based upon several
factors. The Company takes into account compliance with legal
and regulatory guidelines, the amount of the loan, the size of
the assets, the location and type of collateral to be valued,
and how critical the timing of completion of the analysis is to
the assessment of value. Those factors are balanced with the
level of internal expertise, internal experience, and market
information available, versus external expertise available such
as qualified appraisers, brokers, auctioneers, and equipment
specialists.
The Company uses external appraisals to estimate fair value for
projects that are not fully constructed as of the date of
valuation. These projects are generally valued as if complete,
with an appropriate allowance for cost of completion, including
contingencies developed from external sources such as vendors,
engineers, and contractors.
The Company classifies fair value measurements using observable
inputs, such as external appraisals, as level 2 valuations
in the fair value hierarchy, and fair value measurements with
unobservable inputs, such as in-house evaluations, as
level 3 valuations in the fair value hierarchy.
When the fair value measurement of the impaired loan is less
than the recorded amount of the loan, an impairment is
recognized by recording a charge-off to the Allowance or by
designating a specific reserve in accordance with GAAP. The
Company’s policy is to record cash payments received on
impaired loans that are not also nonaccrual loans in the same
manner that cash payments are applied to performing loans.
Loan origination fees received in excess of direct origination
costs are deferred and accreted to interest income using a
method approximating the level-yield method over the life of the
loan.
Allowance for Loan Losses:
The Company maintains
an Allowance to reflect inherent losses from its loan portfolio.
The Allowance is decreased by loan charge-offs and increased by
loan recoveries and provisions for loan losses. The Company has
identified the following segments and classes of loans for
purposes of establishing the Allowance. The Company first
disaggregates the overall loan portfolio into the following
segments: commercial, real estate construction, real estate
term, and home equity lines and other consumer loans. Then the
Company further disaggregates each segment into the following
classes, which are also known as risk classifications:
excellent, good, satisfactory, watch, special mention,
substandard, doubtful, and loss.
In determining its total Allowance, the Company first estimates
a specific allocated allowance for impaired loans. This analysis
is based upon a specific analysis for each impaired loan,
including appraisals on loans secured by real property,
management’s assessment of the current market, recent
payment history, and an evaluation of other sources of repayment.
The Company then estimates a general allocated allowance for all
other loans that were not impaired as of the balance sheet date
using a formula-based approach that includes average historical
loss factors that are adjusted for quantitative and qualitative
factors. Qualitative factors are based on management’s
assessment of current trends that may cause losses inherent in
the current loan portfolio to differ significantly from
historical losses.
Finally, the Company assesses the overall adequacy of the
Allowance based on several factors including the level of the
Allowance as compared to total loans and nonperforming loans in
light of current economic conditions. This portion of the
Allowance is deemed “unallocated” because it is not
allocated to any segment or class of the loan portfolio. This
portion of the
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Table of Contents
Allowance provides for coverage of credit losses inherent in the
loan portfolio but not captured in the credit loss factors that
are utilized in the risk rating-based component, or in the
specific impairment component of the Allowance, and it
acknowledges the inherent imprecision of all loss prediction
models. Due to the subjectivity involved in the determination of
the unallocated portion of the Allowance, the relationship of
the unallocated component to the total Allowance may fluctuate
from period to period.
Based on our methodology and its components, management believes
the resulting Allowance is adequate and appropriate for the risk
identified in the Company’s loan portfolio. While
management believes that it uses the best information available
to determine the Allowance, unforeseen market conditions and
other events could result in adjustment to the Allowance, and
net income could be significantly affected if circumstances
differed substantially from the assumptions used in making the
final determination. Our banking regulators, as an integral part
of their examination process, periodically review the
Company’s Allowance. Our regulators may require the Company
to recognize additions to the allowance based on their judgments
related to information available to them at the time of their
examinations.
Reserve for Unfunded Loan Commitments and Letters of
Credit:
The Company maintains a separate reserve for
losses related to unfunded loan commitments and letters of
credit. The determination of the adequacy of the reserve is
based on periodic evaluations of the unfunded credit facilities
including assessment of historical losses and current economic
conditions. The allowance for unfunded loan commitments and
letters of credit is included in other liabilities on the
consolidated balance sheets, with changes to the balance charged
against noninterest expense.
Purchased Receivables:
The Bank purchases accounts
receivable at a discount from its customers. The purchased
receivables are carried at cost. The discount and fees charged
to the customer are earned while the balances of the purchases
are outstanding. In the event an impairment or write-down is
evident and warranted, the charge is taken against the asset
balance and not from the Allowance.
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
5 years, furniture and equipment ranging between 3 and
7 years, leasehold improvements ranging between 2 and
15 years, and buildings over 39 years. Maintenance and
repairs are charged to current operations, while renewals and
betterments are capitalized.
Intangible Assets:
As part of an acquisition of
branches from Bank of America in 1999, the Company recorded
$6.9 million of goodwill and $2.9 million of core
deposit intangible (“CDI”). The Bank of America CDI is
fully amortized as of December 31, 2008. In 2007, the
Company recorded $2.1 million of goodwill and
$1.3 million of CDI as part of the acquisition of Alaska
First Bank & Trust, N.A. (“Alaska First”)
stock. The Company amortizes the Alaska First CDI over its
estimated useful life of ten years using an accelerated method.
Accumulated amortization related to the Alaska First CDI is
$685,000 at December 31, 2010. Management reviews goodwill
at least annually for impairment by reviewing a number of key
market indicators. Finally, the Company recorded
$1.1 million in intangible assets related to customer
relationships purchased in the acquisition of an additional
40.1% of NBG in December 2005. The Company amortizes this
intangible over its estimated life of ten years.
Other Real Estate Owned:
Other real estate owned
represents properties acquired through foreclosure or its
equivalent. Prior to foreclosure, the carrying value is adjusted
to the fair value, less cost to sell, of the real estate to be
acquired by an adjustment to the Allowance. Management’s
evaluation of fair value is based on appraisals or discounted
cash flows of anticipated sales. The amount by which the fair
value less cost to sell is greater than the carrying amount of
the loan plus amounts previously charged off is recognized in
earnings up to the original cost of the asset. Any subsequent
reduction in the carrying value is charged against earnings.
Operating expenses associated with other real estate owned are
charged to earnings in the period they are incurred.
Other Assets:
Other assets include purchased
software and prepaid expenses. Purchased software is carried at
amortized cost and is amortized using the straight-line method
over their estimated useful life or the term of the agreement.
Also included in other assets is the net deferred tax asset and
the Company’s investments in RML, Elliott Cove, NBG, and
PWA. All of these entities are affiliates of the Company. The
Company includes the income and loss from its affiliates in its
financial statements on a one month lagged basis.
Also included in other assets are the Company’s investments
in three low-income housing partnerships. These partnerships are
all Delaware limited partnerships and include Centerline
Corporate Partners XXII, L.P. (“Centerline XXII”)
Centerline Corporate Partners XXXIII, L.P. (“Centerline
XXXIII”), and U.S.A. Institutional Tax Credit
Fund LVII L.P. (“USA 57”). These entities are
variable interest entities (“VIEs”). A variable
interest entity is an entity whose equity investors lack the
ability to make decisions about the entity’s activity
through voting rights and do not have the obligation to absorb
the entity’s expected losses or receive residual returns if
they occur. The Company made commitments to purchase a
$3 million interest in each of these partnerships in
January 2003, September 2006 and December 2006, respectively.
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Table of Contents
Advertising:
Advertising, promotion and marketing
costs are expensed as incurred. The Company reported total
expenses in these areas of $1.8 million, $1.3 million
and $1.6 million for each of the periods ending
December 31, 2010, 2009, and 2008.
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 18, are considered to
be common stock equivalents. Incremental shares resulting from
stock options were 19,289 and 13,478 at December 31, 2010
and 2009, respectively. There were no dilutive incremental
shares resulting from stock options at December 31, 2008.
Average incremental shares resulting from stock options were
82,576, 71,110, and 30,086, for 2010, 2009, and 2008,
respectively.
Information used to calculate earnings per share was as follows:
| December 31, | 2010 | 2009 | 2008 | |||
|
(In Thousands, Except
|
||||||
| per Share Data) | ||||||
|
Net income
|
$9,066 | $7,727 | $6,083 | |||
|
Basic weighted average common shares outstanding
|
6,398 | 6,346 | 6,359 | |||
|
Dilutive effect of potential common shares from awards granted
under equity incentive program
|
83 | 71 | 30 | |||
|
Diluted weighted average common shares outstanding
|
6,481 | 6,417 | 6,389 | |||
|
Earnings per common share
|
||||||
|
Basic
|
$1.42 | $1.22 | $0.96 | |||
|
Diluted
|
$1.40 | $1.20 | $0.95 | |||
Potential dilutive shares are excluded from the computation of
earnings per share if their effect is anti-dilutive. There were
no anti-dilutive shares outstanding related to options to
acquire common stock in 2010 or 2009. Anti-dilutive shares
outstanding related to options to acquire common stock for the
year ended December 31, 2008 totaled 336,817.
Stock Option Plans:
The Company accounts for its
stock option plans using a fair-value-based method of accounting
for stock-based employee compensation plans. The Company has
elected the modified prospective method for recognition of
compensation cost associated with stock-based employee
compensation awards. The Company amortizes stock-based
compensation expense over the vesting period of each award.
Comprehensive Income:
Comprehensive income
consists of net income and net unrealized gains (losses) on
securities available for sale after tax effect and is presented
in the consolidated statements of shareholders’ equity and
comprehensive income.
Concentrations:
Substantially all of our business
is derived from the Anchorage, Matanuska Valley, and Fairbanks
areas of Alaska. As such, the Company’s growth and
operations depend upon the economic conditions of Alaska and
these specific markets. These areas rely primarily upon the
natural resources industries, particularly oil production, as
well as tourism, government and U.S. military spending for
their economic success. Approximately 87% of the unrestricted
revenues of the Alaska state government are funded through
various taxes and royalties on the oil industry. Our business is
and will remain sensitive to economic factors that relate to
these industries and local and regional business conditions. As
a result, local or regional economic downturns, or downturns
that disproportionately affect one or more of the key industries
in regions served by the Company, may have a more pronounced
effect upon its business than they might on an institution that
is less geographically concentrated. The extent of the future
impact of these events on economic and business conditions
cannot be predicted; however, prolonged or acute fluctuations
could have a material and adverse impact upon our results of
operation and financial condition.
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Table of Contents
At December 31, 2010 and 2009, the Company had
$319.6 million and $310.8 million, respectively, in
commercial and construction loans in Alaska. In addition, the
Company has commitments of $279 million to thirteen
commercial, commercial real estate, and residential
construction/land development borrowing relationships at
December 31, 2010, of which $194 million were
outstanding at December 31, 2010.
Recent
Accounting Pronouncements
In June 2009, the FASB issued SFAS 166,
Accounting for
Transfers of Financial Assets
(“SFAS 166”).
ASU
2009-01
identified SFAS 166 as authoritative until such time that
each is integrated into the Codification. This accounting
standard addresses practices that have developed since the
issuance of SFAS 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities
, that are not consistent with the original
intent and key requirements of SFAS 140 as well as concerns
of financial statement users that many of the financial assets
(and related obligations) that have been derecognized should
continue to be reported in the financial statements of
transferors. SFAS 166 was effective for the Company’s
financial statements for interim and annual periods beginning
after January 1, 2010 and has been adopted prospectively,
and has been applied to transfers occurring on or after the
effective date. The adoption did not significantly impact the
Company’s financial condition and results of operations.
In June 2009, the FASB issued SFAS 167,
Amendments to
FASB Interpretation 46(R) (as amended)
(“SFAS 167”). ASU
2009-01
identified SFAS 167 as authoritative until such time that
each is integrated into the Codification. The FASB’s
objective in issuing this accounting standard is to improve
financial reporting by enterprises involved with variable
interest entities. SFAS 167 addresses the effects on
certain provisions of FASB Interpretation No. 46 (revised
December 2003),
Consolidation of Variable Interest Entities
(“FIN 46R”) as a result of the elimination of
the qualifying special-purpose entity concept in SFAS 166,
and constituent concerns about the application of certain key
provisions of FIN 46R, including those in which the
accounting and disclosures under the Interpretation do not
always provide timely and useful information about an
enterprise’s involvement in a variable interest entity.
This accounting standard was effective for the Company’s
financial statements for annual and interim periods beginning
January 1, 2010 and has been adopted prospectively. The
adoption did not significantly impact the Company’s
financial condition and results of operations.
In July 2010, the FASB issued ASU
2010-20,
an
update to
ASC 310-30,
Receivables — Loans and Debt Securities Acquired
with Deteriorated Credit Quality.
This update is intended to
provide financial statement users with greater transparency
about an entity’s allowance for credit losses and the
credit quality of its financing receivables. The update requires
expanded disclosures that will facilitate financial statement
users’ evaluation of the nature of credit risk inherent in
the entity’s portfolio of financing receivables, how that
risk is analyzed and assessed in arriving at the allowance for
credit losses, and the changes and reasons for those changes in
the allowance for credit losses. ASU
2010-20
is
effective for the Company’s financial statements for annual
and interim periods ending after December 15, 2010 and has
been adopted prospectively. The disclosures as of the end of the
reporting period are effective for interim and annual reporting
periods ending on or after December 15, 2010. The
disclosures about activity that occurs during a reporting period
are effective for interim and annual reporting periods beginning
on and after December 15, 2010. The adoption did not
significantly impact the Company’s financial condition and
results of operations.
In January 2011, the FASB issued ASU
2011-01,
an
update to ASU
2010-10
,
“Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings”.
ASU
2011-01
temporarily delays the effective date of the disclosures about
troubled debt restructurings in ASU
2010-20.
The
delay is intended to allow the FASB time to complete its
deliberations on what constitutes a troubled debt restructuring.
The effective date of the new disclosures about troubled debt
restructurings for public entities and the guidance for
determining what constitutes a troubled debt restructuring will
then be coordinated. Currently, that guidance is anticipated to
be effective for interim and annual periods ending after
June 15, 2011. The adoption of this standard is not
expected to have a material impact on the Company’s
consolidated financial position or results of operations.
| 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, 2010, was $0.
54
Table of Contents
| NOTE 3 — | Overnight Investments |
All overnight investments have a
one-day
maturity. Overnight investment balances are as follows:
|
|
||||
| December 31, | 2010 | 2009 | ||
|
|
||||
| (In Thousands) | ||||
|
Interest-bearing deposits at Federal Home Loan Bank (FHLB)
|
$150 | $255 | ||
|
Interest-bearing deposits at Federal Reserve Bank (FRB)
|
49,830 | 47,071 | ||
|
Interest-bearing deposits at Other Institutions
|
100 | — | ||
|
Total
|
$50,080 | $47,326 | ||
| NOTE 4 — | Investment Securities |
The carrying values and approximate fair values of investment
securities are presented below:
|
Gross
|
Gross
|
|||||||
|
Amortized
|
Unrealized
|
Unrealized
|
||||||
| December 31, | Cost | Gains | Losses | Fair Value | ||||
| (In Thousands) | ||||||||
|
2010:
|
||||||||
|
Securities available for sale
|
||||||||
|
U.S. Treasury & government sponsored entities
|
$164,604 | $430 | $349 | $164,685 | ||||
|
Municpal Securities
|
9,503 | 123 | 2 | 9,624 | ||||
|
U.S. Agency Mortgage-backed Securities
|
71 | 2 | — | 73 | ||||
|
Corporate bonds
|
38,732 | 954 | 58 | 39,628 | ||||
|
Total securities available for sale
|
$212,910 | $1,509 | $409 | $214,010 | ||||
|
Securities held to maturity
|
||||||||
|
Municipal securities
|
$6,125 | $161 | $— | $6,286 | ||||
|
Total securities held to maturity
|
$6,125 | $161 | $— | $6,286 | ||||
|
2009:
|
||||||||
|
Securities available for sale
|
||||||||
|
U.S. Treasury & government sponsored entities
|
$141,371 | $989 | $360 | $142,000 | ||||
|
Municpal Securities
|
6,184 | 86 | — | 6,270 | ||||
|
U.S. Agency Mortgage-backed Securities
|
85 | 2 | — | 87 | ||||
|
Corporate bonds
|
28,242 | 1,576 | 16 | 29,802 | ||||
|
Total securities available for sale
|
$175,882 | $2,653 | $376 | $178,159 | ||||
|
Securities Held to Maturity
|
||||||||
|
Municipal Securities
|
$7,285 | $231 | $— | $7,516 | ||||
|
Total securities held to maturity
|
$7,285 | $231 | $— | $7,516 | ||||
55
Table of Contents
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,
2010 and 2009 were as follows:
| Less Than 12 Months | More Than 12 Months | Total | ||||||||||
|
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||
| December 31, | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||
| (In Thousands) | ||||||||||||
|
2010:
|
||||||||||||
|
Securities Available for Sale
|
||||||||||||
|
U.S. Treasury & government sponsored entities
|
$87,758 | $349 | $— | $— | $87,758 | $349 | ||||||
|
Municipal Securities
|
897 | 2 | — | — | 897 | 2 | ||||||
|
Corporate Bonds
|
7,272 | 58 | — | — | 7,272 | 58 | ||||||
|
Total
|
$95,927 | $409 | $— | $— | $95,927 | $409 | ||||||
|
2009:
|
||||||||||||
|
Securities Available for Sale
|
||||||||||||
|
U.S. Treasury & government sponsored entities
|
$57,595 | $360 | $— | $— | $57,595 | $360 | ||||||
|
Corporate Bonds
|
1,417 | 16 | — | — | 1,417 | 16 | ||||||
|
Total
|
$59,012 | $376 | $— | $— | $59,012 | $376 | ||||||
The unrealized losses on investments in government sponsored
entities, corporate bonds and municipal securities were caused
by interest rate increases. At December 31, 2010 and 2009,
there were thirteen and six
available-for-sale
securities in an unrealized loss position of $409,000 and
$376,000, respectively. 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
it is more likely than not that the Company will hold these
investments until a market price recovery or maturity, these
investments are not considered
other-than-temporarily
impaired.
56
Table of Contents
The amortized cost and fair values of debt securities at
December 31, 2010, are distributed by contractual maturity
as shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
|
Weighted
|
||||||||
|
Amortized
|
Average
|
|||||||
| Cost | Fair Value | Yield | ||||||
| (In Thousands) | ||||||||
|
US Treasury and government sponsored entities
Within 1 year
|
$32,013 | $32,124 | 2.50% | |||||
|
1-5 years
|
132,591 | 132,561 | 0.93% | |||||
|
Total
|
$164,604 | $164,685 | 1.24% | |||||
|
U.S. Agency Mortgage-backed securities 5-10 years
|
$71 | $73 | 4.45% | |||||
|
Total
|
$71 | $73 | 4.45% | |||||
|
Corporate bonds
Within 1 year |
$10,027 | $10,109 | 5.18% | |||||
|
1-5 years
|
14,227 | 14,929 | 2.67% | |||||
|
5-10 years
|
14,478 | 14,590 | 2.17% | |||||
|
Total
|
$38,732 | $39,628 | 3.13% | |||||
|
Municipal securities
Within 1 year |
$2,301 | $2,325 | 3.84% | |||||
|
1-5 years
|
4,532 | 4,640 | 2.92% | |||||
|
5-10 years
|
6,619 | 6,738 | 4.26% | |||||
|
Over 10 years
|
2,176 | 2,207 | 4.75% | |||||
|
Total
|
$15,628 | $15,910 | 3.88% | |||||
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) | |||||||
|
2010:
|
|||||||
|
Available for sale securities
|
$ | 28,667 | $649 | $— | |||
|
Held to maturity securities
|
$ | — | $— | $— | |||
|
2009:
|
|||||||
|
Available for sale securities
|
$ | 7,551 | $220 | $— | |||
|
Held to maturity securities
|
$ | — | $— | $— | |||
|
2008:
|
|||||||
|
Available for sale securities
|
$ | 23,371 | $146 | $— | |||
|
Held to maturity securities
|
$ | — | $— | $— | |||
57
Table of Contents
A summary of interest income on available for sale investment
securities is as follows:
| December 31, | 2010 | 2009 | 2008 | |||
| (In Thousands) | ||||||
|
U.S. Treasury and government sponsored entities
|
$2,579 | $2,507 | $4,225 | |||
|
U.S. Agency Mortgage-backed Securities
|
4 | 6 | 18 | |||
|
Other
|
1,446 | 1,369 | 651 | |||
|
Total taxable interest income
|
$4,029 | $3,882 | $4,894 | |||
|
Municipal Securities
|
287 | 252 | 172 | |||
|
Total tax-exempt interest income
|
287 | 252 | 172 | |||
|
Total
|
$4,316 | $4,134 | $5,066 | |||
| NOTE 5 — | Loans |
The composition of the total loan portfolio, excluding loans
held for resale, is presented below:
| December 31, | 2010 | 2009 | ||
| (In Thousands) | ||||
|
Commercial
|
$256,971 | $248,205 | ||
|
Real estate construction
|
62,620 | 62,573 | ||
|
Real estate term
|
312,128 | 301,816 | ||
|
Home equity lines and other consumer
|
43,264 | 45,243 | ||
|
Sub-total
|
$674,983 | $657,837 | ||
|
Less: Unearned origination fees, net of origination costs
|
(3,171) | (2,798) | ||
|
Total loans
|
671,812 | 655,039 | ||
|
Allowance for loan losses
|
(14,406) | (13,108) | ||
|
Net Loans
|
$657,406 | $641,931 | ||
The Company’s 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, 2010, approximately 71% and 29% of the
Company’s 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
Company’s exposure to credit loss, if any, is the
outstanding amount of the loan if the collateral is proved to be
of no value.
As part of the on-going monitoring of the credit quality of the
Company’s loan portfolio, management tracks certain credit
quality indicators including trends in past due and nonaccrual
loans, gross and net charge-offs, and movement in loan balances
within the risk classifications. The Company utilizes a risk
grading matrix to assign a risk classification to each of its
loans. Loans are graded on a scale of 1 to 8. A description of
the general characteristics of the 8 risk classifications are as
follows:
| • | Risk Code 1 — Excellent: Loans in this grade are those where the borrower has substantial financial capacity, above average profit margins, and excellent liquidity. Cash flow has been consistent and is well in excess of debt servicing requirements. Loans in this grade may secured by cash and/or negotiable securities having a readily ascertainable market value and may also be fully guaranteed by the U.S. government, and other approved governments and financial institutions. Loans in this grade have borrowers with exceptional credit ratings and would compare to AA ratings as established Standard & Poor’s. |
58
Table of Contents
| • | Risk Code 2 — Good: Loans in this grade are those to borrowers who have demonstrated satisfactory asset quality, earnings history, liquidity and other adequate margins of creditor protection. Borrowers exhibit positive fundamentals in terms of working capital, cash flow sufficient to service the debt, and debt to worth ratios. Borrowers for loans in this grade are capable of absorbing normal economic or other setbacks without difficulty. The borrower may exhibit some weaknesses or varying historical profitability. Management is considered adequate in all cases. Borrowing facilities may be unsecured or secured by customary acceptable collateral with well defined market values. Additional support for the loan is available from secondary repayment sources and/or adequate guarantors. | |
| • | Risk Code 3 — Satisfactory: Loans in this grade represent moderate credit risk due to some instability in borrower capacity and financial condition. These loans generally require average loan officer attention. Characteristics of assets in this classification may include: marginal debt service coverage, newly established ventures, limited or unstable earnings history, some difficulty in absorbing normal setbacks, and atypical maturities, collateral or other exceptions to established loan policies. In all cases, such weaknesses are offset by well secured collateral positions and/or acceptable guarantors. | |
| • | Risk Code 4 — Watch List: Loans in this grade are acceptable, but additional attention is needed. This is an interim classification reserved for loans that are intrinsically creditworthy but which require specific attention. Loans may have documentation deficiencies that are deemed correctable, may be contrary to current lending policies, or may have insufficient credit or financial information. Loans in this grade may also be characterized by borrower failure to comply with loan covenants or to provide other required information. If such conditions are not resolved within 90 days from the date of the assignment of Risk Code 4, the loan may warrant further downgrade. | |
| • | Risk Code 5 — Special Mention: Loans in this grade have had a deterioration of financial condition or collateral value, but are still reasonably secured by collateral or net worth of the borrower. Although the Company is presently protected from loss, potential weaknesses are apparent which, if not corrected, could cause future problems. Loans in this classification warrant more than the ordinary amount of attention but have not yet reached the point of concern for loss. Loans in this category have deteriorated sufficiently that they would have difficulty in refinancing. Loans in this classification may show one or more of the following characteristics: inadequate loan documentation, deteriorating financial condition or control over collateral, economic or market conditions which may adversely impact the borrower in the future, unreliable or insufficient credit or collateral information, adverse trends in operations that are not yet jeopardizing repayment, or adverse trends in secondary repayment sources. | |
| • | Risk Code 6 — Substandard: Loans in this grade are no longer adequately protected due to declining net worth of the borrower, lack of earning capacity, or insufficient collateral. The possibility for loss of some portion of the loan principal cannot be ruled out. Loans in this grade exhibit well-defined weaknesses that bring normal repayment into doubt. Some of these weaknesses may include: unprofitable or poor earnings trends of the borrower or property, declining liquidity, excessive debt, significant unfavorable industry comparisons, secondary repayment sources are not available, or there is a possibility of a protracted work-out. | |
| • | Risk Code 7 — Doubtful: Loans in this grade exhibit the same weaknesses as those classified Substandard, but the traits are more pronounced. Collection in full is improbable, however the extent of the loss may be indeterminable due to pending factors which may yet occur that could salvage the loan, such as possible pledge of additional collateral, sale of assets, merger, acquisition or refinancing. Borrowers in this grade may be on the verge of insolvency or bankruptcy, and stringent action is required on the part of the loan officer. | |
| • | Risk Code 8 — Loss: Loans in this grade are those that are largely non-collectible or those in which ultimate recovery is too distant in the future to warrant continuance as a bankable asset. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer charging the loan off even though recovery may be affected in the future. |
59
Table of Contents
The loan portfolio, segmented by risk class at December 31,
2010, is shown below:
|
Home equity lines
|
||||||||||||
|
Real estate
|
and other
|
|||||||||||
| Commercial | construction | Real estate term | consumer | Total | ||||||||
| (In Thousands) | ||||||||||||
|
Risk Code 1 — Excellent
|
$500 | $— | $— | $852 | $1,352 | |||||||
|
Risk Code 2 — Good
|
89,015 | 356 | 67,790 | 986 | 158,147 | |||||||
|
Risk Code 3 — Satisfactory
|
134,815 | 51,537 | 227,990 | 38,162 | 452,504 | |||||||
|
Risk Code 4 — Watch
|
5,147 | 174 | 2,107 | 2,137 | 9,565 | |||||||
|
Risk Code 5 — Special Mention
|
18,748 | 250 | 4,241 | 654 | 23,893 | |||||||
|
Risk Code 6 — Substandard
|
7,964 | 10,303 | 10,000 | 465 | 28,732 | |||||||
|
Risk Code 7 — Doubtful
|
782 | — | — | 8 | 790 | |||||||
|
Subtotal
|
$256,971 | $62,620 | $312,128 | $43,264 | $674,983 | |||||||
|
Less: Unearned origination fees, net of origination costs
|
(3,171) | |||||||||||
| $671,812 | ||||||||||||
Past due loans at December 31, 2010 are presented below:
|
Recorded
|
||||||||||||||
|
30-59
|
60-89
|
Greater
|
Total
|
Total
|
Investment > 90
|
|||||||||
|
DaysPast
|
Days
|
Than
|
Past
|
Financing
|
Days and
|
|||||||||
| Due | Past Due | 90 Days | Due | Current | Receivables | Accruing | ||||||||
| (In Thousands) | ||||||||||||||
|
Risk Code 1 — Excellent
|
$— | $— | $— | $— | $1,352 | $1,352 | $— | |||||||
|
Risk Code 2 — Good
|
— | — | — | — | 158,147 | 158,147 | — | |||||||
|
Risk Code 3 — Satisfactory
|
351 | — | — | 351 | 452,153 | 452,504 | — | |||||||
|
Risk Code 4 — Watch
|
103 | 500 | — | 603 | 8,962 | 9,565 | — | |||||||
|
Risk Code 5 — Special Mention
|
310 | — | — | 310 | 23,583 | 23,893 | — | |||||||
|
Risk Code 6 — Substandard
|
648 | 387 | — | 1,035 | 27,697 | 28,732 | — | |||||||
|
Risk Code 7 — Doubtful
|
— | — | — | — | 790 | 790 | — | |||||||
|
Subtotal
|
$1,412 | $887 | $— | $2,299 | $672,684 | $674,983 | $— | |||||||
|
Less: Unearned origination fees, net of origination costs
|
$(3,171) | |||||||||||||
| $671,812 | $— | |||||||||||||
60
Table of Contents
Nonaccrual loans totaled $11.4 million and
$12.7 million at December 31, 2010, and 2009,
respectively. Interest income which would have been earned on
nonaccrual loans for 2010, 2009, and 2008 amounted to
$1.2 million, $1.4 million, and $1.9 million,
respectively. Nonaccrual loans, by major loan type, are
presented below:
| December 31, 2010 | ||
| (In Thousands) | ||
|
Commercial
|
$5,207 | |
|
Construction
|
2,289 | |
|
Real estate term
|
3,527 | |
|
Home equity lines and other consumer
|
391 | |
|
Total
|
$11,414 | |
At December 31, 2010 and 2009, the recorded investment in
loans that are considered to be impaired was $18.3 million
and $46.3 million, respectively, (of which
$10.5 million and $12.1 million, respectively, were on
a nonaccrual basis). A specific allowance of $384,000 was
established for $3 million of the $18.3 million of
impaired loans in 2010. A specific allowance of
$1.9 million was established for $15.7 million of the
$46.3 million of impaired loans in 2009. At
December 31, 2010 and 2009, the Company had impaired loans
of $15.3 million and $30.6 million, respectively, for
which no specific allowance was taken due to the fact that fair
value exceeded book value for these loans. Management determined
the fair value of these loans based on the underlying collateral
values. The average recorded investment in impaired loans during
the years ended December 31, 2010, 2009, and 2008 was
$31.2 million, $60 million and $71.8 million,
respectively. For December 31, 2010, 2009, and 2008 the
Company recognized interest income on these impaired loans of
$564,000, $2.4 million, and $3 million, respectively.
The following table presents information about impaired loans as
of December 31, 2010:
|
Unpaid
|
Average
|
Interest
|
||||||||
|
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
||||||
| Investment | Balance | Allowance | Investment | Recognized | ||||||
| (In Thousands) | ||||||||||
|
With no related allowance recorded
|
||||||||||
|
Commercial
|
$4,615 | $6,736 | $— | $5,573 | $296 | |||||
|
Construction
|
5,719 | 5,798 | — | 6,344 | 12 | |||||
|
Real estate term
|
4,725 | 5,878 | — | 4,776 | 190 | |||||
|
Home equity lines and other consumer
|
231 | 231 | — | 237 | 9 | |||||
| $15,290 | $18,643 | $— | $16,930 | $507 | ||||||
|
With an allowance recorded
|
||||||||||
|
Commercial
|
$988 | $988 | $274 | $975 | $48 | |||||
|
Construction
|
1,724 | 1,768 | 74 | 1,748 | — | |||||
|
Real estate term
|
256 | 256 | 36 | 263 | 9 | |||||
|
Home equity lines and other consumer
|
— | — | — | — | — | |||||
| $2,968 | $3,012 | $384 | $2,986 | $57 | ||||||
|
Total
|
||||||||||
|
Commercial
|
$5,603 | $7,724 | $274 | $6,548 | $344 | |||||
|
Construction
|
7,443 | 7,566 | 74 | 8,092 | 12 | |||||
|
Real estate term
|
4,981 | 6,134 | 36 | 5,039 | 199 | |||||
|
Home equity lines and other consumer
|
231 | 231 | — | 237 | 9 | |||||
| $18,258 | $21,655 | $384 | $19,916 | $564 | ||||||
61
Table of Contents
The unpaid principle balance included in the table above
represents the recorded investment at December 31, 2010
plus amounts charged off for book purposes.
At December 31, 2010 and 2009, there were no loans pledged
as collateral to secure public deposits.
At December 31, 2010 and 2009, the Company serviced
$79.1 million and $81.1 million of loans,
respectively, which had been sold to various investors without
recourse. At December 31, 2010 and 2009, the Company held
$611,000 and $1.2 million, respectively, in trust for these
loans for the payment of such items as taxes, insurance, and
maintenance costs.
Maturities of fixed and floating rate accrual loans, excluding
loans held for resale, as of December 31, 2010 are as
follows:
| Maturity | ||||||||||||||
|
Within
|
Within
|
Over
|
Over
|
|||||||||||
|
1 Year
|
1 Year
|
1-5 Years
|
1-5 Years
|
5 Years
|
5 Years
|
|||||||||
| December 31, 2010 | Fixed | Float | Fixed | Float | Fixed | Float | Total | |||||||
| (In Thousands) | ||||||||||||||
|
Commercial
|
$38,038 | $62,791 | $38,316 | $63,658 | $7,266 | $41,695 | $251,764 | |||||||
|
Construction
|
35,658 | 11,908 | 221 | — | 12,544 | — | 60,331 | |||||||
|
Real estate term
|
12,823 | 18,368 | 45,274 | 26,232 | 19,032 | 186,872 | 308,601 | |||||||
|
Home equity lines and other consumer
|
922 | 281 | 5,892 | 2,745 | 25,829 | 7,204 | 42,873 | |||||||
|
Total
|
$87,441 | $93,348 | $89,703 | $92,635 | $64,671 | $235,771 | $663,569 | |||||||
During 2009, the Company entered into an agreement to purchase
residential loans from our mortgage affiliate, RML, in
anticipation of higher than normal refinance activity in the
Anchorage market. The Company then sold these loans in the
secondary market. All loans purchased and sold in 2010 and 2009
were newly originated loans that did not affect nonperforming
loans. The Company purchased $70.4 million and sold
$64.9 million in residential loans during 2010 and
recognized $23,000 in gains related to these transactions in
2010. The Company purchased and sold $75.1 million in
residential loans during 2009 and recognized $64,000 in gains
related to these transactions in 2009. There were
$5.6 million in loans held for sale as of December 31,
2010 and none held at December 31, 2009.
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, | 2010 | 2009 | ||
| (In Thousands) | ||||
|
Balance, beginning of the year
|
$974 | $890 | ||
|
Loans made
|
490 | 631 | ||
|
Repayments or change to nondirector status
|
772 | 547 | ||
|
Balance, end of year
|
$692 | $974 | ||
The Company’s unfunded loan commitments to these directors
or their related interests on December 31, 2010 and 2009,
were $194,000 and $195,000, respectively.
| NOTE 6 — | Allowance for Loan Losses |
The Allowance for Loan Losses (“the Allowance”) is
management’s best estimate of probable losses inherent in
its loan portfolio. Accordingly, the methodology is based on
historical loss experience by loan type and internal risk grade
with adjustments for current events and conditions. The
Company’s process for determining the appropriate level of
the Allowance for probable loan losses is designed to account
for credit deterioration as it occurs. The provision for loan
losses reflects loan quality trends, including levels of and
trends related to past due and nonaccrual loans, net charge-offs
or recoveries, and other factors.
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Table of Contents
The level of the Allowance reflects management’s continuing
evaluation of industry concentrations, specific credit risks,
loan loss experience, current loan portfolio quality, present
economic, political and regulatory conditions and unidentified
losses inherent in the current loan portfolio. Portions of the
allowance may be allocated for specific credits; however, the
entire allowance is available for any credit that, in
management’s judgment, should be charged off. While
management utilized its best judgment and information available,
the ultimate adequacy of the Allowance is dependent upon a
variety of factors beyond the Company’s control including,
among other things, the performance of the Company’s loan
portfolio, the economy, changes in interest rates, and the view
of the regulatory authorities toward loan classification.
The Company’s Allowance consists of three elements:
(1) specific valuation allowances based on probable losses
on specific loans, (2) general valuation allowances based
on historical loan loss experience for similar loans with
similar characteristics and trends, adjusted as necessary to
reflect the impact of current conditions, and
(3) unallocated general valuation allowances based on
general economic conditions and other qualitative risk factors
bother internal and external to the Company.
The specific valuation allowance is an allocated allowance for
impaired loans. This analysis is based upon a specific analysis
for each impaired loan that is collateral dependent, including
appraisals on loans secured by real property, management’s
assessment of the current market, recent payment history, and an
evaluation of other sources of repayment. The Company obtains
appraisals on real and personal property that secure its loans
during the loan origination process in accordance with
regulatory guidance and its loan policy.
The general valuation allowance is a general allocated allowance
for all other loans that were not impaired as of the balance
sheet date. The Company uses a formula-based approach that
includes average historical loss factors that are adjusted for
qualitative factors to establish this portion of the Allowance.
The Company first disaggregates the overall loan portfolio in
the following segments: commercial, real estate construction,
real estate term, and home equity lines and other consumer
loans. Then the Company further disaggregates each segment into
the following classes, which are also known as risk
classifications: excellent, good, satisfactory, watch, special
mention, substandard, doubtful and loss. After the portfolio has
been disaggregated into these segments and classes, the Company
calculates a general reserve for each segment and class based on
the average three year loss history for each segment and class.
This general reserve is then adjusted for qualitative factors,
by segment and class. Qualitative factors are based on
management’s assessment of current trends that may cause
losses inherent in the current loan portfolio to differ
significantly from historical losses. Some factors that
management considers in determining the qualitative adjustment
to the general reserve include, national and local economic
trends, business conditions, underwriting policies and
standards, trends in local real estate markets, effects of
various political activities, peer group data, and internal
factors such as underwriting policies and expertise of the
Company’s employees.
The unallocated general valuation portion of the Allowance is
based on several factors including the level of the Allowance as
compared to total loans and nonperforming loans in light of
current economic conditions. This portion of the Allowance is
deemed “unallocated” because it is not allocated to
any segment or class of the loan portfolio. This portion of the
Allowance provides for coverage of credit losses inherent in the
loan portfolio but not captured in the credit loss factors that
are utilized in the risk rating-based component or in the
specific impairment component of the Allowance and acknowledges
the inherent imprecision of all loss prediction models. This
portion of the Allowance is based upon management’s
evaluation of various factors that are not directly measured in
the determination of the allocated portions of the Allowance.
Such factors include uncertainties in identifying triggering
events that directly correlate to subsequent loss rates,
uncertainties in economic conditions, risk factors that have not
yet manifested themselves in loss allocation factors, and
historical loss experience data that may not precisely
correspond to the current portfolio. In addition, the
unallocated reserve may be further adjusted based upon the
direction of various risk indicators. Examples of such factors
include the risk as to current and prospective economic
conditions, the level and trend of charge offs or recoveries,
and the risk of heightened imprecision or inconsistency of
appraisals used in estimating real estate values. Although this
allocation process may not accurately predict credit losses by
loan type or in aggregate, the total allowance for credit losses
is available to absorb losses that may arise from any loan type
or category.
Loans identified as losses by management, internal loan review
and/or
bank
examiners are charged-off.
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The following is a detail of the activity in the Allowance as of
December 31, 2010:
|
Real
|
Home equity
|
|||||||||||
|
estate
|
Real estate
|
lines and other
|
||||||||||
| Commercial | construction | term | consumer | Unallocated | Total | |||||||
| (In Thousands) | ||||||||||||
|
Balance, beginning of year
|
$3,962 | $1,365 | $565 | $50 | $7,166 | $13,108 | ||||||
|
Charge-Offs
|
(3,919) | (1,519) | (342) | (322) | — | (6,102) | ||||||
|
Recoveries
|
1,490 | 4 | 232 | 91 | — | 1,817 | ||||||
|
Provision
|
4,841 | 1,185 | 3,815 | 922 | (5,180) | 5,583 | ||||||
|
Balance, end of year
|
$6,374 | $1,035 | $4,270 | $741 | $1,986 | $14,406 | ||||||
|
Balance, end of year: Individually evaluated for impairment
|
$274 | $74 | $36 | $— | $— | $384 | ||||||
|
Balance, end of year: Collectively evaluated for impairment
|
$6,100 | $961 | $4,234 | $741 | $1,986 | $14,022 | ||||||
The following is a detail of the recorded investment in the loan
portfolio, segregated by amounts evaluated individually or
collectively in the Allowance at December 31, 2010:
|
Home equity
|
||||||||||
|
Real estate
|
lines and other
|
|||||||||
| Commercial | construction | Real estate term | consumer | Total | ||||||
| (In Thousands) | ||||||||||
|
Balance, end of year
|
$256,971 | $62,620 | $312,128 | $43,264 | $674,983 | |||||
|
Balance, end of year: Individually evaluated for impairment
|
$5,603 | $7,443 | $4,981 | $231 | $18,258 | |||||
|
Balance, end of year: Collectively evaluated for impairment
|
$251,368 | $55,177 | $307,147 | $43,033 | $656,725 | |||||
The following represents the balance of the Allowance as
December, 31, 2010 segregated by segment and class:
|
Home equity
|
||||||||||||
|
lines and
|
||||||||||||
|
Real estate
|
Real estate
|
other
|
||||||||||
| December 31, | Total | Commercial | Construction | term | consumer | Unallocated | ||||||
| (In Thousands) | ||||||||||||
|
Individually evaluated for impairment:
|
||||||||||||
|
Risk Code 6 — Substandard
|
$384 | $274 | $74 | $36 | $— | $— | ||||||
|
Collectively evaluated for impairment:
|
||||||||||||
|
Risk Code 3 — Satisfactory
|
7,999 | 3,514 | 813 | 3,215 | 457 | — | ||||||
|
Risk Code 4 — Watch
|
853 | 316 | 8 | 315 | 214 | — | ||||||
|
Risk Code 5 — Special Mention
|
2,365 | 2,209 | 6 | 103 | 47 | — | ||||||
|
Risk Code 6 — Substandard
|
815 | 57 | 134 | 601 | 23 | — | ||||||
|
Risk Code 7 — Doubtful
|
4 | 4 | — | — | — | — | ||||||
|
Unallocated
|
1,986 | — | — | — | — | 1,986 | ||||||
| $14,406 | $6,374 | $1,035 | $4,270 | $741 | $1,986 | |||||||
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Table of Contents
At December 31, 2010, the Allowance was $14.4 million
as compared to balances of $13.1 million and
$12.9 million, respectively, at December 31, 2009 and
2008. The increase in the allowance for the loan losses at
December 31, 2010 as compared to December 31, 2009 was
the result of a $5.6 million provision and
$4.3 million in net charge-offs. The Company’s ratio
of nonperforming loans compared to portfolio loans at
December 31, 2010 was 1.70% as compared to 2.67% as of
December 31, 2009. The Company’s ratio of the
Allowance at December 31, 2010 was 2.14% as compared to
2.00% at December 31, 2009.
At December 31, 2010, the unallocated allowance as a
percentage of the total Allowance was 14%. The unallocated
allowance as a percentage of the total Allowance was 55% at
December 31, 2009 and 41% at December 31, 2008 as
reported in the Company’s
Form 10-K
for the year ended December 31, 2009. The decrease in the
unallocated allowance as a percentage of the total Allowance at
December 31, 2010 is due primarily to an enhancement to the
Company’s methodology. The Company refined its method of
estimating the Allowance in the third quarter of 2010. The
Company elected this enhanced method of estimating the Allowance
because we believe that it more accurately allocates expected
losses by loan segment and class. The Company performed a
retrospective review of the Allowance as of December 31,
2009, March 31, 2010 and June 30, 2010 and determined
that this refinement does not have an effect on the
Company’s financial position, results of operations, or
earnings per share for any period; rather, the refined method of
estimating the Allowance changes how the total Allowance is
allocated among the Company’s loan types and the
unallocated portion of the Allowance.
| NOTE 7 — | Premises and Equipment |
following summarizes the components of premises and equipment:
| December 31, | Useful Life | 2010 | 2009 | |||
| (In Thousands) | ||||||
|
Land
|
$3,201 | $3,201 | ||||
|
Vehicle
|
3 years | — | 61 | |||
|
Furniture and equipment
|
3-7 years | 9,639 | 9,056 | |||
|
Tenant improvements
|
2-15 years | 6,800 | 6,409 | |||
|
Buildings
|
39 years | 24,756 | 24,247 | |||
|
Total Premises and Equipment
|
44,396 | 42,974 | ||||
|
Accumulated depreciation and amortization
|
(15,348) | (14,451) | ||||
|
Total Premises and Equipment, Net
|
$29,048 | $28,523 | ||||
Depreciation expense and amortization of leasehold improvements
was $1.6 million, $1.6 million, and $1.4 million
in 2010, 2009, and 2008, respectively. The Company purchased its
main office facility for $12.9 million on July 1,
2008. In this transaction, the Company assumed an existing loan
secured by the building of $5.1 million and took out a
long-term borrowing to pay the remaining amount of the purchase
price.
| NOTE 8 — | Other Real Estate Owned |
At December 31, 2010 and 2009 the Company held
$10.4 million and $17.4 million, respectively, as
OREO. The Company recognized negative $1.1 million,
$1.1 million and $2.5 million in net operating
expenses related to OREO properties in 2010, 2009, and 2008,
respectively. The following table details net operating expense
related to OREO for the periods indicated:
| Years Ended December 31, | 2010 | $ Change | % Change | 2009 | $ Change | % Change | 2008 | |||||||
| (In Thousands) | ||||||||||||||
|
Net OREO expense, net rental income and gains on sale:
|
||||||||||||||
|
OREO operating expense
|
$882 | $109 | 14% | $773 | $172 | 29% | $601 | |||||||
|
Impairment on OREO
|
246 | (579) | -70% | 825 | (1,133) | -58% | 1,958 | |||||||
|
Rental income on OREO
|
(610) | (584) | 2246% | (26) | (25) | 2500% | (1) | |||||||
|
Gains on sale of OREO
|
(1,663) | (1,210) | 267% | (453) | (408) | 907% | (45) | |||||||
|
Total
|
$(1,145) | $(2,264) | -202% | $1,119 | $(1,394) | -55% | $2,513 | |||||||
65
Table of Contents
| NOTE 9 — | Goodwill, Intangibles and Other Assets |
A summary of intangible assets and other assets is as follows:
| December 31, | 2010 | 2009 | ||||||
| (In Thousands) | ||||||||
|
Intangible assets:
|
||||||||
|
Goodwill
|
$ | 7,525 | $ | 7,524 | ||||
|
Core deposits intangible
|
626 | 810 | ||||||
|
NBG customer relationships
|
546 | 662 | ||||||
|
Total
|
$ | 8,697 | $ | 8,996 | ||||
|
Prepaid expenses
|
$ | 5,573 | $ | 6,873 | ||||
|
Software
|
432 | 396 | ||||||
|
Deferred taxes, net
|
9,658 | 14,951 | ||||||
|
Note receivable from Elliott Cove
|
544 | 677 | ||||||
|
Investment in Elliott Cove
|
66 | (34 | ) | |||||
|
Investment in PWA
|
1,734 | 1,778 | ||||||
|
Investment in RML Holding Company
|
5,146 | 4,652 | ||||||
|
Investment in Low Income Housing Partnerships
|
5,297 | 6,158 | ||||||
|
Bank owned life insurance
|
2,826 | 2,719 | ||||||
|
Taxes receivable
|
2,517 | 342 | ||||||
|
Other assets
|
1,569 | 2,297 | ||||||
|
Total
|
$ | 35,362 | $ | 40,809 | ||||
Prepaid expenses were $5.6 million and $6.9 million at
December 31, 2010 and 2009, respectively. Prepaid expenses
included $4.9 million and $6.2 million in prepaid FDIC
assessments at December 31, 2010 and 2009, respectively. In
accordance with new FDIC regulations, the Company prepaid its
FDIC insurance premiums for the fourth quarter ending
December 31, 2009 and the fiscal years ending Decembers 31,
2010, 2011, and 2012.
As part of the stock acquisition of Alaska First in October
2007, the Company recorded $1.8 million of goodwill and
$1.3 million of CDI for the acquisition of Alaska First
stock. The Company is amortizing the CDI related to the Alaska
First acquisition using the sum of years’ digits method
over the estimated useful life of 10 years.
The Company performed goodwill impairment testing at
December 31, 2010, December 31, 2009 and
March 31, 2009 in accordance with the policy described in
Note 1. There was no indication of impairment in the first
step of the impairment test at December 31, 2010 and 2009,
and accordingly, the Company did not perform the second step.
The fair market value of the Company exceeded the carrying value
by 6% at December 31, 2010.
At March 31, 2009 there were indications of impairment, and
accordingly, the second step was performed. Based on the results
of the step 2 analysis, the Company concluded that no impairment
existed at that time. The more significant fair value
adjustments in the pro forma business combination in the second
step were to loans. Also, our step two analysis included
adjustments to previously recorded identifiable intangible
assets to reflect them at fair value and also included the fair
value of additional intangibles not previously recognized
(generally related to businesses not acquired in a purchase
business combination). The adjustments to measure the assets,
liabilities and intangibles at fair value are for the purpose of
measuring the implied fair value of goodwill and such
adjustments are not reflected in the consolidated balance sheet.
The Company recorded amortization expense of its intangible
assets of $299,000, $323,000, and $347,000 in 2010, 2009, and
2008, respectively. Accumulated depreciation for intangible
assets was $5.4 million, $5.1 million and
$4.8 million at December 31, 2010, 2009 and 2008,
respectively.
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Table of Contents
The future amortization expense required on these assets is as
follows:
| Year Ending December 31: | ||
| (In Thousands) | ||
|
2011
|
$276 | |
|
2012
|
252 | |
|
2013
|
228 | |
|
2014
|
204 | |
|
2015
|
153 | |
|
Thereafter
|
60 | |
|
Total
|
$1,173 | |
Affiliates
As of December 31, 2009, the Company owns a 48% equity
interest in Elliott Cove, an investment advisory services
company, through its wholly-owned subsidiary, NISC. Elliott Cove
began active operations in the fourth quarter of 2002 and has
had
start-up
losses since that time as it continues to build its assets under
management.
In 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. 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.
The Company owns a 24% interest in the profits of RML, a
residential mortgage holding company, and applies the equity
method of accounting for its ownership interest in RML. In
addition to its ownership interest, the Company provides RML
with a line of credit that has a committed amount of
$15 million and an outstanding balance of
$10.8 million as of December 31, 2010. Additionally,
the Company purchased $70.4 million and $75.1 million
from RML in 2010 and 2009. The Company did not purchase any
loans from RML in 2008.
Below is summary balance sheet and income statement information
for RML.
| December 31, | 2010 | 2009 | ||
| (Unaudited) | ||||
| (In Thousands) | ||||
|
Assets
|
||||
|
Cash
|
$10,226 | $8,495 | ||
|
Loans held for sale
|
85,668 | 67,745 | ||
|
Other assets
|
12,490 | 11,562 | ||
|
Total Assets
|
$108,384 | $87,802 | ||
|
Liabilities
|
||||
|
Lines of credit
|
$81,911 | $63,975 | ||
|
Other liabilities
|
6,526 | 5,884 | ||
|
Total Liabilities
|
88,437 | 69,859 | ||
|
Shareholders’ Equity
|
19,947 | 17,943 | ||
|
Total Liabilities and Shareholders’ Equity
|
$108,384 | $87,802 | ||
|
Income/expense
|
||||
|
Gross income
|
$24,701 | $27,229 | ||
|
Total expense
|
18,605 | 18,436 | ||
|
Joint venture allocations
|
(230) | 319 | ||
|
Net Income
|
$5,866 | $9,112 | ||
67
Table of Contents
The Company has analyzed all of its affiliate relationships in
accordance with GAAP and determined that PWA and RML are not
variable interest entities (“VIEs”). The Company has
determined that Elliott Cove is a VIE. However, the Company does
not have a controlling interest in Elliott Cove. The Company
determined that Elliott Cove is a VIE based on the fact that the
Company provides Elliott Cove with a line of credit for which
the majority owner of Elliott Cove provides additional
subordinated financial support in the form of a 50% guarantee.
This line of credit has a committed amount of $750,000 and an
outstanding balance of $542,000 as of December 31, 2010.
Furthermore, Elliott Cove does not have access to any other
financial support through other institutions, nor is it likely
that they would be able to obtain additional lines of credit
based on their operational losses to date and their resulting
lack of equity. As such, it appears that Elliott Cove cannot
finance its activities without additional subordinated financial
support and is therefore considered a VIE under GAAP. However,
the Company has determined that it does not have a controlling
interest in Elliott Cove based on the following facts and
circumstances:
a. Neither the Company nor any members of the
Company’s management have control over the budgeting or
operational processes of Elliott Cove.
b. While the President, CEO and Chairman of the Company is
a member of Elliott Cove’s board, he does not exert
influence on decisions beyond Northrim Investment Services
Company’s ownership percentage in Elliott Cove.
c. The Company has no veto rights with respect to decisions
affecting the operations of Elliott Cove
The Company has the obligation to absorb losses of Elliott Cove
up to its ownership percentage of 47.9%. There are no caps or
guarantees on returns, and there are no protections to limit any
investor’s share of losses. Additionally, the Company
provides Elliott Cove with a $750,000 line of credit. This line
includes a 50% personal guarantee by the majority owner of
Elliott Cove. Therefore, the Company does have the obligation to
absorb losses and the right to receive benefits that could be
significant to Elliott Cove and which, as a result of its
exposure to 50% of any losses incurred on the line of credit
that the Company has extended to Elliott Cove, may be greater
than the Company’s 47.9% ownership therein.
However, the applicable accounting guidance requires that the
Company have both the power to control the activities of Elliott
Cove that most significantly impact its economic performance and
the obligation to absorb losses or the right to receive benefits
from Elliott Cove that could potentially be significant to
Elliott Cove. The Company has determined that the facts and
circumstances of its relationship with Elliott Cove including
its overall involvement in the operations, decision-making
capabilities, and proportionate share in earnings and losses
does not satisfy the criteria for a controlling interest because
it does not have the power to direct the activities of Elliott
Cove according to GAAP.
While the Company also provides a line of credit to RML, which
is also guaranteed by the other owners of RML, RML has other
available lines of credit with unrelated financial institutions
which have been in place for many years. Additionally, RML has a
history of profitability and has sufficient capital to support
its operations. RML had $19.9 million in equity,
$108.4 million in assets and net income of
$5.9 million as of and for the year ended December 31,
2010. As such, the total equity investment in the entity, which
is provided by the Company and the other owners, is adequate to
finance the activities of RML. Therefore, the Company has
concluded that RML is not a VIE.
Low
Income Housing Partnerships
In December of 2006, September of 2006, and January of 2003 the
Company made commitments to invest $3 million each in USA
57, Centerline XXXIII, and Centerline XXII, respectively. The
Company earns a return on its investments in the form of tax
credits and deductions that flow through to it as a limited
partner in these partnerships over a fifteen, eighteen, and
eighteen-year period, respectively. The Company expects to fund
its remaining $317,000 in commitments on these investments in
2011.
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Table of Contents
| NOTE 10 — | Deposits |
At December 31, 2010, 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) | ||
|
2011
|
$103,704 | |
|
2012
|
20,712 | |
|
2013
|
13,425 | |
|
2014
|
129 | |
|
2015
|
203 | |
|
Total
|
$138,173 | |
The Company is a member of the Certificate of Deposit Account
Registry System (“CDARS”) which is a network of
approximately 3,000 banks throughout the United States. The
CDARS system was founded in 2003 and allows participating banks
to exchange FDIC insurance coverage so that 100% of the balance
of their customers’ certificates of deposit are fully
subject to FDIC insurance. The system also allows for investment
of banks’ own investment dollars in the form of domestic
certificates of deposit. The Company did not have any CDARS
certificates of deposits at December 31, 2010. The Company
had $3.3 million and $12.2 million in CDARS
certificates of deposits at December 31, 2009 and 2008,
respectively.
At December 31, 2010 and 2009, the Company did not hold any
certificates of deposit from a public entity collateralized by
letters of credit issued by the Federal Home Loan Bank. At
December 31, 2010 and 2009, the Company did not have any
securities pledged to collateralize certificates of deposit from
a public entity.
At December 31, 2010, the Company held $4.9 million in
deposits for related parties.
| NOTE 11 — | Borrowings |
The Company has a line of credit with the FHLB of Seattle
approximating 11% of assets, or $120.3 million at
December 31, 2010. FHLB advances are subject to collateral
criteria that require the Company to pledge assets under a
blanket pledge arrangement as collateral for its borrowings from
the FHLB. Additional advances are dependent on the availability
of acceptable collateral such as marketable securities or real
estate loans, although all FHLB advances are secured by a
blanket pledge of the Company’s assets. The Company had no
outstanding balances on this line at December 31, 2010 and
December 31, 2009.
The Company purchased its main office facility for
$12.9 million on July 1, 2008. In this transaction,
the Company, through NBL, assumed an existing loan secured by
the building in an amount of $5.1 million. At
December 31, 2010, the outstanding balance on this loan is
$4.8 million. This is an amortizing loan and has a maturity
date of April 1, 2014 and an interest rate of 5.95% as of
December 31, 2010.
The Company entered into a note agreement with the Federal
Reserve Bank on December 27, 1996 on the payment of tax
deposits. Under this agreement, the Company takes in tax
payments from customers and reports these payments to the
Federal Reserve Bank. The Federal Reserve has the option to call
the tax deposits at any time. The balance at December 31,
2010, and 2009, was $620,000 and $690,000, respectively, which
was secured by investment securities.
The Federal Reserve Bank is holding $91.6 million of loans
as collateral to secure available borrowing lines through the
discount window of $64.6 million at December 31, 2010.
There were no discount window advances outstanding at
December 31, 2010 and 2009. The Company paid less than
$1,000 in 2010 and $1,146 in interest on this agreement in 2009.
Securities sold under agreements to repurchase were
$12.9 million and $6.7 million, respectively, for
December 31, 2010 and 2009. The Company was paying 0.49% on
these agreements at December 31, 2010 and 2009. The average
balance outstanding of securities sold under agreement to
repurchase during 2010 and 2009 was $10.2 million and
$4.3 million, respectively, and the maximum outstanding at
any month-end was $14.2 million and $9.1 million,
respectively, during the same time periods. The securities sold
under agreement to repurchase are held by the Federal Home Loan
Bank under the Company’s control.
The Company had no other borrowings at December 31, 2010
and 2009.
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Table of Contents
The future principal payments that are required on the
Company’s borrowings as of December 31, 2010, are as
follows:
| Year Ending December 31: | ||
| (In Thousands) | ||
|
2011
|
$13,635 | |
|
2012
|
147 | |
|
2013
|
157 | |
|
2014
|
4,321 | |
|
Total
|
$18,260 | |
| NOTE 12 — | 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 Company’s Junior Subordinated Deferrable Interest
Debentures (“Trust Preferred Securities”). These
debentures qualify as Tier 1 capital under Federal Reserve
Board guidelines. All of the common securities of the Trust are
owned by the Company. The proceeds from the issuance of the
common securities and the Trust Preferred Securities were
used by the Trust to purchase $8.2 million of junior
subordinated debentures of the Company. The Trust is not
consolidated in the Company’s financial statements in
accordance with GAAP; 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 3.44% at December 31, 2010.
The interest cost to the Company on these debentures was
$283,000 in 2010 and $329,000 in 2009. The Company has entered
into contractual arrangements which, taken collectively, fully
and unconditionally guarantee payment of: (i) accrued and
unpaid distributions required to be paid on the
Trust Preferred Securities; (ii) the redemption price
with respect to any Trust Preferred Securities called for
redemption by the Trust and (iii) payments due upon a
voluntary or involuntary dissolution, winding up or liquidation
of the Trust. The Trust Preferred Securities are
mandatorily redeemable upon maturity of the debentures on
May 15, 2033, or upon earlier redemption as provided in the
indenture. The Company has the right to redeem the debentures
purchased by the Trust in whole or in part, on or after
May 15, 2008. As specified in the indenture, if the
debentures are redeemed prior to maturity, the redemption price
will be the principal amount and any accrued but unpaid interest.
In December of 2005, the Company formed a wholly-owned
Connecticut statutory business trust subsidiary, Northrim
Statutory Trust 2 (the “Trust 2”), which
issued $10 million of guaranteed undivided beneficial
interests in the Company’s 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. Trust 2 is not consolidated in the Company’s
financial statements in accordance with GAAP; therefore, the
Company has recorded its investment in 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 1.67% at December 31, 2010.
The interest cost to the Company on these debentures was
$173,000 in 2010 and $239,000 in 2009. 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.
70
Table of Contents
| NOTE 13 — | Interest Expense |
Interest expense on deposits and borrowings is presented below:
| December 31, | 2010 | 2009 | 2008 | |||
| (In Thousands) | ||||||
|
Interest-bearing demand accounts
|
$176 | $170 | $578 | |||
|
Money market accounts
|
673 | 740 | 3,306 | |||
|
Savings accounts
|
1,120 | 1,240 | 3,444 | |||
|
Certificates of deposit greater than $100,000
|
1,533 | 1,968 | 2,361 | |||
|
Certificates of deposit less than $100,000
|
1,171 | 1,683 | 2,490 | |||
|
Borrowings
|
812 | 1,268 | 1,723 | |||
|
Total
|
$5,485 | $7,069 | $13,902 | |||
| NOTE 14 — | Income Taxes |
At December 31, 2010 and 2009, the Company had
$2.5 million and $342,000 in total taxes receivable. The
Company realized $841,000 and $769,000 in tax credits related to
its investments in low income housing tax credit partnerships
for 2010 and 2009, respectively.
Components of the provision for income taxes are as follows:
|
Current Tax
|
Deferred
|
Total
|
||||
| December 31, | Expense | (Benefit) | Expense | |||
| (In Thousands) | ||||||
|
2010:
|
||||||
|
Federal
|
$(1,655) | $4,918 | $3,263 | |||
|
State
|
(204) | 859 | 655 | |||
|
Total
|
$(1,859) | $5,777 | $3,918 | |||
|
2009:
|
||||||
|
Federal
|
$3,703 | $(1,274) | $2,429 | |||
|
State
|
760 | (222) | 538 | |||
|
Total
|
$4,463 | $(1,496) | $2,967 | |||
|
2008:
|
||||||
|
Federal
|
$5,360 | $(2,822) | $2,538 | |||
|
State
|
1,400 | (816) | 584 | |||
|
Total
|
$6,760 | $(3,638) | $3,122 | |||
The actual expense for 2010, 2009, and 2008, differs from the
“expected” tax expense (computed by applying the
U.S. Federal Statutory Tax Rate of 35% for the year ended
December 31, 2010, 2009, and 2008) as follows:
| December 31, | 2010 | 2009 | 2008 | |||||||||
| (In Thousands) | ||||||||||||
|
Computed “expected” income tax expense
|
$ | 4,545 | $ | 3,743 | $ | 3,222 | ||||||
|
State income taxes, net
|
426 | 350 | 380 | |||||||||
|
Low income housing credits
|
(841 | ) | (769 | ) | (695 | ) | ||||||
|
Other
|
(212 | ) | (357 | ) | 215 | |||||||
|
Total
|
$ | 3,918 | $ | 2,967 | $ | 3,122 | ||||||
71
Table of Contents
The components of the net deferred tax asset are as follows:
| December 31, | 2010 | 2009 | 2008 | |||||||||
| (In Thousands) | ||||||||||||
|
Deferred Tax Asset:
|
||||||||||||
|
Allowance for loan losses
|
$ | 5,912 | $ | 10,676 | $ | 9,855 | ||||||
|
Loan fees, net of costs
|
1,304 | 1,150 | 1,115 | |||||||||
|
Depreciation and amortization
|
698 | 884 | 814 | |||||||||
|
Other real estate owned
|
932 | 1,279 | 907 | |||||||||
|
Other
|
3,743 | 4,158 | 4,824 | |||||||||
|
Total Deferred Tax Asset
|
$ | 12,589 | $ | 18,147 | $ | 17,515 | ||||||
|
Deferred Tax Liability:
|
||||||||||||
|
Unrealized gain on
available-for-sale
investment securities
|
$ | (452 | ) | $ | (936 | ) | $ | (629 | ) | |||
|
Intangible amortization
|
(1,789 | ) | (1,630 | ) | (1,504 | ) | ||||||
|
Other
|
(690 | ) | (630 | ) | (1,620 | ) | ||||||
|
Total Deferred Tax Liability
|
$ | (2,931 | ) | $ | (3,196 | ) | $ | (3,753 | ) | |||
|
Net Deferred Tax Asset
|
$ | 9,658 | $ | 14,951 | $ | 13,762 | ||||||
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
asset 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
asset. The deferred tax asset is included in other assets.
As of December 31, 2010, the Company had no unrecognized
tax benefits. Our policy is to recognize interest and penalties
on unrecognized tax benefits in “Provision for income
taxes” in the Consolidated Statements of Income. There were
no amounts related to interest and penalties recognized for the
years ended December 31, 2010, 2009, and 2008. The tax
years subject to examination by federal and state taxing
authorities are the years ending December 31, 2009, 2008
and 2007.
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Table of Contents
| NOTE 15 — | Comprehensive Income |
At December 31, 2010, 2009, and 2008, 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) | ||||||
|
2010:
|
||||||
|
Unrealized net holding gains on investment securities arising
during 2010
|
$(528) | $217 | $(311) | |||
|
Plus: Reclassification adjustment for net realized gain (loss)
included in net income
|
(649) | 267 | (382) | |||
|
Net unrealized gains
|
$(1,177) | $484 | $(693) | |||
|
2009:
|
||||||
|
Unrealized net holding gains on investment securities arising
during 2009
|
$967 | $(397) | $570 | |||
|
Plus: Reclassification adjustment for net realized gain (loss)
included in net income
|
(220) | 90 | (130) | |||
|
Net unrealized gains
|
$747 | $(307) | $440 | |||
|
2008:
|
||||||
|
Unrealized net holding gains on investment securities arising
during 2008
|
$1,290 | $(528) | $762 | |||
|
Plus: Reclassification adjustment for net realized gain (loss)
included in net income
|
(146) | 60 | (86) | |||
|
Net unrealized gains
|
$1,144 | $(468) | $676 | |||
| NOTE 16 — | Employee Benefit Plans |
On July 1, 1992, the Company implemented a profit sharing
plan, including a provision designed to qualify the plan under
Section 401(k) of the Internal Revenue Code of 1986, as
amended. Employees may participate in the plan if they work more
than 1,000 hours per year. Under the plan, each eligible
participant may contribute a percentage of their eligible salary
to a maximum established by the IRS, and the Company provides
for a mandatory $0.25 match for each $1.00 contributed by an
employee up to 6% of the employee’s salary. The Company may
increase the matching contribution at the discretion of the
Board of Directors. The plan also allows the Company to make a
discretionary contribution on behalf of eligible employees based
on their length of service to the Company.
To be eligible for 401(k) contributions, participants must be
employed at the end of the plan year, except in the case of
death, disability or retirement. The Company expensed $732,000,
$735,000, and $744,000, in 2010, 2009, and 2008, 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 for 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 $328,000, $328,000, and
$302,000, in 2010, 2009, and 2008, respectively, and included
these expenses in salaries and other personnel expense in the
Consolidated Statements of Income. At December 31, 2010 and
2009, the balance of the accrued liability for this plan was
included in other liabilities and totaled $2.6 million and
$2.3 million, respectively.
In February of 2002, the Company implemented a non-qualified
deferred compensation plan in which certain of the executive
officers participate. The Company’s net liability under
this plan is dependant upon market gains and losses on assets
held in the plan. In 2010 and 2009, the Company recognized
increases in its liability of $59,000 and $156,000,
respectively. For 2008, the Company recognized a $249,000
reduction in its liability related to this plan. These expenses
are included in salaries and other
73
Table of Contents
personnel expense in the Consolidated Statements of Income. At
December 31, 2010 and 2009, the balance of the accrued
liability for this plan was included in other liabilities and
totaled $1.5 million and $1.4 million, respectively.
| NOTE 17 — | Common Stock |
Quarterly cash dividends were paid aggregating to
$2.8 million, $2.6 million, and $4.2 million, or
$0.44 per share, $0.40 per share, and $0.66 per share, in 2010,
2009, and 2008, respectively. On February 18, 2011, the
Board of Directors declared a $0.12 per share cash dividend
payable on March 18, 2011, to shareholders of record on
March 10, 2011. Federal and State regulations place certain
limitations on the payment of dividends by the Company.
In September 2002, our Board of Directors approved a plan
whereby we would periodically repurchase for cash up to
approximately 5%, or 306,372, of our shares of common stock in
the open market. In August of 2004, the Board of Directors
amended the stock repurchase plan and increased the number of
shares available under the program by 5% of total shares
outstanding, or 304,283 shares. In June of 2007, the Board
of Directors amended the stock repurchase plan and increased the
number of shares available under the program by 5% of total
shares outstanding, or 305,029 shares. We purchased
688,442 shares of our stock under this program through
December 31, 2009 at a total cost of $14.2 million at
an average price of $20.65, which left a balance of
227,242 shares available under the stock repurchase
program. We intend to continue to repurchase our stock from time
to time depending upon market conditions, but we can make no
assurances that we will continue this program or that we will
repurchase all of the authorized shares. No repurchases occurred
during 2010.
| NOTE 18 — | Options |
The Company set aside 330,750 shares of authorized stock
for the 2004 Stock Incentive Plan (“2004 Plan”) under
which it may grant stock options and restricted stock. During
the second quarter ended June 30, 2010, the Company’s
shareholders approved the 2010 Stock Option Plan (“2010
Plan”) under which it may grant 325,000 shares of
stock in the form of stock options and restricted stock units.
The Company’s policy is to issue new shares to cover
awards. The total number of shares granted and outstanding under
the 2010 Plan and previous stock incentive plans at
December 31, 2010 was 351,703. Under the 2010 Plan and
previous plans, certain key employees have been granted the
option to purchase set amounts of common stock at the market
price on the day the option was granted. Optionees, at their own
discretion, may cover the cost of exercise through the exchange,
at then fair value, of already owned shares of the
Company’s stock. Options are granted for a
10-year
period and vest on a pro rata basis over the initial three years
from grant. In addition to stock options, the Company has
granted restricted stock to certain key employees under the 2010
Plan and previous plans. These restricted stock grants cliff
vest at the end of a three-year time period.
Activity on options and restricted stock granted under the 2010
Plan is as follows:
|
|
||||||
|
Shares
|
Weighted
|
Range of
|
||||
|
Under
|
Average
|
Exercise
|
||||
| Option | Exercise Price | Price | ||||
|
|
||||||
|
Granted — 2008
|
58,127 | $5.71 | ||||
|
Forfeited
|
(5,021) | 13.31 | ||||
|
Exercised
|
(47,657) | 7.56 | ||||
|
December 31, 2008 outstanding
|
493,894 | $13.16 | $7.17-$25.94 | |||
|
Granted — 2009
|
41,166 | $5.21 | ||||
|
Forfeited
|
(1,103) | 12.70 | ||||
|
Exercised
|
(60,202) | 5.89 | ||||
|
December 31, 2009 outstanding
|
473,755 | $13.40 | $7.17-$25.94 | |||
|
Granted — 2010
|
38,260 | $5.50 | ||||
|
Forfeited
|
(43,895) | 17.55 | ||||
|
Exercised
|
(116,417) | 8.31 | ||||
|
December 31, 2010 outstanding
|
351,703 | $13.70 | $11.31-$25.94 | |||
74
Table of Contents
Stock options outstanding and exercisable at December 31,
2010 are as follows:
|
Weighted
|
||||
|
Number of
|
Average
|
|||
| Shares | Exercise Price | |||
|
Outstanding at January 1, 2010
|
396,911 | $15.99 | ||
|
Changes during the period:
|
||||
|
Granted
|
11,601 | 18.13 | ||
|
Forfeited
|
(40,289) | 19.13 | ||
|
Exercised
|
(101,156) | 9.56 | ||
|
Outstanding at December 31, 2010
|
267,067 | $18.04 | ||
|
Options exercisable at December 31, 2010
|
238,397 | $18.29 | ||
|
Unexercisable options at December 31, 2010
|
28,670 | $16.01 | ||
Restricted stock outstanding at December 31, 2010 is as
follows:
|
Weighted
|
||||
|
Number of
|
Average
|
|||
| Shares | Fair Value | |||
|
Outstanding at January 1, 2010
|
76,844 | $16.27 | ||
|
Changes during the period:
|
||||
|
Granted
|
26,659 | 18.13 | ||
|
Vested
|
(15,261) | 23.00 | ||
|
Forfeited
|
(3,606) | 17.08 | ||
|
Outstanding at December 31, 2010
|
84,636 | $15.61 | ||
At December 31, 2010, all restricted stock was unvested. No
options or restricted stock expired unexercised in 2010.
At December 31, 2010, 2009, and 2008, the weighted-average
remaining contractual life of outstanding options and restricted
stock was 4.1 years, 4.1 years, and 4.0 years,
respectively.
At December 31, 2010, 2009, and 2008, the number of options
exercisable was 238,397, 350,787, and 362,815, respectively, and
the weighted-average exercise price of those options was $18.29,
$15.83, and $14.23, respectively.
The aggregate intrinsic value of options outstanding,
exercisable, and unexercisable at December 31, 2010 was
$342,000, $246,000, and $95,000, respectively. The weighted
average remaining life of options outstanding and options
exercisable at December 31, 2010 is 4.9 and 4.4 years,
respectively. The weighted average remaining life of restricted
stock outstanding at December 31, 2010 is 1.8 years.
No restricted stock is exercisable.
75
Table of Contents
At December 31, 2010, there were 300,545 additional shares
available for grant under the plan. The per share fair values of
stock options granted during 2010, 2009, and 2008, were
calculated on the date of grant using a Black-Scholes
option-pricing model with the following weighted-average
assumptions:
| Granted | ||||||
| Stock Options: | Nov. 2010 | Nov. 2009 | Nov. 2008 | |||
|
|
||||||
|
Expected option life (years)
|
7.8 | 8.4 | 8.4 | |||
|
Risk free rate
|
2.16% | 3.30% | 4.70% | |||
|
Dividends per Share
|
$0.48 | $0.40 | $0.40 | |||
|
Expected volatility factor
|
28.86% | 29.77% | 30.21% | |||
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 Company’s stock.
The weighted average fair value of stock option grants, the fair
value of shares vested during the period, and the intrinsic
value of options exercised during the years ended
December 31, 2010, 2009 and 2008 are as follows:
| Years Ended December 31, | 2010 | 2009 | 2008 | |||
| (In Thousands, Except Per Share Data) | ||||||
|
Options:
|
||||||
|
Weighted-average grant-date fair value per share of stock
options granted:
|
$4.42 | $4.73 | $3.74 | |||
|
Total fair value of shares vested during the period:
|
112 | 260 | 296 | |||
|
Total intrinsic value of options exercised:
|
781 | 351 | 382 | |||
|
Restricted stock units:
|
||||||
|
Weighted-average grant-date fair value per share of stock
options granted:
|
$18.13 | $16.28 | $12.74 | |||
The Company recognizes the fair value of the stock options and
restricted stock as expense over the required service period,
net of estimated forfeitures, using the straight line
attribution method for stock-based payment grants previously
granted but not fully vested at January 1, 2006 as well as
grants made after January 1, 2006 as prescribed by GAAP. As
a result, the Company recognized expense of $112,000 on the fair
value of stock options and $354,000 on the fair value of
restricted stock for a total of $466,000 in stock-based
compensation expense for the year ending December 31, 2010.
The Company recognized expense of $260,000 on the fair value of
stock options and $388,000 on the fair value of restricted stock
for a total of $648,000 in stock-based compensation expense for
the year ending December 31, 2009. The Company recognized
expense of $296,000 on the fair value of stock options and
$301,000 on the fair value of restricted stock for a total of
$597,000 in stock-based compensation expense for the year ending
December 31, 2008.
76
Table of Contents
The unamortized stock-based compensation expense and the
weighted average expense period remaining at December 31,
2010 are as follows:
|
Average Period
|
||||
|
Unamortized
|
to Expense
|
|||
| Expense | (years) | |||
| (In Thousands) | ||||
|
Stock options
|
$110 | 1.6 | ||
|
Restricted stock
|
780 | 1.8 | ||
|
Total
|
$890 | 1.7 | ||
Proceeds from the exercise of stock options and vesting of
restricted stock in 2010, 2009, and 2008 were $968,000,
$376,000, and $373,000 respectively. The Company withheld
$986,000, $329,000, and $345,000 to pay for stock option
exercises or income taxes that resulted from the exercise of
stock options in 2010, 2009, and 2008, respectively. The
intrinsic value of the options that were exercised during 2010,
2009, and 2008 was $1.1 million, $493,000, and $382,000,
respectively, which represents the difference between the fair
value of the options at the date of exercise and their exercise
price. A portion of these options were incentive stock options
that were exercised and held by the optionee and not eligible
for a tax deduction. At the date of exercise, the intrinsic
values of these options was $472,000, $269,000, and $194,000 for
2010, 2009, and 2008, respectively. Thus, the Company’s tax
deduction was based on options exercised and sold during 2010,
2009, and 2008 with total intrinsic values of $523,000,
$185,000, and $228,000, respectively. The Company recognized tax
deductions of $185,000, $26,000, and $66,000 related to the
exercise of these stock options during 2010, 2009, and 20,
respectively. The Company recognized tax deductions of $115,000,
$228,000, and $114,000 for vested restricted stock in 2010,
2009, and 2008, respectively.
| NOTE 19 — | Commitments and Contingent Liabilities |
Rental expense under leases for equipment and premises was
$1.1 million, $1.2 million, and $1.7 million in
2010, 2009, and 2008, respectively. Required minimum rentals on
non-cancelable leases as of December 31, 2010, are as
follows:
| Year Ending December 31: | ||
| (In Thousands) | ||
|
2011
|
$748 | |
|
2012
|
640 | |
|
2013
|
436 | |
|
2014
|
427 | |
|
2015
|
354 | |
|
Thereafter
|
4,381 | |
|
Total
|
$6,986 | |
Rental income under leases was $810,000, $850,000 and $463,000
in 2010, 2009, and 2008, respectively. Required minimum rentals
on non-cancelable leases as of December 31, 2010, are as
follows:
| Year Ending December 31: | ||
| (In Thousands) | ||
|
2011
|
$768 | |
|
2012
|
457 | |
|
2013
|
138 | |
|
Total
|
$1,363 | |
77
Table of Contents
The Company purchased its main office facility for
$12.9 million on July 1, 2008. Prior to the purchase,
the Company leased the main office facility from an entity in
which a former director has an interest. Rent expense under this
lease agreement was $582,000 in 2008. The Company believes that
the lease agreement was 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 $100,000 per covered individual and $1 million for
all medical claims incurred by an individual. The Company has
established a liability for outstanding 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 Company’s 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, | 2010 | 2009 | ||
| (In Thousands ) | ||||
|
Off-balance sheet commitments:
|
||||
|
Commitments to extend credit
|
$181,305 | $166,704 | ||
|
Standby letters of credit
|
$19,085 | $16,913 | ||
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
customer’s creditworthiness.
The Company has established as reserve for losses related to
these commitments and letters of credit that is recorded in
other liabilities on the consolidated balance sheets.
| NOTE 20 — | Regulatory Matters |
The Company and Northrim Bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and Northrim
Bank must meet specific capital guidelines that involve
quantitative measures of the Company’s and Northrim
Bank’s assets, liabilities, and certain off-balance sheet
items as calculated under regulatory practices. The
Company’s and Northrim Bank’s 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 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, 2010, that the Company and
Northrim Bank met all capital adequacy requirements.
The tables below illustrate the capital requirements for the
Company and the Bank and the actual capital ratios for each
entity that exceed these requirements. Management intends to
maintain a Tier 1 risk-based capital ratio for the Bank in
excess of 10% in 2010, exceeding the FDIC’s
“well-capitalized” capital requirement classification.
The dividends that the Bank pays to the Company are limited to
the extent necessary for the Bank to meet the regulatory
requirements of a “well-capitalized” bank. The capital
ratios for the Company exceed those for the Bank primarily
because the $18 million trust preferred securities
offerings that
78
Table of Contents
the Company completed in the second quarter of 2003 and in the
fourth quarter of 2005 are included in the Company’s
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 Bank’s financial
statements nor are they included in its capital. As a result,
the Company has $18 million more in regulatory capital than
the Bank at December 31, 2010 and 2009, 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, 2010:
|
|||||||||||||
|
Total Capital (to risk-weighted assets)
|
$138,796 | 15.33% | $72,431 | ³ 8.0% | $90,539 | ³ 10.0% | |||||||
|
Tier I Capital (to risk-weighted assets)
|
$127,444 | 14.08% | $36,206 | ³ 4.0% | $54,309 | ³ 6.0% | |||||||
|
Tier I Capital (to average assets)
|
$127,444 | 12.15% | $41,957 | ³ 4.0% | $52,446 | ³ 5.0% | |||||||
|
As of December 31, 2009:
|
|||||||||||||
|
Total Capital (to risk-weighted assets)
|
$131,976 | 15.24% | $69,279 | ³ 8.0% | $86,598 | ³ 10.0% | |||||||
|
Tier I Capital (to risk-weighted assets)
|
$121,202 | 13.98% | $34,679 | ³ 4.0% | $52,018 | ³ 6.0% | |||||||
|
Tier I Capital (to average assets)
|
$121,202 | 12.13% | $39,968 | ³ 4.0% | $49,960 | ³ 5.0% | |||||||
| Northrim Bank | Actual | Adequately-Capitalized | Well-Capitalized | |||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||
| (In Thousands) | ||||||||||||
|
As of December 31, 2010:
|
||||||||||||
|
Total Capital (to risk-weighted assets)
|
$129,599 | 14.36% | $72,200 | ³ 8.0% | $90,250 | ³ 10.0% | ||||||
|
Tier I Capital (to risk-weighted assets)
|
$118,279 | 13.11% | $36,088 | ³ 4.0% | $54,132 | ³ 6.0% | ||||||
|
Tier I Capital (to average assets)
|
$118,279 | 11.30% | $41,869 | ³ 4.0% | $52,336 | ³ 5.0% | ||||||
|
As of December 31, 2009:
|
||||||||||||
|
Total Capital (to risk-weighted assets)
|
$122,625 | 14.30% | $68,601 | ³ 8.0% | $85,752 | ³ 10.0% | ||||||
|
Tier I Capital (to risk-weighted assets)
|
$111,879 | 13.05% | $34,292 | ³ 4.0% | $51,439 | ³ 6.0% | ||||||
|
Tier I Capital (to average assets)
|
$111,879 | 11.33% | $39,498 | ³ 4.0% | $49,373 | ³ 5.0% | ||||||
| NOTE 21 — | Fair Value Measurements |
The Company groups its assets and liabilities measured at fair
value in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the
assumptions used to determine fair value. These levels are:
Level 1:
Valuation is based upon quoted prices for
identical instruments traded in active exchange markets, such as
the New York Stock Exchange. Level 1 also includes
U.S. Treasury and federal agency securities, which are
traded by dealers or brokers in active markets. Valuations are
obtained from readily available pricing sources for market
transactions involving identical assets or liabilities.
Level 2:
Valuation is based upon quoted market
prices for similar instruments in active markets, quoted prices
for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all
significant assumptions are observable in the market.
Level 3:
Valuation is generated from model-based
techniques that use significant assumptions not observable in
the market. These unobservable assumptions reflect the
Company’s estimation of assumptions that market
participants would use in pricing the asset or liability.
Valuation techniques include use of option pricing models,
discounted cash flow models and similar techniques.
The following methods and assumptions were used to estimate fair
value disclosures. All financial instruments are held for other
than trading purposes.
Cash, Due from Banks and Overnight
Investments:
Due to the short term nature of
these instruments, the carrying amounts reported in the balance
sheet represent their fair values.
79
Table of Contents
Investment Securities:
Fair values for
investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable
instruments. Investments in Federal Home Loan Bank stock are
recorded at cost, which also represents fair value.
Loans Held for Sale:
Due to the
short-term nature of these instruments, the carrying amounts
reported in the balance sheet represent their fair values.
Loans:
Fair value adjustments for loans
are mainly related to credit risk, interest rate risk, required
equity return, and liquidity risk. Credit risk is primarily
addressed in the financial statements through the Allowance (see
Note 6). Loans are valued using a discounted cash flow
methodology and are pooled based on type of interest rate (fixed
or adjustable) and maturity. A discount rate was developed based
on the relative risk of the cash flows, taking into account the
maturity of the loans and liquidity risk. Impaired loans are
carried at fair value. Specific valuation allowances are
included in the Allowance. 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.
Accrued Interest Receivable:
Due to the
short-term nature of these instruments, the carrying amounts
reported in the balance sheet represent their fair values.
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.
Accrued Interest Payable:
Due to the
short-term nature of these instruments, the carrying amounts
reported in the balance sheet represent their fair values.
Securities Sold Under Repurchase
Agreements:
Fair values for securities sold under
repurchase agreements are based on their carrying amounts due to
their short duration and repricing frequency.
Borrowings:
Due to the short-term nature of
these instruments, the carrying amount of short-term borrowings
reported in the balance sheet approximate the fair value. Fair
values for fixed-rate long-term borrowings are estimated using a
discounted cash flow calculation that applies currently offered
interest rates to a schedule of aggregate expected monthly
payments.
Junior Subordinated Debentures:
Fair value
adjustments for junior subordinated debentures are based on
discounted cash flows to maturity using current interest rates
for similar financial instruments. Management utilized a market
approach to determine the appropriate discount rate for junior
subordinated debentures.
Assets Subject to Nonrecurring Adjustment to Fair Value:
The Company is also required to measure certain assets
such as equity method investments, goodwill, intangible assets
or OREO at fair value on a nonrecurring basis in accordance with
GAAP. Any nonrecurring adjustments to fair value usually result
from the write down of individual assets.
The Company uses either in-house evaluations or external
appraisals to estimate the fair value of OREO and impaired loans
as of each reporting date. In-house appraisals are considered
Level 3 inputs and external appraisals are considered
Level 2 inputs. The Company’s determination of which
method to use is based upon several factors. The Company takes
into account compliance with legal and regulatory guidelines,
the amount of the loan, the size of the assets, the location and
type of property to be valued and how critical the timing of
completion of the analysis is to the assessment of value. Those
factors are balanced with the level of internal expertise,
internal experience and market information available, versus
external expertise available such as qualified appraisers,
brokers, auctioneers and equipment specialists.
The Company uses external sources to estimate fair value for
projects that are not fully constructed as of the date of
valuation. These projects are generally valued as if complete,
with an appropriate allowance for cost of completion, including
contingencies developed from external sources such as vendors,
engineers and contractors. The Company believes that recording
other real estate owned that is not fully constructed based on
as if complete values is more appropriate than recording other
real estate owned that is not fully constructed using as is
values. We concluded that as if complete values are appropriate
for these types of projects based on the accounting guidance for
capitalization of project costs and subsequent measurement of
the value of real estate. GAAP specifically states that
estimates and cost allocations must be reviewed at the end of
each reporting period and reallocated based on revised
estimates. The Company adjusts the carry value of other real
estate owned in accordance with this guidance for increases in
estimated cost to complete that exceed the fair value of the
real estate at the end of each reporting period.
Commitments to Extend Credit and Standby Letters of
Credit:
The fair value of commitments is estimated using
the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and
the present creditworthiness
80
Table of Contents
of the counterparties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of
interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or
otherwise settle the obligation with the counterparties at the
reporting date.
Limitations:
Fair value estimates are made at
a specific point in time, based on relevant market information
and information about the financial instrument. These estimates
do not reflect any premium or discount that could result from
offering for sale at one time the Company’s entire holdings
of a particular financial instrument. Because no market exists
for a significant portion of the Company’s financial
instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
| December 31, | 2010 | 2009 | ||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||
| Amount | Value | Amount | Value | |||||
| (In Thousands) | ||||||||
|
Financial Assets:
|
||||||||
|
Cash and cash equivalents
|
$66,033 | $66,033 | $66,721 | $66,721 | ||||
|
Investment securities
|
221,138 | 222,299 | 187,447 | 187,678 | ||||
|
Loans
|
662,964 | 659,650 | 641,931 | 616,476 | ||||
|
Purchased receivables
|
16,531 | 16,531 | 7,261 | 7,261 | ||||
|
Accrued interest receivable
|
3,401 | 3,401 | 3,986 | 3,986 | ||||
|
Financial Liabilities:
|
||||||||
|
Deposits
|
$892,136 | $890,729 | $853,108 | $841,629 | ||||
|
Accrued interest payable
|
300 | 300 | 394 | 394 | ||||
|
Securities sold under repurchase agreements
|
12,874 | 12,874 | 6,733 | 6,733 | ||||
|
Borrowings
|
5,386 | 4,759 | 5,587 | 4,941 | ||||
|
Junior subordinated debentures
|
18,558 | 15,106 | 18,558 | 10,111 | ||||
|
Unrecognized Financial Instruments:
|
||||||||
|
Commitments to extend
credit
(a)
|
$181,305 | $1,813 | $166,704 | $1,667 | ||||
|
Standby letters of credit
|
19,085 | 191 | 16,913 | 169 | ||||
| (a) | Carrying amounts reflect the notional amount of credit exposure under these financial instruments. |
81
Table of Contents
The following table sets forth the balances of assets and
liabilities measured at fair value on a recurring basis:
|
Quoted Prices in
|
||||||||
|
Active Markets for
|
Significant Other
|
Significant
|
||||||
|
Identical Assets
|
Observable Inputs
|
Unobservable
|
||||||
| Total | (Level 1) | (Level 2) | Inputs (Level 3) | |||||
| (In Thousands) | ||||||||
|
2010:
|
||||||||
|
Available for sale securities
|
||||||||
|
U.S. Treasury
|
$20,970 | — | $20,970 | — | ||||
|
U.S. Government Sponsored Entities
|
153,339 | — | 153,339 | — | ||||
|
U.S. Agency Mortgage-backed Securities
|
73 | 73 | ||||||
|
Corporate bonds
|
39,628 | — | 39,628 | — | ||||
|
Total
|
$214,010 | — | $214,010 | — | ||||
|
2009:
|
||||||||
|
Available for sale securities
|
||||||||
|
U.S. Treasury
|
$502 | — | $502 | — | ||||
|
U.S. Government Sponsored Entities
|
147,768 | — | 147,768 | — | ||||
|
U.S. Agency Mortgage-backed Securities
|
87 | 87 | ||||||
|
Corporate bonds
|
29,802 | — | 29,802 | — | ||||
|
Total
|
$178,159 | — | $178,159 | — | ||||
As of and for the year ending December 31, 2010, no
impairment or valuation adjustment was recognized for assets
recorded at fair value on a nonrecurring basis, except for
certain assets as shown in the following table:
|
Quoted Prices in
|
||||||||||||||||||||
|
Active Markets for
|
Significant Other
|
Significant Unobservable
|
||||||||||||||||||
|
Identical Assets
|
Observable Inputs
|
Inputs
|
Total (gains)
|
|||||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | losses | ||||||||||||||||
| (In Thousands) | ||||||||||||||||||||
|
2010:
|
||||||||||||||||||||
|
Loans measured for
impairment
1
|
$ | 2,968 | — | $ | 2,234 | $ | 734 | $ | (1,284 | ) | ||||||||||
|
Other real estate
owned
2
|
640 | — | — | 640 | 246 | |||||||||||||||
|
Total
|
$ | 3,608 | — | $ | 2,234 | $ | 1,374 | $ | (1,038 | ) | ||||||||||
|
2009:
|
||||||||||||||||||||
|
Loans measured for
impairment
1
|
$ | 15,691 | — | $ | 11,533 | $ | 4,158 | $ | (622 | ) | ||||||||||
|
Other real estate
owned
2
|
7,330 | — | — | 10,520 | 825 | |||||||||||||||
|
Total
|
$ | 23,021 | — | $ | 11,533 | $ | 14,678 | $ | 203 | |||||||||||
| 1 | Relates to certain impaired collateral dependant loans. The impairment was measured based on the fair value of collateral, in accordance with GAAP. | |
| 2 | Relates to certain impaired other real estate owned. This impairment arose from an adjustment to the Company’s estimate of the fair market value of these properties based on changes in estimated costs to complete the projects. |
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Table of Contents
| NOTE 22 — | Quarterly Results of Operations (Unaudited) |
| 2010 Quarter Ended | Dec. 31 | Sept. 30 | June 30 | March 31 | ||||
| (In Thousands Except Per Share Amounts) | ||||||||
|
Total interest income
|
$12,089 | $12,266 | $12,569 | $12,774 | ||||
|
Total interest expense
|
1,179 | 1,370 | 1,466 | 1,470 | ||||
|
Net interest income
|
10,910 | 10,896 | 11,103 | 11,304 | ||||
|
Provision for loan losses
|
2,416 | 417 | 1,375 | 1,375 | ||||
|
Other operating income
|
3,362 | 3,200 | 3,222 | 2,593 | ||||
|
Other operating expense
|
9,232 | 8,710 | 9,788 | 9,894 | ||||
|
Income before provision for income taxes
|
2,624 | 4,969 | 3,162 | 2,628 | ||||
|
Provision for income taxes
|
675 | 1,629 | 912 | 702 | ||||
|
Net Income
|
1,949 | 3,340 | 2,250 | 1,926 | ||||
|
Less: Net income attributable to the noncontrolling interest
|
101 | 162 | 110 | 26 | ||||
|
Net income attributable to Northrim
|
$1,848 | $3,178 | $2,140 | $1,900 | ||||
|
Bancorp
|
||||||||
|
Earnings per share, basic
|
$0.29 | $0.50 | $0.34 | $0.30 | ||||
|
Earnings per share, diluted
|
$0.28 | $0.49 | $0.33 | $0.29 | ||||
| 2009 Quarter Ended | Dec. 31 | Sept. 30 | June 30 | March 31 | ||||
| (In Thousands Except Per Share Amounts) | ||||||||
|
Total interest income
|
$13,344 | $13,404 | $13,455 | $13,287 | ||||
|
Total interest expense
|
1,507 | 1,662 | 1,789 | 2,111 | ||||
|
Net interest income
|
11,837 | 11,742 | 11,666 | 11,176 | ||||
|
Provision for loan losses
|
2,200 | 1,374 | 2,117 | 1,375 | ||||
|
Other operating income
|
2,916 | 3,159 | 3,535 | 3,474 | ||||
|
Other operating expense
|
9,862 | 10,666 | 10,417 | 10,412 | ||||
|
Income before provision for income taxes
|
2,691 | 2,861 | 2,667 | 2,863 | ||||
|
Provision for income taxes
|
649 | 810 | 681 | 827 | ||||
|
Net Income
|
2,042 | 2,051 | 1,986 | 2,036 | ||||
|
Less: Net income attributable to the noncontrolling interest
|
96 | 102 | 109 | 81 | ||||
|
Net income attributable to Northrim Bancorp
|
$1,946 | $1,949 | $1,877 | $1,955 | ||||
|
Earnings per share, basic
|
$0.31 | $0.31 | $0.29 | $0.31 | ||||
|
Earnings per share, diluted
|
$0.30 | $0.30 | $0.29 | $0.31 | ||||
83
Table of Contents
| NOTE 23 — | 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 the opinion of management, the resolution of these
matters will not have a material effect on the Company’s
financial position, results of operations, and cash flows.
| NOTE 24 — | Parent Company Financial Information |
Condensed financial information for Northrim BanCorp, Inc.
(unconsolidated parent company only) is as follows:
| Balance Sheets for December 31, | 2010 | 2009 | 2008 | |||
| (In Thousands) | ||||||
|
Assets
|
||||||
|
Cash
|
$5,752 | $5,220 | $5,160 | |||
|
Investment in Northrim Bank
|
125,762 | 120,509 | 114,623 | |||
|
Investment in NISC
|
1,691 | 1,866 | 2,025 | |||
|
Investment in NCT1
|
248 | 248 | 248 | |||
|
Investment in NST2
|
310 | 310 | 310 | |||
|
Due from NISC
|
593 | 479 | 382 | |||
|
Due from Northrim Bank
|
— | 111 | 14 | |||
|
Other assets
|
1,523 | 1,088 | 678 | |||
|
Total Assets
|
$135,879 | $129,831 | $123,440 | |||
|
Liabilities
|
||||||
|
Junior subordinated debentures
|
$18,558 | $18,558 | $18,558 | |||
|
Other liabilities
|
249 | 301 | 234 | |||
|
Total Liabilities
|
18,807 | 18,859 | 18,792 | |||
|
Shareholders’ Equity
|
||||||
|
Common stock
|
6,427 | 6,371 | 6,331 | |||
|
Additional paid-in capital
|
52,658 | 52,139 | 51,458 | |||
|
Retained earnings
|
57,339 | 51,121 | 45,958 | |||
|
Accumulated other comprehensive income
|
648 | 1,341 | 901 | |||
|
Total Shareholders’ Equity
|
117,072 | 110,972 | 104,648 | |||
|
Total Liabilities and Shareholders’ Equity
|
$135,879 | $129,831 | $123,440 | |||
| Statements of Income for Years Ended: | 2010 | 2009 | 2008 | |||
| (In Thousands) | ||||||
|
Income
|
||||||
|
Interest income
|
$57 | $70 | $115 | |||
|
Net income from Northrim Bank
|
10,246 | 9,247 | 7,813 | |||
|
Net loss from NISC
|
(167) | (67) | (24) | |||
|
Other income
|
270 | — | 30 | |||
|
Total Income
|
10,406 | 9,250 | 7,934 | |||
|
Expense
|
||||||
|
Interest expense
|
470 | 585 | 998 | |||
|
Administrative and other expenses
|
1,579 | 2,137 | 1,765 | |||
|
Total Expense
|
2,049 | 2,722 | 2,763 | |||
|
Net Income Before Provision for Income Taxes
|
8,357 | 6,528 | 5,171 | |||
|
Income tax expense (benefit)
|
(709) | (1,199) | (912) | |||
|
Net Income
|
$9,066 | $7,727 | $6,083 | |||
84
Table of Contents
| Statements of Cash Flows for Years Ended: | 2010 | 2009 | 2008 | |||
| (In Thousands) | ||||||
|
Operating Activities:
|
||||||
|
Net income
|
$9,066 | $7,727 | $6,083 | |||
|
Adjustments to Reconcile Net Income to Net Cash:
|
||||||
|
Equity in undistributed earnings from subsidiaries
|
(10,076) | (9,180) | (7,789) | |||
|
Stock-based compensation
|
466 | 648 | 597 | |||
|
Changes in other assets and liabilities
|
(568) | (535) | 611 | |||
|
Net Cash Used from Operating Activities
|
(1,112) | (1,340) | (498) | |||
|
Investing Activities:
|
||||||
|
Investment in Northrim Bank, NISC, NCT1 & NST2
|
4,307 | 3,891 | 5,795 | |||
|
Net Cash Used by Investing Activities
|
4,307 | 3,891 | 5,795 | |||
|
Financing Activities:
|
||||||
|
Dividends paid to shareholders
|
(2,848) | (2,564) | (4,182) | |||
|
Proceeds from issuance of trust preferred securities
|
— | — | — | |||
|
Proceeds from issuance of common stock and excess tax benefits
|
185 | 73 | 94 | |||
|
Repurchase of common stock
|
— | — | — | |||
|
Net Cash Provided by Financing Activities
|
(2,663) | (2,491) | (4,088) | |||
|
Net Increase by Cash and Cash Equivalents
|
532 | 60 | 1,209 | |||
|
Cash and Cash Equivalents at beginning of period
|
5,220 | 5,160 | 3,951 | |||
|
Cash and Cash Equivalents at end of period
|
$5,752 | $5,220 | $5,160 | |||
85
Table of Contents
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | 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.
Changes
in Internal Controls
There were no changes in the Company’s 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 Company’s internal control over
financial reporting.
Management’s
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
Company’s 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 Company’s
internal control over financial reporting as of
December 31, 2010. 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, 2010, the
Company maintained effective internal control over financial
reporting.
The Company’s registered public accounting firm has issued
an attestation report on the Company’s effectiveness of
internal control over financial reporting.
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Table of Contents
| Item 9B. | Other Information |
None.
| Item 10. | Directors, Executive Officers and Corporate Governance |
The following table presents the names and occupations of our
directors and executive officers.
| Executive Officers/Age | Occupation | |
|
*R. Marc Langland, 69
|
Chairman, President, & CEO of the Company, Chairman & CEO of the Bank; Director, Alaska Air Group; Director, Usibelli Coal Mine, Inc. | |
|
*Christopher N. Knudson, 57
|
Executive Vice President and Chief Operating Officer of the Company and the Bank | |
|
Joseph M. Schierhorn, 53
|
Executive Vice President and Chief Financial Officer of the Company and the Bank | |
|
Joseph M. Beedle, 59
|
Executive Vice President of the Company and President of the Bank | |
|
Steven L. Hartung, 64
|
Executive Vice President and Chief Credit Officer of the Company and the Bank |
| * | Indicates individual serving as both director and executive officer. |
| Directors/Age | Occupation | |
|
Larry S. Cash, 59
|
President and CEO, RIM Architects LLC (Alaska, Guam, Hawaii and California) since 1986 | |
|
Mark G. Copeland, 68
|
Owner and sole member of Strategic Analysis, LLC, a management consulting firm | |
|
Ronald A. Davis, 78
|
Former Vice President, Acordia of Alaska Insurance (full service insurance agency) and Former CEO and Administrator, Tanana Valley Clinic | |
|
Anthony Drabek, 63
|
President and CEO, Natives of Kodiak, Inc. (Alaska Native Corporation) from 1989 until retirement in 2010; Chairman and President, Koncor Forest Products Co. | |
|
Richard L. Lowell, 70
|
Former President, Ribelin Lowell & Company (insurance brokerage firm) | |
|
Irene Sparks Rowan, 69
|
Former Director, Klukwan, Inc. (Alaska Native Corporation) and its subsidiaries | |
|
John C. Swalling, 61
|
President and Director, Swalling & Associates, P.C. (accounting firm) since 1991 | |
|
David G. Wight, 70
|
President and CEO, Alyeska Pipeline Service Company from 2000 until retirement in 2005; and Director, Storm Cat Energy since 2006 |
In addition to the information provided above, information
concerning the officers and directors of the Company required to
be included in this item is set forth under the headings
“Proposal 1: Election of Directors” and
“Section 16(a) Beneficial Ownership Reporting
Compliance” in the Company’s definitive proxy
statement for the 2011 Annual Shareholders’ Meeting which
is incorporated herein by reference.
| Item 11. | Executive Compensation |
Information concerning executive compensation and director
compensation and certain matters regarding participation in the
Company’s compensation committee required by this item is
set forth under the heading “Compensation
Discussion & Analysis” in the Company’s
definitive proxy statement for the 2011 Annual
Shareholders’ Meeting and is incorporated into this report
by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information concerning the security ownership of certain
beneficial owners and management required by this item is set
forth under the heading “Security Ownership of Certain
Beneficial Owners and Management” in the Company’s
definitive proxy statement for the 2011 Annual
Shareholders’ Meeting and is incorporated into this report
by reference.
87
Table of Contents
| Item 13. | Certain Relationships and Related Transactions and Director Independence |
Information concerning certain relationships and related
transactions required by this item is set forth under the
heading “Interest of Management in Certain
Transactions” and the information concerning director
independence is set forth under the heading of “Information
Regarding the Board of Directors and its Committees” each
in the Company’s definitive proxy statement for the 2011
Annual Shareholders’ Meeting and is incorporated into this
report by reference.
| Item 14. | Principal Accounting Fees and Services |
Information concerning fees paid to our independent auditors
required by this item is included under the heading “Fees
Billed By Independent Registered Public Accounting Firms During
Fiscal Years 2010 and 2009” in the Company’s
definitive proxy statement for the 2011 Annual
Shareholders’ Meeting and is incorporated into this report
by reference.
| Item 15. | Exhibits and Financial Statement Schedules |
Financial Statements
(a) The following documents are filed as part of this
Annual Report on
Form 10-K:
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Income for the years ended
December 31, 2010, 2009, and 2008
Consolidated Statements of Changes in Shareholders’ Equity
and Comprehensive Income for the years ended December 31,
2010, 2009, and 2008
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009, and 2008
Notes to Consolidated Financial Statements
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Table of Contents
Exhibits
|
3.1
|
Articles of Amendment to the Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.3 of the Company’s Form 10-Q for the quarter ended June 30, 2009, filed with the SEC on August 10, 2009.) | |
|
3.2
|
Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.4 of the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2009.) | |
|
4.1
|
Pursuant to Item 601 (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. | |
|
4.2
|
Indenture dated as of December 16, 2005 (Incorporated by reference to Exhibit 4.3 of the Company’s Form 10-K for the year ended December 31, 2005, filed with the SEC on March, 16, 2006.) | |
|
4.3
|
Form of Junior Subordinated Debt Security due 2036 (Incorporated by reference to Exhibit 4.4 of the Company’s Form 10-K for the year ended December 31, 2005, filed with the SEC on March, 16, 2006.) | |
|
10.36
|
Employment Agreement with R. Marc Langland dated January 1, 2011 (Incorporated by reference to Exhibit 10.36 to the Company’s Current Report on Form 8-K, filed with the SEC on January 5, 2011.) | |
|
10.37
|
Employment Agreement with Christopher N. Knudson dated January 1, 2011 (Incorporated by reference to Exhibit 10.37 to the Company’s Current Report on Form 8-K, filed with the SEC on January 5, 2011.) | |
|
10.38
|
Employment Agreement with Joseph M. Schierhorn dated January 1, 2011 (Incorporated by reference to Exhibit 10.38 to the Company’s Current Report on Form 8-K, filed with the SEC on January 5, 2011.) | |
|
10.39
|
Employment Agreement with Joseph M. Beedle dated January 1, 2011 (Incorporated by reference to Exhibit 10.39 to the Company’s Current Report on Form 8-K, filed with the SEC on January 5, 2011.) | |
|
10.40
|
Employment Agreement with Steven L. Hartung dated January 1, 2011 (Incorporated by reference to Exhibit 10.40 to the Company’s Current Report on Form 8-K, filed with the SEC on January 5, 2011.) | |
|
21.1
|
Subsidiaries | |
|
23.1
|
Consent of Moss Adams, LLP | |
|
23.2
|
Consent of KPMG LLP | |
|
24.1
|
Form of Power of Attorney | |
|
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 | |
|
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 | |
|
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 | |
|
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 |
89
Table of Contents
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, 2010.
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, 2010,
was $94,761,114.
The number of shares of Northrim BanCorp’s common stock
outstanding at March 11, 2010, was 6,429,476.
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.
90
Table of Contents
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 14th day of March, 2011.
Northrim BanCorp, Inc.
| By |
/s/ R.
Marc Langland
|
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 14th day of March, 2011.
Principal Executive Officer:
/s/ R.
Marc Langland
R. Marc Langland
Chairman, President and Chief Executive Officer
Principal Financial Officer and Principal Accounting Officer:
/s/ Joseph
M. Schierhorn
Joseph M. Schierhorn
Executive Vice President, Chief Financial Officer
R. Marc Langland, pursuant to powers of attorney signed by
the following directors and substantially identical to the power
of attorney which is being filed with this Annual Report on
Form 10-K
as Exhibit 24.1, has signed this report on March 14,
2011, as attorney-in-fact for the following directors who
constitute a majority of the Board of Directors.
|
Larry S. Cash
|
R. Marc Langland | |||
|
Mark G. Copeland
|
Richard L. Lowell | |||
|
Ronald A. Davis
|
Irene Sparks Rowan | |||
|
Anthony Drabek
|
John C. Swalling | |||
|
Christopher N. Knudson
|
David G. Wight |
| By |
/s/ R.
Marc Langland
|
R. Marc Langland,
as Attorney-in-fact
March 14, 2011
91
Table of Contents
Investor
Information
Annual
Meeting
|
Date:
|
Thursday, May 19, 2011 | |
|
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
For the year ended December 31, 2010: Moss Adams, LLP
For the years ended December 31, 2009 and prior: 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 Northrim’s 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 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
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TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters, and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Summary Of Significant Accounting PoliciesNote 2 Cash and Due From BanksNote 3 Overnight InvestmentsNote 4 Investment SecuritiesNote 5 LoansNote 6 Allowance For Loan LossesNote 7 Premises and EquipmentNote 8 Other Real Estate OwnedNote 9 Goodwill, Intangibles and Other AssetsNote 10 DepositsNote 11 BorrowingsNote 12 Junior Subordinated DebenturesNote 13 Interest ExpenseNote 14 Income TaxesNote 15 Comprehensive IncomeNote 16 Employee Benefit PlansNote 17 Common StockNote 18 OptionsNote 19 Commitments and Contingent LiabilitiesNote 20 Regulatory MattersNote 21 Fair Value MeasurementsNote 22 Quarterly Results Of Operations (unaudited)Note 23 Disputes and ClaimsNote 24 Parent Company Financial InformationItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules