10-Q


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
FORM 10-Q
(Mark One)
þ    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2015
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 000-33501
NORTHRIM BANCORP, INC.
(Exact name of registrant as specified in its charter)
Alaska
 
92-0175752
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
3111 C Street
Anchorage, Alaska 99503
(Address of principal executive offices)    (Zip Code) 

(907) 562-0062

(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   
ý Yes  ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
ý Yes  ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:  
Large Accelerated Filer ¨  Accelerated Filer ý    Non-accelerated Filer ¨ Smaller Reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      
¨ Yes  ý No
The number of shares of the issuer’s Common Stock, par value $1 per share, outstanding at November 6, 2015 was 6,862,916.






TABLE OF CONTENTS
 
 
 
Part  I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



1



PART I. FINANCIAL INFORMATION
These consolidated financial statements should be read in conjunction with the financial statements, accompanying notes and other relevant information included in Northrim BanCorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014.
ITEM 1. FINANCIAL STATEMENTS

2


CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.
Consolidated Balance Sheets
(Unaudited)
 
September 30,
2015
 
December 31,
2014
(In Thousands, Except Share Data)
 
ASSETS
 
 
 
Cash and due from banks

$42,257

 

$36,036

Interest bearing deposits in other banks
102,309

 
36,020

 
 
 
 
Investment securities available for sale
234,273

 
281,730

Investment securities held to maturity
904

 
2,201

Total portfolio investments
235,177

 
283,931

 
 
 
 
Investment in Federal Home Loan Bank stock
1,816

 
3,404

 
 
 
 
Loans held for sale
66,597

 
43,866

 
 
 
 
Loans
973,680

 
924,504

Allowance for loan losses
(17,848
)
 
(16,723
)
Net loans
955,832

 
907,781

Purchased receivables, net
13,732

 
15,254

Accrued interest receivable
3,476

 
3,373

Other real estate owned, net
3,511

 
4,607

Premises and equipment, net
39,434

 
35,643

Goodwill
22,334

 
22,334

Other intangible assets, net
1,483

 
1,701

Other assets
51,295

 
55,399

Total assets

$1,539,253

 

$1,449,349

LIABILITIES
 
 
 
Deposits:
 
 
 
Demand

$485,304

 

$403,523

Interest-bearing demand
179,080

 
185,114

Savings
221,205

 
222,324

Money market
236,488

 
226,574

Certificates of deposit less than $100,000
53,386

 
58,249

Certificates of deposit greater than $100,000
89,456

 
83,963

Total deposits
1,264,919

 
1,179,747

Securities sold under repurchase agreements
33,413

 
19,843

Borrowings
12,458

 
26,304

Junior subordinated debentures
18,558

 
18,558

Other liabilities
34,569

 
40,456

Total liabilities
1,363,917

 
1,284,908

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, 6,859,351 and 6,854,189 shares
issued and outstanding at September 30, 2015 and December 31, 2014, respectively
6,859

 
6,854

Additional paid-in capital
62,183

 
61,729

Retained earnings
105,363

 
95,493

Accumulated other comprehensive income
784

 
247

Total Northrim BanCorp shareholders' equity
175,189

 
164,323

Noncontrolling interest
147

 
118

Total shareholders' equity
175,336

 
164,441

Total liabilities and shareholders' equity

$1,539,253

 

$1,449,349

See notes to consolidated financial statements

3



NORTHRIM BANCORP, INC.
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended September 30,
Nine Months Ended September 30,
(In Thousands, Except Per Share Data)
2015
 
2014
2015
 
2014
Interest Income
 
 
 
 
 
 
Interest and fees on loans

$14,484

 

$13,437


$42,086

 

$37,390

Interest on investment securities available for sale
844

 
696

2,488

 
2,176

Interest on investment securities held to maturity
13

 
24

61

 
69

Interest on deposits in other banks
47

 
55

82

 
145

Total Interest Income
15,388

 
14,212

44,717

 
39,780

Interest Expense
 
 
 
 
 
 
Interest expense on deposits, borrowings and junior subordinated debentures
706

 
487

2,208

 
1,411

Net Interest Income
14,682

 
13,725

42,509

 
38,369

Provision for loan losses
676

 

1,378

 
(1,136
)
Net Interest Income After Provision for Loan Losses
14,006

 
13,725

41,131

 
39,505

Other Operating Income
 
 
 
 
 
 
Mortgage banking income
8,113

 

23,235

 

Employee benefit plan income
1,004

 
899

2,712

 
2,653

Electronic banking income
721

 
590

2,043

 
1,694

Purchased receivable income
587

 
582

1,738

 
1,547

Service charges on deposit accounts
559

 
599

1,617

 
1,682

Gain on sale of securities, net
4

 
15

134

 
461

Gain on sale of premises and equipment

 
1,115


 
1,115

Equity in earnings from RML

 
384


 
608

Other income
1,419

 
750

3,026

 
2,014

Total Other Operating Income
12,407

 
4,934

34,505

 
11,774

Other Operating Expense
 
 
 
 
 
 
Salaries and other personnel expense
11,440

 
7,107

33,115

 
19,866

Occupancy expense
1,522

 
1,041

4,720

 
3,030

Change in fair value, RML earn-out liability
780

 

2,869

 

Professional and outside services
642

 
323

2,184

 
947

Marketing expense
565

 
417

1,824

 
1,425

Insurance expense
406

 
319

1,075

 
788

Equipment expense
387

 
405

1,249

 
1,062

Software expense
298

 
383

947

 
997

Internet banking expense
229

 
264

676

 
677

Intangible asset amortization expense
73

 
81

218

 
214

Merger and acquisition expense

 
1,031


 
1,736

Reserve for (recovery from) purchased receivables
(23
)
 
241

(95
)
 
447

OREO (income) expense, net rental income and gains on sale
152

 
(68
)
328

 
(315
)
Other operating expense
1,732

 
1,235

5,308

 
3,494

Total Other Operating Expense
18,203

 
12,779

54,418

 
34,368

Income Before Provision for Income Taxes
8,210

 
5,880

21,218

 
16,911

Provision for income taxes
2,678

 
1,982

7,111

 
5,848

Net Income
5,532

 
3,898

14,107

 
11,063

Less: Net income attributable to the noncontrolling interest
197

 
191

431

 
329

Net Income Attributable to Northrim BanCorp, Inc.

$5,335

 

$3,707


$13,676

 

$10,734

Earnings Per Share, Basic

$0.78

 

$0.54


$2.00

 

$1.59

Earnings Per Share, Diluted

$0.77

 

$0.53


$1.97

 

$1.57

Weighted Average Shares Outstanding, Basic
6,856,059

 
6,831,976

6,854,862

 
6,733,175

Weighted Average Shares Outstanding, Diluted
6,952,209

 
6,919,993

6,941,861

 
6,822,288

See notes to consolidated financial statements

4



NORTHRIM BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
2010
 
Three Months Ended September 30,
Nine Months Ended September 30,
(In Thousands)
2015
2014
2015
2014
Net income

$5,532


$3,898


$14,107


$11,063

Other comprehensive income (loss), net of tax:
 
 
 
 
   Securities available for sale:
 
 
 
 
         Unrealized gains (losses) arising during the period

$217


($307
)

$953


$400

         Reclassification of net gains included in net income (net tax expense of
 
 
 
 
          $2 and $6 for the third quarter of 2015 and 2014, respectively and
 
 
 
 
          $55 and $190 for the first nine months of 2015 and 2014, respectively)
(2
)
(9
)
(79
)
(271
)
         Income tax (benefit) expense related to unrealized gains and losses
(74
)
108

(337
)
(152
)
Other comprehensive income (loss)
141

(208
)
537

(23
)
Comprehensive income
5,673

3,690

14,644

11,040

  Less: comprehensive income attributable to the noncontrolling interest
197

191

431

329

      Comprehensive income attributable to Northrim BanCorp, Inc.

$5,476


$3,499


$14,213


$10,711

 
See notes to consolidated financial statements


5



NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
 Retained Earnings
 
Accumulated Other Comprehensive Income
 
Non-controlling Interest
 
 Total
 
Number of Shares
 
Par Value
 
 
 
 
 
(In Thousands)
 
 
 
 
 
 
Balance as of January 1, 2014
6,538

 

$6,538

 

$54,089

 

$82,855

 

$669

 

$167

 

$144,318

Purchase of Alaska Pacific
290

 
290

 
7,156

 

 

 

 
7,446

Cash dividend declared

 

 

 
(4,770
)
 

 

 
(4,770
)
Stock-based compensation expense

 

 
360

 

 

 

 
360

Exercise of stock options
26

 
26

 
28

 

 

 

 
54

Excess tax benefits from stock based payment arrangements

 

 
96

 

 

 

 
96

Distributions to noncontrolling interest

 

 

 

 

 
(508
)
 
(508
)
Other comprehensive loss, net of tax

 

 

 

 
(422
)
 

 
(422
)
Net income attributable to the noncontrolling interest

 

 

 

 

 
459

 
459

Net income attributable to Northrim BanCorp, Inc.

 

 

 
17,408

 

 

 
17,408

Twelve Months Ended December 31, 2014
6,854

 

$6,854

 

$61,729

 

$95,493

 

$247

 

$118

 

$164,441

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividend declared






(3,806
)





(3,806
)
Stock-based compensation expense




357








357

Exercise of stock options
5


5


92








97

Excess tax benefits from share-based payment arrangements




5








5

Distributions to noncontrolling interest










(402
)

(402
)
Other comprehensive income, net of tax








537




537

Net income attributable to the noncontrolling interest










431


431

Net income attributable to Northrim BanCorp, Inc.






13,676






13,676

Nine Months Ended September 30, 2015
6,859



$6,859



$62,183



$105,363



$784



$147



$175,336

 
See notes to consolidated financial statements

6



NORTHRIM BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
(In Thousands)
2015
 
2014
Operating Activities:
 
 
 
Net income

$14,107

 

$11,063

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

 
 

Gain on sale of securities, net
(134
)
 
(461
)
Gain on sale of premises and equipment

 
(1,115
)
Depreciation and amortization of premises and equipment
1,670

 
1,355

Amortization of software
136

 
136

Intangible asset amortization
218

 
214

Amortization of investment security premium, net of discount accretion
(196
)
 
(126
)
Deferred tax liability
(314
)
 
(1,503
)
Stock-based compensation
357

 
254

Excess tax benefits from share-based payment arrangements
(5
)
 
(5
)
Deferral of loan fees and costs, net
(203
)
 
627

Provision (benefit) for loan losses
1,378

 
(1,136
)
Reserve for (recovery from) purchased receivables
(95
)
 
447

Purchases of loans held for sale

 
(117,225
)
Proceeds from the sale of loans held for sale
571,494

 
118,201

Origination of loans held for sale
(594,225
)
 

Gain on sale of other real estate owned
(136
)
 
(470
)
Impairment on other real estate owned
360

 
45

Equity in undistributed earnings from mortgage affiliate

 
(239
)
Net changes in assets and liabilities:
 

 
 
(Increase) in accrued interest receivable
(103
)
 
(754
)
Decrease in other assets
3,836

 
1,685

Decrease in other liabilities
(5,937
)
 
(2,606
)
Net Cash (Used) Provided by Operating Activities
(7,792
)
 
8,387

Investing Activities:
 

 
 

Investment in securities:
 

 
 
Purchases of investment securities available for sale
(107,873
)
 
(156,014
)
Proceeds from sales/maturities of securities available for sale
156,491

 
173,239

Proceeds from calls/maturities of securities held to maturity
1,285

 

Purchases of domestic certificates of deposit

 
(3,500
)
Proceeds from maturities of domestic certificates of deposit
3,500

 
13,500

Proceeds from redemption of FHLB stock
1,588

 
129

Alaska Pacific acquisition, net of cash received

 
6,367

Decrease in purchased receivables, net
1,617

 
1,250

Increase in loans, net
(50,359
)
 
(28,899
)
Proceeds from sale of other real estate owned
1,971

 
1,828

Elliott Cove divestiture, net of cash received
219

 

Decrease in loan to Elliott Cove, net

 
189

Purchases of premises and equipment
(5,461
)
 
(4,104
)
Net Cash (Used) Provided by Investing Activities
2,978

 
3,985

Financing Activities:
 

 
 
Increase in deposits
85,172

 
37,206

Increases (decrease) in securities sold under repurchase agreements
13,570

 
(1,212
)
Decrease in borrowings
(13,846
)
 
(4,352
)
Distributions to noncontrolling interest
(402
)
 
(341
)
Proceeds from the issuance of common stock
97

 
75

Excess tax benefits from share-based payment arrangements
5

 
5


7



Cash dividends paid
(3,772
)
 
(3,503
)
Net Cash Provided (Used) by Financing Activities
80,824

 
27,878

 
 
 
 
Net Change in Cash and Cash Equivalents
76,010

 
40,250

Cash and Cash Equivalents at Beginning of Period
68,556

 
85,591

Cash and Cash Equivalents at End of Period

$144,566

 

$125,841

Supplemental Information:
 

 
 
Income taxes paid

$4,136

 

$3,627

Interest paid

$2,174

 

$1,408

Noncash commitments to invest in Low Income Housing Tax Credit Partnerships

$55

 

$8,518

Transfer of loans to other real estate owned

$1,133

 

$1,158

Transfer of premises to other real estate owned

$—

 

$904

Cash dividends declared but not paid

$34

 

$23

Acquisitions:
 
 
 
Assets acquired

$—

 

$167,199

Liabilities assumed

$—

 

$153,172

 
See notes to consolidated financial statements

8



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements and corresponding footnotes have been prepared by Northrim BanCorp, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. The year-end Consolidated Balance Sheet data was derived from the Company's audited financial statements. Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles ("GAAP") for complete financial statements. The Company owns a 100% interest in Residential Mortgage Holding Company, LLC ("RML"), the parent company of Residential Mortgage, LLC ("Residential Mortgage") and a 50.1% interest in Northrim Benefits Group, LLC ("NBG") and consolidates their balance sheets and income statements into its financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain immaterial reclassifications have been made to prior year amounts to maintain consistency with the current year with no impact on net income or total shareholders’ equity. The Company determined that it operates in two primary operating segments: Community Banking and Home Mortgage Lending. Prior to December 2014, the Company operated in a single segment: Community Banking. The Company has evaluated events and transactions through November 6, 2015 for potential recognition or disclosure. Operating results for the interim period ended September 30, 2015, are not necessarily indicative of the results anticipated for the year ending December 31, 2015. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

2. Significant Accounting Policies and Recent Accounting Pronouncements

The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
In January 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. ASU 2014-01 permits an entity to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and should be applied prospectively. The Company adopted ASU 2014-01 in its consolidated financial statements as of January 1, 2015. As a result, amortization expense related to the Company's investments in low income housing tax credit partnerships has been included in the line item entitled "Provision for income taxes" in the Consolidated Statements of Income for all periods presented.
In February 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). The amendments to the Codification in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. The amendments in this update affect the following areas: 1) the effect of related parties on the primary beneficiary determination, 2) evaluating fees paid to a decision maker or a service provider as a variable interest, 3) the effect of fee arrangements on the primary beneficiary determination, and 4) certain investment funds. This ASU is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2015, and must be applied prospectively. The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial position or results of operations.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments to the Codification in ASU 2015-03 identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. This ASU is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2015, and must be applied prospectively. The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial position or results of operations.
In August 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-14, Revenue from Contracts with Customers (“ASU 2015-14”). The amendments to the Codification in ASU 2015-14 defer the effective date of Update 2014-09

9



for all entities by one year. This ASU is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2017, and must be applied prospectively. The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial position or results of operations.
In September 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-16, Business Combinations (“ASU 2015-16”). The amendments to the Codification in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This ASU is effective for fiscal years beginning on or after December 15, 2015, and must be applied prospectively. The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial position or results of operations.

3. Business Combinations
Alaska Pacific Bancshares, Inc.
On April 1, 2014, the Company completed the acquisition of 100% of the outstanding shares of Alaska Pacific Bancshares, Inc. ("Alaska Pacific") for a total purchase price of $13.9 million, which was comprised of the issuance of 290,212 shares of the Company’s common stock (at a volume weighted average closing price of $25.66 per share) and $6.4 million in cash. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting and were recorded at their estimated fair values as of the April 1, 2014 acquisition date. Estimated fair values recorded in the transaction were subject to change for up to one year after the closing date of the acquisition. The primary reason for the acquisition was to expand the Company's geographic footprint in Alaska. 

The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $170,000 and a core deposit intangible of $623,000, or 0.5% of core deposits. The bargain purchase gain represents the excess of the estimated fair value of the net assets acquired in excess of the purchase price and is included in Other Income in the Consolidated Statements of Income in this Form 10-Q. This acquisition resulted in a bargain purchase gain primarily due to the inclusion of certain adjustments to the purchase price for potential risks identified by the Company during the due diligence and price negotiation stages of the acquisition that were concluded in October of 2013. The Company has concluded that the potential risks identified at that time do not represent a liability to the Company and, accordingly, they have not been allocated any value in the application of the acquisition method of accounting.

A summary of the net assets acquired and the estimated fair value adjustments of Alaska Pacific are presented below:  

 
Alaska Pacific
(In Thousands)
 
April 1, 2014
 
 
 
Cost basis net assets
 

$14,733

Cash payment made
 
(6,423
)
Common stock issued
 
(7,446
)
Fair value adjustments:
 

   Net loans
 
(1,137
)
   Premises and equipment
 
547

   Other intangible assets
 
623

   Mortgage servicing rights
 
(119
)
   Deposits
 
(844
)
   Other
 
236

Bargain purchase gain
 

$170



10



A summary of assets acquired and liabilities assumed at their estimated fair values are presented below:  

 
Alaska Pacific
(In Thousands)
 
April 1, 2014
 
 
 
Assets Acquired:
 

   Cash and equivalents
 

$12,956

   Investment securities
 
7,240

   Loans
 
138,432

   Premises and equipment
 
3,436

   Other intangibles
 
623

   Mortgage servicing rights
 
1,170

   Other real estate owned
 
1,709

   Other assets
 
1,645

     Total assets acquired
 

$167,211


 

Liabilities Assumed:
 

   Deposits
 

$151,438

   Other liabilities
 
1,734

     Total liabilities assumed
 

$153,172

Alaska Pacific purchased loans not subject to the requirements of FASB ASC  310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30") are presented below at acquisition:
(In Thousands)
 
April 1, 2014
 
 
 
Contractually required principal payments
 

$133,921

Purchase adjustment for credit, interest rate, and liquidity
 
612

Fair value of purchased non-credit impaired loans
 

$134,533


Alaska Pacific purchased loans subject to the requirements of FASB ASC  310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality. The Company identified eighteen purchased credit impaired loans as of April 1, 2014. This group of loans consists primarily of commercial and commercial real estate loans, and unlike a pool of consumer mortgages, it is not practicable for the Company to analyze the accretable yield of these loans. As such, the Company has elected the cost recovery method of income recognition for these loans, and thus no accretable difference has been identified for these loans.
Purchased credit impaired loans at acquisition are presented below:
(In Thousands)
 
April 1, 2014
 
 
 
Contractually required principal payments
 

$7,553

Nonaccretable difference
 
(3,654
)
Fair value of purchased credit impaired loans
 

$3,899

The acquisition of Alaska Pacific is not considered significant to the Company’s financial statements. The operations of Alaska Pacific are included in our operating results from April 1, 2014, and the Company estimates that these operations added revenue of $6.7 million, non-interest expense of $3.9 million, and net income of $2.8 million, before taxes, for the nine months ended September 30, 2015. Alaska Pacific’s results of operations prior to the acquisition are not included in our operating results. Additionally, merger-related costs of $1.3 million for the nine months ended September 30, 2014 were incurred and expensed in connection with the acquisition of Alaska Pacific and recognized within the merger and acquisition expense on the Consolidated Statements of Income.

11



The following table presents unaudited pro forma results of operations for the nine month period ended September 30, 2014 as if the acquisition of Alaska Pacific had occurred on January 1, 2014. The proforma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2014.
(In Thousands, except earnings per share data)

Nine Months Ended September 30, 2014




Pro Forma

Pro Forma


Company
Alaska Pacific1
Adjustments

Combined
Net interest and other income


$50,143


$2,095


($10
)
2 

$52,228

Net income attributable to Northrim BanCorp, Inc.

10,734

(1,282
)
101

3 
9,553

Earnings Per Share, Basic


$1.59





$1.36

Earnings Per Share, Diluted


$1.57





$1.34

Weighted Average Shares Outstanding, Basic

6,733,175




7,023,387

Weighted Average Shares Outstanding, Diluted

6,822,288




7,112,500

1 Alaska Pacific represents results from January 1 to March 31 for 2014.
2 Amount of amortization/ accretion of the fair value adjustments on loans and certificates of deposit.
3 Amount of amortization/accretion of the fair value adjustments on loans and certificates of deposit, bargain purchase gain, amortization of core deposit intangible, and the change in the provision for income taxes.
Residential Mortgage Holding Company, LLC
On December 1, 2014, the Company completed the acquisition of 76.5% of the equity interest in RML, the parent company of Residential Mortgage, in a cash transaction valued at $29.5 million, resulting in RML becoming an indirect wholly-owned subsidiary of the Company. The primary reason for the acquisition was to expand the Company's presence in the mortgage lending business in Alaska. The fair value of the Company's 23.5% equity interest in RML immediately prior to the acquisition was $9.0 million. The Company recorded a $3.0 million gain in the fourth quarter of 2014 as a result of remeasuring the Company's equity interest in RML immediately prior to the acquisition, which was included in the Company's Consolidated Statements of Income in the line item entitled "Gain on purchase of mortgage affiliate". The Company utilized a market value approach to value its equity interest in RML which included analysis of current trading values and historical acquisition multiples of comparable mortgage companies. The consideration transferred or transferable to the former owners of RML and the assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting and were recorded at their estimated fair values as of the December 1, 2014 acquisition date. Estimated fair values recorded in the transaction are subject to change for up to one year after the closing date of the acquisition. The application of the acquisition method of accounting resulted in the recognition of goodwill in the amount of $14.8 million and a trade name intangible of $950,000. RML holds a 30% equity interest in Homestate Mortgage LLC.


12



The former owners of RML (the "sellers") will receive additional cash proceeds (the "earn-out" payments) based on the adjusted pretax earnings of RML for each of the twelve months periods ending November 30, 2015, 2016, 2017, 2018 and 2019. The Company recorded a $7.3 million liability as of December 1, 2014 as part of its purchase accounting for future earn-out payments. Per the purchase agreement, the earn-out payments are calculated as follows:
First tier earn-out payment
Adjusted pretax earnings greater than $1,000,000 and less than or equal to $2,000,000
Payment will be calculated as product of amount of adjusted pretax earnings times 40%
Second tier earn-out payment
Adjusted pretax earnings greater than $2,000,000 and less than or equal to $3,000,000
The first tier earn-out payment, plus the product of amount of adjusted pretax earnings greater than $2,000,000 and less than $3,000,000 times 50%
Third tier earn-out payment
Adjusted pretax earnings greater than $3,000,000 and less than or equal to $4,000,000
The first tier plus the second tier earn-out payment, plus the product of amount of adjusted pretax earnings greater than $3,000,000 and less than $4,000,000 times 70%
Fourth tier earn- out payment
Adjusted pretax earnings greater than $4,000,000 and less than or equal to $6,000,000
The first, second and third tier earn-out payment, plus the product of amount of adjusted pretax earnings greater than $4,000,000 and less than $6,000,000 times 85%
Fifth tier earn-out payment
Adjusted pretax earnings greater than $6,000,000
The first, second, third and fourth tier earn-out payment, plus the product of amount of adjusted pretax earnings greater than $6,000,000 times 55%

The purchase agreement provides for these earn-out payments as a portion of the purchase price to be paid to the sellers in future periods, contingent on future events. Therefore the Company included an estimate of the acquisition-date fair value of the contingent consideration of $7.3 million as part of the cost of the combination. The accounting treatment of the contingent consideration to be paid to those of the sellers who continue employment with the Company was evaluated to determine whether the amounts represent purchase consideration or a separate transaction, such as post-transaction employee compensation. Factors evaluated require significant judgment and include, among other factors; consideration of the terms of continuing employment, levels of post-transaction compensation, ownership interest of the sellers/employees, linkage of the contingent consideration to the transaction date combination valuation, and any other agreements or matters related to the transaction.
Based on an evaluation of the factors surrounding the transaction and the terms of the purchase agreement, the amount due under the earn-out provision was accounted for as acquisition consideration. The Company concluded that the contingent consideration to be paid to the sellers/employees was a significant component of the transaction date valuation of the acquired business. The calculation of the contingent payment was based upon factors established at the date of the transaction to be paid upon meeting the established earnings criteria of RML. The post transaction employment arrangements of the continuing employees are at market rates, and the formula for determining the contingent consideration is consistent with the business valuation methodologies, based upon a multiplier of earnings recognized from RML for five twelve month periods following the acquisition.

For the nine month period ended September 30, 2015, the Company recorded an adjustment to increase the contingent liability by $2.9 million. The increase in the contingent liability resulted from the excess of RML's pretax income from December 1, 2014 through the end of the third quarter of 2015 over and above estimates made at the close of the purchase of RML. The adjustment to the contingent liability for estimated future earn-out payments is recorded in the line item titled "Change in fair value, RML earn-out liability" in other operating expense on the Consolidated Statements of Income. The total contingent liability as of September 30, 2015 is $10.3 million.


13



A summary of the net assets acquired and the estimated fair value adjustments of RML are presented below:  
 
 
RML
(In Thousands)
 
December 1, 2014
 
 
 
Cost basis net assets
 

$11,915

Cash payment made
 
(18,240
)
Cash surrender value of life insurance paid
 
(3,896
)
Liability for future earn out payments
 
(7,318
)
 
 
 
Fair value adjustments:
 
 
   Loans
 
(360
)
   Trade name intangible
 
950

   Rate lock derivative asset
 
960

   Investment in Homestate Mortgage, LLC
 
1,490

   Other
 
(311
)
Goodwill
 

($14,810
)
A summary of assets acquired and liabilities assumed at their estimated fair values are presented below:  
 
 
RML
(In Thousands)
 
December 1, 2014
 
 
 
Assets Acquired:
 
 
   Cash and equivalents
 

$10,828

   Net loans
 
41,304

   Premises and equipment
 
255

   Trade name intangible
 
950

   Rate lock derivative asset
 
960

   Investment in Homestate Mortgage LLC
 
3,000

   Other real estate owned
 
270

   Other assets
 
10,291

     Total assets acquired
 

$67,858

 
 
 
Liabilities Assumed:
 
 
   Borrowings
 

$37,541

   Other liabilities
 
6,625

     Total liabilities assumed
 

$44,166

The acquisition of RML is not considered significant to the Company’s financial statements under Regulation S-X; however, the Company has determined that the acquisition results in a new reporting segment, Home Mortgage Lending.
The operations of RML are included in our operating results from December 1, 2014, and added revenue of $23.8 million, non-interest expense of $16.4 million, and net income of $7.4 million, before taxes, for the nine month period ended September 30, 2015. RML’s results of operations prior to the December 1, 2014 acquisition are included in our operating results under the equity method. Additionally, merger-related costs of $430,000 for the nine-month period ended September 30, 2014 were incurred and expensed in connection with the acquisition of RML and recognized within the merger and acquisition expense on the Consolidated Statements of Income.
    

14



The following table presents unaudited pro forma results of operations for the nine month period ended September 30, 2014 as if the acquisition of RML had occurred on January 1, 2014. The proforma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2014.
(In Thousands, except earnings per share data)
 
Nine Months Ended September 30, 2014
 
 
 
 
 
Pro Forma
 
Pro Forma
 
 
Company
RML1
 
Adjustments
 
Combined
Net interest and other income
 

$50,143


$17,978

2 

($569
)
3 

$67,552

Net income attributable to Northrim BanCorp, Inc.
 
10,734

3,172

 
2,625

4 
16,531

Earnings Per Share, Basic
 

$1.59

 
 
 
 

$2.46

Earnings Per Share, Diluted
 

$1.57

 
 
 
 

$2.42

Weighted Average Shares Outstanding, Basic
 
6,733,175

 
 
 
 
6,733,175

Weighted Average Shares Outstanding, Diluted
 
6,822,288

 
 
 
 
6,822,288

1 RML represents results from January 1 to September 30.
2 2014 amount is comprised of net interest income of $244,000 and $17.7 million of other income.
3 Amount of accretion of the fair value adjustments on loans and income recognized under the equity method prior to the December 2014 acquisition.
4 Amount of accretion of the fair value adjustments on loans, income recognized under the equity method, gain on acquisition, earn out accretion, and the change in the provision for income taxes.
Prior to December 1, 2014, the Company accounted for RML under the equity method of accounting. As of December 1, 2014, the Company owns 100% interest in RML and consolidates RML's activity into the Company's Consolidated Financial Statements.
The following table presents unaudited combined pro forma results of operations for the nine month period ended September 30, 2014 as if the acquisition of Alaska Pacific and RML had occurred on January 1, 2014. The proforma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisitions actually occurred on January 1, 2014.
(In Thousands, except earnings per share data)
 
Nine Months Ended September 30, 2014
 
 
 
Alaska
 
 
Pro Forma
 
Pro Forma
 
 
Company
Pacific1
RML2
 
Adjustments
 
Combined
Net interest and other income
 

$50,143


$2,095


$17,978

3 

($597
)
4 

$69,619

Net income attributable to Northrim BanCorp, Inc.
 
10,734

(1,282
)
3,172

 
2,726

5 
15,350

Earnings Per Share, Basic
 

$1.59

 
 
 
 
 

$2.19

Earnings Per Share, Diluted
 

$1.57

 
 
 
 
 

$2.16

Weighted Average Shares Outstanding, Basic
 
6,733,175

 
 
 
 
 
7,023,387

Weighted Average Shares Outstanding, Diluted
 
6,822,288

 
 
 
 
 
7,112,500

1 Alaska Pacific represents results from January 1 to March 31 for 2014.
2 RML represents results from January 1 to September 30.
3 2014 amount is comprised of net interest income of $244,000 and $17.7 million of other income.
4 Amount of amortization/ accretion of the fair value adjustments on loans and certificates of deposit for Alaska Pacific and amount of accretion of the fair value adjustments on loans and income recognized under the equity method prior to the December 2014 acquisition for RML.

15



5 Amount of amortization/accretion of the fair value adjustments on loans and certificates of deposit, bargain purchase gain, amortization of core deposit intangible, and the change in the provision for income taxes for Alaska Pacific and amount of accretion of the fair value adjustments on loans, income recognized under the equity method, gain on acquisition, earn out accretion, and the change in the provision for income taxes for RML.

4. 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.  As of September 30, 2015, the Company had no certificate of deposit in another bank with original maturity greater than 90 days. Cash and cash equivalent balances placed with the Federal Reserve of San Francisco is the only concentration representing more than 10% of the Company’s equity.

5. Investment Securities
The carrying values and approximate fair values of investment securities at the periods indicated are presented below:
(In Thousands)
Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value
September 30, 2015
 


 


 


 

Securities available for sale
 


 


 


 

U.S. Treasury and government sponsored entities

$181,920



$859



$5



$182,774

Municipal securities
10,932


172


13


11,091

U.S. Agency mortgage-backed securities
875


3


4


874

Corporate bonds
38,309


228




38,537

Preferred stock
998




1


997

Total securities available for sale

$233,034



$1,262



$23



$234,273

Securities held to maturity
 


 


 


 

Municipal securities

$904



$68



$—



$972

Total securities held to maturity

$904



$68



$—



$972

December 31, 2014
 


 


 


 

Securities available for sale
 


 


 


 

U.S. Treasury and government sponsored entities

$226,624



$105



$539



$226,190

Municipal securities
11,843


285


4


12,124

U.S. Agency mortgage-backed securities
1,024


6


1


1,029

Corporate bonds
38,820


415




39,235

Preferred stock
2,999


153




3,152

Total securities available for sale

$281,310



$964



$544



$281,730

Securities held to maturity
 


 


 


 

Municipal securities

$2,201



$107



$—



$2,308

Total securities held to maturity

$2,201



$107



$—



$2,308



16



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 September 30, 2015 and December 31, 2014 were as follows:

 
Less Than 12 Months
More Than 12 Months
Total
(In Thousands)
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
September 30, 2015:
 
 
 
 
 
 
Securities Available for Sale
 
 
 
 
 
 
     U.S. Treasury and government sponsored entities

$3,621


$5


$39


$—


$3,660


$5

     Municipal Securities
2,145

13



2,145

13

     Mortgage-backed Securities
508

3

80

1

588

4

     Preferred Stock
996

1



996

1

          Total

$7,270


$22


$119


$1


$7,389


$23

 
 
 
 
 
 
 
December 31, 2014:
 
 
 
 
 
 
Securities Available for Sale
 
 
 
 
 
 
     U.S. Treasury and government sponsored entities

$165,004


$539


$—


$—


$165,004


$539

     Municipal Securities
567

4



567

4

     Mortgage-backed Securities
117

1



117

1

          Total

$165,688


$544


$—


$—


$165,688


$544


There were twelve and twenty-nine available-for-sale securities with unrealized losses as of September 30, 2015 and December 31, 2014, respectively, that have been in a loss position for less than twelve months. There were three and no securities as of September 30, 2015 and December 31, 2014 that have been in an unrealized loss position for more than twelve months.  The contractual terms of the investments in a loss position do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company does not intend to sell, nor is it required to sell these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

At September 30, 2015, $64.0 million in securities, or 27%, of the investment portfolio was pledged for deposits and borrowings, as compared to $54.1 million, or 19%, at December 31, 2014. We held no securities of any single issuer (other than government sponsored entities) that exceeded 10% of our shareholders’ equity at September 30, 2015 and December 31, 2014.


17



The amortized cost and fair values of debt securities at September 30, 2015, are distributed by contractual maturity as shown below.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.  Although preferred stock has no stated maturity, it is aggregated in the calculation of weighted average yields presented below in the category of investments that mature in ten years or more.
(In  Thousands)
Amortized Cost

Fair Value

Weighted Average Yield
US Treasury and government sponsored entities
 

 

 
1-5 years

$181,920



$182,774


1.26
%
Total

$181,920



$182,774


1.26
%
U.S. Agency mortgage-backed securities
 

 

 
1-5 years

$37



$36


1.99
%
5-10 years
250


248


3.04
%
Over 10 years
588


590


2.82
%
Total

$875



$874


2.85
%
Corporate bonds
 

 

 
Within 1 year

$17,233



$17,388


1.99
%
1-5 years
21,076


21,149


1.07
%
Total

$38,309



$38,537


1.48
%
Preferred stock
 

 

 
Over 10 years

$998



$997


6.02
%
Total

$998



$997


6.02
%
Municipal securities
 

 

 
Within 1 year

$658



$666


2.64
%
1-5 years
6,289


6,434


2.11
%
5-10 years
4,889


4,963


4.54
%
Total

$11,836



$12,063


3.14
%

The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the nine months ending September 30, 2015 and 2014, respectively, are as follows: 
(In Thousands)
Proceeds

Gross Gains

Gross Losses
2015
 

 

 
Available for sale securities

$3,633



$134



$—

2014
 

 

 
Available for sale securities

$24,102



$465



$4

    
A summary of interest income for the nine months ending September 30, 2015 and 2014 on available for sale investment securities is as follows:
(In Thousands)
2015

2014
US Treasury and government sponsored entities

$1,713



$1,186

U.S. Agency mortgage-backed securities
20


17

Other
507


671

Total taxable interest income

$2,240



$1,874

Municipal securities

$248



$302

Total tax-exempt interest income

$248



$302

Total

$2,488



$2,176


18




6. Loans Held for Sale
The Company acquired the remaining 76.5% of RML on December 1, 2014. The Company originates 1-4 family residential mortgages through RML and sells them to the secondary market. These loans are shown as loans held for sale on the Company's Consolidated Balance Sheet. The Company originated $594.2 million and sold $571.5 million in loans during the nine-month period ending September 30, 2015. Prior to December 1, 2014, the Company had a 23.5% ownership interest in RML and purchased residential loans from them.  The Company then sold these loans in the secondary market.  The Company purchased $117.2 million and sold $118.2 million in loans from RML during the nine-month period ending September 30, 2014.

7.  Loans
The following table presents total portfolio loans by portfolio segment and class of financing receivable, based on our asset quality rating ("AQR") criteria:
(In Thousands)
Commercial

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deeds of trust

Consumer other

Total
September 30, 2015
 

 

 

 

 

 

 

 

 
AQR Pass

$309,102



$48,527



$96,037



$106,573



$290,743



$36,076



$26,964



$29,159



$943,181

AQR Special Mention
573






746


108


367


164


21


1,979

AQR Substandard
15,417




11,356


5,208


262




536


89


32,868

AQR Doubtful

















AQR Loss

















Subtotal

$325,092



$48,527



$107,393



$112,527



$291,113



$36,443



$27,664



$29,269



$978,028

Less: Unearned origination fees, net of origination costs

 

 

(4,348
)
        Total loans
 

 

 

 

 

 

 

 


$973,680

December 31, 2014
 

 

 

 

 

 

 

 

 
AQR Pass

$291,020



$34,651



$91,195



$103,049



$282,774



$36,705



$31,118



$31,399



$901,911

AQR Special Mention
11,618






5,817


2,095


39


396


47


20,012

AQR Substandard
3,905


191




606


1,747


150


486


47


7,132

AQR Doubtful

















AQR Loss

















Subtotal

$306,543



$34,842



$91,195



$109,472



$286,616



$36,894



$32,000



$31,493



$929,055

Less: Unearned origination fees, net of origination costs

 

 

(4,551
)
        Total loans
 

 

 

 

 

 

 

 


$924,504

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

19



Nonaccrual loans totaled $3.7 million and  $4.7 million at September 30, 2015 and December 31, 2014, respectively. Nonaccrual loans at the periods indicated, by segment, are presented below:
(In  Thousands)
September 30, 2015

December 31, 2014
Commercial

$3,041



$2,031

Real estate construction one-to-four family


191

Real estate term owner occupied
41


135

Real estate term non-owner occupied
262


1,746

Real estate term other


39

Consumer secured by 1st deeds of trust
302


485

Consumer other
89


47

Total

$3,735



$4,674


Past due loans and nonaccrual loans at the periods indicated are presented below by AQR:
(In Thousands)
30-59 Days
Past Due
Still
Accruing

60-89 Days
Past Due
Still
Accruing

Greater Than
90 Days
Still
Accruing

Nonaccrual

Total Past
Due

Current

Total
September 30, 2015
 

 

 

 

 

 

 
AQR Pass

$80



$—



$—



$—



$80



$943,101



$943,181

AQR Special Mention
15








15


1,964


1,979

AQR Substandard






3,735


3,735


29,133


32,868

AQR Doubtful













AQR Loss













Subtotal

$95



$—



$—



$3,735



$3,830



$974,198



$978,028

Less: Unearned origination fees,  net of origination costs

 


 


(4,348
)
     Total
 


 


 


 


 


 



$973,680

December 31, 2014
 

 

 

 

 

 

 
AQR Pass

$696



$545



$—



$—



$1,241



$900,670



$901,911

AQR Special Mention










20,012


20,012

AQR Substandard
40






4,674


4,714


2,418


7,132

AQR Doubtful













AQR Loss













Subtotal

$736



$545



$—



$4,674



$5,955



$923,100



$929,055

Less: Unearned origination fees,  net of origination costs

 


 


(4,551
)
     Total
 


 


 


 


 


 



$924,504


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

20



At September 30, 2015 and December 31, 2014, the recorded investment in loans that are considered to be impaired was $35.0 million and $11.3 million, respectively.  The following table presents information about impaired loans by class as of the periods indicated:
(In Thousands)
Recorded Investment

Unpaid Principal Balance

Related Allowance
September 30, 2015
 

 

 
With no related allowance recorded
 

 

 
Commercial - AQR special mention

$160



$160



$—

Commercial - AQR substandard
14,011


14,460



Real estate construction other - AQR pass
721


721



Real estate construction other - AQR substandard
11,356


11,356




Real estate term owner occupied- AQR pass
758


758



Real estate term owner occupied- AQR substandard
5,167


5,167



Real estate term non-owner occupied- AQR pass
493


493



Real estate term non-owner occupied- AQR special mention
101


101



Real estate term non-owner occupied- AQR substandard
262


262



Real estate term other - AQR special mention
148


148



Consumer secured by 1st deeds of trust - AQR pass
78


78



Consumer secured by 1st deeds of trust - AQR substandard
482


482



          Subtotal

$33,737



$34,186



$—

With an allowance recorded
 

 

 
Commercial - AQR substandard

$1,169



$1,169



$433

Consumer other - AQR substandard
80


80


80

  Subtotal

$1,249



$1,249



$513

Total
 
 
 
 
 
Commercial - AQR special mention

$160



$160



$—

Commercial - AQR substandard
15,180


15,629


433

Real estate construction other - AQR pass
721


721



Real estate construction other - AQR substandard
11,356


11,356



Real estate term owner-occupied - AQR pass
758


758



Real estate term owner-occupied - AQR substandard
5,167


5,167



Real estate term non-owner occupied - AQR pass
493


493



Real estate term non-owner occupied - AQR special mention
101


101



Real estate term non-owner occupied - AQR substandard
262


262



Real estate term other - AQR special mention
148


148



Consumer secured by 1st deeds of trust - AQR pass
78


78



Consumer secured by 1st deeds of trust - AQR substandard
482


482



Consumer other - AQR substandard
80


80


80

  Total

$34,986



$35,435



$513


21



(In Thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
December 31, 2014
 

 

 
With no related allowance recorded
 

 

 
Commercial - AQR special mention

$170



$170



$—

Commercial - AQR substandard
3,000


3,045



Real estate construction one-to-four family - AQR special mention
191


191



Real estate construction other - AQR pass
772


772



Real estate term owner occupied - AQR pass
501


501



Real estate term owner occupied - AQR special mention
273


273



Real estate term owner occupied - AQR substandard
558


558



Real estate term non-owner occupied - AQR pass
549

 
549

 

Real estate term non-owner occupied - AQR special mention
2,088


2,088



Real estate term non-owner occupied - AQR substandard
1,709


1,709



Real estate term other - AQR substandard
150


150



Consumer secured by 1st deeds of trust - AQR pass
82


82



Consumer secured by 1st deeds of trust - AQR special mention
448


461



  Subtotal

$10,491



$10,549



$—

With an allowance recorded
 

 

 
Commercial - AQR substandard

$806



$806



$75

         Subtotal

$806



$806



$75

Total
 
 
 
 
 
Commercial - AQR special mention

$170



$170



$—

Commercial - AQR substandard
3,806


3,851


75

Real estate construction one-to-four family - AQR special mention
191


191



Real estate construction other - AQR pass
772


772



Real estate term owner occupied - AQR pass
501


501



Real estate term owner occupied - AQR special mention
273


273



Real estate term owner occupied - AQR substandard
558


558



Real estate term non-owner occupied - AQR pass
549

 
549

 

Real estate term non-owner occupied - AQR special mention
2,088


2,088



Real estate term non-owner occupied - AQR substandard
1,709


1,709



Real estate term other - AQR substandard
150


150



Consumer secured by 1st deeds of trust - AQR pass
82


82



Consumer secured by 1st deeds of trust - AQR special mention
448


461



  Total

$11,297



$11,355



$75


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

22



The following tables summarize our average recorded investment and interest income recognized on impaired loans for the three and nine month periods ended September 30, 2015 and 2014, respectively:
Three Months Ended September 30,
2015

2014
(In Thousands)
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
With no related allowance recorded







     Commercial - AQR pass

$—



$—



$323



$1

     Commercial - AQR special mention
161


3


358


10

     Commercial - AQR substandard
13,661


155


1,661


65

     Real estate construction other - AQR pass
726


13





     Real estate construction other - AQR substandard
5,678







     Real estate term owner occupied- AQR pass
761


17


505


12

     Real estate term owner occupied- AQR special mention




276


6

     Real estate term owner occupied- AQR substandard
5,203


85


1,218


24

     Real estate term non-owner occupied- AQR pass
516


19


591


19

     Real estate term non-owner occupied- AQR special mention
101


10


3,103


168

     Real estate term non-owner occupied- AQR substandard
269




1,118



     Real estate term other - AQR special mention
148


3


795


30

     Real estate term other - AQR substandard




424


3

     Consumer secured by 1st deeds of trust - AQR pass




84


1

     Consumer secured by 1st deeds of trust - AQR special mention
78


1





     Consumer secured by 1st deeds of trust - AQR substandard
461


2


467



         Subtotal

$27,763



$308



$10,923



$339

With an allowance recorded







     Commercial - AQR substandard

$944



$—



$—



$—

     Consumer secured by 1st deeds of trust - AQR substandard




165



     Consumer other - AQR substandard
40







         Subtotal

$984



$—



$165



$—


23



Total





 

     Commercial - AQR pass

$—



$—



$323

 

$1

     Commercial - AQR special mention
161


3


358

 
10

     Commercial - AQR substandard
14,605


155


1,661

 
65

     Real estate construction other - AQR pass
726


13



 

     Real estate construction other - AQR substandard
5,678





 

     Real estate term owner-occupied - AQR pass
761


17


505

 
12

     Real estate term owner-occupied - AQR special mention




276

 
6

     Real estate term owner-occupied - AQR substandard
5,203


85


1,218

 
24

     Real estate term non-owner occupied - AQR pass
516


19


591

 
19

     Real estate term non-owner occupied - AQR special mention
101


10


3,103

 
168

     Real estate term non-owner occupied - AQR substandard
269




1,118

 

     Real estate term other - AQR special mention
148


3


795

 
30

     Real estate term other - AQR substandard




424

 
3

     Consumer secured by 1st deeds of trust - AQR pass




84

 
1

     Consumer secured by 1st deeds of trust - AQR special mention
78


1



 

     Consumer secured by 1st deeds of trust - AQR substandard
461


2


632

 

     Consumer other - AQR substandard
40





 

         Total Impaired Loans

$28,747



$308



$11,088

 

$339

Nine Months Ended September 30,
2015
 
2014
(In Thousands)
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
With no related allowance recorded
 
 
 
 
 
 
 
     Commercial - AQR pass

$—

 

$—

 

$130

 

$2

     Commercial - AQR special mention
165

 
10

 
281

 
20

     Commercial - AQR substandard
9,711

 
225

 
1,538

 
72

     Real estate construction one-to-four family - AQR special mention

 

 
116

 
6

     Real estate construction other - AQR pass
744

 
72

 

 

     Real estate construction other - AQR special mention

 

 
271

 
29

     Real estate construction other - AQR substandard
1,913

 

 

 

     Real estate term owner occupied- AQR pass
677

 
46

 
508

 
39

     Real estate term owner occupied- AQR special mention
90

 
5

 
307

 
15

     Real estate term owner occupied- AQR substandard
3,720

 
113

 
1,168

 
51

     Real estate term non-owner occupied- AQR pass
534

 
57

 
607

 
74

     Real estate term non-owner occupied- AQR special mention
1,444

 
97

 
2,447

 
209

     Real estate term non-owner occupied- AQR substandard
1,423

 

 
1,062

 

     Real estate term other - AQR special mention
50

 
3

 
655

 
77

     Real estate term other - AQR substandard
99

 
7

 
245

 
10

     Consumer secured by 1st deeds of trust - AQR pass
80

 
3

 
85

 
3

     Consumer secured by 1st deeds of trust - AQR substandard
526

 
6

 
284

 

     Consumer other - AQR substandard

 

 
38

 

         Subtotal

$21,176

 

$644

 

$9,742

 

$607


24



With an allowance recorded
 
 
 
 
 
 
 
     Commercial - AQR special mention

$—

 

$—

 

$61

 

$6

     Commercial - AQR substandard
1,863

 

 
198

 

     Real estate term other - AQR substandard
93

 

 

 

     Consumer secured by 1st deeds of trust - AQR substandard

 

 
234

 

     Consumer other - AQR substandard
14

 

 

 

         Subtotal

$1,970

 

$—

 

$493

 

$6

Total
 
 
 
 
 
 
 
     Commercial - AQR pass

$—

 

$—

 

$130

 

$2

     Commercial - AQR special mention
165

 
10

 
342

 
26

     Commercial - AQR substandard
11,574

 
225

 
1,736

 
72

     Real estate construction one-to-four family - AQR special mention

 

 
116

 
6

     Real estate construction other - AQR pass
744

 
72

 

 

     Real estate construction other - AQR special mention

 

 
271

 
29

     Real estate construction other - AQR substandard
1,913

 

 

 

     Real estate term owner-occupied - AQR pass
677

 
46

 
508

 
39

     Real estate term owner-occupied - AQR special mention
90

 
5

 
307

 
15

     Real estate term owner-occupied - AQR substandard
3,720

 
113

 
1,168

 
51

     Real estate term non-owner occupied - AQR pass
534

 
57

 
607

 
74

     Real estate term non-owner occupied - AQR special mention
1,444

 
97

 
2,447

 
209

     Real estate term non-owner occupied - AQR substandard
1,423

 

 
1,062

 

     Real estate term other - AQR special mention
50

 
3

 
655

 
77

     Real estate term other - AQR substandard
192

 
7

 
245

 
10

     Consumer secured by 1st deeds of trust - AQR pass
80

 
3

 
85

 
3

     Consumer secured by 1st deeds of trust - AQR substandard
526

 
6

 
518

 

     Consumer other - AQR substandard
14

 

 
38

 

         Total Impaired Loans

$23,146

 

$644

 

$10,235

 

$613

As described in Note 3 above, the Company acquired 18 purchased credit impaired loans from Alaska Pacific on April 1, 2014 subject to the requirements of FASB ASC  310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality. This group of loans consists primarily of commercial and commercial real estate loans, and unlike a pool of consumer mortgages, it is not practicable for the Company to analyze the accretable yield of these loans. As such, the Company has elected the cost recovery method of income recognition for these loans, and thus no accretable difference has been identified for these loans. At the acquisition date, April 1, 2014, the fair value of this group of loans was $3.9 million. The carrying value of these loans as of September 30, 2015 is $1.7 million.
Loans classified as troubled debt restructurings (“TDR”) totaled $5.1 million and  $7.7 million at September 30, 2015 and December 31, 2014, respectively.  A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession that it would not grant otherwise.  The Company has granted a variety of concessions to borrowers in the form of loan modifications.  The modifications granted can generally be described in the following categories:
Rate Modification:  A modification in which the interest rate is changed.
Term Modification:  A modification in which the maturity date, timing of payments, or frequency of payments is changed.
Payment Modification:  A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time is included in this category.
Combination Modification:  Any other type of modification, including the use of multiple categories above. 

25



AQR pass graded loans included above in the impaired loan data are loans classified as TDRs. By definition, TDRs are considered impaired loans. All of the Company's TDRs are included in impaired loans.
The following table presents the breakout between newly restructured loans that occurred during the nine months ended September 30, 2015 and restructured loans that occurred prior to 2015 that are still included in portfolio loans:
 
Accrual Status

Nonaccrual Status

Total Modifications
(In Thousands)


New Troubled Debt Restructurings
 

 

 
Commercial - AQR substandard

$66



$1,317



$1,383

Subtotal

$66



$1,317



$1,383

Existing Troubled Debt Restructurings

$3,138



$583



$3,721

Total

$3,204



$1,900



$5,104

The following table presents newly restructured loans that occurred during the nine months ended September 30, 2015, by concession (terms modified):
 
 

September 30, 2015
 
Number of Contracts

Rate Modification

Term Modification

Payment Modification

Combination Modification

Total Modifications
(In Thousands)





Pre-Modification Outstanding Recorded Investment:
 

 

 

 

 

 
Commercial - AQR substandard
4


$—



$—



$423



$900



$1,323

Total
4


$—



$—



$423



$900



$1,323

Post-Modification Outstanding Recorded Investment:
 

 

 

 

 

 
Commercial - AQR substandard
4


$—



$—



$406



$977



$1,383

Total
4


$—



$—



$406



$977



$1,383

The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs. There was a $304,000 charge off in the nine months ended September 30, 2015 on a loan that was later classified as a TDR.
All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the Allowance. There were no TDRs with specific impairment at September 30, 2015 and December 31, 2014, respectively.
     The Company had no TDRs that subsequently defaulted within the first twelve months of restructure, during the periods ending September 30, 2015 and December 31, 2014.


26



8.  Allowance for Loan Losses
The following tables detail activity in the Allowance for the periods indicated:
Three Months Ended September 30,
Commercial
Real estate construction one-to-four family
Real estate construction other
Real estate term owner occupied
Real estate term non-owner occupied
Real estate term other
Consumer secured by 1st deed of trust
Consumer other
Unallocated
Total
2015
 
 
 
 
 
 
 
 

 
 

Balance, beginning of period

$5,687


$689


$1,863


$1,470


$4,888


$671


$265


$415


$1,470


$17,418

Charge-Offs
(367
)





(28
)
(5
)

(400
)
Recoveries
152







2


154

Provision (benefit)
308

202

(81
)
54

54

(69
)
31

64

113

676

Balance, end of period

$5,780


$891


$1,782


$1,524


$4,942


$602


$268


$476


$1,583


$17,848

Balance, end of period:
 

 

 

 

 

 

 

 

 

Individually evaluated
 

 

 

 

 

 

 

 

 

for impairment

$433


$—


$—


$—


$—


$—


$—


$80


$—


$513

Balance, end of period:
 

 

 

 

 

 

 

 

 

Collectively evaluated
 

 

 

 

 

 

 

 

 

for impairment

$5,347


$891


$1,782


$1,524


$4,942


$602


$268


$396


$1,583


$17,335

2014
 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

$5,134


$570


$830


$1,384


$4,124


$642


$272


$370


$2,706


$16,032

Charge-Offs






(13
)
(41
)

(54
)
Recoveries
259







6


265

Provision (benefit)
22

64

285

177

87

254

7

53

(949
)

Balance, end of period

$5,415


$634


$1,115


$1,561


$4,211


$896


$266


$388


$1,757


$16,243

Balance, end of period:
 

 

 

 

 

 

 

 

 

Individually evaluated
 

 

 

 

 

 

 

 

 

for impairment

$—


$—


$—


$—


$—


$—


$8


$—


$—


$8

Balance, end of period:
 

 

 

 

 

 

 

 

 

Collectively evaluated
 

 

 

 

 

 

 

 

 

for impairment

$5,415


$634


$1,115


$1,561


$4,211


$896


$258


$388


$1,757


$16,235

    

27



Nine Months Ended September 30,
Commercial
Real estate construction one-to-four family
Real estate construction other
Real estate term owner occupied
Real estate term non-owner occupied
Real estate term other
Consumer secured by 1st deed of trust
Consumer other
Unallocated
Total
2015
 
 
 
 
 
 
 
 

 
 

Balance, beginning of period

$5,643


$644


$1,653


$1,580


$4,704


$656


$285


$410


$1,148


$16,723

Charge-Offs
(474
)




(81
)
(28
)
(5
)

(588
)
Recoveries
310





17


8


335

Provision (benefit)
301

247

129

(56
)
238

10

11

63

435

1,378

Balance, end of period

$5,780


$891


$1,782


$1,524


$4,942


$602


$268


$476


$1,583


$17,848

Balance, end of period:
 

 

 

 

 

 

 

 

 

Individually evaluated
 

 

 

 

 

 

 

 

 

for impairment

$433


$—


$—


$—


$—


$—


$—


$80


$—


$513

Balance, end of period:
 

 

 

 

 

 

 

 

 

Collectively evaluated
 

 

 

 

 

 

 

 

 

for impairment

$5,347


$891


$1,782


$1,524


$4,942


$602


$268


$396


$1,583


$17,335

2014
 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

$5,779


$557


$539


$1,583


$4,297


$537


$322


$390


$2,278


$16,282

Charge-Offs
(320
)





(52
)
(74
)

(446
)
Recoveries
889

625






29


1,543

Provision (benefit)
(933
)
(548
)
576

(22
)
(86
)
359

(4
)
43

(521
)
(1,136
)
Balance, end of period

$5,415


$634


$1,115


$1,561


$4,211


$896


$266


$388


$1,757


$16,243

Balance, end of period:
 

 

 

 

 

 

 

 

 

Individually evaluated
 

 

 

 

 

 

 

 

 

for impairment

$—


$—


$—


$—


$—


$—


$8


$—


$—


$8

Balance, end of period:
 

 

 

 

 

 

 

 

 

Collectively evaluated
 

 

 

 

 

 

 

 

 

for impairment

$5,415


$634


$1,115


$1,561


$4,211


$896


$258


$388


$1,757


$16,235



28



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

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deed of trust

Consumer other

Total
September 30, 2015
 

 

 

 

 

 

 

 

 
Balance, end of period

$325,092



$48,527



$107,393



$112,527



$291,113



$36,443



$27,664



$29,269



$978,028

Balance, end of period:
 

 

 

 

 

 

 

 

 
Individually evaluated
 

 

 

 

 

 

 

 

 
for impairment

$15,340



$—



$12,077



$5,925



$856



$148



$560



$80



$34,986

Balance, end of period:
 

 

 

 

 

 

 

 

 
Collectively evaluated
 

 

 

 

 

 

 

 

 
for impairment

$309,752



$48,527



$95,316



$106,602



$290,257



$36,295



$27,104



$29,189



$943,042

December 31, 2014
 

 

 

 

 

 

 

 

 
Balance, end of period

$306,543



$34,842



$91,195



$109,472



$286,616



$36,894



$32,000



$31,493



$929,055

Balance, end of period:
 

 

 

 

 

 

 

 

 
Individually evaluated
 

 

 

 

 

 

 

 

 
for impairment

$3,976



$191



$772



$1,332



$4,346



$150



$530



$—



$11,297

Balance, end of period:
 

 

 

 

 

 

 

 

 
Collectively evaluated
 

 

 

 

 

 

 

 

 
for impairment

$302,567



$34,651



$90,423



$108,140



$282,270



$36,744



$31,470



$31,493



$917,758

    
The following represents the balance of the Allowance for the periods indicated segregated by segment and class:
(In Thousands)
Commercial
Real estate construction 1-4 family
Real estate construction other
Real estate term owner occupied
Real estate term non-owner occupied
Real estate term other
Consumer secured by 1st deeds of trust
Consumer other
Unallocated
Total
September 30, 2015
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
AQR Substandard

$432


$—


$—


$—


$—


$—


$—


$80


$—


$512

Collectively: evaluated for impairment:
 

 

 

 

 

 

 

 

 
AQR Pass
5,320

891

1,782

1,498

4,942

598

264

395


15,690

AQR Special Mention
15



26


4

3



48

AQR Substandard
13






1

1


15

Unallocated








1,583

1,583

 

$5,780


$891


$1,782


$1,524


$4,942


$602


$268


$476


$1,583


$17,848

December 31, 2014
 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment:
 

 

 

 

 

 

 

 

 

AQR Substandard

$75


$—


$—


$—


$—


$—


$—


$—


$—


$75

Collectively: evaluated for impairment:
 

 

 

 

 

 

 

 

 

AQR Pass
4,938

644

1,653

1,382

4,703

651

278

394


14,643

AQR Special Mention
621



198


5

7

1


832

AQR Substandard
9




1



15


25

Unallocated








1,148

1,148

 

$5,643


$644


$1,653


$1,580


$4,704


$656


$285


$410


$1,148


$16,723



29



9. Purchased Receivables
Purchased receivables are carried at their principal amount outstanding, net of a reserve for anticipated losses that have not yet been identified, and have a maturity of less than one year.  Purchased receivable balances are charged against this reserve when management believes that collection of principal is unlikely.  Management evaluates the adequacy of the reserve for purchased receivable losses based on historical loss experience by class of receivable and its assessment of current economic conditions.  As of September 30, 2015, the Company has one class of purchased receivables.  There were no purchased receivables past due at September 30, 2015 or December 31, 2014, respectively, and there were no restructured purchased receivables at September 30, 2015 or December 31, 2014.
Income on purchased receivables is accrued and recognized on the principal amount outstanding using an effective interest method except when management believes doubt exists as to the collectability of the income or principal.  As of September 30, 2015, the Company is accruing income on all purchased receivable balances outstanding.
The following table summarizes the components of net purchased receivables for the periods indicated:
(In Thousands)
September 30, 2015
December 31, 2014
Purchased receivables

$13,956


$15,543

Reserve for purchased receivable losses
(224
)
(289
)
Total

$13,732


$15,254


The following table sets forth information regarding changes in the purchased receivable reserve for the three and nine month periods ending September 30, 2015 and 2014, respectively: 
 
Three Months Ended September 30,
Nine Months Ended September 30,
(In Thousands)
2015
2014
2015
2014
Balance at beginning of period

$247


$242


$289


$273

Charge-offs



(240
)
Recoveries


30

3

     Charge-offs net of recoveries


30

(237
)
Reserve for (recovery from) purchased receivables
(23
)
241

(95
)
447

Balance at end of period

$224


$483


$224


$483


The Company did not record any charge-offs in the first nine months of 2015. The Company recorded one partial charge-off for $215,000 and one full charge-off for $25,000 in the first nine months of 2014.

10. Goodwill and Intangible Assets
The Company acquired Alaska Pacific on April 1, 2014. The Company did not record goodwill related to the acquisition of Alaska Pacific. The Company recorded a core deposit intangible of $623,000 related to deposits acquired from Alaska Pacific that will be amortized over its estimated useful life of ten years using an accelerated method. See Note 3 above for further discussion of this transaction.
The Company acquired the remaining 76.5% of RML on December 1, 2014. The Company recorded $14.8 million of goodwill and $950,000 of trade name intangible as part of the acquisition of RML. These assets have indefinite useful lives and are not amortized. See Note 3 above for further discussion of this transaction.
The Company performs goodwill impairment testing annually in accordance with the policy described in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2014.  There was no indication of impairment as of September 30, 2015. The Company continues to monitor the Company’s goodwill for potential impairment on an ongoing basis. No assurance can be given that there will not be an impairment charge to earnings during 2015 for goodwill impairment, if, for example, our stock price declines and trades at a significant discount to its book value, although there are many qualitative and quantitative factors that we analyze in determining the impairment of goodwill.        

30




11.  Deposit Activities
Total deposits at September 30, 2015 and December 31, 2014 were $1.3 billion and $1.2 billion, respectively. The only deposit category with stated maturity dates is certificates of deposit. At September 30, 2015, the Company had $142.8 million in certificates of deposit as compared to certificates of deposit of $142.2 million at December 31, 2014. At September 30, 2015, $91.6 million, or 64%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $81.9 million, or 58%, of total certificates of deposit at December 31, 2014.

12.  Derivatives
The Company enters into commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement that effectively converts the customer’s variable rate loan into a fixed rate. The Company then simultaneously enters into a corresponding swap agreement with a third party financial institution (“counterparty”) in order to offset its exposure on the fixed component of the customer’s interest rate swap. The Company has an agreement with its counterparty that contains a provision that provides that if the Company fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreement. This agreement also requires that the Company and the counterparty collateralize any fair value shortfalls that exceed $250,000 with eligible collateral, which includes cash and securities backed with the full faith and credit of the federal government. Similarly, the Company could be required to settle its obligations under the agreement if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels. The Company pledged $262,000 and zero in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements as of September 30, 2015 and December 31, 2014, respectively.
The interest rate swap agreements with our customers and the counterparty are not designated as hedging instruments under the Derivatives and Hedging topic of the FASB ASC 815, rather they are accounted for as free standing derivatives with changes in fair value reported in income. The Company had interest rate swaps with an aggregate notional amount of $21.9 million and $23.6 million at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, the notional amount of interest rate swaps is made up of two swaps totaling $11.0 million, a variable to fixed rate swap to a commercial loan customer and two swaps totaling $11.0 million fixed to variable rate swap with a counterparty. Changes in fair value from these four interest rate swaps offset each other in the third quarter of 2015. The Company did not recognize any fee income related to interest rate swaps in the three month and nine month periods ending September 30, 2015 or 2014, respectively. Interest rate swap income is recorded in other income on the Consolidated Statements of Income.
The Company also uses derivatives to hedge the risk of changes in the fair values of interest rate lock commitments. None of the Company’s derivatives are designated as hedging instruments. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in income. The Company primarily utilizes forward interest rate contracts in its derivative risk management strategy.
RML enters into commitments to originate residential mortgage loans, and it enters into forward delivery contracts to sell mortgage-backed securities to broker/dealers at specific prices and dates in order to hedge the interest rate risk in its residential mortgage loan commitments. Market risk with respect to commitments to originate loans arises from changes in the value of contractual positions due to changes in interest rates. RML had commitments to originate mortgage loans held for sale totaling $74.6 million and $39.6 million at September 30, 2015 and December 31, 2014, respectively. Changes in the value of RML's interest rate derivatives are recorded in the mortgage banking income on the Consolidated Statements of Income.

31



The following table presents the fair value of derivatives not designated as hedging instruments at September 30, 2015 and December 31, 2014:
(In Thousands)
Asset Derivatives


 
September 30, 2015

 
December 31, 2014

Balance Sheet Location

Fair Value


Fair Value


 


 

Interest rate contracts
Other assets
 

$240


 

$78

Interest rate lock commitments
Other assets
 
1,787

 
 
841

Total
 
 

$2,027

 
 

$919

(In Thousands)
Liability Derivatives


 
September 30, 2015

 
December 31, 2014

Balance Sheet Location

Fair Value


Fair Value


 


 

Interest rate contracts
Other liabilities
 

$535


 

$158

The following table presents the net gains of derivatives not designated as hedging instruments for the nine month period ending September 30, 2015:
(In Thousands)
Income Statement Location
September 30, 2015
Interest rate contracts
Mortgage banking income
 

($569
)
Interest rate lock commitments
Mortgage banking income
 
887

Total
 
 

$318


13.  Stock Incentive Plan
The Company adopted the 2014 Stock Option Plan (“2014 Plan”) following shareholder approval of the 2014 Plan at the 2014 Annual Meeting.  Subsequent to the adoption of the 2014 Plan, no additional grants may be issued under the prior plans.  The 2014 Plan provides for grants of up to 350,000 shares of common stock.
Stock Options:  Under the 2014 Plan and previous plans, certain key employees have been granted the option to purchase set amounts of common stock at the market price on the day the option was granted.  Optionees, at their own discretion, may cover the cost of exercise through the exchange at the then fair value of already owned shares of the Company’s stock.  Options are granted for a 10-year period and vest on a pro-rata basis over the initial three years from grant.
The Company measures the fair value of each stock option at the date of grant using the Black-Scholes option pricing model. For the quarters ended September 30, 2015 and 2014, the Company recognized $22,000 and $16,000, respectively, in stock option compensation expense as a component of salaries and other personnel expense. For the nine months ended September 30, 2015 and 2014, the Company recognized $66,000 and $49,000, respectively, in stock option compensation expense as a component of salaries and other personnel expense.
The Company issued 4,938 and 5,162 shares from the exercise of stock options in the three and nine months ended September 30, 2015, respectively. Proceeds from the exercise of stock options in the three and nine months ended September 30, 2015 were $160,000 and $209,000, respectively. The Company withheld $63,000 and $112,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options in the three and nine months ended September 30, 2015, respectively.
Proceeds from the exercise of stock options in the three and nine months ended September 30, 2014 were $331,000 and $395,000, respectively. The Company withheld $320,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options in the three and nine months ended September 30, 2014, respectively.
There were no stock options granted in the third quarter of 2015.

32



Restricted Stock Units:  The Company grants restricted stock units to certain key employees periodically.  Recipients of restricted stock units do not pay any cash consideration to the Company for the shares and receive all dividends with respect to such shares when the shares vest. Restricted stock units cliff vest at the end of a three-year time period. For the three months ended September 30, 2015 and 2014, the Company recognized $98,000 and $48,000, respectively, in restricted stock unit compensation expense as a component of salaries and other personnel expense. For the nine months ended September 30, 2015 and 2014, the Company recognized $291,000 and $205,000, respectively, in restricted stock unit compensation expense as a component of salaries and other personnel expense.
There were no restricted stock units granted in the third quarter of 2015.

14.  Fair Value of Assets and Liabilities
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1:  Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2:  Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3:  Valuation is generated from model-based techniques that use significant assumptions not observable in the market.  These unobservable assumptions reflect the Company’s estimation of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The following methods and assumptions were used to estimate fair value disclosures.  All financial instruments are held for other than trading purposes.
Cash and cash equivalents: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.
Investment securities: Fair values for investment securities are based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.  Investments in Federal Home Loan Bank stock are recorded at cost, which also represents fair value.
Loans held for sale:  Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet approximate their fair values.
Loans:  Fair values were generally determined by discounting both principal and interest cash flows on pools of loans expected to be collected using a discount rate for similar instruments with adjustments that the Company believes a market participant would consider in determining fair value. The Company estimates the cash flows expected to be collected using internal credit risk, interest rate and prepayment risk models that incorporate the Corporation’s best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds for the life of the loan.
Purchased receivables: Fair values for purchased receivables are based on their carrying amounts due to their short duration and repricing frequency.  Generally, purchased receivables have a duration of less than one year.
Mortgage servicing rights: MSR are measured at fair value on a recurring basis. These assets are classified as Level 3. In order to determine the fair value of MSRs, the present value of net expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates, and ancillary fee income net of servicing costs. The model assumptions are also compared to publicly filed information from several large MSR holders, as available.
Accrued interest receivable: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

33



Deposits: The fair value for deposits with stated maturities was determined by discounting contractual cash flows using current market rates for instruments with similar maturities. For deposits with no stated maturities, the carrying value was considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of the Company's long-term relationships with depositors.
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 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.
Contingent liability, earn-out payments related to acquisition of RML: The contingent liability for estimated earn-out payments included as a portion of the purchase price for RML is recorded in the balance sheet at it estimated fair value, and fair value adjustments to the liability are reported in other operating expense. The fair value for this contingent liability is estimated based on management's assessment of expected pre-tax income at RML over the remaining earn out period. These cash flows are discounted to present value using the appropriate FHLB borrowing rate, Inputs to this assessment include the general economic conditions in our markets that impact mortgage loan originations, current and anticipated trends in local market demand for mortgage, including interest rates, and RML's estimated market share.
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.
Derivative instruments: The fair value of the interest rate lock commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Bank has determined that the majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2015, the Bank has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that the they are not significant to the overall valuation of its interest rate derivatives. As a result, the Bank has classified its interest rate derivative valuations in Level 2 of the fair value hierarchy.
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, impaired loans, and other real estate owned (“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-is-complete values are appropriate for these types of projects based on the accounting guidance for capitalization of project costs and subsequent measurement of the value

34



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 carrying value of other real estate owned in accordance with this guidance for increases in estimated cost to complete that exceed the fair value of the real estate at the end of each reporting period.
Commitments to extend credit and standby letters of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.
Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

35



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

 
September 30, 2015
 
December 31, 2014
(In Thousands)
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair  Value
Financial assets:


 
 

 


 
 

Level 1 inputs:


 
 

 


 
 

     Cash, due from banks and deposits in other banks

$144,566

 

$144,566

 

$72,056

 

$72,056

     Investment securities
36,958

 
36,958

 
45,570

 
45,570

 
 
 
 
 
 
 
 
Level 2 inputs:


 
 

 


 
 

     Investment securities
198,219

 
198,287

 
238,361

 
238,468

     Investment in Federal Home Loan Bank stock
1,816

 
1,816

 
3,404

 
3,404

     Accrued interest receivable
3,476

 
3,476

 
3,373

 
3,373

     Interest rate contracts
240

 
240

 
78

 
78

 
 
 
 
 
 
 
 
Level 3 inputs:


 
 

 


 
 

     Loans and loans held for sale
1,040,277

 
1,038,911

 
968,370

 
974,366

     Purchased receivables, net
13,732

 
13,732

 
15,254

 
15,254

     Interest rate lock commitments
1,787

 
1,787

 
841

 
841

     Mortgage servicing rights
1,199

 
1,199

 
1,010

 
1,010

 
 
 
 
 
 
 
 
Financial liabilities:


 
 

 


 
 

Level 2 inputs:


 
 

 


 
 

     Deposits

$1,264,919

 

$1,264,995

 

$1,179,747

 

$1,180,136

     Securities sold under repurchase agreements
33,413

 
33,413

 
19,843

 
19,843

     Borrowings
12,458

 
12,491

 
26,304

 
26,485

     Accrued interest payable
52

 
52

 
18

 
18

     Interest rate contracts
535

 
535

 
158

 
158

Level 3 inputs:
 
 
 
 
 
 
 
     RML earn-out liability
10,262

 
10,262

 
7,324

 
7,324

     Junior subordinated debentures
18,558

 
17,254

 
18,558

 
17,239

 
 
 
 
 
 
 
 
Unrecognized financial instruments:


 
 

 


 
 

     Commitments to extend credit(1)

$242,506

 

$2,425

 

$219,349

 

$2,193

     Standby letters of credit(1)
8,122

 
81

 
6,004

 
60

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


36



The following table sets forth the balances as of the periods indicated of assets measured at fair value on a recurring basis:
(In Thousands)
Total

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)
September 30, 2015
 

 

 

 
Assets:
 
 
 
 
 
 
 
    Available for sale securities
 

 

 

 
    U.S. Treasury and government sponsored entities

$182,774



$15,166



$167,608



$—

    Municipal securities
11,091




11,091



    U.S. Agency mortgage-backed securities
874




874



    Corporate bonds
38,537


21,792


16,745



    Preferred stock
997




997



           Total available for sale securities

$234,273



$36,958



$197,315



$—

Interest rate contracts

$240

 

$—

 

$240

 

$—

Interest rate lock commitments
1,787

 

 

 
1,787

Mortgage servicing rights
1,199

 

 

 
1,199

           Total other assets

$3,226



$—



$240



$2,986

Liabilities:


 
 
 
 
 
 
Interest rate contracts

$535

 

$—

 

$535

 

$—

December 31, 2014
 

 

 

 
Assets:
 
 
 
 
 
 
 
Available for sale securities
 

 

 

 
U.S. Treasury and government sponsored entities

$226,190



$15,545



$210,645



$—

Municipal securities
12,124




12,124



U.S. Agency mortgage-backed securities
1,029




1,029



Corporate bonds
39,235


26,873


12,362



Preferred stock
3,152


3,152





           Total available for sale securities

$281,730

 

$45,570



$236,160



$—

Interest rate contracts

$78

 

$—

 

$78

 

$—

Interest rate lock commitments
841

 

 

 
841

Mortgage servicing rights
1,010

 

 

 
1,010

           Total other assets

$1,929



$—



$78



$1,851

Liabilities:
 
 
 
 
 
 
 
Interest rate contracts

$158

 

$—

 

$158

 

$—

 

37



As of and for the nine months ending September 30, 2015 and 2014, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis, except for certain assets as shown in the following table.  For loans measured for impairment, the Company classifies fair value measurements using observable inputs, such as external appraisals, as Level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as Level 3 valuations in the fair value hierarchy.    
(In Thousands)
Total

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Total (gains) losses
September 30, 2015
 

 

 

 

 
  Loans measured for impairment

$1,249



$—



$—



$1,249



$437

   Other real estate owned
830






830


360

Total

$2,079



$—



$—



$2,079



$797

September 30, 2014
 

 

 

 

 
  Loans measured for impairment

$165



$—



$—



$165



($3
)
  Other real estate owned
227






227


45

Total

$392



$—



$—



$392



$42


Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at September 30, 2015:

Financial Instrument
Valuation Technique
Unobservable Input
Weighted Average Rate Range
Loans measured for impairment
In-house valuation of real estate; discounted cash flow
Discount rate
25% - 100%

 
 
Cash flows
NA(1)

Other real estate owned
Fair value of collateral
Estimated selling and holding costs
7% - 25%

Interest rate lock commitment
External pricing model
Pull through rate
91.95
%
Mortgage servicing rights
Discounted cash flow
Constant prepayment rate
9.92% - 27.59%

 
 
Discount rate
9.20% - 9.69%

RML earn-out liability
Discounted cash flow
Financial projections of mortgage operations
0.47% - 1.99%

(1)  Fair value of impaired collateral dependent loans was calculated using contractual cash flows for specific impaired loan.  


38



15.  Segment Information
The Company operates two primary segments: Community Banking and Home Mortgage Lending. The Community Banking segment's principal business focus is the offering of loan and deposit products to business and consumer customers in its primary market areas. As of September 30, 2015, the Community Banking segment operated 14 branches throughout Alaska. The Home Mortgage Lending segment's principal business focus is the origination and sale of mortgage loans for 1-4 family residential properties.
Prior to December 1, 2014, Home Mortgage Lending income was limited to equity in earnings from RML.
Summarized financial information for the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables:
 
Three Months Ended September 30, 2015
(In Thousands)
Community Banking
 
Home Mortgage Lending
 
Consolidated
 
 
 
 
 
 
Interest income

$14,883

 

$505

 

$15,388

Interest expense
458

 
248

 
706

   Net interest income
14,425

 
257

 
14,682

Provision (benefit) for loan losses
676

 

 
676

Other operating income
4,294

 
8,113

 
12,407

Other operating expense
12,633

 
5,570

 
18,203

   Income before provision for income taxes
5,410

 
2,800

 
8,210

Provision for income taxes
1,523

 
1,155

 
2,678

Net income
3,887

 
1,645

 
5,532

Less: net income attributable to the noncontrolling interest
197

 

 
197

Net income attributable to Northrim BanCorp, Inc.

$3,690

 

$1,645

 

$5,335


 
Nine Months Ended September 30, 2015
(In Thousands)
Community Banking
 
Home Mortgage Lending
 
Consolidated
 
 
 
 
 
 
Interest income

$43,227

 

$1,490

 

$44,717

Interest expense
1,302

 
906

 
2,208

   Net interest income
41,925

 
584

 
42,509

Provision (benefit) for loan losses
1,378

 

 
1,378

Other operating income
11,270

 
23,235

 
34,505

Other operating expense
37,975

 
16,443

 
54,418

   Income before provision for income taxes
13,842

 
7,376

 
21,218

Provision for income taxes
4,066

 
3,045

 
7,111

Net income
9,776

 
4,331

 
14,107

Less: net income attributable to the noncontrolling interest
431

 

 
431

Net income attributable to Northrim BanCorp, Inc.

$9,345

 

$4,331

 

$13,676




39



 
Three Months Ended September 30, 2014
(In Thousands)
Community Banking
 
Home Mortgage Lending
 
Consolidated
 
 
 
 
 
 
Interest income

$14,212

 

$—

 

$14,212

Interest expense
487

 

 
487

   Net interest income
13,725

 

 
13,725

Provision (benefit) for loan losses

 

 

Other operating income (loss)
4,550

 
384

 
4,934

Other operating expense
12,779

 

 
12,779

   Income before provision for income taxes
5,496

 
384

 
5,880

Provision for income taxes
1,824

 
158

 
1,982

Net income (loss)
3,672

 
226

 
3,898

Less: net income attributable to the noncontrolling interest
191

 

 
191

Net income (loss) attributable to Northrim BanCorp, Inc.

$3,481

 

$226

 

$3,707


 
Nine Months Ended September 30, 2014
(In Thousands)
Community Banking
 
Home Mortgage Lending
 
Consolidated
 
 
 
 
 
 
Interest income

$39,780

 

$—

 

$39,780

Interest expense
1,411

 

 
1,411

   Net interest income
38,369

 

 
38,369

Provision (benefit) for loan losses
(1,136
)
 

 
(1,136
)
Other operating income (loss)
11,166

 
608

 
11,774

Other operating expense
34,368

 

 
34,368

   Income before provision for income taxes
16,303

 
608

 
16,911

Provision for income taxes
5,598

 
250

 
5,848

Net income (loss)
10,705

 
358

 
11,063

Less: net income attributable to the noncontrolling interest
329

 

 
329

Net income (loss) attributable to Northrim BanCorp, Inc.

$10,376

 

$358

 

$10,734



September 30, 2015
 
 
 
 
 
(In Thousands)
Community Banking
 
Home Mortgage Lending
 
Consolidated
 
 
 
 
 
 
Total assets

$1,456,032

 

$83,221

 

$1,539,253

Loans held for sale

$—

 

$66,597

 

$66,597

Borrowings

$2,131

 

$10,327

 

$12,458



40



December 31, 2014
 
 
 
 
 
(In Thousands)
Community Banking
 
Home Mortgage Lending
 
Consolidated
 
 
 
 
 
 
Total assets

$1,391,862

 

$57,487

 

$1,449,349

Loans held for sale

$—

 

$43,866

 

$43,866

Borrowings

$2,164

 

$24,140

 

$26,304



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited consolidated financial statements of Northrim BanCorp, Inc. (the “Company”) and the notes thereto presented elsewhere in this report and with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Except as otherwise noted, references to "we", "our", "us" or "the Company" refer to Northrim BanCorp, Inc. and its subsidiaries that are consolidated for financial reporting purposes.
Note Regarding Forward Looking-Statements
This quarterly report on Form 10-Q includes “forward-looking statements,” as that term is defined for purposes of Section 21D of the Securities Exchange Act of 1934, as amended, 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; our ability to maintain asset quality and expand our market share or net interest margin; the acquisition of Residential Mortgage Holding Company, LLC might result in costs or difficulties relating to integration matters that might be greater than expected; and our ability to execute our business plan. Further, actual results may be affected by competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Part II. Item 1A Risk Factors of this report and Item 1A in the Company's Annual Report on form 10-K for the year ended December 31, 2014, as well as in our other filings with the Securities and Exchange Commission. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition, you should note that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements, other than as required by law.
Critical Accounting Policies
The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances.  We believe that our estimates and assumptions are reasonable; however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.
The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. The Company’s critical accounting policies include those that address the accounting for the allowance for loan losses ("Allowance"), valuation of goodwill and other intangible assets, and the valuation of other real estate owned.  These critical accounting policies are further described in Item 7,

41



Management’s Discussion and Analysis, and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company’s Form 10-K for the year ended December 31, 2014. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements.
Update on Economic Conditions
Although the Company believes that there is uncertainty about the future of Alaska's economy, we also believe that the economy is currently stable and showing resilience in the face of the on-going low-price energy marketplace. While Shell Oil’s decision to cease exploratory drilling operations in the Chuckchi Sea was a disappointment to many Alaskans, the Company believes that activity on the North Slope continues to reflect the long-term commitments of the oil industry to the region.
Highlights and Summary of Performance - Third Quarter of 2015
Year over year loan growth of 4% and deposit growth of 6%, increased net interest income in the three and nine month periods ending September 30, 2015 as compared to the same periods in 2014. The integration of the assets and operations acquired by the Company in connection with the acquisitions of Alaska Pacific Bancshares, Inc. ("Alaska Pacific") and Residential Mortgage Holding Company, LLC ("RML"), that were completed in 2014 also contributed to increases of 44% and 27%, respectively, in net income attributable to Northrim BanCorp, Inc. for the three and nine month periods ended September 30, 2015 as compared to the same periods in 2014. Additionally, management determined that as a result of the acquisition of RML, the Company now operates two business segments: Community Banking and Home Mortgage Lending, with RML's operations falling under the Home Mortgage Lending segment. See Note 15 of the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion on our business segments and results of operations for each such business segment.
Year-to-date profits increased 27% to $13.7 million, or $1.97 per diluted share at September 30, 2015, from $10.7 million, or $1.57 per diluted share at September 30, 2014.
Total revenues, which include net interest income plus other operating income, were $27.1 million in the third quarter of 2015, a 45% increase from total revenues of $18.7 million in the third quarter a year ago.
Net interest income increased 7% to $14.7 million in the third quarter of 2015, compared to $13.7 million in the quarter ended September 30, 2014.
Return on average assets was 1.42% and return on average equity was 12.37% at September 30, 2015, as compared to 1.07% and 9.29% at September 30, 2014, respectively.
Average portfolio loans increased 5% to $982.3 million for the third quarter of 2015 as compared to $936.4 million for the third quarter of 2014, reflecting organic loan growth.
Net interest margin was 4.32% in the third quarter of 2015 and 4.35% in the first nine months of 2015 as compared to 4.38% and 4.33% in the same periods of 2014. The decrease in the third quarter of 2015 compared to the third quarter of 2014 was primarily the result of decreased balances of higher yielding portfolio loans as a percentage of total interest earning assets during the current quarter, while the increase in net interest margin year to date compared to the same period last year was mainly the result of increased average loan balances, partially offset by a decrease in yield on loans and increases in both volume and cost for interest-bearing liabilities.
Northrim paid a quarterly cash dividend of $0.19 per share in September of 2015, compared to the $0.18 per share dividend paid in September 2014. The dividend provides a yield of approximately 2.6% at current market share prices.
Tangible book value1 was $22.09 per share at September 30, 2015 as compared to $20.48 per share at December 31, 2014. Tangible book value is a non-GAAP ratio that represents total shareholders’ equity less goodwill and intangible assets divided by the number of shares outstanding. Although we believe this non-GAAP financial measure is frequently used by stakeholders in the evaluation of companies in the banking industry, there are limitations, it is not required to be uniformly applied, and it is not audited. The most comparable GAAP measure of book value per share consists of total shareholders’ equity divided by the number of shares outstanding, which was $25.56 at September 30, 2015, compared to $23.99 at December 31, 2014.
The Company remains well-capitalized with Tier 1 Capital to Risk Adjusted Assets at September 30, 2015, of 13.00%, compared to 13.06% at December 31, 2014. The decrease in Tier 1 Capital to Risk Adjusted Assets at September 30, 2015 was primarily the result of the new BASEL III requirements.
Tangible common equity to tangible assets2 was 10.00% at September 30, 2015, compared to 9.85% December 31, 2014. Tangible common equity to tangible assets is a non-GAAP ratio that represents total equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. Although we believe this non-GAAP financial measure is frequently used by stakeholders in the evaluation of companies in the banking industry, there are limitations, it is not required to be uniformly applied, and it is

42



not audited. The most comparable GAAP measure of equity to assets consists of total equity divided by total assets. Total equity to total assets was 11.39% at September 30, 2015 as compared to 11.35% at December 31, 2014.

1 Tangible book value is a non-GAAP measure defined as shareholders' equity, less intangible assets, divided by shares outstanding. The reconciliation of tangible book value per share to book value per share is shown in the table below:
(In thousands, except per share data)
September 30, 2015
December 31, 2014
Total shareholders' equity

$175,336


$164,441

Divided by common shares outstanding
6,859,351

6,854,189

Book value per share

$25.56


$23.99

 
 
 
(In thousands, except per share data)
September 30, 2015
December 31, 2014
Total shareholders' equity

$175,336


$164,441

Less: goodwill and intangible assets, net
23,817

24,035

 

$151,519


$140,406

Divided by common shares outstanding
6,859,351

6,854,189

Tangible book value per share

$22.09


$20.48


2 Tangible common equity to tangible assets is a non-GAAP ratio that represents total equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. This ratio has received more attention over the past several years from stock analysts and regulators. The most comparable GAAP measure of common equity to assets is calculated by dividing total equity by total assets. The reconciliation of total shareholders' equity to tangible common shareholders' equity (non-GAAP) and total assets to tangible assets is shown in the table below:
(In Thousands)
September 30, 2015
December 31, 2014
Total shareholders' equity

$175,336


$164,441

Less: goodwill and other intangible assets, net
23,817

24,035

Tangible common shareholders' equity

$151,519


$140,406

Total assets

$1,539,253


$1,449,349

Less: goodwill and other intangible assets, net
23,817

24,035

Tangible assets

$1,515,436


$1,425,314

Tangible common equity ratio
10.00
%
9.85
%


The Company reported net income and diluted earnings per share of $5.3 million and $0.77, respectively, for the third quarter of 2015 compared to net income and diluted earnings per share of $3.7 million and $0.53, respectively, for the third quarter of 2014. The Company reported net income and diluted earnings per share of $13.7 million and $1.97, respectively, year to date as of September 30, 2015 compared to net income and diluted earnings per share of $10.7 million and $1.57, respectively, for the same period in 2014. The increase in net income for both of these periods in 2015 as compared to the same periods of 2014 was primarily the result of mortgage banking income recognized from RML's home mortgage lending operations combined with increased interest and fees on loans. The increase in interest and fees on loans in the three month period ending September 30, 2015 compared to the same period in 2014 was primarily the result of organic loan growth. Interest and fees on loans increased in the nine month period ending September 30, 2015 compared to the same period of 2014 primarily due to organic loan growth combined with the acquisition of Alaska Pacific on April 1, 2014. These increases were partially offset by increased operating expenses primarily resulting from the acquisitions of RML and Alaska Pacific as well as expense recorded in connection with the change in fair value of our earn-out liability associated with the acquisition of RML. Additionally, the increases in other operating income and net interest income for these periods in 2015 as compared to the same periods in 2014 were partially offset by a loan loss provision of $1.4 million recorded for the first nine months of 2015 compared to a $1.1 million benefit for loan losses recorded in the same period of 2014 due to net recoveries in 2014 that led to a negative loan loss provision.
The Company’s total assets were $1.5 billion and $1.4 billion at September 30, 2015 and December 31, 2014, respectively. Increases in loans and loans held for sale were partially offset by decreases in investment securities available for sale. Net loans

43



increased to $955.8 million at September 30, 2015 as compared to $907.8 million at December 31, 2014, mainly due to increases in commercial, commercial real estate, and construction loans in the first nine months of 2015.
Credit Quality
Nonperforming assets: Nonperforming assets at September 30, 2015 decreased $2.0 million, or 22% to $7.2 million as compared to $9.3 million at December 31, 2014. Nonaccrual loans decreased $939,000 to $3.7 million and total other real estate owned ("OREO") decreased $1.1 million to $3.5 million at September 30, 2015 as compared to $4.7 million and $4.6 million at December 31, 2014, respectively. Nonperforming purchased receivables were zero at September 30, 2015 and December 31, 2014, respectively. Government guarantees included in nonperforming assets totaled $1.6 million at September 30, 2015 as compared to $2.1 million at December 31, 2014. These represent the portion of nonperforming assets that are guaranteed by governmental agencies including the Small Business Administration, the United States Department of Agriculture, the Bureau of Indian Affairs, and the Alaska Industrial Development and Export Authority.
The following table summarizes OREO activity for the three and nine month periods ending September 30, 2015 and 2014:
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2015
2014
2015
2014
 
(In Thousands)
Balance, beginning of the period

$2,807


$4,897


$4,607


$2,402

Transfers from loans
796


1,133

1,158

Transfers from premises and equipment



904

Acquired from Alaska Pacific



1,709

Proceeds from the sale of other real estate owned

(229
)
(1,971
)
(1,828
)
Gain on sale of other real estate owned, net

102

136

470

Deferred gain on sale of other real estate owned

(38
)
(34
)
(38
)
Impairment on other real estate owned
(92
)

(360
)
(45
)
Balance at end of period

$3,511


$4,732


$3,511


$4,732


Potential problem loans: Potential problem loans are loans which are currently performing 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 impaired loans. At September 30, 2015, management had identified potential problem loans of $29.0 million as compared to potential problem loans of $18.0 million at December 31, 2014. The increase in potential problem loans from December 31, 2014 to September 30, 2015 is primarily the result of one commercial real estate construction project.
Troubled debt restructurings (“TDRs”): 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, which is generally after a period of six months. The Company had $3.2 million in loans classified as TDRs that were performing and $1.9 million in TDRs included in nonaccrual loans at September 30, 2015 for a total of approximately $5.1 million. At December 31, 2014 there were $5.4 million in loans classified as TDRs that were performing and $2.3 million in TDRs included in nonaccrual loans for a total of $7.7 million. See Note 6 of the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion of TDRs.
RESULTS OF OPERATIONS
Income Statement
Net Income
Net income attributable to the Company for the third quarter of 2015 increased $1.6 million, or 43%, to $5.3 million as compared to $3.7 million for the same period in 2014. Net income attributable to the Company for the nine months ended September 30, 2015 increased $2.9 million, or 27%, to $13.7 million as compared to the same period in 2014. The increases in net income

44



for the three and nine month periods ending September 30, 2015 as compared to the same periods in 2014 was primarily due to the acquisition of the remaining 76.5% of RML in the fourth quarter of 2014, the acquisition of Alaska Pacific in the second quarter of 2014, as well as organic loan growth.
Net Interest Income  / Net Interest Margin
Net interest income for the third quarter of 2015 increased $957,000, or 7%, to $14.7 million as compared to $13.7 million for the third quarter in 2014. Net interest income increased $4.1 million, or 11%, to $42.5 million in the first nine months of 2015 as compared to $38.4 million for the same period in 2014. Net interest margin decreased 6 basis points to 4.32% in the third quarter and increased 2 basis points 4.35% in the first nine months of 2015 as compared to 4.38% and 4.33% in the same periods of 2014. The increases in net interest income in the three and nine month periods ending September 30, 2015 as compared to the same periods in 2014 were primarily the result of increased average loan balances, partially offset by increases in both volume and cost for interest-bearing liabilities. The decrease in net interest margin in the third quarter of 2015 as compared to the third quarter of 2014 is primarily the result of decreased balances of higher yielding portfolio loans as a percentage of total interest-earning assets.
Average loans, the largest category of interest-earning assets, increased by $45.9 million, or 5% to $982.3 million in the three-month period ending September 30, 2015, and increased $87.4 million, or 10% to $965.2 million in the nine-month period ending September 30, 2015, as compared to the same periods in 2014, respectively. Total interest income from loans increased $578,000 for the third quarter of 2015 and increased $3.4 million in the nine-month period ending September 30, 2015 as compared to the same period in 2014, respectively, mainly due to increased average balances. Average loan balances increased in the three month period ended September 30, 2015 compared to the same period in 2014 as a result of loan growth from the Company's legacy operations (excluding the impact of loans acquired in connection with the transaction with Alaska Pacific). In addition to growth from legacy operations, the acquisition of Alaska Pacific contributed to the increase in average loan balances in the nine month period ending September 30, 2015 as compared to 2014.
Average loans held for sale increased by $47.6 million, or 542% to $56.4 million in the three-month period ending September 30, 2015, and increased $46.6 million, or 532% to $55.3 million in the nine-month period ending September 30, 2015, as compared to the same periods in 2014, respectively. Total interest income from loans held for sale increased $469,000 for the third quarter of 2015 and increased $1.3 million in the nine-month period ending September 30, 2015 as compared to the same period in 2014, respectively, as a result of the increase in average balances. Average balances and net interest income for loans held for sale increased in both the third quarter and first nine months of 2015 primarily as a result of loans acquired by the Company in connection with the Company's acquisition of the remaining 76.5% of RML on December 1, 2014 and loans generated by RML subsequent to the acquisition.
Average investments increased by $10.4 million, or 3% to $308.2 million in the three-month period ending September 30, 2015, and decreased $9.4 million, or 3% to $287.5 million in the nine-month period ending September 30, 2015, as compared to the same periods in 2014. The increase in average investments for the three-month period ending September 30, 2015 as compared to the same period in 2014 is mainly the result of purchases of long-term investments funded by increased deposit balances. The decrease in average investments for the nine-month period ending September 30, 2015 as compared to the same period in 2014 is mainly a result of decreased short-term investment balances.
Average interest-bearing liabilities increased $55.4 million, or 7%, to $841.6 million during the third quarter of 2015 and increased $86.3 million, or 11%, to $838.5 million in the nine-month period ending September 30, 2015, as compared to $786.2 million and $752.2 million, for the same periods in 2014, respectively. These increases were primarily the result of increased borrowings resulting from a warehouse line of credit acquired as a result of our acquisition of RML. Additionally, certificates of deposits increased in both periods compared to 2014 mainly as a result of a campaign the Company ran in the fourth quarter of 2014. Average interest-bearing liabilities increased in the nine months ended September 30, 2015 as compared to 2014 mostly due to the deposit balances acquired in connection with the acquisition of Alaska Pacific. The average cost of interest-bearing liabilities increased $219,000 and $797,000, or 45% and 56%, for the three and nine-month periods ending September 30, 2015, respectively, as compared to the same periods in 2014, primarily due to increases in both average balances and interest rates for both deposits and borrowings. Interest rates on deposits increased due to a change in the mix of the Company's deposits. Average certificates of deposits accounted for 12% and 10% of total average deposits for the third quarters of 2015 and 2014, respectively, and 12% and 9% of total average deposits year-to-date at September 30, 2015 and 2014, respectively. Additionally, interest rates on short term borrowings increased mainly due to the Company's use of some higher cost short term funding lines used to fund mortgage originations.

45



Components of Net Interest Margin
The following table compares average balances and rates as well as net tax equivalent margins on earning assets for the three-month periods ended September 30, 2015 and 2014:
(Dollars in Thousands)
Three Months Ended September 30,
 
 
 
 
 
Interest income/
 
 
Average Yields/Costs
 
Average Balances
Change
expense
Change
Tax Equivalent3

2015
2014
$
%
2015
2014
$
%
2015
2014
Change
Loans1,2

$982,301


$936,415


$45,886

5
%

$13,929


$13,351


$578

4
 %
5.67
%
5.68
%
(0.01
)%
Loans held for sale
56,379

8,787

47,592

542
%
555

86

469

545
 %
3.90
%
3.90
%
 %
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments
74,895

72,844

2,051

3
%
47

55

(8
)
(15
)%
0.25
%
0.29
%
(0.04
)%
Long-term investments
233,255

224,898

8,357

4
%
857

720

137

19
 %
1.58
%
1.43
%
0.15
 %
   Total investments
308,150

297,742

10,408

3
%
904

775

129

17
 %
1.25
%
1.14
%
0.11
 %
   Interest-earning assets
1,346,830

1,242,944

103,886

8
%
15,388

14,212

1,176

8
 %
4.58
%
4.58
%
 %
Nonearning assets
145,747

133,829

11,918

9
%







          Total

$1,492,577


$1,376,773


$115,804

8
%







 











Interest-bearing deposits

$783,721


$744,631


$39,090

5
%

$490


$352


$138

39
 %
0.25
%
0.19
%
0.06
 %
Borrowings
57,916

41,594

16,322

39
%
216

135

81

60
 %
1.45
%
1.25
%
0.20
 %
   Total interest-bearing liabilities
841,637

786,225

55,412

7
%
706

487

219

45
 %
0.33
%
0.24
%
0.09
 %
Demand deposits and other noninterest











      -bearing liabilities
479,843

432,226

47,617

11
%







Equity
171,097

158,322

12,775

8
%







          Total

$1,492,577


$1,376,773


$115,804

8
%







Net interest income





$14,682


$13,725


$957

7
 %



Tax equivalent net interest margin on interest earning assets3




4.38
%
4.43
%
(0.05
)%

1Interest income includes loan fees.  Loan fees recognized during the period and included in the yield calculation totaled $923,000 and $799,000 in the third quarter of 2015 and 2014, respectively.
2Nonaccrual loans are included with a zero effective yield.  Average nonaccrual loans included in the computation of the average loans were $4.1 million and $2.9 million in the third quarter of 2015 and 2014 respectively.
3Tax-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 2015 and 2014. Although we believe this non-GAAP financial measure is frequently used by stakeholders in the evaluation of companies in the banking industry, there are limitations, it is not required to be uniformly applied, and it is not audited. The most comparable GAAP measure, net interest margin, was 4.32% and 4.38%, respectively, for the third quarter of 2015 and 2014.

46



The following table is a reconciliation of tax-equivalent net interest margin to net interest margin for the periods indicated:
 
Three Months Ended September 30,
(In Thousands)
2015
2014
Net interest income

$14,682


$13,725

Divided by average interest-bearing assets
1,346,830

1,242,944

Net interest margin
4.32
%
4.38
%
 
 
 
(In Thousands)
2015
2014
Net interest income

$14,682


$13,725

Plus: reduction in tax expense related to
 
 
tax-exempt interest income
185

148

 

$14,867


$13,873

Divided by average interest-bearing assets
1,346,830

1,242,944

Tax-equivalent net interest margin
4.38
%
4.43
%
The following table compares average balances and rates as well as net tax equivalent margins on earning assets for the nine-month periods ended September 30, 2015 and 2014:
(Dollars in Thousands)
Nine Months Ended September 30,
 
 
 
 
 
Interest income/
 
 
Average Yields/Costs
 
Average Balances
Change
expense
Change
Tax Equivalent3
 
2015
2014
$
%
2015
2014
$
%
2015
2014
Change
Loans1,2

$965,241


$877,800


$87,441

10
 %

$40,549


$37,127


$3,422

9
 %
5.66
%
5.68
%
(0.02
)%
Loans held for sale
55,319

8,747

46,572

532
 %
1,537

263

1,274

484
 %
3.72
%
4.01
%
(0.29
)%
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments
43,122

59,870

(16,748
)
(28
)%
82

145

(63
)
(43
)%
0.25
%
0.32
%
(0.07
)%
Long-term investments
244,357

237,033

7,324

3
 %
2,549

2,245

304

14
 %
1.52
%
1.40
%
0.12
 %
   Total investments
287,479

296,903

(9,424
)
(3
)%
2,631

2,390

241

10
 %
1.34
%
1.19
%
0.15
 %
   Interest-earning assets
1,308,039

1,183,450

124,589

11
 %
44,717

39,780

4,937

12
 %
4.62
%
4.54
%
0.08
 %
Nonearning assets
147,830

117,397

30,433

26
 %
 
 
 
 
 
 
 
          Total

$1,455,869


$1,300,847


$155,022

12
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits

$781,320


$709,877


$71,443

10
 %

$1,460


$986


$474

48
 %
0.25
%
0.19
%
0.06
 %
Borrowings
57,177

42,362

14,815

35
 %
748

425

323

76
 %
1.71
%
1.31
%
0.40
 %
   Total interest-bearing liabilities
838,497

752,239

86,258

11
 %
2,208

1,411

797

56
 %
0.35
%
0.25
%
0.10
 %
Demand deposits and other noninterest
 
 
 
 
 
 
 
 
 
 
 
      -bearing liabilities
448,917

394,981

53,936

14
 %
 
 
 
 
 
 
 
Equity
168,455

153,627

14,828

10
 %
 
 
 
 
 
 
 
          Total

$1,455,869


$1,300,847


$155,022

12
 %
 
 
 
 
 
 
 
Net interest income
 
 
 
 

$42,509


$38,369


$4,140

11
 %
 
 
 
Tax equivalent net interest margin on interest earning assets3
 
 
 
 
4.40
%
4.38
%
0.02
 %

47



1Interest income includes loan fees.  Loan fees recognized during the period and included in the yield calculation totaled $2.7 million and $2.2 million in the first nine months of 2015 and 2014, respectively.
2Nonaccrual loans are included with a zero effective yield.  Average nonaccrual loans included in the computation of the average loans were $4.5 million and $2.9 million in the first nine months of 2015 and 2014 respectively.
3Tax-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 2015 and 2014. Although we believe this non-GAAP financial measure is frequently used by stakeholders in the evaluation of companies in the banking industry, there are limitations, it is not required to be uniformly applied, and it is not audited. The most comparable GAAP measure, net interest margin, was 4.35% and 4.33%, respectively, for the first nine months of 2015 and 2014.
The following table is a reconciliation of tax-equivalent net interest margin to net interest margin for the periods indicated:
 
Nine Months Ended September 30,
(In Thousands)
2015
2014
Net interest income

$42,509


$38,369

Divided by average interest-bearing assets
1,308,039

1,183,450

Net interest margin
4.35
%
4.33
%
 
 
 
(In Thousands)
2015
2014
Net interest income

$42,509


$38,369

Plus: reduction in tax expense related to
 
 
tax-exempt interest income
535

428

 

$43,044


$38,797

Divided by average interest-bearing assets
1,308,039

1,183,450

Tax-equivalent net interest margin
4.40
%
4.38
%
The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the three and nine-month periods ending September 30, 2015 and 2014.  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 rates:
(In Thousands)
Three Months Ended September 30, 2015 vs. 2014

Increase (decrease) due to


Volume
Rate
Total
Interest Income:



   Loans

$693


($115
)

$578

   Loans held for sale
469


469

   Short-term investments
1

(9
)
(8
)
   Long-term investments
36

101

137

          Total interest income

$1,199


($23
)

$1,176





Interest Expense:



   Interest-bearing deposits

$20


$118


$138

   Borrowings
57

24

81

          Total interest expense

$77


$142


$219


48




(In Thousands)
Nine Months Ended September 30, 2015 vs. 2014
 
Increase (decrease) due to
 
 
Volume
Rate
Total
Interest Income:
 
 
 
   Loans

$3,738


($316
)

$3,422

   Loans held for sale
1,290

(16
)
1,274

   Short-term investments
(38
)
(25
)
(63
)
   Long-term investments
78

226

304

          Total interest income

$5,068


($131
)

$4,937

 
 
 
 
Interest Expense:
 
 
 
   Interest-bearing deposits

$106


$368


$474

   Borrowings
162

161

323

          Total interest expense

$268


$529


$797


Provision for Loan Losses 
We recorded a provision for loan losses of $676,000 for the third quarter of 2015 compared to no provision for loan losses in the same period of 2014. We recorded a provision for loan losses of $1.4 million and a benefit for the provision of loan losses of $1.1 million for the nine month periods ending September 30, 2015 and 2014, respectively. The increase in the provision for loan losses in both periods of 2015 as compared to 2014 is primarily the result of an increase in portfolio loans. Net recoveries in 2014 led to the loan loss benefit. See "Analysis of the Allowance for Loan Losses" under the "Financial Condition-Balance Sheet Overview" and Note 8 of the Notes to Consolidated Financial Statements included in Part I of this report for more information on changes in the Company's Allowance.
Other Operating Income
Other operating income for the three-month period ending September 30, 2015, increased $7.5 million, or 151%, to $12.4 million as compared to the same period in 2014. This increase is primarily the result of $8.1 million in mortgage banking income earned in the third quarter of 2015. The Company acquired the remaining 76.5% of RML on December 1, 2014 making RML a wholly-owned, consolidated subsidiary of the Company. RML's results of operations prior to the December 1, 2014 acquisition were included in our operating results under the equity method. Additionally, other income increased $669,000 in the third quarter of 2015 compared to the same period in 2014 primarily due to $683,000 in gains on loans acquired at a discount in connection with the acquisition of Alaska Pacific in 2014 that were paid off in the second quarter of 2015. These increases were partially offset by a decrease of $1.1 million in gains on the sale of premises and equipment, which was the result of the Company selling a branch location in 2014 to the State of Alaska in order to accommodate a major road project in Anchorage.
Other operating income for the nine-month period ending September 30, 2015, increased $22.7 million, or 193%, to $34.5 million as compared to the same period in 2014. This increase is primarily the result of $23.2 million in mortgage banking income earned in the first nine months of 2015 as a result of the acquisition of RML noted above. Additionally, other income increased $1.0 million the first nine months of 2015 compared to the same period of 2014 primarily due to $910,000 in gains recognized on the disposition of loans acquired in connection with the acquisition of Alaska Pacific in 2014 at a discount, as well as an increase in rental income of $200,000 due to new tenants occupying space in the Company's main office building beginning August 1, 2014. These increases were partially offset by a decrease of $1.1 million in gains on the sale of premises and equipment as a result of the branch sale noted above.

49



Other Operating Expense
Other operating expense for the third quarter of 2015 increased $5.4 million, or 42%, to $18.2 million as compared to the same period in 2014, mainly as a result of a $4.3 million increase in salaries and other personnel expense and an expense of $780,000 incurred in the third quarter of 2015 related to the earn out liability attributable to the RML acquisition. The increase in salaries and other personnel expense was primarily due to an increase in average full time equivalent employees from 314 at September 30, 2014 to 434 at September 30, 2015, primarily due to the acquisition of RML. Additionally, occupancy expense, professional and outside services expense, other loan expense, and OREO expense net of rental income and gains on sale increased $481,000, $319,000, $258,000 and $220,000, respectively, in the third quarter of 2015 as compared to the third quarter of 2014. Occupancy and professional and outside services expenses increased primarily due to the acquisition of RML. Other loan expense increased in the third quarter of 2015 compared to the same period of 2014 primarily due to an increase in portfolio loans, while OREO expense net of rental income and gains on sale also increased due to increased impairment on OREO properties and a decrease in gains on sale. These increases were partially offset by a decrease of $1.0 million in merger and acquisition expense, which mostly resulted from costs incurred in connection with the acquisitions of Alaska Pacific and RML in 2014 and a $264,000 decrease in the reserve for purchased receivables.
Other operating expense for the nine-month period ending September 30, 2015 increased $20.0 million, or 58%, to $54.4 million as compared to the same period in 2014, primarily due to an $13.2 million increase in salaries and other personnel expense primarily due to the acquisitions of RML and Alaska Pacific, and an expense of $2.9 million related to the earn out liability attributable to the RML acquisition. The following are other changes in other operating expense: an increase of $1.7 million in occupancy expense, an increase of $1.2 million in professional and other outside services, an increase of $804,000 in other loan expense, and an increase of $643,000 in OREO expense net of rental income and gains on sale. These expenses increased in the nine month period ending September 30, 2015 compared to the same period of 2014 primarily due to the same factors discussed above for the third quarter. Additionally, marketing expense, equipment expense, and insurance expense also increased by $399,000, $187,000, and $287,000, respectively, primarily due to the acquisitions of Alaska Pacific and RML. These increases were partially offset by decreases of $1.7 million and $542,000, in merger and acquisition expense and the reserve for purchased receivables, respectively.
Income Taxes
The provision for income taxes for the three and nine-month periods ending September 30, 2015 increased $696,000 and $1.3 million, or 35% and 22%, respectively, as compared to the same periods in 2014 primarily due to increases in pre-tax net income. The effective tax rate for the nine-month periods ending September 30, 2015 and 2014 was 34% and 35%, respectively.

FINANCIAL CONDITION
Balance Sheet Overview
Investment Securities
Investment securities at September 30, 2015 decreased $48.7 million, or 17%, to $235.2 million from $283.9 million at December 31, 2014. This decrease was primarily due to sales, maturities, and security calls of available for sale securities, which were only partially offset by purchases. The Company used proceeds from the net decrease in investment securities to fund loan growth in the first nine months of 2015.
Loans and Lending Activities
Our loan products include short and medium-term commercial loans, commercial credit lines, construction and real estate loans, and consumer loans. From our inception, we have emphasized commercial, land development and home construction, and commercial real estate lending. This type of lending has provided us with market opportunities and higher net interest margins than other types of lending. However, it also involves greater risks, including greater exposure to changes in local economic conditions, than certain other types of lending.
Portfolio loans increased by $49.2 million, or 5%, to $973.7 million at September 30, 2015 from $924.5 million at December 31, 2014, primarily the result of organic growth in commercial, commercial real estate and real estate construction loans. The growth in real estate construction loans in 2015 was from commercial real estate projects and tax-advantaged low-income housing projections. Residential housing construction loans remain consistent at approximately 5% of portfolio loans at September 30, 2015.

50



The following table details loan balances by loan type as of the dates indicated:
 
September 30, 2015
December 31, 2014
 
Dollar Amount
Percent of Total
Dollar Amount
Percent of Total
(In Thousands)
Commercial

$325,092

33.4
 %

$306,543

33.2
 %
Real estate construction one-to-four family
48,527

5.0
 %
34,842

3.8
 %
Real estate construction other
107,393

11.0
 %
91,195

9.9
 %
Real estate term owner occupied
112,527

11.6
 %
109,472

11.8
 %
Real estate term non-owner occupied
291,113

29.9
 %
286,616

31.0
 %
Real estate term other
36,443

3.7
 %
36,894

4.0
 %
Consumer secured by 1st deeds of trust
27,664

2.8
 %
32,000

3.5
 %
Consumer other
29,269

3.0
 %
31,493

3.4
 %
Subtotal

$978,028

 

$929,055

 
Less: Unearned origination fee,
 
 
 
 
net of origination costs
(4,348
)
(0.3
)%
(4,551
)
(0.6
)%
Total loans

$973,680

 

$924,504

 


Analysis of Allowance for Loan Losses
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 determines 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 external 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. 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 its 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 warrants 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. 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. As of September 30, 2015 and December 31, 2014, 30% and 6% of nonperforming loans, which totaled $3.7 million and $4.7 million, respectively, had partially charged-off balances.
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 its 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.

51



The Company has the following loan segments: commercial, real estate construction one-to-four family, real estate construction other, real estate term owner occupied, real estate term non-owner occupied, real estate term other, consumer secured by 1st deeds of trust, and other consumer loans. The Company has five loan classes: pass, special mention, substandard, doubtful, and loss.
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 year loss history for each segment and class using a five year look-back period.
After the Company calculates a general allocation using its loss history, the 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 loan quality trends in our own portfolio, 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.
An unallocated reserve. The unallocated portion of the Allowance provides for other credit losses inherent in the Company’s 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 September 30, 2015, the unallocated portion of the Allowance as a percentage of the total Allowance was 9%. The unallocated portion of the Allowance as a percentage of the total Allowance was 7% at December 31, 2014.
Further discussion of the enhancement to the Company’s Allowance methodology can be found in Item 7 in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
Allowance related to acquired loans: In accordance with generally accepted accounting principles, loans acquired in connection with the acquisition of Alaska Pacific on April 1, 2014 were recorded at their fair value at the acquisition date. Credit discounts were included in the determination of fair value; therefore, an allowance for loan losses was not recorded at the acquisition date. Purchased credit impaired loans were evaluated on a loan by loan basis and the valuation allowance for these loans was netted against the carrying value. Deterioration in credit quality of the acquired loans subsequent to acquisition date results in the establishments of an allowance. There was no allowance related to acquired loans at September 30, 2015.
The following table sets forth information regarding changes in the Allowance for the periods indicated:
 
Three Months Ended September 30,
Nine Months Ended September 30,
(In Thousands)
2015

2014
2015

2014
Balance at beginning of period

$17,418



$16,032


$16,723



$16,282

Charge-offs:
 

 
 

 
Commercial
367



474


320

Real estate term other

 

81

 

Consumer secured by 1st deeds of trust
28


13

28


52

Consumer other
5


41

5


74

Total charge-offs
400


54

588


446

Recoveries:
 

 
 

 
Commercial
152


259

310


889

Real estate construction one-to-four family





625

Real estate term other



17



Consumer other
2


6

8


29

Total recoveries
154


265

335


1,543

Net, charge-offs (recoveries)
246


(211
)
253


(1,097
)
Provision for loan losses
676



1,378


(1,136
)
Balance at end of period

$17,848



$16,243


$17,848



$16,243



52



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 of the Allowance. Moreover, bank regulators frequently monitor banks' loan loss allowances, and if regulators were to determine that the Company’s Allowance is inadequate, they may require the Company to increase the Allowance, which may adversely impact the Company’s net income and financial condition.
Deposits
Deposits are the Company’s primary source of funds. Total deposits increased $85.2 million or 7% with a balance of $1.3 billion at September 30, 2015 and December 31, 2014, respectively. The following table summarizes the Company's composition of deposits as of the periods indicated:
 
September 30, 2015
December 31, 2014
(In thousands)
Balance
% of total
Balance
% of total
Demand deposits

$485,304

39
%

$403,523

35
%
Interest-bearing demand
179,080

14
%
185,114

15
%
Savings deposits
221,205

17
%
222,324

18
%
Money market deposits
236,488

19
%
226,574

20
%
Time deposits
142,842

11
%
142,212

12
%
   Total deposits

$1,264,919

 

$1,179,747

 

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 89% and 88% of total deposits September 30, 2015 and December 31, 2014, respectively. There were no depositors with deposits representing 10% or more of total deposits at September 30, 2015 or December 31, 2014.
Borrowings
The Company has a maximum line of credit with the Federal Home Loan Bank of Des Moines, or "FHLB" approximating 35% of eligible assets. FHLB advances are subject to collateral criteria that require the Company to pledge assets under a blanket pledge arrangement as collateral for its borrowings from the FHLB. Based on assets currently pledged and advances currently outstanding at September 30, 2015, the Company’s available borrowing line from the FHLB, was $180.0 million, representing approximately 12% of the Company’s assets. The Company has an outstanding FHLB advance of $2.1 million and $2.2 million as of September 30, 2015 and December 31, 2014, respectively, that was originated in the first quarter of 2013. 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. The $2.2 million FHLB advance that the Company drew in the first quarter of 2013 was to match fund a $2.2 million loan to one borrower for the construction of a low income housing project that qualified for a long term fixed interest rate of 3.12%. This FHLB borrowing originally had an eighteen year term with a 30 year amortization period, which mirrors the term of the construction loan made to the borrower. The maturity date of this borrowing is March 21, 2031.

The Company, through RML, had borrowings of $10.3 million and $24.1 million at September 30, 2015 and December 31, 2014, respectively. This borrowing is a line of credit used by RML to fund mortgage originations that matures on August 10, 2016.
At September 30, 2015 and December 31, 2014, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.
Liquidity and Capital Resources
The Company manages its liquidity through its Asset and Liability Committee. In addition to the $144.6 million of cash and due from banks and interest bearing deposits in other banks and $170.3 million in unpledged available for sale securities held at September 30, 2015, the Company had additional funding sources which include fed fund borrowing lines and advances available at the FHLB of Des Moines and the Federal Reserve Bank of approximately $222.2 million as of September 30, 2015.

53



At September 30, 2015, $64.0 million in securities, or 27%, of the investment portfolio was pledged, as compared to $54.1 million, or 19%, at December 31, 2014. As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 "Financial Statements" of this report, net cash used by operating activities was $7.8 million for the first nine months of 2015 primarily due to cash used in connection with net originations of loans held for sale and a decrease in other liabilities being partially offset by cash received from proceeds from the sale of loans held for sale. Net cash provided by investing activities was $3.0 million for the same period, primarily due to cash received from proceeds from sales and maturities of securities available for sale. These proceeds were partially offset by loan fundings and purchases of investment securities available for sale. Net cash provided by financing activities was $80.8 million, primarily due to an increase in deposits.
The Company issued 4,938 shares of its common stock in the third quarter of 2015 and did not repurchase any shares of its common stock under the Company’s publicly announced repurchase program. At September 30, 2015, the Company had 6,859,351 shares of its common stock outstanding.
Capital Requirements and Ratios
The Company and its wholly-owned subsidiary, Northrim Bank (the “Bank”), are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum regulatory capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material adverse effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by regulators about the components of regulatory capital, risk weightings, and other factors. The regulatory agencies may establish higher minimum requirements if, for example, a bank or bank holding company has previously received special attention or has a high susceptibility to interest rate risk.
Effective January 1, 2015, both the Company and the Bank were required to meet more stringent minimum capital requirements standards, commonly referred to as “Basel III”. As such, the ratios presented as of June 30, 2015 are calculated under the new regulations of Basel III. The ratios presented as of December 31, 2014 are calculated under the prior regulations of Basel II.
The requirements address both risk-based capital and leverage capital. At September 30, 2015, all capital ratios of the Company and the Bank exceeded the ratios required for a “well-capitalized” institution under regulatory guidelines.
The following table sets forth the actual capital ratios for the Company and the Bank as calculated under regulatory guidelines, compared to the regulatory minimum capital ratios and the regulatory minimum capital ratios needed to be eligible to qualify as a “well-capitalized” institution as of September 30, 2015.
 
 Adequately-Capitalized

 Well-Capitalized

Northrim BanCorp, Inc.

Northrim Bank
 







September 30, 2015







Common equity tier 1 capital
4.50%
 
6.50%
 
11.60%
 
11.86%
Tier 1 risk-based capital
6.00%

8.00%

13.00%

11.88%
Total risk-based capital
8.00%

10.00%

14.25%

13.13%
Leverage ratio
4.00%

5.00%

10.21%

10.00%
December 31, 2014







Tier 1 risk-based capital
4.00%

6.00%

13.06%

12.05%
Total risk-based capital
8.00%

10.00%

14.31%

13.30%
Leverage ratio
4.00%

5.00%

11.21%

10.35%

The regulatory capital ratios for the Company exceed those for the Bank in certain categories primarily because the $18.6 million junior subordinated debenture offerings that the Company completed in the third quarter of 2003 and the fourth quarter of 2005 are included in the Company’s capital for regulatory purposes although such securities are accounted for as a long-term debt in its financial statements. The junior subordinated debentures are not accounted for on the Bank’s financial statements nor are they included in its capital. As a result, the Company has $18.6 million more in regulatory capital than the Bank.

54



Off-Balance Sheet Items
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. As of September 30, 2015 and December 31, 2014, the Company’s commitments to extend credit and to provide letters of credit which are not reflected on its balance sheet amounted to $250.6 million and $225.4 million, respectively. Since many of the commitments are expected to expire without being drawn upon, these total commitment amounts do not necessarily represent future cash requirements. The Company has established reserves of $137,000 and $112,000 at September 30, 2015 and December 31, 2014, respectively, for losses related to these commitments that are recorded in other liabilities on the consolidated balance sheet.
Capital Expenditures and Commitments
At September 30, 2015 the Company has capital commitments of $508,000 related to the construction of new branch locations and $996,000 related to planned improvements to the Company’s corporate office building. The Company expects these capital expenditures to be incurred in the fourth quarter of 2015 and first quarter of 2016.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our assessment of market risk as of September 30, 2015 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2014.
ITEM 4. CONTROLS AND PROCEDURES 
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934). 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 as of September 30, 2015, the disclosure controls and procedures are effective in timely alerting them to material information required to be included in the 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 Control over Disclosure and Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15-d-15(f) of the Securities Exchange Act of 1934) that occurred during the quarterly period ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
During the normal course of its business, the Company is a party to various debtor-creditor legal actions, disputes, claims, and litigation related to the conduct of its banking business. These include cases filed as a plaintiff in collection and foreclosure cases, and the enforcement of creditors’ rights in bankruptcy proceedings. 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.
ITEM 1A. RISK FACTORS
For information regarding risk factors, please refer to Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. These risk factors have not materially changed as of September 30, 2015.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

55



(a)-(b) Not applicable
(c) There were no stock repurchases by the Company during the nine months ending September 30, 2015.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

56



ITEM 5. OTHER INFORMATION
(a) Not applicable
(b) There have been no material changes to the procedures by which shareholders may nominate directors to the Company’s board of directors.

ITEM 6. EXHIBITS
31.1
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)
31.2
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
32.1
Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2
Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.LAB
XBRL Labels Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
Notes to Exhibits List:
______________________________________________________________________________________________________
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i)  Consolidated Balance Sheet, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income and Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements. In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.


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SIGNATURES
Pursuant to the requirements 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.
NORTHRIM BANCORP, INC.
November 6, 2015
By
/s/ Joseph M. Beedle
 

Joseph M. Beedle
 

President and Chief Executive Officer
 
 
(Principal Executive Officer)

    
November 6, 2015
By
/s/ Latosha M. Frye
 

Latosha M. Frye
 

Executive Vice President, Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)


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