NOTE 11 - Goodwill, Intangible and Other Assets

A summary of intangible assets and other assets is as follows:



(In Thousands)	2012		2011
Intangible assets:
Goodwill	$	7,525	$	7,525
Core deposit intangible		328		465
NBG customer relationships		317		431
Total	$	8,170	$	8,421

Other assets:
Deferred taxes, net	$	9,991	$	10,872
Prepaid expenses		4,388		5,033
Investment in RML Holding Company		6,153		5,338
Investment in Low Income Housing Partnerships		5,974		4,396
Bank owned life insurance		2,726		3,006
Investment in PWA		1,575		1,722
Taxes receivable		1,432		1,436
Note receivable from ECCM		339		445
Investment in ECCM		36		41
Investment in ECIA		56		7
Other assets		2,219		1,942
Total	$	34,889	$	34,238

Prepaid expenses were $4.4 million and $5.0 million at December 31, 2012 and 2011, respectively. Prepaid expenses included $3.5 million and $4.3 million in prepaid FDIC assessments at December 31, 2012 and 2011, respectively. In accordance with FDIC regulations, the Company prepaid its FDIC insurance premiums for the fourth quarter ending December 31, 2009 and the fiscal years ending Decembers 31, 2010, 2011, and 2012.

As part of the stock acquisition of Alaska First in October 2007, the Company recorded $1.8 million of goodwill and $1.3 million of CDI for the acquisition of Alaska First stock. The Company is amortizing the CDI related to the Alaska First acquisition using the sum of years’ digits method over the estimated useful life of 10 years.

The Company performed goodwill impairment testing at December 31, 2012 and 2011 in accordance with the policy described in Note 1. There was no indication of impairment in the first step of the impairment test at December 31, 2012, and accordingly the Company did not perform the second step. At December 31, 2011, the Company performed its annual impairment test by applying the qualitative assessment described in ASU 2011-08 and concluded that it is more likely than not that the fair value of the Company exceeds the carry value and that no potential impairment existed at that time. Accordingly, the Company did not perform step one of the impairment test in 2011. Significant positive inputs to the qualitative assessment included the Company’s capital position; the Company’s increasing historical trends and budget-to-actual results of operations; the Company’s decreasing trends in, and current level of nonperforming assets; results of regulatory examinations; trends and peer comparisons of net interest margin; and trends in the Company’s cash flows. Significant negative inputs to the qualitative assessment included general local, national, and international economic conditions and how they may negatively affect our business as well as the current volatility and uncertainty related to market capitalization of financial institutions in general.

The Company recorded amortization expense of its intangible assets of $252,000, $275,000, and $299,000 for the years ended December 31, 2012, 2011, and 2010, respectively. Accumulated amortization for intangible assets was $5.9 million and $5.7 million at December 31, 2012 and 2011, respectively.

The future amortization expense required on these assets is as follows:



(In Thousands)
2013	$	228
2014		204
2015		153
2016		42
2017		18
Thereafter		-
Total	$	645

Affiliates

The Company applies the equity method of accounting for the following affiliates:

The Company owns a 48% equity interest in ECCM, an investment advisory services company. ECCM began active operations in the fourth quarter of 2002 and has had operating losses since that time. In addition to its ownership interest, the Company provides ECCM with a line of credit that has a committed amount of $750,000 and an outstanding balance of $339,000 as of December 31, 2012.

·	The Company owns a 24% interest in Pacific Wealth Advisors, LLC (“PWA”), an investment advisory, trust, and wealth management business located in Seattle, Washington.

·	The Company owns a 48% ECIA, an insurance agency that offers annuity and other insurance products.

The Company owns a 24% interest in the profits of RML, a residential mortgage holding company. In addition to its ownership interest, the Company provides RML with two lines of credit that have committed amounts of $18 million and outstanding balances of $11.1 million as of December 31, 2012. Additionally, the Company purchased $242.5 million and $82.9 million in loans from RML in 2012 and 2011.

Below is summary balance sheet and income statement information for RML.



(In Thousands, Unaudited)	2012		2011
Assets
Cash	$	13,547	$	9,925
Loans held for sale		59,840		77,896
Other assets		15,777		14,935
Total Assets	$	89,164	$	102,756

Liabilities
Lines of credit	$	56,932	$	74,595
Other liabilities		7,481		6,834
Total Liabilities		64,413		81,429
Shareholders' Equity		24,751		21,327
Total Liabilities and Shareholders' Equity	$	89,164	$	102,756


Income/expense
Gross income	$	31,113	$	23,569
Total expense		20,033		17,751
Joint venture allocations		84		(144)
Net Income	$	11,164	$	5,674

The Company has analyzed all of its affiliate relationships in accordance with GAAP and determined that PWA, RML, and ECIA are not variable interest entities (“VIEs”). The Company has determined that ECCM is a VIE. However, the Company does not have a controlling interest in ECCM. The Company determined that ECCM is a VIE based on the fact that the Company provides ECCM with a line of credit for which the majority owner of ECCM provides additional subordinated financial support in the form of a 50% guarantee. This line of credit has a committed amount of $750,000 and an outstanding balance of $339,000 as of December 31, 2012. Furthermore, ECCM does not have access to any other financial support through other institutions, nor is it likely that it would be able to obtain additional lines of credit based on its operational losses to date and its resulting lack of equity. As such, it appears that ECCM cannot finance its activities without additional subordinated financial support and is therefore considered a VIE under GAAP. However, the Company has determined that it does not have a controlling interest in ECCM based on the following facts and circumstances:

a.	Neither the Company nor any members of the Company’s management have control over the budgeting or operational processes of ECCM.

b.	While the President, CEO and Chairman of the Company is a member of ECCM’s board, he does not exert influence on decisions beyond Northrim Investment Services Company’s ownership percentage in ECCM.

c.	The Company has no veto rights with respect to decisions affecting the operations of ECCM.

The Company has the obligation to absorb losses of ECCM up to its ownership percentage of 48%. There are no caps or guarantees on returns, and there are no protections to limit any investor’s share of losses. Additionally, the Company provides ECCM with a $750,000 line of credit. This line includes a 50% personal guarantee by the majority owner of ECCM. Therefore, the Company does have the obligation to absorb losses and the right to receive benefits that could be significant to ECCM and which, as a result of its exposure to 50% of any losses incurred on the line of credit that the Company has extended to ECCM, may be greater than the Company’s 48% ownership therein.

However, the applicable accounting guidance requires that the Company have both the power to control the activities of ECCM that most significantly impact its economic performance and the obligation to absorb losses or the right to receive benefits from Elliott Cove that could potentially be significant to ECCM. The Company has determined that the facts and circumstances of its relationship with ECCM including its overall involvement in the operations, decision-making capabilities, and proportionate share in earnings and losses do not satisfy the criteria for a controlling interest because it does not have the power to direct the activities of ECCM according to GAAP.

While the Company also provides a line of credit to RML, which is also guaranteed by the other owners of RML, RML has other available lines of credit with unrelated financial institutions which have been in place for many years. Additionally, RML has a history of profitability and has sufficient capital to support its operations. RML had $24.8 million in equity, $89.2 million in assets and net income of $11.2 million as of and for the year ended December 31, 2012. As such, the total equity investment in the entity, which is provided by the Company and the other owners, is adequate to finance the activities of RML. Therefore, the Company has concluded that RML is not a VIE.

Low Income Housing Partnerships

In December of 2012, December of 2006, September of 2006, and January of 2003, the Company made commitments to invest $2.5 million in WNC and $3 million each in USA 57, Centerline XXXIII, and Centerline XXII, respectively. The Company earns a return on its investments in the form of tax credits and deductions that flow through to it as a limited partner in these partnerships over a sixteen, fifteen, eighteen, and eighteen-year period, respectively. The Company recognized amortization expense of $921,000, $902,000, and $861,000 in 2012, 2011, and 2010, respectively. The Company expects to fund its remaining $2 million in commitments on these investments through 2017.