10-K 1 nrim2016-10k.htm 10-K Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
FORM 10-K
(Mark One)
þ    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
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)
Securities registered pursuant to Section 12(b) of the Act: N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
The NASDAQ Stock Market, LLC
(Title of Class)
(Name of Exchange on Which Listed)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ Yes  ý No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨ Yes  ý No  
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
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 ¨ (Do not check if a smaller reporting company) Smaller Reporting Company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).       ¨ Yes  ý No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) was $174,841,698.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  6,909,865 shares of Common Stock, $1.00 par value, as of March 13, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement on Schedule 14A, relating to the registrant’s annual meeting of shareholders to be held on May 25, 2017, are incorporated by reference into Part III of this Form 10-K.




TABLE OF CONTENTS
 
 
 
 
Part  I
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
Part II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
Part III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
Part IV
 
Item 15.
 
 


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PART I
 
Cautionary Note Regarding Forward Looking Statements

This Annual Report on Form 10-K includes “forward-looking statements”, within the meaning of the Private Securities Litigation Reform Act of 1995, 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 Northrim BanCorp Inc.’s style of banking, and the outlook of the local economy in which we operate. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this report are forward-looking. We use words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management’s current plans and expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations, and those variations may be both material and adverse. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the general condition of, and changes in, the Alaska economy; factors that impact our net interest margin; and our ability to maintain asset quality; our ability to implement our marketing and growth strategies; 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 as those factors relate to our cost of funds and return on assets. In addition, there are risks inherent in the banking industry relating to collectability of loans and changes in interest rates. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified Item 1A. Risk Factors, and in our filings with the 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.

ITEM 1.            BUSINESS
In this document, please note that references to "we", "our", "us", or the "Company" mean Northrim BanCorp, Inc. and its subsidiaries, unless the context suggests otherwise.
General
We are a publicly traded bank holding company headquartered in Anchorage, Alaska.  The Company’s common stock trades on the Nasdaq Global Select Stock Market (“NASDAQ”) under the symbol, “NRIM.”  The Company is regulated by the Board of Governors of the Federal Reserve System.  We began banking operations in Anchorage in December 1990, and formed the Company as an Alaska corporation in connection with our reorganization into a holding company structure; that reorganization was completed effective December 31, 2001.  The Company has grown to be the third largest commercial bank in Alaska and in Anchorage in terms of deposits, with $1.3 billion in total deposits and $1.5 billion in total assets at December 31, 2016.  Through our fourteen banking branches and fifteen mortgage origination offices, we are accessible to approximately 90% of the Alaska population.
The Company has four direct wholly-owned subsidiaries:
Northrim Bank (the “Bank”), a state chartered, full-service commercial bank headquartered in Anchorage, Alaska.  The Bank is regulated by the Federal Deposit Insurance Corporation (the "FDIC") and the State of Alaska Department of Commerce, Community and Economic Development, Division of Banking, Securities and Corporations.  The Bank has fourteen branch locations in Alaska; seven in Anchorage, one in Wasilla, two in Juneau, one in Fairbanks, one in Ketchikan, one in Sitka, and one in Eagle River.  We also operate in Washington State through Northrim Funding Services (“NFS”), a factoring business that the Bank started in 2004.  We offer a wide array of commercial and consumer loan and deposit products, investment products, and electronic banking services over the Internet;
Northrim Investment Services Company (“NISC”) was formed in November 2002 to hold the Company’s equity interest in Elliott Cove Capital Management, LLC ("ECCM"), an investment advisory services company. In the first quarter of 2006, through NISC, we purchased an equity interest in Pacific Wealth Advisors, LLC (“PWA”), an investment advisory, trust, and wealth management business located in Seattle, Washington, in which we hold

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24% of PWA's total outstanding equity interests. Although we still sell their products, in May 2015, we sold all of our equity interest in ECCM held by NISC;
Northrim Capital Trust I (“NCTI”), an entity that we formed in May of 2003 to facilitate a trust preferred securities offering by the Company;
Northrim Statutory Trust 2 (“NST2”), an entity that we formed in December of 2005 to facilitate a trust preferred securities offering by the Company; and
The Bank has three direct wholly-owned subsidiaries:
Northrim Capital Investments Co. (“NCIC”) is a wholly-owned subsidiary of the Bank, which holds a 100% interest in a residential mortgage holding company, Residential Mortgage Holding Company, LLC (“RML”).  The predecessor of RML, Residential Mortgage, LLC, was formed in 1998 and has fifteen offices throughout Alaska.  RML became a wholly-owned subsidiary of NCIC on December 1, 2014. Prior to that, the Company held a 23.5% interest in RML. RML holds a 30% investment in Homestate Mortgage, LLC. In March and December of 2005, NCIC purchased ownership interests totaling 50.1% in Northrim Benefits Group, LLC (“NBG”), an insurance brokerage company that focuses on the sale and servicing of employee benefit plans.  In the fourth quarter of 2011, NCIC purchased an equity interest in Elliott Cove Insurance Agency LLC (“ECIA”); an insurance agency that offers annuity and other insurance products. Although we still sell their products, we sold all of our equity interests in ECIA held by NCIC in May 2015.
Northrim Building, LLC (“NBL”) is a wholly-owned subsidiary of the Bank that owns and operates the Company’s main office facility at 3111 C Street in Anchorage. 
Northrim Building LO, LLC is a wholly-owned subsidiary of the Bank that owns and operates the Company’s community branch facility at 2270 E. 37th Avenue in Anchorage. 
Segments
The Company operates in two primary segments: Community Banking and Home Mortgage Lending. Prior to December 2014, the Company operated as a single segment. As of December 31, 2014, management determined, based on accounting principles generally accepted in the United States ("GAAP"), that the Company operates with two segments as a result of the acquisition of RML on December 1, 2014. Measures of the Company's revenues, profit or loss, and total assets are included in this report, Item 8. "Financial Statements and Supplementary Data", and incorporated herein by reference.
Business Strategy
The Company’s primary objective is to become Alaska's most trusted financial institution by adding value for our customers, communities, and shareholders. We aspire to be Alaska's premier bank and employer of choice as a leader in financial expertise, products, and services. We value our state, and we are proud to be Alaskan. We embody Alaska's frontier spirit and values, and we support our communities. We have a sincere appreciation for our customers, and we strive to deliver superior customer first service that is reliable, ethical, and secure. We look for growth opportunities for our customers, our institution and our employees.
Our strategy is one of value-added growth.  Management believes that calculated, sustainable organic and inorganic market share growth coupled with good asset quality, an appropriate core deposit and capital base, operational efficiency, diversified sources of other operating income, and improved profitability is the most appropriate means of increasing shareholder value.
The Company executed on our strategy of inorganic growth in 2014 through our acquisition of Alaska Pacific Bancshares, Inc. ("Alaska Pacific Bank") on April 1, 2014 and our acquisition of the remaining 76.5% equity interest in RML on December 1, 2014. The acquisition of Alaska Pacific Bank benefited the Company's core business through increased loan and deposit balances, an increased customer base, and expansion into the Southeast region of Alaska. The acquisition of RML increased the Company's presence in the mortgage origination business in Alaska and enhanced our ability to provide financial services to our customers. Both of these acquisitions have been accretive to the Company's earnings per share since their respective completion dates in 2014.
Our business strategy emphasizes commercial lending products and services through relationship banking with businesses and professional individuals.  Additionally, we are a significant land development and residential construction lender and an active lender in the commercial real estate market in Alaska.  Because of our relatively small size, our experienced senior management

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team can be more involved with serving customers and making credit decisions, all of which are made in Alaska, allowing us to compete more favorably with larger competitors for lending relationships.  We believe that there is opportunity to increase the Company’s loan portfolio, particularly in the commercial portion of the portfolio, in the Company’s current market areas through existing and new customers.
Management believes that our real estate construction and term real estate loan departments have developed a strong level of expertise and will continue to compete favorably in our markets.  We have also dedicated additional resources to our small business lending operations and have targeted the acquisition of new customers in professional fields including physicians, dentists, accountants, and attorneys.  In addition to lending products, in many cases commercial customers also require multiple deposit and affiliate services that add franchise value to the Company.  While we expect that opportunities for growth in 2017 have decreased compared to prior years mainly due to the lower oil prices, we believe that these strategies will continue to benefit the Company in the long term. The Company benefits from solid capital and liquidity positions, and management believes that this provides a competitive advantage in the current business environment. (See “Liquidity and Capital Resources” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.)
The Company’s business strategy also stresses the importance of customer deposit relationships to support its lending activities.  Our guiding principle is to serve our market areas by operating with a “Superior Customer First Service” philosophy, affording our customers the highest priority in all aspects of our operations.  We believe that our successful execution of this philosophy has created a strong core deposit franchise that provides a stable, low cost funding source for expanded growth in all of our lending areas.  We have devoted significant resources to future deposit product development, expansion of electronic services for both personal and business customers, and enhancement of information security related to these services.
In addition to market share growth, a significant aspect of the Company’s business strategy is focused on managing the credit quality of our loan portfolio.  Over the last several years, the Company has allocated substantial resources to the credit management function of the Bank to provide enhanced financial analysis of our largest, most complex loan relationships to further develop our processes for analyzing and managing various concentrations of credit within the overall loan portfolio and to develop strategies to improve or collect our existing loans.  Continued success in maintaining or further improving the credit quality of our loan portfolio and managing our level of other real estate owned is a significant aspect of the Company’s strategy for attaining sustainable, long-term market growth to affect increased shareholder value.
Employees
We believe that we provide a high level of customer service. To achieve our objective of providing “Superior Customer First Service”, management emphasizes the hiring and retention of competent and highly motivated employees at all levels of the organization.  Management believes that a well-trained and highly motivated core of employees allows maximum personal contact with customers in order to understand and fulfill customer needs and preferences.  This “Superior Customer First Service” philosophy is combined with our emphasis on personalized, local decision making.  The Company continues to enhance our company-wide employee training program which focuses on Northrim culture, Customer First Service, general sales skills, and various technical focus areas.
We consider our relations with our employees to be satisfactory.  We had 451 full-time equivalent employees at December 31, 2016. None of our employees are covered by a collective bargaining agreement.  Of the 451 full-time equivalent employees, 321 were Community Banking employees (304 Northrim Bank, 17 NBG) and 130 were Home Mortgage Lending employees.
Products and Services
Community Banking
Lending Services: We have an emphasis on commercial and real estate lending.  We also believe we have a significant niche in construction and land development lending in Anchorage, Fairbanks, the Matanuska-Susitna Valley, and Southeast Alaska.  (See “Loans” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.)
Purchase of accounts receivable:  We provide short-term working capital to customers primarily in our Alaska markets as well as Washington, Oregon and some other states by purchasing their accounts receivable through NFS.  In 2017, we expect NFS to continue to penetrate these markets and to continue to contribute to the Company’s net income.
Deposit Services: Our deposit services include noninterest-bearing checking accounts and interest-bearing time deposits, checking accounts, and savings accounts.  Our interest-bearing accounts generally earn interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits.  

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Several of our deposit services and products are:
A money market deposit account;
A “Jump-Up” certificate of deposit (“CD”) that allows additional deposits with the opportunity to increase the rate to the current market rate for a similar term CD;
 A savings account that is priced like a money market account that allows additional deposits, quarterly withdrawals without penalty, and tailored maturity dates; and
Arrangements to courier noncash deposits from our customers to their local Northrim Bank branch. 
Other Services: In addition to our traditional deposit and lending services, we offer our customers several convenience services:  Consumer Online Banking, Mobile App and Mobile Deposit, Mobile Web and Text Banking, Business Online Banking, FinanceWorks™ powered by Quicken®, Online Statements, Consumer Debit Cards, Business Debit Cards, Cash Back Rewards, personalized checks and instantly issued debit cards at account opening, telebanking, and automated teller services.  Other special services include personalized checks at account opening, overdraft protection from a savings account, extended banking hours and commercial drive-up banking at many locations, automatic transfers and payments, wire transfers, direct payroll deposit, electronic tax payments, Automated Clearing House origination and receipt, remote deposit capture, merchant services, cash management programs to meet the specialized needs of business customers, annuity products, long term investment portfolios, and in some markets, courier agents who pick up noncash deposits from business customers. 
Other Services Provided through Affiliates:  The Company sells and services employee benefit plans for small and medium sized businesses in Alaska through NBG, an insurance brokerage company.  In 2013, we launched the Enroll Alaska initiative, a division of NBG, which works to bring insurance coverage under the Affordable Health Care Act to uninsured Alaskans. In 2016, in response to an identified small business need, we launched Northrim Benefits Group Employer Services, a division of NBG, which is an outsource solution for business customers that provides various human resources consulting and payroll services. Our affiliate PWA provides investment advisory, trust, and wealth management services for customers who are primarily located in the Pacific Northwest and Alaska.  We plan to continue to leverage our affiliate relationships to strengthen our existing customer base and bring new customers into the Bank.
Significant Business Concentrations:    No individual or single group of related accounts is considered material in relation to our total assets or total revenues, or to the total assets, deposits or revenues of the Bank, or in relation to our overall business. Based on classification by North American Industry Classification System ("NAICS"), there are no segments that exceed 10% of portfolio loans, except for real estate (see Note 6, Loans, of the Notes to Consolidated Financial Statements included in Item 8 of this report for a breakout of real estate loans). In addition to its review of NAICS codes, the Company has also identified concentrations in two specialized industries. We estimate that as of December 31, 2016 approximately 6% of portfolio loans have direct exposure to the oil and gas industry in Alaska and approximately 8% of portfolio loans are attributable to a combination of Alaska Native Regional and Village Corporations. Additionally, approximately 41% of our loan portfolio at December 31, 2016 is attributable to 27 large borrowing relationships. Moreover, our business activities are currently focused primarily in the state of Alaska.  Consequently, our results of operations and financial condition are dependent upon the general trends in the Alaska economy and, in particular, the residential and commercial real estate markets in Anchorage, Juneau, Fairbanks, the Matanuska-Susitna Valley, Ketchikan, and Sitka. 
Home Mortgage Lending
Lending Services: The Company originates 1-4 family residential mortgages throughout Alaska which we sell to the secondary market. Residential mortgage choices include several products from the Alaska Housing Finance Corporation including first-time homebuyer, veteran's and rural community programs; Federal Housing Authority, or "FHA" loans; Veteran's Affairs, or "VA" loans; Jumbo loans; and various conventional mortgages. The Company retains servicing rights on loans sold to the Alaska Housing Finance Corporation since implementing a new loan servicing program in July 2015.

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Alaska Economy
Our growth and operations depend upon the economic conditions of Alaska and the specific markets we serve.  Significant changes in the Alaska economy and the markets we serve eventually could have a positive or negative impact on the Company. Alaska is strategically located on the Pacific Rim, within nine hours by air from 95% of the northern hemisphere, and Anchorage has become a worldwide cargo and transportation link between the United States and international business in Asia and Europe.  The economy of Alaska is dependent upon natural resources industries.  Key sectors of the Alaska economy are the oil industry, government and military spending, and the fishing, mining, tourism, air cargo, transportation, construction, and forest products industries, as well as medical services. The Company believes that the acquisition of Alaska Pacific Bank increases the Company's exposure in the tourism industry as Southeast Alaska is the primary destination for cruise ships that visit in Alaska. Based on information from Rain Coast Data, approximately one million cruise ship tourists visited Southeast Alaska in both 2014 and 2015. We believe our increased exposure to this industry diversifies the Company's larger exposure to natural resource industries, specifically the oil industry, in Alaska.
The oil industry plays a significant role in the economy of Alaska.  According to the State of Alaska Department of Revenue, in 2016 approximately 72% of the unrestricted revenues that funded the Alaska state government in the fiscal year ending June 30, 2016 were generated through various taxes and royalties on the oil industry. This is down from approximately 90% in the last several years due to a decrease in the price of oil, causing the state of Alaska to use savings from previous years to fund its budget deficit. State revenues are sensitive to volatile oil prices and production levels have been in decline for over 20 years. As oil prices have stabilized at relatively low-levels, we believe the reduction in various taxes and royalties on the oil industry is now a serious concern for state revenues as it is projected that Alaska's savings will be depleted within two years at current prices. If oil prices remain at their current relatively low levels in the longer term, we anticipate it will be a concern for Alaska's long-term economic growth. However, we believe Alaska's economy is less sensitive to oil price volatility in the short term than Alaska's state government budget. While state government revenue from oil royalties is immediately and directly impacted by a drop in oil prices, we believe that the large scale and nature of oil wells in Alaska are such that project commitments that currently exist will most likely not be disrupted by short term price volatility. While we believe that subcontractors who provide oil field services and transportation for the large, multi-national companies that produce oil in Alaska experienced a slowdown in revenues in 2016 as a result of the decrease in prices, we are encouraged by recent announcements by several oil exploration companies announcing new oil fields on the North Slope that could lead to future increases in oil production over time.
We believe the long-term growth of the Alaska economy will most likely be determined by large scale natural resource development projects. Several multi-billion dollar projects can potentially advance in the moderate term.  Some of these projects include: potential oil and gas activities in the Arctic National Wildlife Refuge; copper, gold and molybdenum production at the Donlin mine; and continued exploration in the National Petroleum Reserve Alaska. Because of their size, we believe each of these projects faces tremendous challenges.  We believe contentious political decisions need to be made by government regulators, issues need to be resolved in the court system, and multi-billion dollar financial commitments need to be made by the private sector if they are to advance.  If none of these projects moves forward in the next ten years, we believe state revenues will probably continue to decline with falling oil production from older fields on the North Slope of Alaska.  We anticipate the decline in state revenues will likely have a negative effect on Alaska’s economy.
In the last several years, Alaska's economy has been stronger relative to many other states in the nation, due largely to a natural resources based economy which has benefited from high commodity and energy prices.  According to the Treasury Division of Alaska Department of Revenue, as of October, 2015, Alaska's Statutory Budget Reserve Fund was liquidated and its assets were transferred to the General Fund. As of December 31, 2016, Alaska's Constitutional Budget Reserve was $5.7 billion and the Alaska Permanent Fund had a balance of $56.3 billion. The Alaska Permanent Fund pays an annual dividend to every eligible Alaskan citizen.  According to a January 20, 2017 press release from the Alaska Department of Labor and Workforce Development, the seasonally adjusted unemployment rates in the United States and Alaska were 4.7% and 6.7%, respectively, in December 2016. Prior to November 2014, the unemployment rate in Alaska had been lower than that of the United States as a whole since 2009. As general economic conditions in the United States have recovered over the past several years and oil prices have significantly declined, Alaska's unemployment rate now exceeds that of the United States as a whole. The Alaska Department of Labor predicts a loss of 7,500 jobs, or approximately 2.3%, in 2017 following job losses of approximately 2.0% in 2016. The Company anticipates that the estimated decrease in jobs in Alaska in 2016 and 2017 will have an impact on our ability to grow organically in the next few years.
A material portion of our loans at December 31, 2016, were secured by real estate located in greater Anchorage, Matanuska-Susitna Valley, Fairbanks, and Southeast Alaska.  Thirty-six percent of our revenue in 2016 was derived from the residential housing market in the form of loan fees and interest on residential construction and land development loans and income from RML as compared to 38% and 13% in 2015 and 2014.  Real estate values generally are affected by economic and other conditions in the area where the real estate is located, fluctuations in interest rates, changes in tax and other laws, and other matters outside

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of our control. A decline in real estate values in the greater Anchorage, Matanuska-Susitna Valley, Fairbanks, and Southeast Alaska areas could significantly reduce the value of the real estate collateral securing our real estate loans and could increase the likelihood of defaults under these loans. At December 31, 2016, $278.2 million, or 29%, of our loan portfolio was represented by commercial loans in Alaska.  
Alaska’s residents are not subject to any state income or state sales taxes.  For over 30 years, Alaska residents have received annual distributions payable in October of each year from the Alaska Permanent Fund Corporation, which is supported by royalties from oil production.  The distribution was $1,022 per eligible resident in 2016 for an aggregate distribution of approximately $650 million.  The Anchorage Economic Development Corporation estimates that, for most Anchorage households, distributions from the Alaska Permanent Fund exceed other Alaska taxes to which those households are subject (primarily real estate taxes).
Competition
We operate in a highly competitive and concentrated banking environment.  We compete not only with other commercial banks, but also with many other financial competitors, including credit unions (including Alaska USA Federal Credit Union, one of the nation’s largest credit unions), finance companies, mortgage banks and brokers, securities firms, insurance companies, private lenders, and other financial intermediaries, many of which have a state-wide or regional presence, and in some cases, a national presence.  Many of our competitors have substantially greater resources and capital than we do and offer products and services that are not offered by us.  Our non-bank competitors also generally operate under fewer regulatory constraints, and in the case of credit unions, are not subject to income taxes.  We estimate that credit unions in Alaska have a 40% share of total deposits held in banks and credit unions in the state as of June 30, 2016.  Changes in credit union regulations have eliminated the “common bond” of membership requirement and liberalized their lending authority to include business and real estate loans on par with commercial banks.  The differences in resources and regulation may make it harder for us to compete profitably, to reduce the rates that we can earn on loans and investments, to increase the rates we must offer on deposits and other funds, and adversely affect our financial condition and earnings.
As our industry becomes increasingly dependent on and oriented toward technology-driven delivery systems, permitting transactions to be conducted via a computer or wireless device, non-bank institutions are able to attract funds and provide lending and other financial services even without offices located in our primary service area. Some insurance companies and brokerage firms compete for deposits by offering rates that are higher than may be appropriate for the Company in relation to its asset and liability management objectives.  However, we offer a wide array of deposit products and services and believe we can compete effectively through relationship based pricing and effective delivery of “Superior Customer First Service”. We also compete with full service investment firms for non-bank financial products and services offered by ECCM, ECIA and PWA.
Currently, there are seven commercial banks operating in Alaska.  At June 30, 2016, the date of the most recently available information, Northrim Bank had approximately an 11% share of the Alaska commercial bank deposits, 15% in the Anchorage area, 15% in Juneau, 13% in Sitka, 10% in Matanuska-Susitna, 6% in Fairbanks, and 4% in Ketchikan.
The following table sets forth market share data for the commercial banks having a presence in Alaska as of June 30, 2016, the most recent date for which comparative deposit information is available.
Financial institution
Number of branches
Total deposits (in thousands)
Market share of total financial institution deposits
Market share of total bank deposits
Northrim Bank
14

$1,266,106

7
%
11
%
Wells Fargo Bank Alaska
49
6,080,288

30
%
50
%
First National Bank Alaska
30
2,424,638

12
%
20
%
Key Bank
15
1,242,368

6
%
10
%
First Bank
9
468,590

2
%
4
%
Mt. McKinley Bank
5
333,246

2
%
3
%
Denali State Bank
5
236,815

1
%
2
%
Total banks
127

$12,052,051

60
%
100
%
Credit unions(1)
100

$8,153,545

40
%
NA

Total financial institutions
227

$20,205,596

100
%
100
%
 (1) SNL Financial Deposit Market Share Summary as of June 30, 2016.


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Supervision and Regulation
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “BHC Act”) registered with and subject to examination by the Board of Governors of the Federal Reserve System (the “FRB”).  The Company’s bank subsidiary is an Alaska-state chartered commercial bank and is subject to examination, supervision, and regulation by the Alaska Department of Commerce, Community and Economic Development, Division of Banking, Securities and Corporations (the “Division”).  The FDIC insures Northrim Bank’s deposits and also examines, supervises, and regulates Northrim Bank. The Company’s affiliated investment advisory and wealth management company, Pacific Portfolio Consulting LLC, is subject to and regulated under the Investment Advisors Act of 1940 and applicable state investment advisor rules and regulations.  The Company’s affiliated trust company, Pacific Portfolio Trust Company, is regulated as a non-depository trust company under the trust company laws of the State of Washington and is subject to supervision and examination by the Department of Financial Institutions of Washington State.
The Company’s earnings and activities are affected, among other things, by legislation, by actions of the FRB, the Division, the FDIC and other regulators, by local legislative and administrative bodies, and decisions of courts.  These include limitations on the ability of Northrim Bank to pay dividends to the Company, numerous federal and state consumer protection laws imposing requirements on the making, enforcement, and collection of consumer loans, and restrictions on and regulation of the sale of mutual funds and other uninsured investment products to customers.
Regulation of banks and the financial services industry has been undergoing major changes in recent years, including the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  The Dodd-Frank Act significantly modifies and expands legal and regulatory requirements imposed on banks and other financial institutions.  
The Dodd-Frank Act has significantly affected Northrim Bank and its business and operations. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance coverage to $250,000 per depositor and deposit insurance assessments paid by Northrim Bank are now based on Northrim Bank’s total assets.  Other Dodd-Frank Act changes include: (i) tightened capital requirements for Northrim Bank and the Company; (ii) new requirements on parties engaged in residential mortgage origination, brokerage, lending and securitization; (iii) expanded restrictions on affiliate and insider transactions; (iv) enhanced restrictions on management compensation and related governance procedures; (v) creation of a federal Consumer Financial Protection Bureau with broad authority to regulate consumer financial products and services; and (vi) restrictions and prohibitions on the ability of banking entities to engage in proprietary trading and to invest in or have certain relationships with hedge funds and private equity funds.
The Trump administration and various members of Congress have expressed a desire to modify or repeal parts of the Dodd-Frank Act. We cannot predict whether any modification or repeal will be enacted or, if so, any effect they would have on our business, operation or financial condition or on the financial services industry in general.    
The Gramm-Leach-Bliley Act (the “GLB Act”), which was enacted in 1999, allows bank holding companies to elect to become financial holding companies, subject to certain regulatory requirements.  In addition to the activities previously permitted bank holding companies, financial holding companies may engage in non-banking activities that are financial in nature, such as securities, insurance, and merchant banking activities, subject to certain limitations.  The Company could utilize this structure to accommodate an expansion of its products and services in the future.
Bank holding companies, such as the Company, are subject to a variety of restrictions on the activities in which they can engage and the acquisitions they can make. The activities or acquisitions of bank holding companies, such as the Company, that are not financial holding companies, are limited to those which constitute banking, managing or controlling banks or which are closely related activities.  A bank holding company is required to obtain the prior approval of the FRB for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company.  Nonbank acquisitions and activities of a bank holding company are also generally limited to the acquisition of up to 5% of the outstanding shares of any class of voting securities of a company and activities previously determined by the FRB by regulation or order to be closely related to banking, unless prior approval is obtained from the FRB.
The GLB Act also included extensive consumer privacy provisions.  These provisions, among other things, require full disclosure of the Company’s privacy policy to consumers and mandate offering the consumer the ability to “opt out” of having non-public personal information disclosed to third parties.  Pursuant to these provisions, the federal banking regulators adopted privacy regulations.  As a result of the Dodd-Frank Act, the rule-making authority for the privacy provisions of the GLB Act has been transferred to the CFPB. In addition, the states are permitted to adopt more extensive privacy protections through legislation or regulation.

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There are various legal restrictions on the extent to which a bank holding company and certain of its nonbank subsidiaries can borrow or otherwise obtain credit from their banking subsidiaries or engage in certain other transactions with or involving those banking subsidiaries.  With certain exceptions, federal law imposes limitations on, and requires collateral for, extensions of credit by insured depository institutions, such as Northrim Bank, to their non-bank affiliates, such as the Company. In addition, new capital rules may affect the Company's ability to pay dividends.
Subject to certain limitations and restrictions, a bank holding company, with prior approval of the FRB, may acquire an out-of-state bank.  Banks in states that do not prohibit out-of-state mergers may merge with the approval of the appropriate federal banking agency. A state bank may establish a de novo branch out of state if such branching is permitted by the other state for state banks chartered by such other state. 
Among other things, applicable federal and state statutes and regulations which govern a bank’s activities relate to minimum capital requirements, required reserves against deposits, investments, loans, legal lending limits, mergers and consolidations, borrowings, issuance of securities, payment of dividends, establishment of branches and other aspects of its operations.  The Division and the FDIC also have authority to prohibit banks under their supervision from engaging in what they consider to be unsafe or unsound practices.
There also are certain limitations on the ability of the Company to pay dividends to its shareholders.  It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s current and expected future capital needs, asset quality and overall financial condition.  The policy provides that bank holding companies should not maintain a level of cash dividends that undermines a bank holding company’s ability to serve as a source of strength to its banking subsidiaries. Additionally, the Alaska Corporations Code prohibits the Company from making any distributions to the Company's shareholders unless the amount of the retained earnings of the Company immediately before the distribution equals or exceeds the amount of the proposed distribution. The Alaska Corporations Code also prohibits the Company from making any distribution to the Company's shareholders if the Company or a subsidiary of the Company making the distribution is, or as a result of the distribution would be, likely to be unable to meet its liabilities as they mature.
Various federal and state statutory provisions also limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval.  The FDIC or the Division could take the position that paying a dividend would constitute an unsafe or unsound banking practice. In addition, new capital rules may affect the Bank's ability to pay dividends.
Under longstanding FRB policy and under the Dodd-Frank Act, a bank holding company is required to act as a source of financial strength for its subsidiary banks.  The Company could be required to commit resources to its subsidiary banks in circumstances where it might not do so, absent such requirement.
Both the Company and the Bank are required to maintain minimum levels of regulatory capital. In July 2013, federal banking regulators (including the FDIC and the FRB) adopted new capital requirement rules (the “Rules”). The Rules apply to both depository institutions (such as the Bank) and their holding companies (such as the Company). The Rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act. The Rules have applied to both the Company and the Bank since the beginning of 2015.
The Rules recognize three types, or tiers, of capital: common equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital. Common equity Tier 1 capital generally consists of retained earnings and common stock instruments (subject to certain adjustments), as well as accumulated other comprehensive income ("AOCI") except to the extent that the Company and the Bank exercise a one-time irrevocable option to exclude certain components of AOCI. Additional Tier 1 capital generally includes noncumulative perpetual preferred stock and related surplus subject to certain adjustments and limitations. Tier 2 capital generally includes certain capital instruments (such as subordinated debt) and portions of the amounts of the allowance for loan and lease losses, subject to certain requirements and deductions. The term "Tier 1 capital" means common equity Tier 1 capital plus additional Tier 1 capital, and the term "total capital" means Tier 1 capital plus Tier 2 capital.
The Rules generally measure an institution's capital using four capital measures or ratios. The common equity Tier 1 capital ratio is the ratio of the institution's common equity Tier 1 capital to its total risk-weighted assets. The Tier 1 capital ratio is the ratio of the institution's total Tier 1 capital to its total risk-weighted assets. The total capital ratio is the ratio of the institution's total capital to its total risk-weighted assets. The leverage ratio is the ratio of the institution's Tier 1 capital to its average total consolidated assets. To determine risk-weighted assets, assets of an institution are generally placed into a risk category and given a percentage weight based on the relative risk of that category. The percentage weights range from 0% to 1,250%. An asset's risk-weighted value will generally be its percentage weight multiplied by the asset's value as determined under generally accepted

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accounting principles. In addition, certain off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the risk categories. An institution's federal regulator may require the institution to hold more capital than would otherwise be required under the Rules if the regulator determines that the institution's capital requirements under the Rules are not commensurate with the institution's credit, market, operational or other risks.    
Both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 4.5% as well as a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. In addition to the preceding requirements, both the Company and the Bank are required to establish a “conservation buffer,” consisting of common equity Tier 1 capital, which is at least 2.5% above each of the preceding common equity Tier 1 capital ratio, the Tier 1 risk-based ratio and the total risk-based ratio. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers.
The Rules set forth the manner in which certain capital elements are determined, including but not limited to, requiring certain deductions related to mortgage servicing rights and deferred tax assets. When the federal banking regulators initially proposed new capital rules in 2012, the rules would have phased out trust preferred securities as a component of Tier 1 capital. As finally adopted, however, the Rules permit holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Company) to continue to include trust preferred securities issued prior to May 19, 2010 in Tier 1 capital, generally up to 25% of other Tier 1 capital.
The Rules made changes in the methods of calculating certain risk-based assets, which in turn affects the calculation of risk- based ratios. Higher or more sensitive risk weights are assigned to various categories of assets, among which are commercial real estate, credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or are nonaccrual, foreign exposures, certain corporate exposures, securitization exposures, equity exposures and in certain cases mortgage servicing rights and deferred tax assets.
Both the Company and the Bank were required to begin compliance with the Rules on January 1, 2015. The conservation buffer started to be phased in beginning in 2016 and will take full effect on January 1, 2019. Certain calculations under the Rules will also have phase-in periods. We believe that the current capital levels of the Company and the Bank are in compliance with the standards under the Rules including the conservation buffer.
In addition to the minimum capital standards, the federal banking agencies have issued regulations to implement a system of "prompt corrective action." These regulations apply to the Bank but not the Company. The regulations establish five capital categories; under the Rules, a bank is:

“well capitalized” if it has a total risk-based capital ratio of 10.0% or more, a Tier 1 risk-based capital ratio of 8.0% or more, a common equity Tier 1 risk-based ratio of 6.5% or more, and a leverage capital ratio of 5.0% or more, and is not subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure;

“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more, a common equity Tier 1 risk-based ratio of 4.5% or more, and a leverage capital ratio of 4.0% or more;

“undercapitalized” if it has a total risk-based capital ratio less than 8.0%, a Tier 1 risk-based capital ratio less than 6.0%, a common equity risk-based ratio less than 4.5% or a leverage capital ratio less than 4.0%;

“significantly undercapitalized” if it has a total risk-based capital ratio less than 6.0%, a Tier 1 risk-based capital ratio less than 4.0%, a common equity risk-based ratio less than 3.0% or a leverage capital ratio less than 3.0%; and

“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.

A bank that, based upon its capital levels, is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.


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At each successive lower capital category, a bank is subject to increasing supervisory restrictions. For example, being “adequately capitalized” rather than “well-capitalized” affects a bank’s ability to accept brokered deposits without the prior approval of the FDIC, and may cause greater difficulty obtaining retail deposits.  Banks in the “adequately capitalized” classification may have to pay higher interest rates to continue to attract those deposits, and higher deposit insurance rates for those deposits. This status also affects a bank’s eligibility for a streamlined review process for acquisition proposals.
Management intends to maintain capital ratios for the Bank in 2017 that exceed the FDIC’s new requirements for the “well-capitalized” capital requirement classification under the Basel Committee on Banking Supervision rules which took effect for the Company on January 1, 2015.  The dividends that the Bank pays to the Company will be limited to the extent necessary for the Bank to meet the regulatory requirements of a “well-capitalized” bank. 
The capital ratios for the Company exceed those for Northrim Bank primarily because the $18 million trust preferred securities offerings that the Company completed in the second quarter of 2003 and in the fourth quarter of 2005 are included in the Company’s capital for regulatory purposes, although they are accounted for as a liability in its consolidated financial statements.  The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital (although the Company did contribute to the Bank a portion of the cash proceeds from the sale of those securities).  As a result, the Company has $18 million more in regulatory capital than the Bank at December 31, 2016 and 2015, which explains most of the difference in the capital ratios for the two entities.     
Northrim Bank is required to file periodic reports with the FDIC and the Division and is subject to periodic examinations and evaluations by those regulatory authorities.  These examinations must be conducted every 12 months, except that certain “well-capitalized” banks may be examined every 18 months.  The FDIC and the Division may each accept the results of an examination by the other in lieu of conducting an independent examination. 
In the liquidation or other resolution of a failed insured depository institution, claims for administrative expenses (including certain employee compensation claims) and deposits are afforded a priority over other general unsecured claims, including non-deposit claims, and claims of a parent company such as the Company. Such priority creditors would include the FDIC, which succeeds to the position of insured depositors to the extent it has made payments to such depositors.    
The Company is also subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act of 1934”), including certain requirements under the Sarbanes-Oxley Act of 2002.
Northrim Bank is subject to the Community Reinvestment Act of 1977 (“CRA”).  The CRA requires that Northrim Bank help meet the credit needs of the communities it serves, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution.  The FDIC assigns one of four possible ratings to Northrim Bank’s CRA performance and makes the rating and the examination reports publicly available.  The four possible ratings are outstanding, satisfactory, needs to improve and substantial noncompliance.  A financial institution’s CRA rating can affect an institution’s future business.  For example, a federal banking agency will take CRA performance into consideration when acting on an institution’s application to establish or move a branch, to merge or to acquire assets or assume liabilities of another institution. In its most recent CRA examination, Northrim Bank received a “Satisfactory” rating from the FDIC.
The Company is also subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”).  Among other things, the USA Patriot Act requires the Company and Northrim Bank to adopt and implement specific policies and procedures designed to prevent and defeat money laundering. Management believes the Company is in compliance with the USA Patriot Act as in effect on December 31, 2016.
In addition, the Company and its affiliates are subject to a broad array of financial and state consumer protection laws and regulations. Among other things, these laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions deal with their customers.
Available Information
The Company’s annual report on Form 10-K and quarterly reports on Form 10-Q, as well as its current reports on Form 8-K and proxy statement filings (and all amendments thereto), which are filed with the Securities and Exchange Commission (“SEC”), are accessible free of charge at our website at http://www.northrim.com as soon as reasonably practicable after filing with the SEC.  By making this reference to our website, the Company does not intend to incorporate into this report any information contained in the website. The website should not be considered part of this report.

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The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC.

ITEM 1A.            RISK FACTORS
An investment in the Company’s common stock is subject to risks inherent to the Company’s business.  The material risks and uncertainties that management believes affect the Company are described below.  Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report.  The risks and uncertainties described below are not the only ones facing the Company.  Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations.  This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and you could lose all or part of your investment.
Current economic conditions continue to pose significant challenges for us and could adversely affect our financial condition and results of operations.
We are operating in an uncertain economic environment, including a dramatic decrease in the price of oil, sluggish national and global economic conditions, and very low interest rates. The decrease in the price of oil has led to a significant deficit in the budget for the State of Alaska, and absent immediate action by the legislature, these deficits are expected to exhaust cash savings of the state within approximately two years. In the longer term, relatively low oil prices are expected to negatively impact the overall economy in Alaska on a larger scale as we estimate that one third of the Alaskan economy is related to oil. Financial institutions continue to be affected by changing conditions in the real estate and financial markets, along with an arduous regulatory climate. Dramatic declines in the United States housing market from 2008 through 2012, with falling home prices and increasing foreclosures and unemployment, resulted in significant write-downs of asset values by financial institutions. While conditions have improved nationally, a return to a recessionary economy could result in financial stress on our borrowers that would adversely affect our financial condition and results of operations. Deteriorating conditions in the regional economies of Anchorage, Matanuska-Susitna Valley, Fairbanks, and the Southeast areas of Alaska served by the Company could drive losses beyond that which is provided for in our allowance for loan losses. We may also face the following risks in connection with events:
Ineffective monetary policy could cause rapid changes in interest rates and asset values that would have a materially adverse impact on our profitability and overall financial condition.
Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities.
Regulatory scrutiny of the industry could increase, leading to harsh regulation of our industry that could lead to a higher cost of compliance, limit our ability to pursue business opportunities and increase our exposure to the judicial system and the plaintiff’s bar.
Further erosion in the fiscal condition of the U.S. Treasury could lead to new taxes that would limit the ability of the Company to pursue growth and return profits to shareholders.
If these conditions or similar ones continue to exist or worsen, we could experience continuing or increased adverse effects on our financial condition.
Our concentration of operations in the Anchorage, Matanuska-Susitna Valley, Fairbanks and Southeast areas of Alaska makes us more sensitive to downturns in those areas.
Substantially all of our business is derived from the Anchorage, Matanuska-Susitna Valley, Fairbanks, and Southeast areas of Alaska.  The majority of our lending has been with Alaska businesses and individuals.   At December 31, 2016, approximately 74% of the Bank’s loans are secured by real estate and 3% are unsecured. Approximately 23% are for general commercial uses, including professional, retail, and small businesses, and are secured by non-real estate assets.  Repayment is expected from the borrowers’ cash flow or, secondarily, the collateral.   Our exposure to credit loss, if any, is the outstanding amount of the loan if the collateral is proved to be of no value.  These areas rely primarily upon the natural resources industries,

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particularly oil production, as well as tourism and government and U.S. military spending for their economic success.  In particular, the oil industry plays a significant role in the Alaskan economy The dramatic decline in the global price of oil in 2015 and 2016 poses a significant risk for the Alaskan economy which is heavily dependent on the petroleum industry and if the global price of oil continues to decline or stabilizes at the current relatively low level, the Alaskan economy would likely be adversely affected. We estimate that one third of Alaska's gross state product is currently derived from the oil industry.
Our business is and will remain sensitive to economic factors that relate to these industries and local and regional business conditions.  As a result, local or regional economic downturns, or downturns that disproportionately affect one or more of the key industries in regions served by the Company, may have a more pronounced effect upon its business than they might on an institution that is less geographically concentrated.  The extent of the future impact of these events on economic and business conditions cannot be predicted; however, prolonged or acute fluctuations could have a material and adverse impact upon our results of operation and financial condition.
We operate in a highly regulated environment and changes of or increases in banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.
We are subject to extensive regulation, supervision and examination by federal and state banking authorities.  In addition, as a publicly-traded company, we are subject to regulation by the SEC and NASDAQ.  Any change in applicable regulations or federal or state legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on us and our operations.  Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions on our operations.  Additional legislation and regulations that could significantly affect our authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations.  Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to our reputation, all of which could adversely affect our business, financial condition or results of operations.
In that regard, the Dodd-Frank Act was enacted in July 2010.  Among other provisions, the Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to regulate consumer financial products such as credit cards and mortgages, created a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, has resulted in new capital requirements from federal banking agencies, placed new limits on electronic debt card interchange fees, and requires banking regulators, the SEC and national stock exchanges to adopt significant new corporate governance and executive compensation reforms.  The Dodd-Frank Act and the corresponding regulations have and are expected to further increase the overall costs of regulatory compliance and limit certain sources of revenue.
Certain provisions of the new rules have phase-in periods, including a 2.5% conservation buffer, which began to be phased in 2016 and is scheduled to take full effect on January 1, 2019. Further, regulators have significant discretion and authority to prevent or remedy practices that they deem to be unsafe or unsound, or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties.  These powers have been utilized more frequently in recent years due to the serious national economic conditions that faced the financial system in late 2008 and early 2009.  The exercise of regulatory authority may have a negative impact on our financial condition and results of operations. Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including the FRB.
We cannot accurately predict the full effects of recent or future legislation or the various other governmental, regulatory, monetary, and fiscal initiatives which have been and may be enacted on the financial markets and on the Company.  The terms and costs of these activities could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock.
We are subject to more stringent capital and liquidity requirements which may adversely affect our net income and future growth.
In July 2013, the FRB and the FDIC announced the new capital rules, which apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies.  As described in further detail above in “Item 1 Business - Supervision and Regulation” the new rules create new and increased capital requirements for United States depository institutions and their holding companies. The new rules include risk-based and leverage capital ratio requirements, which became effective on January 1, 2015. The new rules also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds. These revisions also became effective January 1, 2015. 

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Although we currently cannot predict the specific impact and long-term effects that the new rules will have on us and the banking industry more generally, higher regulatory capital levels could impact our operations, net income and ability to grow. Furthermore, our failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.     
The operations of our business, including our interaction with customers, are increasingly done via electronic means, and this has increased our risks related to cybersecurity.
The Company is exposed to cyber-attacks in the normal course of business.  In general, cyber incidents can result from deliberate attacks or unintentional events.  We have observed an increased level of attention focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption.  Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as by causing denial-of-service attacks on websites.  Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to electronically circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining information necessary to gain access.  The objectives of cyber-attacks vary widely and may include theft of financial assets, intellectual property, or other sensitive information belonging to the Company or our customers.  Cyber-attacks may also be directed at disrupting the operations of the Company’s business. 
While the Company has not incurred any material losses related to cyber-attacks, nor are we aware of any specific or threatened cyber-incidents as of the date of this report, we may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks.  Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; increased cybersecurity protection costs that may include organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting customer or investor confidence.
The network and computer systems on which we depend could fail.
Our computer systems could be vulnerable to unforeseen problems. Because we conduct a part of our business over the Internet and outsource several critical functions to third parties, operations will depend on our ability, as well as the ability of third-party service providers, to protect computer systems and network infrastructure against damage from fire, power loss, telecommunications failure, physical break-ins or similar catastrophic events. Any damage or failure that causes interruptions in operations may compromise our ability to perform critical functions in a timely manner and could have a material adverse effect on our business, financial condition and results of operations as well as our reputation and customer or vendor relationships.
Our business is highly reliant on third party vendors and our ability to manage the operational risks associated with outsourcing those services.
We rely on third parties to provide services that are integral to our operations. These vendors provide services that support our operations, including the storage and processing of sensitive consumer and business customer data. The loss of these vendor relationships could disrupt the services we provide to our customers and cause us to incur significant expense in connection with replacing these services. Further, a cyber security breach of a vendor's system may result in theft of our data or disruption of business processes.  A material breach of customer data security at a service provider's site may negatively impact our business reputation and cause a loss of customers; result in increased expense to contain the event and/or require that we provide credit monitoring services for affected customers, result in regulatory fines and sanctions and/or result in litigation.  In most cases, we will remain primarily liable to our customers for losses arising from a breach of a vendor's data security system. We rely on our outsourced service providers to implement and maintain prudent cyber security controls.  We have procedures in place to assess a vendor's cyber security controls prior to establishing a contractual relationship and to periodically review assessments of those control systems; however, these procedures are not infallible and a vendor's system can be breached despite the procedures we employ.
We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our clients by using

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technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Many national vendors provide turn-key services to community banks, such as Internet banking and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to invest in technological improvements. We may not be able, however, to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
The Company's core banking system conversion process could expose the Company to operating and financial risks.
The Company is currently in the process of converting its core banking system. Although the Company does not anticipate any material complications associated with this conversion process, we can give no assurances that the new core banking system will be operational within the timeline currently contemplated or that the additional expenses allocated to implement the new system will be sufficient. Since the core banking system is integral to our operations, any delays or increased costs beyond those budgeted could adversely impact our operations and profitability. Even if implemented within the scheduled timeline and within the expected budget, the change to our core banking system could expose the Company to new risks associated with new systems and new vendors.  Further, potential problems with new systems could involve regulatory compliance risk, potentially resulting in higher operating costs or limitations on our operating activities.

Declines in the residential housing market would have a negative impact on our residential housing market income.
The Company earns revenue from the residential housing market in the form of interest income and fees on loans and earnings from RML.  A slowdown in the residential sales cycle in our major markets and a constriction in the availability of mortgage financing negatively impacts real estate sales, which results in customers’ inability to repay loans. We expect earnings from RML to decrease if refinancing activity slows, and because of our acquisition of all of the remaining equity interest in RML in December 2014, our exposure to the slowdown in refinancing activity or the residential housing market in general is greater than it was before such acquisition. Further, declines in the residential housing market may have a material adverse effect on our financial condition through a decline in interest income and loan fees.
If we do not comply with the agreements governing  servicing of loans or if others allege non-compliance, our business and results of operations may be harmed.
We have contractual obligations under the servicing agreements pursuant to which we service mortgage loans. Many of our servicing agreements require adherence to general servicing standards, and certain contractual provisions delegate judgment over various servicing matters to us. Our servicing practices, and the judgments that we make in our servicing of loans, could be questioned by parties to these agreements. We could also become subject to litigation claims seeking damages or other remedies arising from alleged breaches of our servicing agreements. 
Additionally, under our loan servicing program we retain servicing rights on mortgage loans originated by RML and sold to the Alaska Housing Finance Corporation. If we breach any of the representations and  warranties in our servicing agreements with the Alaska Housing Finance Corporation, we may be required to repurchase any loan sold under this program and record a loss upon repurchase and/or bear any subsequent loss on the loan. We may not have any remedies available to us against third parties for such losses, or the remedies might not be as broad as the remedies available to the Alaska Housing Finance Corporation against us.
Our loan loss allowance may not be adequate to cover future loan losses, which may adversely affect our earnings.
We have established a reserve for probable losses we expect to incur in connection with loans in our credit portfolio. This allowance reflects our estimate of the collectability of certain identified loans, as well as an overall risk assessment of total loans outstanding.  Our determination of the amount of loan loss allowance is highly subjective; although management personnel apply criteria such as risk ratings and historical loss rates; these factors may not be adequate predictors of future loan performance.  Accordingly, we cannot offer assurances that these estimates ultimately will prove correct or that the loan loss allowance will be sufficient to protect against losses that ultimately may occur.  If our loan loss allowance proves to be inadequate, we may suffer unexpected charges to income, which would adversely impact our results of operations and financial condition.  Moreover, bank regulators frequently monitor banks' loan loss allowances, and if regulators were to determine that the allowance is inadequate, they may require us to increase the allowance, which also would adversely impact our net income and financial condition.
We have a significant concentration in real estate lending. A downturn in real estate within our markets would have a negative impact on our results of operations. 

15



Approximately 74% of the Bank’s loan portfolio at December 31, 2016 consisted of loans secured by commercial and residential real estate located in Alaska. Additionally, all of the Company's loans held for sale are secured by residential real estate. A slowdown in the residential sales cycle in our major markets and a constriction in the availability of mortgage financing, such as what occurred during the financial crisis in the United States housing market from 2008 through 2012, would negatively impacted residential real estate sales, which would result in customers’ inability to repay loans.  This would result in an increase in our non-performing assets if more borrowers fail to perform according to loan terms and if we take possession of real estate properties. Additionally, if real estate values decline, the value of real estate collateral securing our loans could be significantly reduced.  If any of these effects continue or become more pronounced, loan losses will increase more than we expect and our financial condition and results of operations would be adversely impacted.
Further, approximately 57% of the Bank’s loan portfolio at December 31, 2016 consisted of commercial real estate loans.   While our investments in these types of loans have not been as adversely impacted as residential construction and land development loans, there can be no assurance that the credit quality in these portfolios will remain stable.  Commercial construction and commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers.  Consequently, an adverse development with respect to one commercial loan or one credit relationship exposes us to significantly greater risk of loss compared to an adverse development with respect to a consumer loan.  The credit quality of these loans may deteriorate more than expected which may result in losses that exceed the estimates that are currently included in our loan loss allowance, which could adversely affect our financial conditions and results of operations. 
Real estate values may decrease leading to additional and greater than anticipated loan charge-offs and valuation write downs on our other real estate owned (“OREO”) properties.
Real estate owned by the Bank and not used in the ordinary course of its operations is referred to as “other real estate owned” or “OREO” property.  We foreclose on and take title to the real estate serving as collateral for defaulted loans as part of our business.  At December 31, 2016, the Bank held $6.6 million of OREO properties, many of which relate to residential construction and land development loans.   Increased OREO balances lead to greater expenses as we incur costs to manage and dispose of the properties.  Our ability to sell OREO properties is affected by public perception that banks are inclined to accept large discounts from market value in order to quickly liquidate properties.  Any decrease in market prices may lead to OREO write downs, with a corresponding expense in our income statement.  We evaluate OREO property values periodically and write down the carrying value of the properties if the results of our evaluations require it.  Further write-downs on OREO or an inability to sell OREO properties could have a material adverse effect on our results of operations and financial condition.
Changes in the FRB’s monetary or fiscal policies could adversely affect our results of operations and financial condition.
Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The FRB has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The FRB affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.
Changes in market interest rates could adversely impact the Company. 
Our earnings are impacted by changing interest rates.  Changes in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loans and securities, and rates paid on deposits and borrowings.  The relationship between the rates received on loans and securities and the rates paid on deposits and borrowings is known as the net interest margin.  Exposure to interest rate risk is managed by monitoring the repricing frequency of our rate-sensitive assets and rate-sensitive liabilities over any given period.  Although we believe the current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates could potentially have an adverse effect on our business, financial condition and results of operations.
We conduct substantially all of our operations through Northrim Bank, our banking subsidiary; our ability to pay dividends, repurchase our shares, or to repay our indebtedness depends upon liquid assets held by the holding company and the results of operations of our subsidiaries and their ability to pay dividends.
The Company is a separate legal entity from our subsidiaries. It receives substantially all of its revenue from dividends paid from the Bank.  There are legal limitations on the extent to which the Bank may extend credit, pay dividends or otherwise

16



supply funds to, or engage in transactions with us.  Our inability to receive dividends from the Bank could adversely affect our business, financial condition, results of operations and prospects.
Our net income depends primarily upon the Bank’s net interest income, which is the income that remains after deducting from total income generated by earning assets the expense attributable to the acquisition of the funds required to support earning assets (primarily interest paid on deposits and borrowings).  The amount of interest income is dependent on many factors including the volume of earning assets, the general level of interest rates, the dynamics of changes in interest rates and the levels of nonperforming loans.  All of those factors affect the Bank’s ability to pay dividends to the Company. In 2016, a requirement to have a capital conservation buffer started to be phased in and this requirement, which is scheduled to come into full effect on January 1, 2019 could adversely affect the Bank's ability to pay dividends.
Various statutory provisions restrict the amount of dividends the Bank can pay to us without regulatory approval.  Under Alaska law, a bank may not declare or pay a dividend in an amount greater than its net undivided profits then on hand. In addition, the Bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet the “adequately capitalized” level in accordance with regulatory capital requirements.  It is also possible that, depending upon the financial condition of the Bank and other factors, regulatory authorities could conclude that payment of dividends or other payments, including payments to us, is an unsafe or unsound practice and impose restrictions or prohibit such payments.   It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s current and expected future capital needs, asset quality and overall financial condition.  The policy provides that bank holding companies should not maintain a level of cash dividends that undermines a bank holding company’s ability to serve as a source of strength to its banking subsidiaries.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure. There can be no assurance that any such losses would not materially and adversely affect our results of operations.
The financial services business is intensely competitive and our success will depend on our ability to compete effectively.
The financial services business in our market areas is highly competitive.  It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers.  We face competition both in attracting deposits and in originating loans. We compete for loans principally through the pricing of interest rates and loan fees and the efficiency and quality of services.  Increasing levels of competition in the banking and financial services industries may reduce our market share or cause the prices charged for our services to fall.   Improvements in technology, communications, and the internet have intensified competition. As a result, our competitive position could be weakened, which could adversely affect our financial condition and results of operations.
We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so could materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results could be materially adversely affected.
We may be unable to attract and retain key employees and personnel.
We will be dependent for the foreseeable future on the services of Joseph M. Beedle, our Chairman of the Board, President and Chief Executive Officer of the Company; Joseph M. Schierhorn, our Executive Vice President and Chief Operating Officer; Michael Martin, our Executive Vice President, General Counsel and Corporate Secretary; and Latosha M. Frye, our Executive Vice President and Chief Financial Officer.  While we maintain keyman life insurance on the lives of Messrs. Beedle,Schierhorn, and Martin and Ms. Frye in the amounts of $2 million each, we may not be able to timely replace Mr. Beedle, Mr. Schierhorn,

17



Mr. Martin or Ms. Frye with a person of comparable ability and experience should the need to do so arise, causing losses in excess of the insurance proceeds.  The unexpected loss of key employees could have a material adverse effect on our business and possibly result in reduced revenues and earnings.
Liquidity risk could impair our ability to fund operations and jeopardize our financial conditions.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings and other sources could have a substantial negative effect on our liquidity and severely constrain our financial flexibility. Our primary source of funding is deposits gathered through our network of branch offices. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or the economy in general. Factors that could negatively impact our access to liquidity sources include:
a decrease in the level of our business activity as a result of an economic downturn in the markets in which our loans are concentrated;
adverse regulatory actions against us; or
our inability to attract and retain deposits. 
Our ability to borrow could be impaired by factors that are not specific to us or our region, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry and unstable credit markets.
A failure of a significant number of our borrowers, guarantors and related parties to perform in accordance with the terms of their loans would have an adverse impact on our results of operations.
A source of risk arises from the possibility that losses will be sustained if a significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans.  We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of our allowance for loan losses, which we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance, and diversifying our credit portfolio.  These policies and procedures, however, may not prevent unexpected losses that could materially affect our results of operations.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act or other laws and regulations could result in fines, sanctions or other adverse consequences.
Financial institutions are required under the USA PATRIOT Act and Bank Secrecy Act to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities. Financial institutions are also obligated to file suspicious activity reports with the United States Treasury Department’s Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines or penalties, intervention or sanctions by regulators, and costly litigation or expensive additional controls and systems. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. In addition, the federal government has in placelaws and regulations relating to residential and consumer lending, as well as other activities with customers, that create significant compliance burdens and financial risks. We have developed policies and continue to augment procedures and systems designed to assist in compliance with these laws and regulations, however it is possible for such safeguards to fail or prove deficient during the implementation phase to avoid non-compliance with such laws.



ITEM 1B.            UNRESOLVED STAFF COMMENTS
None.

18




ITEM 2.            PROPERTIES
The following sets forth information about our Community Banking branch locations:
Locations
Type
Leased/Owned
Midtown Financial Center: Northrim Headquarters
3111 C Street, Anchorage, AK
Traditional
Land partially leased, partially owned, building owned
SouthSide Financial Center
8730 Old Seward Highway, Anchorage, AK
Traditional
Land leased, building owned
Lake Otis Community Branch
2270 East 37th Avenue, Anchorage, AK
Traditional
Land leased, building owned
Huffman Branch
1501 East Huffman Road, Anchorage, AK
Instore
Leased
Jewel Lake Branch
9170 Jewel Lake Road Suite 101, Anchorage, AK
Traditional
Leased
Seventh Avenue Branch
517 West Seventh Avenue, Suite 300, Anchorage, AK
Traditional
Leased
West Anchorage Branch
2709 Spenard Road, Anchorage, AK
Traditional
Owned
Eagle River Branch
12812 Old Glenn Highway, Suite C03, Eagle River, AK
Traditional
Leased
Fairbanks Financial Center
360 Merhar Avenue, Fairbanks, AK
Traditional
Owned
Wasilla Financial Center
850 E. USA Circle, Suite A, Wasilla, AK
Traditional
Owned
Juneau Financial Center
2094 Jordan Avenue, Juneau, AK
Traditional
Leased
Juneau Downtown Branch
301 North Franklin Street, Juneau, AK
Traditional
Leased
Sitka Financial Center
315 Lincoln Street, Suite 206, Sitka, AK
Traditional
Leased
Ketchikan Financial Center
2491 Tongass Avenue, Ketchikan, AK
Traditional
Owned

19




The following sets forth information about our Home Mortgage Lending branch locations, operated by RML:
Locations
Leased/Owned
Main Office at Calais
100 Calais Drive, Anchorage, AK
Leased
ReMax/Dynamic Office
3350 Midtown Place, Suite 101, Anchorage, AK
Leased
Midtown Office
101 W. Benson Boulevard, #201, Anchorage, AK
Leased
Dwell Office
3230 C Street, Suite 100, Anchorage, AK
Leased
Real Estate Brokers of Alaska Office
1577 C Street, Suite 101A, Anchorage, AK
Leased
Eagle River Office
11901 Business Boulevard, #203, Eagle River, AK
Leased
Fairbanks Office
505 Old Steese Highway, Suite 117, Fairbanks, AK
Leased
Fairbanks Office
711 Gaffney Road, Suite 202, Fairbanks, AK
Leased
Juneau Office
8800 Glacier Highway, #232, Juneau, AK
Leased
Ketchikan Office
2491 Tongass Avenue, Ketchikan, AK
Leased
Kodiak Office
2011 Mill Bay Road, #101, Kodiak, AK
Leased
Sitka Office
315 Lincoln Street, Suite 206, Sitka, AK
Leased
Soldotna Office
44296 Sterling Highway, #1, Soldotna, AK
Leased
Wasilla Remax Dynamic Branch
892 E USA Circle, Suite 105, Wasilla, AK
Leased
Wasilla Northrim Branch
850 E USA Circle, Suite B, Wasilla, AK
Leased


ITEM 3.            LEGAL PROCEEDINGS
The Company from time to time may be involved with disputes, claims, and litigation related to the conduct of its banking business.  Management does not expect that the resolution of these matters will have a material effect on the Company’s business, financial position, results of operations, or cash flows.

ITEM 4.            MINE SAFETY DISCLOSURES
Not applicable.

20



PART II
ITEM 5.                MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the NASDAQ Global Select market under the symbol, “NRIM.”    At March 13, 2017, the number of shareholders of record of our common stock was 263. As many of our shares of common stock are held of record in "street name" by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of beneficial holders of our common stock represented by these record holders.
The following are high and low closing prices as reported by NASDAQ. Prices do not include retail markups, markdowns or commissions.
 
 
First
Second
Third
Fourth
 
 
Quarter
Quarter
Quarter
Quarter
2016
 
 
 
 
 
 
High
$26.72
$27.52
$28.76
$32.55
 
Low
$21.83
$23.27
$25.05
$24.45
2015
 
 
 
 
 
 
High
$25.88
$27.33
$29.09
$29.43
 
Low
$20.73
$23.84
$24.84
$26.44
 
In 2016, we paid cash dividends of $0.19 per share in the first and second quarters and $0.20 per share in the third and fourth quarters.  In 2015, we paid cash dividends of $0.18 per share in the first and second quarters and $0.19 per share in the third and fourth quarters.  Cash dividends totaled $5.4 million, $5.1 million, and $4.8 million in 2016, 2015, and 2014, respectively.  On February 23, 2017, the Board of Directors approved payment of a $0.21 per share cash dividend on March 17, 2017, to shareholders of record on March 9, 2017.  The Company and the Bank are subject to restrictions on the payment of dividends pursuant to applicable federal and state banking regulations and Alaska corporate law.  The dividends that the Bank pays to the Company are limited to the extent necessary for the Bank to meet the regulatory requirements of a “well-capitalized” bank.  Given the fact that the Bank believes it will remain “well-capitalized”; the Company expects to receive dividends from the Bank in 2017. Beginning in 2016, a requirement to have a capital conservation buffer began to be phased in, and this requirement could adversely affect the Bank's ability to pay dividends. See "Item 1 Business - Supervision and Regulation" in this report.
Repurchase of Securities
The Company did not repurchase any of its common stock during the fourth quarter of 2016.
Equity Compensation Plan Information
The following table sets forth information regarding securities authorized for issuance under the Company’s equity plans as of December 31, 2016. Additional information regarding the Company’s equity plans is presented in Note 21 of the Notes to Consolidated Financial Statements included in Item 8 of this report.
Plan Category
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) (2)
Weighted-Average Exercise Price of Outstanding Options,
Warrants and Rights (b)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))  (c)
Equity compensation plans approved by security holders1
243,370
$16.88
110,868
Total
243,370
$16.88
110,868
1Consists of the Company's 2014 Stock Incentive Plan, which replaced the 2010 Stock Incentive Plan (the "2010 Plan")
2 Includes 95,492 options awarded under the 2010 Plan and other previous stock option plans.
    

21



We do not have any equity compensation plans that have not been approved by our shareholders.
Stock Performance Graph
The graph shown below depicts the total return to shareholders during the period beginning after December 31, 2011, and ending December 31, 2016.  The definition of total return includes appreciation in market value of the stock, as well as the actual cash and stock dividends paid to shareholders.  The comparable indices utilized are the Russell 3000 Index, representing approximately 98% of the U.S. equity market, and the SNL Financial Bank Stock Index, comprised of publicly traded banks with assets of $1 billion to $5 billion, which are located in the United States.  The graph assumes that the value of the investment in the Company’s common stock and each of the two indices was $100 on December 31, 2011, and that all dividends were reinvested.
snlperfgraphnorthrimbancorpi.jpg
 
Period Ending
Index
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
Northrim BanCorp, Inc.
100.00

132.83

158.18

162.57

169.43

207.46

Russell 3000
100.00

116.42

155.47

175.00

175.84

198.23

SNL Bank $1B-$5B
100.00

123.31

179.31

187.48

209.86

301.92



22



ITEM 6.            SELECTED FINANCIAL DATA (1) 
 
Years Ended December 31,
 

2016
2015
2014
2013
2012
2011
Five Year Compound Growth Rate
 
(Unaudited)
Net interest income

$56,357


$56,909


$52,293


$44,034


$42,223


$42,364

6
%
Provision (benefit) for loan losses
2,298

1,754

(636
)
(635
)
(1,559
)
1,999

3
 %
Other operating income
43,263

44,608

20,034

12,886

15,432

13,090

27
 %
Compensation expense, RML acquisition payments
4,775

4,094





NM

Other operating expense
71,505

68,551

46,923

38,897

38,679

35,853

15
 %
Income before provision for income taxes

$21,042


$27,118


$26,040


$18,658


$20,535


$17,602

4
%
Provision for income taxes
6,052

8,784

8,173

6,246

7,077

5,775

1
 %
Net Income
14,990

18,334

17,867

12,412

13,458

11,827

5
 %
Less: Net income attributable to
 
 
 
 
 
 

noncontrolling interest
579

551

459

87

512

429

6
 %
Net income attributable to Northrim Bancorp, Inc.

$14,411


$17,783


$17,408


$12,325


$12,946


$11,398

5
%
 
 
 
 
 
 
 
 
Year End Balance Sheet
 
 
 
 
 
 
 
Assets

$1,526,540


$1,499,492


$1,449,349


$1,215,006


$1,160,107


$1,085,258

7
 %
Portfolio loans
975,015

980,787

924,504

770,016

704,213

645,562

9
 %
Deposits
1,267,653

1,240,792

1,179,747

1,003,723

970,129

911,248

7
 %
Securities sold under repurchase agreements
27,607

31,420

19,843

21,143

19,038

16,348

11
 %
Borrowings
4,338

2,120

26,304

6,527

4,479

4,626

(1
)%
Junior subordinated debentures
18,558

18,558

18,558

18,558

18,558

18,558

 %
Shareholders' equity
186,712

177,214

164,441

144,318

136,353

125,435

8
 %
Common shares outstanding
6,897,890

6,877,140

6,854,189

6,537,652

6,511,649

6,466,763

1
 %
 
 
 
 
 
 
 
 
Average Balance Sheet
 
 
 
 
 
 
 
Assets

$1,506,522


$1,480,913


$1,335,929


$1,156,500


$1,088,419


$1,048,696

8
 %
Earning assets
1,361,913

1,334,102

1,212,291

1,041,268

973,741

934,732

8
 %
Portfolio loans
976,613

968,752

893,031

734,427

668,014

646,651

9
 %
Deposits
1,250,243

1,219,445

1,111,594

953,925

909,129

882,858

7
 %
Securities sold under repurchase agreements
27,322

24,447

20,909

19,454

16,490

14,116

14
 %
Borrowings
4,215

14,552

4,697

6,130

4,548

4,691

(2
)%
Junior subordinated debentures
18,558

18,558

18,558

18,558

18,558

18,558

 %
Shareholders' equity
181,628

169,802

155,591

140,924

131,368

122,039

8
 %
Basic common shares outstanding
6,883,663

6,859,209

6,761,328

6,518,772

6,477,266

6,438,625

1
 %
Diluted common shares outstanding
6,974,864

6,948,474

6,852,267

6,609,950

6,574,993

6,554,761

1
 %
 
 
 
 
 
 
 
 
Per Common Share Data
 
 
 
 
 
 
 
Basic earnings

$2.09


$2.59


$2.57


$1.89


$2.00


$1.77

3
 %
Diluted earnings

$2.06


$2.56


$2.54


$1.87


$1.97


$1.74

3
 %
Book value per share

$27.07


$25.77


$23.99


$22.07


$20.94


$19.40

7
 %
Tangible book value per share(2)

$24.70


$22.31


$20.48


$20.86


$19.69


$18.09

6
 %
Cash dividends per share

$0.78


$0.74


$0.70


$0.64


$0.56


$0.50

9
 %

23



 
Years Ended December 31,
 
 
2016
2015
2014
2013
2012
2011
Five Year Compound Growth Rate
 
(Unaudited)
 
Performance Ratios
 
 
 
 
 
 
 
Return on average assets
0.96
%
1.20
%
1.30
 %
1.07
 %
1.19
 %
1.09
 %
(3
)%
Return on average equity
7.93
%
10.47
%
11.19
 %
8.75
 %
9.85
 %
9.34
 %
(3
)%
Equity/assets
12.23
%
11.82
%
11.35
 %
11.88
 %
11.75
 %
11.56
 %
1
 %
Tangible common equity/tangible assets(3)
11.28
%
10.40
%
9.85
 %
11.30
 %
11.12
 %
10.87
 %
1
 %
Net interest margin
4.14
%
4.27
%
4.31
 %
4.23
 %
4.34
 %
4.53
 %
(2
)%
Net interest margin (tax equivalent)(4)
4.20
%
4.32
%
4.36
 %
4.29
 %
4.40
 %
4.59
 %
(2
)%
Non-interest income/total revenue
43.43
%
43.94
%
27.70
 %
22.64
 %
26.77
 %
23.61
 %
13
 %
Efficiency ratio (5)
76.44
%
71.31
%
64.48
 %
67.94
 %
66.65
 %
64.16
 %
4
 %
Dividend payout ratio
37.59
%
28.81
%
27.40
 %
34.18
 %
28.39
 %
28.67
 %
6
 %
 
 
 
 
 
 
 
 
Asset Quality
 
 
 
 
 
 
 
Nonperforming loans, net of government guarantees

$12,936


$2,125


$3,496


$1,814


$4,529


$7,354

12
 %
Nonperforming assets, net of government guarantees
19,315

5,178

7,231

4,216

9,072

12,537

9
 %
Nonperforming loans/portfolio loans, net of government guarantees
1.33
%
0.22
%
0.38
 %
0.24
 %
0.64
 %
1.14
 %
3
 %
Net charge-offs (recoveries)/average loans
0.08
%
0.03
%
(0.12
)%
(0.07
)%
(0.21
)%
(0.01
)%
NM

Allowance for loan losses/portfolio loans
2.02
%
1.85
%
1.81
 %
2.11
 %
2.33
 %
2.56
 %
(5
)%
Nonperforming assets/assets, net of government guarantees
1.27
%
0.35
%
0.50
 %
0.35
 %
0.78
 %
1.16
 %
2
 %
 
 
 
 
 
 
 
 
Other Data
 
 
 
 
 
 
 
Effective tax rate
29
%
32
%
31
 %
33
 %
34
 %
33
 %
(3
)%
Number of banking offices(6)
14

14

14

10

10

10

7
 %
Number of employees (FTE) (7)
451

441

426

269

252

269

11
 %
These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.
 
2Tangible book value per share is a non-GAAP ratio defined as shareholders’ equity, less intangible assets, divided by common shares outstanding. Management believes that tangible book value is a useful measurement of the value of the Company’s equity because it excludes the effect of intangible assets on the Company’s equity.  See reconciliation to book value per share, the most comparable GAAP measurement below.
3Tangible 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. Management believes this ratio is important as it has received more attention over the past several years from stock analysts and regulators. The most comparable GAAP measure of shareholders' equity to total assets is calculated by dividing total shareholders' equity by total assets. See reconciliation to shareholders' equity to total assets below.

4Tax-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 all years presented.  Management believes that tax-equivalent net interest margin is a useful financial measure because it enables investors to evaluate net interest margin excluding tax expense in order to monitor our effectiveness in growing higher interest yielding assets and managing our costs of interest bearing liabilities over time on a fully tax equivalent basis.  See reconciliation to net interest margin, the comparable GAAP measurement below. 

24



5In managing our business, we review the efficiency ratio exclusive of intangible asset amortization, which is a non-GAAP performance measurement.  Management believes that this is a useful financial measurement because we believe this presentation provides investors with a more accurate picture of our operating efficiency.  The efficiency ratio is calculated by dividing other operating expense, exclusive of intangible asset amortization, by the sum of net interest income and other operating income.  Other companies may define or calculate this data differently.  For additional information see the "Other Operating Expense" section in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operation" of this report.  See reconciliation to comparable GAAP measurement below.
6Number of banking offices does not include RML locations
7FTE includes employees of the Bank, NBG, and in 2016, 2015 and 2014, also includes RML.
Reconciliation of Selected Financial Data to GAAP Financial Measures
These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with "Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.
Reconciliation of total shareholders  equity to tangible common shareholders’ equity (Non-GAAP) and total assets to tangible assets:
(In Thousands)
2016
2015
2014
2013
2012
2011
Total shareholders' equity

$186,712


$177,214


$164,441


$144,318


$136,353


$125,435

Total assets
1,526,540

1,499,492

1,449,349

1,215,006

1,160,107

1,085,258

Total shareholders' equity to total assets ratio
12.23
%
11.82
%
11.35
%
11.88
%
11.75
%
11.56
%
(In Thousands)
2016
2015
2014
2013
2012
2011
Total shareholders' equity

$186,712


$177,214


$164,441


$144,318


$136,353


$125,435

Less: goodwill and other intangible assets, net
16,324

23,776

24,035

7,942

8,170

8,421

Tangible common shareholders' equity

$170,388


$153,438


$140,406


$136,376


$128,183


$117,014

Total assets

$1,526,540


$1,499,492


$1,449,349


$1,215,006


$1,160,107


$1,085,258

Less: goodwill and other intangible assets, net
16,324

23,776

24,035

7,942

8,170

8,421

Tangible assets

$1,510,216


$1,475,716


$1,425,314


$1,207,064


$1,151,937


$1,076,837

Tangible common equity to tangible assets ratio
11.28
%
10.40
%
9.85
%
11.30
%
11.12
%
10.87
%
Reconciliation of tangible book value per share to book value per share
(In thousands, except per share data)
2016
2015
2014
2013
2012
2011
Total shareholders' equity

$186,712


$177,214


$164,441


$144,318


$136,353


$125,435

Divided by common shares outstanding
6,897,890

6,877,140

6,854,189

6,537,652

6,511,649

6,466,763

Book value per share

$27.07


$25.77


$23.99


$22.07


$20.94


$19.40


25



(In thousands, except per share data)
2016
2015
2014
2013
2012
2011
Total shareholders' equity

$186,712


$177,214


$164,441


$144,318


$136,353


$125,435

Less: goodwill and intangible assets, net
16,324

23,776

24,035

7,942

8,170

8,421

 

$170,388


$153,438


$140,406


$136,376


$128,183


$117,014

Divided by common shares outstanding
6,897,890

6,877,140

6,854,189

6,537,652

6,511,649

6,466,763

Tangible book value per share

$24.70


$22.31


$20.48


$20.86


$19.69


$18.09


Reconciliation of tax-equivalent net interest margin to net interest margin
(In Thousands)
2016
2015
2014
2013
2012
2011
Net interest income(8)

$56,357


$56,909


$52,293


$44,034


$42,223


$42,364

Divided by average interest-bearing assets
1,361,913

1,334,102

1,212,291

1,041,268

973,741

934,732

Net interest margin
4.14
%
4.27
%
4.31
%
4.23
%
4.34
%
4.53
%
(In Thousands)
2016
2015
2014
2013
2012
2011
Net interest income(8)

$56,357


$56,909


$52,293


$44,034


$42,223


$42,364

Plus: reduction in tax expense related to
 
 
 
 
 
 
tax-exempt interest income
808

722

583

585

626

580

 

$57,165


$57,631


$52,876


$44,619


$42,849


$42,944

Divided by average interest-bearing assets
1,361,913

1,334,102

1,212,291

1,041,268

973,741

934,732

Tax-equivalent net interest margin
4.20
%
4.32
%
4.36
%
4.29
%
4.40
%
4.59
%

Calculation of efficiency ratio
(In Thousands)
2016
2015
2014
2013
2012
2011
Net interest income(8)

$56,357


$56,909


$52,293


$44,034


$42,223


$42,364

Other operating income
43,263

44,608

20,034

12,886

15,432

13,090

Total revenue
99,620

101,517

72,327

56,920

57,655

55,454

Other operating expense
76,280

72,645

46,923

38,897

38,679

35,853

Less intangible asset amortization
135

258

289

228

252

275

Adjusted other operating expense

$76,145


$72,387


$46,634


$38,669


$38,427


$35,578

Efficiency ratio
76.44
%
71.31
%
64.48
%
67.94
%
66.65
%
64.16
%

8Amount represents net interest income before provision for loan losses.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.  Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of the Company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP.


26



ITEM 7.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion highlights key information as determined by management but may not contain all of the information that is important to you. For a more complete understanding, the following should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto as of December 31, 2016, 2015 and 2014 included elsewhere in this report.
This annual report contains forward-looking statements that involve risks and uncertainties.  Our actual results may differ materially from those indicated in forward-looking statements.  See “Cautionary Note Regarding Forward-Looking Statements.”

Executive Overview
Net income attributable to the Company decreased 19% to $14.4 million or $2.06 per diluted share for the year ended December 31, 2016, from $17.8 million, or $2.56 per diluted share, for the year ended December 31, 2015. Approximately half of the decline in 2016 compared to 2015, or $0.26 per diluted share, was due to a non-cash accounting error correction and the related change in accounting treatment for RML acquisition payments associated with the Company's 2014 acquisition of RML. The remainder of the decline was primarily the result of a decrease in net interest income, an increase in the provision for loan losses, a decrease in other operating income mainly due to lower gains recognized on the disposition of previously acquired loans, and an increase in other operating expenses.
The following are significant items for the year ended December 31, 2016:  
Total revenues, which include net interest income plus other operating income, decreased 2% to $99.6 million in 2016 from $101.5 million in 2015. This decrease mainly reflects decreased gain on sale of loans acquired with our acquisition of Alaska Pacific in 2014 and lower net interest income. In 2016, reversals of interest income for loans that were moved to nonaccrual status exceeded recoveries of nonaccrual interest from nonperforming loans that paid off by $58,000, while in 2015, there were $666,000 in recoveries of nonaccrual interest from nonperforming loans that paid off in that year, net of reversals of interest income for loans that were moved to nonaccrual status.
Average portfolio loans increased 1% to $976.6 million in 2016 compared to $968.8 in 2015, primarily reflecting growth in the commercial real estate portfolio which was partially offset by a decrease in the construction loan portfolio.
Our provision for loan losses in 2016 of $2.3 million increased from $1.8 million in 2015. We experienced net charge-offs of $754,000 in 2016 as compared to $324,000 in 2015; additionally, our adversely classified loans, net of government guarantees at December 31, 2016 increased by $4.8 million, or 16%, from $30.8 million at December 31, 2015 to $35.6 million at December 31, 2016. The allowance for loan losses (“Allowance”) totaled 2.02% of total portfolio loans at December 31, 2016, compared to 1.85% at December 31, 2015.  The Allowance compared to nonperforming loans, net of government guarantees, decreased to 152% at December 31, 2016 from 854% at December 31, 2015.
Nonperforming assets net of government guarantees increased by 273% year-over-year to $19.3 million at December 31, 2016 or 1.27% of total assets, compared to $5.2 million or 0.35% of total assets at December 31, 2015 in large part due to the addition of two lending relationships to nonaccrual loans totaling $11.2 million as well as a $3.3 million relationship which was transfered to OREO in 2016.
Other operating expenses increased in 2016 by 5% to $76.3 million from $72.6 million in 2015. This increase mainly reflects the non-accounting correction and change in accounting treatment for RML acquisition payments as well as increased salaries and other personnel expenses in 2016.
The Company continued to maintain strong capital ratios with Tier 1 Capital/risk adjusted assets of 14.54% at December 31, 2016 as compared to 13.34% a year ago. 
Book value was $27.07 per share at December 31, 2016 compared to $25.77 per share at December 31, 2015 while tangible book value was $24.70 per share at December 31, 2016, compared to $22.31 per share at December 31, 2015. Tangible book value per share is a non-GAAP ratio defined as shareholders' equity, less intangible assets, divided by common shares outstanding. Management believes that tangible book value is a useful measurement of the value of the Company's equity because it excludes the effect of intangible assets on the Company's equity. See reconciliation to book value per share, the most comparable GAAP measurement under "Selected Financial Data - Reconciliation of Selected Financial Data to GAAP Financial Measures" above.

27



Total equity to total assets was 12.23% at December 31, 2016 as compared to 11.82% at December 31, 2015, while tangible common equity to tangible assets at year end 2016 was 11.28%, up from 10.40% at year-end 2015.   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. Management believes this ratio is important as it has received more attention over the past several years from stock analysts and regulators. The most comparable GAAP measure of shareholders' equity to total assets is calculated by dividing total shareholders' equity by total assets. See reconciliation to shareholders’ equity to total assets under “Selected Financial Data - Reconciliation of Selected Financial Data to GAAP Financial Measures” above.
The cash dividend paid in the fourth quarter of 2016, rose 5% to $0.20 per diluted share from $0.19 per diluted share paid in the fourth quarter of 2015.     

Critical Accounting Estimates
The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances.  We believe that our estimates and assumptions are reasonable; however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.
The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows:  
Allowance for loan losses:  The Company maintains an Allowance to reflect inherent losses in its loan portfolio as of the balance sheet date.  In determining its total Allowance, the Company first estimates a specific allocated allowance for impaired loans.  This analysis is based upon a specific analysis for each impaired loan that is collateral dependent, including appraisals on loans secured by real property, management’s assessment of the current market, recent payment history, and an evaluation of other sources of repayment.  The Company obtains appraisals on real and personal property that secure its loans during the loan origination process in accordance with regulatory guidance and its loan policy.  The Company obtains updated appraisals on loans secured by real or personal property based upon its assessment of changes in the current market or particular projects or properties, information from other current appraisals, and other sources of information.  The Company uses the information provided in these updated appraisals along with its evaluation of all other information available on a particular property as it assesses the collateral coverage on its performing and nonperforming loans and the impact that may have on the adequacy of its Allowance. 
The Company then estimates a general allocated allowance for all other loans that were not impaired as of the balance sheet date using a formula-based approach that includes average historical loss factors that are adjusted for qualitative factors applied to segments and classes of loans not considered impaired for purposes of establishing the allocated portion of the general reserve of the Allowance.  The Company first disaggregates the overall loan portfolio into the following 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.  Then the Company further disaggregates each segment into the following classes; pass, special mention, substandard, doubtful and loss.  After the portfolio has been disaggregated into these segments and classes, the Company calculates a general reserve for each segment and class based on the average five year loss history for each segment and class.  This general reserve is then adjusted for qualitative factors, by segment and class.  Qualitative factors are based on management’s assessment of current trends that may cause losses inherent in the current loan portfolio to differ significantly from historical losses.  Some factors that management considers in determining the qualitative adjustment to the general reserve include loan quality trends in our own portfolio, the degree of concentrations of large borrowers in our loan 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. 
Finally, the Company assesses the overall adequacy of the Allowance based on several factors including the level of the Allowance as compared to total loans and nonperforming loans in light of current economic conditions.  This portion of the Allowance is deemed “unallocated” because it is not allocated to any segment or class of the loan portfolio.  This portion of the Allowance provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are

28



utilized in the risk rating-based component or in the specific impairment component of the Allowance and acknowledges the inherent imprecision of all loss prediction models.
The unallocated portion of the Allowance is based upon management’s evaluation of various factors that are not directly measured in the determination of the allocated portions of the Allowance.  Such factors include uncertainties in identifying triggering events that directly correlate to subsequent loss rates, uncertainties in economic conditions, risk factors that have not yet manifested themselves in loss allocation factors, and historical loss experience data that may not precisely correspond to the current portfolio.  In addition, the unallocated reserve may fluctuate based upon the direction of various risk indicators.  Examples of such factors include the risk as to current and prospective economic conditions, the level and trend of charge offs or recoveries, and the risk of heightened imprecision or inconsistency of appraisals used in estimating real estate values.  Although this allocation process may not accurately predict credit losses by loan type or in aggregate, the total allowance for credit losses is available to absorb losses that may arise from any loan type or category.  Due to the subjectivity involved in the determination of the unallocated portion of the Allowance, the relationship of the unallocated component to the total Allowance may fluctuate from period to period.
Based on our methodology and its components, management believes the resulting Allowance is adequate and appropriate for the risk identified in the Company's loan portfolio.  Given current processes employed by the Company, management believes the segments, classes, and estimated loss rates currently assigned are appropriate.  It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be material to the Company's financial statements.  In addition, current loan classes and fair value estimates of collateral are subject to change as we continue to review loans within our portfolio and as our borrowers are impacted by economic trends within their market areas.  Although we have established an Allowance that we consider adequate, there can be no assurance that the established Allowance will be sufficient to offset losses on loans in the future.
Goodwill and other intangibles:  Net assets of entities acquired in purchase transactions are recorded at fair value at the date of acquisition.  Identified intangibles with estimated useful lives are amortized over the period benefited either on a straight-line basis or on an accelerated basis depending on the nature of the intangible.  Goodwill and other intangibles with indefinite lives are not amortized but instead are reviewed for impairment on an annual basis or at an interim date if events or circumstances indicate a potential impairment.  Goodwill impairment testing is performed at the segment level.  We have determined that the Company has two segments: Community Banking and Home Mortgage Lending. 
Under current guidance, the Company has the option to first assess qualitative factors to determine whether the existence of certain events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than the carrying amount.  If, using the qualitative assessment described above, it is determined that it is more likely than not that the carrying value exceeds the fair value of the Company, then we must move on to a more comprehensive goodwill impairment analysis. 
The first step of the comprehensive analysis, used to identify potential impairment, involves comparing the reporting unit’s fair value to its carrying value including goodwill.  If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired.  If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.  
The second step involves calculating an implied fair value of goodwill for each reporting unit when the first step indicated impairment.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination.  If the implied fair value of goodwill in the “proforma” business combination accounting as described above exceeds the goodwill assigned to the reporting unit, there is no impairment.  If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted under applicable accounting standards. 
The Company completed two acquisitions in 2014; there is no goodwill related to the acquisition of Alaska Pacific and $7.5 million in goodwill related to the acquisition of RML included in the Company's Consolidated Balance Sheet as of December 31, 2016. The Company performed its annual goodwill impairment testing at December 31, 2016 and 2015 in accordance with the policy described in Note 1 to the financial statements included with this report.  At December 31, 2016, the Company performed its annual impairment test by performing the qualitative assessment described above. Significant positive inputs to the qualitative assessment included the Company’s capital position and increasing stock price ; the Company’s increasing net income as compared to historical trends, the Company's stable budget-to-actual results of operations; results of regulatory examinations; peer comparisons of the Company's net interest margin; and trends in the Company’s cash flows. Significant negative inputs to the qualitative assessment included the recent decline in oil prices and current uncertainty in the Alaska economy. We believe that the

29



positive inputs to the qualitative assessment noted above outweigh the negative inputs, and we therefore concluded that it is more likely than not that the fair value of the Company exceeds its carrying value at December 31, 2016 and that no potential impairment existed at that time.
The Company continues to monitor goodwill for potential impairment on an ongoing basis.  No assurance can be given that we will not charge earnings in the future for goodwill impairment, if, for example, our stock price declines significantly, although there are many factors that we analyze in determining the impairment of goodwill.
Valuation of OREO:  OREO represents properties acquired through foreclosure or its equivalent.  Prior to foreclosure, the carrying value is adjusted to the fair value, less cost to sell, of the real estate to be acquired by an adjustment to the allowance for loan loss.  The amount by which the fair value less cost to sell is greater than the carrying amount of the loan plus amounts previously charged off is recognized in earnings.  Any subsequent reduction in the carrying value is charged against earnings.
Mortgage servicing rights:  The Company measures mortgage servicing rights ("MSRs") at fair value on a recurring basis and reports changes in fair value through earnings in mortgage banking income in the period in which the change occurs. Fair value adjustments encompass market-driven valuation changes and the runoff in value that occurs from the passage of time, which are separately reported. Retained MSRs are measured at fair value as of the date of sale. Initial and subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the MSR, the present value of expected net 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.

RESULTS OF OPERATIONS
Income Statement
Net Income
Our results of operations are dependent to a large degree on our net interest income.  We also generate other income primarily through mortgage banking income (earnings from our mortgage affiliate through November 2014), purchased receivables products, sales of employee benefit plans, service charges and fees, bankcard fees, and rental income.  Our operating expenses consist in large part of salaries and other personnel costs, occupancy, compensation expense for RML acquisition payments, and data processing expense. Interest income and cost of funds, or interest expense, are affected significantly by general economic conditions, particularly changes in market interest rates, by government policies and the actions of regulatory authorities, and by competition in our markets.
We earned net income attributable to the Company of $14.4 million in 2016, compared to net income of $17.8 million in 2015, and $17.4 million in 2014.  During these periods, net income per diluted share was $2.06, $2.56, and $2.54, respectively.  The decrease in net income in 2016 compared to 2015 was primarily due to an increase of $3.6 million in other operating expense and an increase of $554,000 in the provision for loan losses, as well as decreases of $1.3 million and $552,000 in other operating income and net interest income, respectively, in 2016 as compared to 2015. The increase in net income in 2015 compared to 2014 was primarily due to increases of $24.6 million and $4.6 million in other operating income and net interest income, respectively, which were only partially offset by increases of $25.7 million and $611,000 in other operating expense and in income taxes, respectively, in 2015 as compared to 2014. The purchase of the remaining 76.5% equity interest in RML in December of 2014 and the acquisition of Alaska Pacific in April of 2014 had significant impacts on all of these items in 2015.
Net Interest Income / Net Interest Margin
Net interest income is the difference between interest income from loan and investment securities portfolios and interest expense on customer deposits and borrowings.  Net interest income in 2016 was $56.4 million, compared to $56.9 million in 2015 and $52.3 million in 2014.  The decrease in 2016 as compared to 2015 was primarily due to decreased interest income earned on loans and loans held for sale mainly due to lower yields, which was only partially offset by increased interest income on long-term investments due to higher balances. The increase in 2015 as compared to 2014 was primarily due to increased interest income earned on loans and long-term investments due to higher averages balances, which was only partially offset by decreased average yields on loans.
Changes in net interest income result from changes in volume and spread, which in turn affect our margin.  For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the

30



difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets.  Changes in net interest income are influenced by yields and the level and relative mix of interest-earning assets and interest-bearing liabilities.  
During the fiscal years ended December 31, 2016, 2015, and 2014, net interest margins were 4.14%, 4.27%, and 4.31%, respectively. The decrease in the net interest margin in 2016 as compared to 2015 is primarily the result of lower yields on portfolio loans as well as an unfavorable change in the mix of interest-earning assets as average portfolio loans decreased as a percentage of total interest-earning assets. These changes were only partially offset by higher average balances of portfolio loans and long-term investments. The decrease in net interest margin in 2015 as compared to 2014 is primarily the result of a change in the mix of the Company's earning assets in 2015 as compared to 2014. The Company intends to continue to implement strategies designed to grow our loan portfolio, while actively managing non-performing assets, to offset the negative effect that today's relatively low interest rates have on our net interest margin.   
The following table sets forth for the periods indicated information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities.  Resultant yields or costs, net interest income, and net interest margin are also presented:
Years ended December 31,
2016

2015

2014
 
Average outstanding balance
Interest income / expense
Average Yield / Cost

Average outstanding balance
Interest income / expense
Average Yield / Cost

Average outstanding balance
Interest income / expense
Average Yield / Cost
 
(In Thousands)
Loans (1),(2)

$976,613


$52,905

5.42
%


$968,752


$54,070

5.58
%


$893,031


$50,566

5.66
%
Loans held for sale
52,012

1,872

3.60
%
 
55,243

2,096

3.79
%
 
11,232

449

4.00
%
Long-term Investments(3)
296,214

3,936

1.33
%

252,354

3,461

1.37
%

243,634

3,133

1.29
%
Short-term investments(4)
37,074

205

0.55
%

57,753

153

0.26
%

64,394

198

0.31
%
Total interest-earning assets

$1,361,913


$58,918

4.33
%


$1,334,102


$59,780

4.48
%


$1,212,291


$54,346

4.48
%
Noninterest-earning assets
144,609

 
 

146,811

 
 

123,638

 
 
Total

$1,506,522

 

 



$1,480,913

 

 



$1,335,929

 

 

Interest-bearing deposits

$803,877


$1,870

0.23
%


$788,916


$1,939

0.25
%


$727,078


$1,419

0.20
%
Borrowings
50,095

691

1.38
%

57,557

932

1.62
%

44,164

634

1.44
%
Total interest-bearing  liabilities

$853,972


$2,561

0.30
%


$846,473


$2,871

0.34
%


$771,242


$2,053

0.27
%
Noninterest-bearing demand deposits
446,366

 
 

430,529

 
 

384,516

 
 
Other liabilities
24,556

 
 

34,109

 
 

24,580

 
 
Equity
181,628

 
 

169,802

 
 

155,591

 
 
Total

$1,506,522

 
 


$1,480,913

 
 


$1,335,929

 
 
Net interest income
 

$56,357

 

 

$56,909

 

 

$52,293

 
Net interest margin
 
 
4.14
%

 
 
4.27
%

 
 
4.31
%
Average portfolio loans to average-earnings assets
71.71
%
 
 
 
72.61
%
 
 
 
73.66
%
 
 
Average portfolio loans to average total deposits
78.11
%
 
 
 
79.44
%
 
 
 
80.34
%
 
 
Average non-interest deposits to average total deposits
35.70
%
 
 
 
35.31
%
 
 
 
34.59
%
 
 
Average interest-earning assets to average interest-bearing liabilities
159.48
%
 
 
 
157.61
%
 
 
 
157.19
%
 
 
1Interest income includes loan fees.  Loan fees recognized during the period and included in the yield calculation totaled $3.1 million, $3.5 million and $3.2 million for 2016, 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 $7.2 million, $4.3 million, and $3.0 million in 2016, 2015 and 2014, respectively.

3Consists of investment securities available for sale, investment securities held to maturity, and investment in Federal Home Loan Bank stock.
4Consists of interest bearing deposits in other banks and domestic CDs.

31



The following table sets forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates.  Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rate:
 
2016 compared to 2015
2015 compared to 2014
 
Increase (decrease) due to
Increase (decrease) due to
(In Thousands)
Volume
Rate
Total
Volume
Rate
Total
Interest Income:
 
 
 
 
 
 
Loans

$444


($1,609
)

($1,165
)

$4,213


($709
)

$3,504

Loans held for sale
(119
)
(105
)
(224
)
1,669

(22
)
1,647

Long-term investments
579

(104
)
475

115

213

328

Short term investments
(26
)
78

52

(19
)
(26
)
(45
)
Total interest income

$878


($1,740
)

($862
)

$5,978


($544
)

$5,434

Interest Expense:
 
 
 
 
 
 
Interest-bearing deposits

$38


($107
)

($69
)

$129


$391


$520

Borrowings
(113
)
(128
)
(241
)
210

88

298

Total interest expense

($75
)

($235
)

($310
)

$339


$479


$818

 
    
Provision for Loan Losses 
We recorded a provision for loan losses in 2016 of $2.3 million, compared to $1.8 million and a benefit of $636,000 in 2015 and 2014, respectively.  The loan loss provision increased in 2016 primarily due to an increase in nonperforming loans as well as increase in qualitative factors due to softening in the Alaskan economy. The loan loss provision increased in 2015 primarily due to an increase in adversely classified assets related to three large borrowing relationships, respectively. We recorded a benefit under our loan loss provision in 2014 primarily due to the fact that we had net recoveries of previously charged off loans of $1.1 million in 2014. See the “Allowance for Loan Loss” section under “Financial Condition” and Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of these decreases and changes in the Company’s Allowance. 
Other Operating Income
The following table details the major components of other operating income for the years ended December 31:
(In Thousands)
2016
$ Change
% Change
2015
$ Change
% Change
2014
Other Operating Income
 
 
 
 
 
 
 
Mortgage banking income

$29,507


($106
)
 %

$29,613


$27,227

1,141
 %

$2,386

Employee benefit plan income
3,770

119

3
 %
3,651

154

4
 %
3,497

Bankcard fees
2,670

(1
)
 %
2,671

442

20
 %
2,229

Purchased receivable income
2,347

60

3
 %
2,287

213

10
 %
2,074

Service charges on deposit accounts
1,998

(105
)
(5
)%
2,103

(52
)
(2
)%
2,155

Other loan fees
528

88

20
 %
440

88

25
 %
352

Merchant credit card transaction fees
527

(36
)
(6
)%
563

(20
)
(3
)%
583

Rental income
424

(23
)
(5
)%
447

187

72
 %
260

Gain on loans acquired - APB
171

(742
)
(81
)%
913

218

31
 %
695

Gain (loss) on sale of securities
(11
)
(282
)
(104
)%
271

(190
)
(41
)%
461

Gain on purchase of mortgage affiliate


NM


(3,001
)
100
 %
3,001

Equity in earnings from RML


NM


(894
)
(100
)%
894

Other income
1,332

(317
)
(19
)%
1,649

202

14
 %
1,447

     Total other operating income

$43,263


($1,345
)
(3
)%

$44,608


$24,574

123
 %

$20,034



32



2016 Compared to 2015
The most significant changes in other operating income in 2016 were a decrease in gains on the disposition of loans acquired in the Alaska Pacific transaction at a discount to par values and in gains on the sale of investment securities. Mortgage banking income, which is the largest component of other operating income and represented 68% of total other operating income in 2016 and consists of gross income from the origination and sale of mortgages as well as mortgage loan servicing fees, decreased slightly to $29.5 million in 2016 from $29.6 million in 2015 mainly due to lower mortgage production revenue resulting from lower realized gains on the sale of mortgage loans and the change in fair value of mortgage loan commitments, which was mostly offset by increased mortgage servicing revenue. Service charges on deposit accounts also decreased in 2016 compared to 2015 in part due to lower non-sufficient funds fees. These decreases were partially offset by an increase in employee benefit plan income due to growth in NBG's core business operations, higher other loan fees due to increased commercial loan servicing revenue, and higher purchased receivable income due to higher yields in 2016 compared to 2015 .
2015 Compared to 2014
The most significant change in other operating income in 2015 was the increase in mortgage banking income, which represented 66% of total other operating income in 2015, to $29.6 million in 2015 from $2.4 million in 2014. This increase is primarily due to the fact that 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, in connection with the acquisition of Alaska Pacific, the Company recognized a $913,000 gain on the disposition of loans acquired in the transaction at a discount which is included in other income in the preceding table. Bankcard fees, purchased receivable income, rental income and employee benefit plan income also increased in 2015 compared to 2014. Bankcard fees increased mostly due to higher interchange income. Purchased receivable income increased primarily due to increased average purchase receivable balances outstanding during the year. The increase in rental income is due to a portion of the Northrim Headquarters building being leased to a large tenant for all of 2015 as compared to only a partial year in 2014.  Lastly, employee benefit plan income increased in 2015 compared to 2014 primarily due to increased revenues generated through Enroll Alaska which provides health insurance plans to individuals under the Affordable Care Act.  These increases were partially offset by a one-time $3 million gain in 2014 due to a fair value adjustment in connection with our purchase of the remaining 76.5% equity interest of RML in December of 2014.


33



Other Operating Expense
The following table details the major components of other operating expense for the years ended December 31:
(In Thousands)
2016
$ Change
% Change
2015
$ Change
% Change
2014
Other Operating Expense
 
 
 
 
 
 
 
Salaries and other personnel expense

$46,752


$2,821

6
 %

$43,931


$16,173

58
 %

$27,758

Occupancy expense
6,462

130

2
 %
6,332

1,972

45
 %
4,360

Compensation expense - RML acquisition payments
4,775

681

17
 %
4,094

4,094

100
 %

Data processing expense
4,566

253

6
 %
4,313

142

3
 %
4,171

Professional and outside services
3,110

130

4
 %
2,980

1,543

107
 %
1,437

Marketing expense
2,449

(279
)
(10
)%
2,728

669

32
 %
2,059

Insurance expense
1,023

(316
)
(24
)%
1,339

308

30
 %
1,031

Loss (gain) on sale of premise and equipment
352

315

NM

37

1,146

(103
)%
(1,109
)
Intangible asset amortization
135

(123
)
(48
)%
258

(31
)
(11
)%
289

Merger and acquisition expense


 %

(1,962
)
(100
)%
1,962

Reserve for purchased receivables
(10
)
128

(93
)%
(138
)
(842
)
(120
)%
704

OREO (income) expense, net rental income and gains on sale:
 
   OREO operating expense
304

81

36
 %
223

49

28
 %
174

   Impairment on OREO
187

(174
)
(48
)%
361

305

545
 %
56

   Rental income on OREO
(98
)
(18
)
23
 %
(80
)
(77
)
NM

(3
)
   Gains on sale of OREO
(295
)
19

6
 %
(314
)
329

(51
)%
(643
)
         Subtotal
98

(92
)
48
 %
190

606

(146
)%
(416
)
Other expenses
6,568

(13
)
 %
6,581

1,904

41
 %
4,677

     Total other operating expense

$76,280


$3,635

5
 %

$72,645


$25,722

55
 %

$46,923

 
2016 Compared to 2015
Other operating expense increased in 2016 as compared to the prior year primarily due to increased costs in salaries and other personnel expense and compensation expense - RML acquisition payments, and, to a lesser extent, data processing expense, occupancy expense and professional and outside services. Salaries and other personnel expenses increased on an approximately equal basis in both the community banking segment and home mortgage lending segment in 2016. Salaries and other personnel expense related to the operations of the community banking segment increased $1.4 million mainly due to higher medical costs and increases in various other benefits costs, as well as normal cost of living and performance based annual salary increases. The home mortgage lending segment had an increase in salaries and other personnel expense primarily attributable to an increase in full-time equivalent employees for new management and marketing positions and the addition of a new location in Wasilla. While compensation expense - RML acquisition payments increased $681,000 in 2016 as compared to 2015, 2016 included a $2.3 million non-cash error correction that covered the period from December 1, 2014, through June 30, 2016. Additionally, the change in the accounting treatment of these payments also increased compensation expense - RML acquisition payments in the third and fourth quarters of 2016. The total increase in compensation expense - RML acquisition payments in 2016 resulting from the error correction and prospective change in accounting is $3.0 million. These increases were partially offset by slight decreases in insurance expense and marketing expense in 2016 compared to 2015.

34



2015 Compared to 2014
Other operating expense increased in 2015 as compared to the prior year primarily due to the acquisition of the remaining 76.5% of RML on December 1, 2014, making RML a wholly-owned subsidiary, and to a lesser extent, the acquisition of Alaska Pacific in April 2014. The Company incurred increased costs particularly in salaries and other personnel expense, compensation expense - RML acquisition payments, occupancy expense, and professional and outside services primarily as a result of these acquisitions. Operating expenses related to the operation of RML in 2015 were $21.5 million. This includes salaries and other personnel expenses of $15.4 million, occupancy expenses of $1.7 million, and professional and outside services expenses of $1.5 million. Salaries and other personnel expense related to community banking operations increased $1.5 million mainly due to additional personnel acquired in the Alaska Pacific acquisition as well as normal cost of living and performance based annual salary increases. Additionally, the Company incurred an increase in marketing expenses primarily related to RML operations, an increase in OREO expense, net of rental income and gains on sale due to the impairment recorded on three OREO properties as well as a decrease in gains recorded on the sale of OREO properties, and an increase in insurance expense attributable to an increase in FDIC insurance expense, increased keyman insurance expense and increased insurance costs related to the acquisition of Alaska Pacific and RML. These increases were partially offset by a one-time gain of $1.1 million on the sale of a branch location to the State of Alaska in 2014.
Income Taxes
The provision for income taxes decreased $2.7 million, or 31%, to $6.1 million in 2016 as compared to 2015 and increased $611,000, or 7%, to $8.8 million in 2015 as compared to 2014.  These changes are due primarily to the 22% decrease in income before income taxes in 2016 compared to the previous year and a 4% increase in income before income taxes 2015 compared to 2014.  Additionally, the Company's effective tax rates were 29%, 32%, and 31% in 2016, 2015, and 2014, respectively. The decrease in the effective tax rate in 2016 compared to 2015 is mainly due to higher tax credits and tax-exempt income as a percentage of pre-tax income in 2016 as compared to 2015. The increase in effective tax rate in 2015 compared to 2014 was primarily the result of the $3.0 million, tax exempt fair value adjustment in connection with our purchase of the remaining 76.5% equity interest in RML in December of 2014.

FINANCIAL CONDITION
Investment Securities
The composition of our investment securities portfolio reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income.  The investment securities portfolio also mitigates interest rate and credit risk inherent in the loan portfolio, while providing a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral or through repurchase agreements), and collateral for certain public funds deposits. Investment securities designated as available for sale comprised 99% of the portfolio as of December 31, 2016 and are available to meet liquidity requirements. 
Our investment portfolio consists primarily of government sponsored entity securities, corporate securities, and municipal securities.  Investment securities at December 31, 2016 increased $40.1 million, or 14%, to $332.1 million from $292.0 million at December 31, 2015.  The increase at December 31, 2016 as compared to December 31, 2015 is primarily due to investment of funds received as deposit balances increased, as well as investment of funds previously held in interest bearing deposits in other banks as these longer term investment securities have a higher yield. The average maturity of the investment portfolio was approximately two years at December 31, 2016.
Investment securities may be pledged as collateral to secure public deposits.  At December 31, 2016 and 2015, $50.9 million and $59.7 million in securities were pledged for deposits and borrowings, respectively.  Pledged securities decreased at December 31, 2016 as compared to December 31, 2015 because the Company had decreased balances in securities sold under agreements to repurchase accounts at December 31, 2016.

35



The following tables set forth the composition of our investment portfolio at December 31 for the years indicated:
(In Thousands)
Amortized Cost

Fair Value
Securities Available for Sale:
 


 

   2016:
 


 

    U.S. Treasury and government sponsored entities

$264,267



$263,361

    Municipal Securities
18,184


18,157

    U.S. Agency Mortgage-backed Securities
2


2

    Corporate Bonds
44,437


44,732

    Preferred Stock
4,922


4,967

            Total

$331,812



$331,219

   2015:
 


 

    U.S. Treasury and government sponsored entities

$238,116



$237,436

    Municipal Securities
10,227


10,326

    U.S. Agency Mortgage-backed Securities
818


809

    Corporate Bonds
39,049


39,018

    Preferred Stock
3,549


3,524

             Total

$291,759



$291,113

   2014:
 


 

    U.S. Treasury and government sponsored entities

$226,624



$226,190

    Municipal Securities
11,843


12,124

    U.S. Agency Mortgage-backed Securities
1,024


1,029

    Corporate Bonds
38,820


39,235

         Preferred Stock
2,999


3,152

             Total

$281,310



$281,730

Securities Held to Maturity:
 


 

   2016:
 


 

    Municipal Securities

$899



$922

             Total

$899



$922

   2015:
 


 

    Municipal Securities

$903



$959

            Total

$903



$959

   2014:
 


 

    Municipal Securities

$2,201



$2,308

            Total

$2,201



$2,308

 
    

36



The following table sets forth the market value, maturities, and weighted average pretax yields of our investment portfolio as of December 31, 2016:
 
Maturity
 
Within
 
 
Over
 
(In Thousands)
1 Year
1-5 Years
5-10 Years
10 Years
Total
Securities Available for Sale:
 
 
 
 
 
    U.S. Treasury and government sponsored entities
 

 

 

 

 

         Balance

$50,041


$213,320


$—


$—


$263,361

         Weighted average yield
0.96
%
1.25
 %
%