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NORTHRIM BANCORP INC - Quarter Report: 2002 September (Form 10-Q)

Northrim Bancorp, Inc.
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2002

[  ] 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
(State or other jurisdiction of incorporation or organization)
  92-0175752
(I.R.S. Employer Identification Number)
     
3111 C Street
Anchorage, Alaska
(Address of principal executive offices)
   99503
(Zip Code)

(907) 562-0062
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 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 fo
r the past 90 days.

Yes [X] No [  ]

The number of shares of the issuer’s Common Stock outstanding at November 4, 2002 was 6,094,536.

 


TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
ITEM ONE
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4 CONTROLS AND PROCEDURES
ITEM 6 EXHIBITS AND REPORT ON FORM 8-K
SIGNATURES
EXHIBIT 99.1
EXHIBIT 99.2


Table of Contents

TABLE OF CONTENTS

                 
PART I  
FINANCIAL INFORMATION
       
Item 1.  
Consolidated Financial Statements (unaudited)
       
       
Consolidated Balance Sheets
       
       
- September 30, 2002 (unaudited)
    3  
       
- December 31, 2001
    3  
       
Consolidated Statements of Income (unaudited)
       
       
- Three and nine months ended September 30, 2002 and 2001
    4  
       
Consolidated Statements of Comprehensive Income (unaudited)
       
       
- Three and nine months ended September 30, 2002 and 2001
    5  
       
Consolidated Statements of Cash Flows (unaudited)
       
       
- Nine months ended September 30, 2002 and 2001
    6  
       
Notes to the Consolidated Financial Statements
    7  
Item 2.  
Management’s Discussion and Analysis of Financial
    11  
       
Condition and Results of Operations
       
Item 3.  
Qualitative and Quantitative Disclosures About
    22  
       
Market Risk
       
Item 4.  
Controls and Procedures
    23  
PART II  
OTHER INFORMATION
       
Item 6.  
Exhibits and Reports on Form 8-K
    24  
SIGNATURES  
 
    25  

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NORTHRIM BANCORP, INC.
PART I — FINANCIAL INFORMATION
ITEM ONE

NORTHRIM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(in thousands, except share data)

                         
            September 30,   December 31,
            2002   2001
           
 
            (unaudited)   (audited)
ASSETS
               
 
Cash and due from banks
  $ 31,348     $ 26,040  
 
Money market investments
    59,918       15,832  
 
Investment securities held to maturity
    1,281       1,832  
 
Investment securities available for sale
    78,279       74,111  
 
Investment in Federal Home Loan Bank stock
    1,744       2,660  
 
Real estate loans for sale
    4,782       19,496  
 
Loans
    511,887       463,066  
 
Allowance for loan losses
    (8,254 )     (7,200 )
 
 
   
     
 
   
Net loans
    508,415       475,362  
 
Premises and equipment, net
    6,408       5,877  
 
Accrued interest receivable
    3,263       3,470  
 
Intangible assets
    7,462       7,737  
 
Other assets
    10,633       7,597  
 
 
   
     
 
       
Total Assets
  $ 708,751     $ 620,518  
 
 
   
     
 
LIABILITIES
               
 
Deposits:
               
   
Demand
  $ 139,931     $ 128,881  
   
Interest-bearing demand
    51,589       49,916  
   
Savings
    103,754       47,669  
   
Money market
    170,446       139,524  
   
Certificates of deposit less than $100,000
    77,480       86,631  
   
Certificates of deposit greater than $100,000
    90,455       97,986  
 
 
   
     
 
     
Total deposits
    633,655       550,607  
 
 
   
     
 
 
Borrowings
    5,271       5,682  
 
Other liabilities
    3,437       3,438  
 
 
   
     
 
     
Total liabilities
    642,363       559,727  
 
 
   
     
 
SHAREHOLDERS’ EQUITY
               
 
Common stock, $1 par value, 10,000,000 shares authorized, 6,092,812 and 6,106,823 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively
    6,093       6,107  
 
Additional paid-in capital
    46,739       47,023  
 
Retained earnings
    12,425       7,140  
 
Accumulated other comprehensive income — unrealized gain (loss) on securities, net
    1,131       521  
 
 
   
     
 
     
Total shareholders’ equity
    66,388       60,791  
 
 
   
     
 
       
Total Liabilities and Shareholders’ Equity
  $ 708,751     $ 620,518  
 
 
   
     
 

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands, except per share data)

                                       
          Three Months Ended:   Nine Months Ended:
          September 30,   September 30,
         
 
          2002   2001   2002   2001
         
 
 
 
          (unaudited)   (unaudited)
Interest Income
                               
 
Interest and fees on loans
  $ 10,660     $ 11,091     $ 30,098     $ 32,938  
 
Interest on investment securities:
                               
   
Assets available for sale
    807       890       2,711       2,903  
   
Assets held to maturity
    55       58       173       170  
 
Interest on money market investments
    65       174       145       562  
 
 
   
     
     
     
 
     
Total Interest Income
    11,587       12,213       33,127       36,573  
Interest Expense
                               
 
Interest expense on deposits and borrowings
    2,528       4,101       7,885       13,537  
 
 
   
     
     
     
 
     
Net Interest Income
    9,059       8,112       25,242       23,036  
Provision for loan losses
    980       615       1,855       1,435  
 
 
   
     
     
     
 
     
Net Interest Income After Provision for Loan Losses
    8,079       7,497       23,387       21,601  
Other Operating Income
                               
 
Service charges on deposit accounts
    444       393       1,258       1,237  
 
Other income
    992       893       2,383       2,244  
 
 
   
     
     
     
 
     
Total Other Operating Income
    1,436       1,286       3,641       3,481  
Other Operating Expense
                               
 
Salaries and other personnel expense
    3,292       2,980       9,511       9,022  
 
Occupancy, net
    513       519       1,460       1,444  
 
Equipment expense
    322       398       1,068       1,169  
 
Marketing expense
    312       300       934       906  
 
Supply expense
    104       105       314       340  
 
Intangible asset amortization expense
    92       207       276       624  
 
Other operating expense
    1,249       1,275       3,571       3,407  
 
 
   
     
     
     
 
     
Total Other Operating Expense
    5,884       5,784       17,134       16,912  
 
 
   
     
     
     
 
     
Income Before Income Taxes
    3,631       2,999       9,894       8,170  
 
Provision for income taxes
    1,404       1,072       3,692       2,993  
 
 
   
     
     
     
 
     
Net Income
  $ 2,227     $ 1,927     $ 6,202     $ 5,177  
 
 
   
     
     
     
 
 
Earnings Per Share, Basic
  $ 0.36     $ 0.32     $ 1.01     $ 0.85  
 
Earnings Per Share, Diluted
  $ 0.35     $ 0.31     $ 0.98     $ 0.83  
 
Weighted Average Shares Outstanding, Basic
    6,122,323       6,101,396       6,117,452       6,101,396  
 
Weighted Average Shares Outstanding, Diluted
    6,290,699       6,281,012       6,331,329       6,259,664  

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands)

                                   
      Three Months Ended:   Nine Months Ended:
      September 30,   September 30,
     
 
      2002   2001   2002   2001
     
 
 
 
      (unaudited)   (unaudited)   (unaudited)   (unaudited)
Net income
  $ 2,227     $ 1,927     $ 6,202     $ 5,177  
Other comprehensive income, net of tax:
                               
 
Unrealized gains (losses) on securities:
                               
 
Unrealized holding gains (losses) arising during period
    362       634       677       910  
Less: reclassification adjustment for gains included in net income
    34       1       67       28  
 
   
     
     
     
 
Comprehensive income
  $ 2,556     $ 2,561     $ 6,812     $ 6,059  
 
   
     
     
     
 

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands)

                         
            Nine Months Ended:
            September 30,
           
            2002   2001
           
 
            (unaudited)   (unaudited)
Operating Activities
               
 
Net income
  $ 6,202     $ 5,177  
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
               
 
Security (gains) losses
    (113 )     (46 )
 
Depreciation and amortization of premises and equipment
    824       955  
 
Amortization of software
    289       307  
 
Intangible asset amortization
    276       276  
 
Deferred tax expense (benefit)
    (507 )     538  
 
Deferral of loan fees and costs, net
    670       275  
 
Gain on sale of building
    (9 )     (22 )
 
Provision for loan losses
    1,855       1,435  
 
(Increase) decrease in accrued interest receivable
    207       202  
 
(Increase) decrease in other assets
    (2,820 )     (2,278 )
 
Amortization of investment security premium, net of discount accretion
    114       64  
 
Increase (decrease) of other liabilities
    8       1,493  
 
 
   
     
 
       
Net Cash Provided by Operating Activities
    6,996       8,376  
 
 
   
     
 
Investing Activities
               
 
Investment in securities:
               
   
Purchases of investment securities:
               
     
Available-for-sale
    (74,200 )     (65,107 )
     
Held-to-maturity
    (120 )     (129 )
   
Proceeds from sales / maturities of securities:
               
     
Available-for-sale
    70,642       66,754  
     
Held-to-maturity
    1,587       250  
 
Investments in loans:
               
   
Sales of loans and loan participations
    72,983       150,347  
   
Loans made, net of repayments
    (108,561 )     (202,935 )
 
Purchases of premises and equipment
    (1,355 )     (50 )
 
 
   
     
 
       
Net Cash Provided (Used) by Investing Activities
    (39,024 )     (50,870 )
 
 
   
     
 
Financing Activities
               
 
Increase (decrease) in deposits
    83,048       31,519  
 
Increase (decrease) in borrowings
    (411 )     353  
 
Net proceeds from issuance of common stock
    133       0  
 
Net proceeds from repurchase of common stock
    (431 )     0  
 
Cash dividends paid
    (917 )     (832 )
 
 
   
     
 
       
Net Cash Provided (Used) by Financing Activities
    81,422       31,040  
 
 
   
     
 
       
Net Increase (Decrease) in Cash and Cash Equivalents
    49,394       (11,454 )
 
Cash and cash equivalents at beginning of period
    41,872       41,310  
 
 
   
     
 
 
Cash and cash equivalents at end of period
  $ 91,266     $ 29,856  
 
 
   
     
 
Supplemental Information
               
 
Income taxes paid
  $ 4,175     $ 1,765  
 
 
   
     
 
 
Interest paid
  $ 8,126     $ 13,758  
 
 
   
     
 

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2002 and 2001

1. BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared by Northrim BanCorp, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with instructions to Form 10-Q under the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2002, are not necessarily indicative of the results anticipated for the year ending December 31, 2002. These financial statements should be read in conjunction with Northrim BanCorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001.

2. STOCK DIVIDEND

Northrim paid a 10% stock dividend on November 30, 2001, to shareholders of record as of November 15, 2001. Earnings per share for the 2001 periods were restated to reflect the stock dividend.

3. STOCK REPURCHASE

In September of this year, the Board of Directors of the Company approved a plan whereby the Company would periodically repurchase for cash up to approximately 5%, or 306,372, of its shares of stock in the open market. The Company purchased 35,000 shares of its stock under this program during the month of September 2002 at a total cost of $431,000. The Company intends to continue to repurchase its stock from time to time depending upon market conditions.

4. ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued Statement No. 142, Goodwill and Other Intangible Assets. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. The provisions of Statement 142 were required to be applied starting with fiscal years beginning after December 15, 2001.

The effect on the Company of Statement 142 for the third quarter of 2002 was the elimination of $116,000 of amortization expense related to goodwill. The expected effect on the Company for 2002 will be the elimination of $464,000 of this amortization expense. However, the Company will continue to accrue a benefit from this amortization expense for tax purposes, as it will continue to deduct it from taxable income. The Company will continue to amortize a core deposit intangible asset, as it believes it has a determinable useful life. Amortization expense related to the Company’s core deposit intangible asset was $92,000 for the third quarter of 2002. Basic and diluted earnings per share would have been $0.33 and $0.32 versus $0.32 and $0.31, respectively, if amortization expense of $116,000 were not recorded in the third quarter of 2001. For the nine-month period in 2001, basic and diluted earnings per share would have been $0.88 and $0.86 versus $0.85 and $0.83, respectively, if amortization expense of $349,000 were not recorded.

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In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Statement No. 145 eliminates the treatment of extinguishment of debt as extraordinary and clarifies the accounting for certain sale-leaseback transactions. The provisions of Statement No. 145 are required to be applied starting with fiscal years beginning after May 15, 2002, with early adoption encouraged. Northrim believes the adoption of Statement No. 145 will have no impact on its financial statements.

In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of Statement No. 146 are required to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Northrim believes the adoption of Statement No. 146 will have no impact on its financial statements.

In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain Financial Institutions. This Statement brings all business combinations involving financial institutions, except mutuals, into the scope of Statement No. 141, Business Combinations. Statement No. 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with Statement No. 141 and the related intangibles accounted for in accordance with Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 147 also amends Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions. Statement No. 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of Statement No. 72. Northrim believes the adoption of Statement No. 147 will have no impact on its financial statements.

5. LENDING ACTIVITIES

The following table sets forth the Company’s loan portfolio composition by loan type for the dates indicated:

                                                   
      September 30, 2002   December 31, 2001   September 30, 2001
     
 
 
      Dollar   Percent   Dollar   Percent   Dollar   Percent
      Amount   of Total   Amount   of Total   Amount   of Total
     
 
 
 
 
 
      (Dollars in thousands)
Commercial
  $ 182,151       35 %   $ 166,845       34 %   $ 164,496       35 %
Construction/development
    78,005       15 %     68,952       14 %     71,592       15 %
Commercial real estate
    203,209       39 %     177,493       37 %     158,004       34 %
Real estate loans for sale
    4,782       1 %     19,496       4 %     16,781       4 %
Consumer
    50,883       10 %     52,236       11 %     55,912       12 %
 
   
     
     
     
     
     
 
 
Total
    519,030       100 %     485,022       100 %     466,785       100 %
 
           
             
             
 
Other, net
    (2,361 )             (2,460 )             (1,859 )        
 
   
             
             
         
 
Net loans
  $ 516,669             $ 482,562             $ 464,926          
 
   
             
             
         

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The following table details activity in the Allowance for Loan Losses for the dates indicated:

                                     
        Third Quarter   Nine Months
        (Dollars in thousands)   (Dollars in thousands)
       
 
        2002   2001   2002   2001
       
 
 
 
Balance at beginning of period
  $ 7,545     $ 6,469     $ 7,200     $ 6,208  
Charge-offs:
                               
 
Commercial
    207       142       764       499  
 
Construction/development
    0       0       0       0  
 
Commercial real estate
    67       78       67       354  
 
Consumer
    49       73       211       122  
 
   
     
     
     
 
   
Total charge-offs
    323       293       1,042       975  
Recoveries:
                               
 
Commercial
    19       13       155       133  
 
Construction/development
    0       0       0       0  
 
Commercial real estate
    13       0       33       0  
 
Consumer
    20       7       53       10  
 
   
     
     
     
 
   
Total recoveries
    52       20       241       143  
Provision for loan losses
    980       615       1,855       1,435  
 
   
     
     
     
 
Balance at end of period
  $ 8,254     $ 6,811     $ 8,254     $ 6,811  
 
   
     
     
     
 

Nonperforming assets consist of nonaccrual loans, accruing loans of 90 days or more past due, restructured loans, and real estate owned. The following table sets forth information with respect to nonperforming assets:

                               
          09/30/02   12/31/01   09/30/01
         
 
 
          (Dollars in thousands)
Nonaccrual loans
  $ 3,291     $ 2,615     $ 1,371  
Accruing loans past due 90 days or more
    635       965       1,383  
Restructured loans
    1,667             46  
 
   
     
     
 
 
Total nonperforming loans
    5,593       3,580       2,800  
Real estate owned
                 
 
   
     
     
 
     
Total nonperforming assets
  $ 5,593     $ 3,580     $ 2,800  
 
   
     
     
 
   
Allowance for loan losses
  $ 8,254     $ 7,200     $ 6,811  
 
   
     
     
 

6. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted-average number of common shares used to compute basic EPS plus the incremental amount of potential common stock from unvested stock awards and stock options, determined by the treasury stock method.

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The following table compares average shares and earnings per share for the third quarter and nine months ending 2002 and 2001:

                                                   
      Three Months Ended   Nine Months Ended
      September 30, 2002   September 30, 2002
      (Dollars in thousands)   (Dollars in thousands)
     
 
      Net   Average   Earnings   Net   Average   Earnings
      Income   Shares   Per Share   Income   Shares   Per Share
     
 
 
 
 
 
Net income/average shares issued
  $ 2,227       6,122             $ 6,202       6,117          
 
 
   
     
     
     
     
     
 
 
Basic EPS
    2,227       6,122     $ 0.36       6,202       6,117     $ 1.01  
Incremental shares under stock plans:
                                               
 
Stock options
            169                       214          
 
 
   
     
     
     
     
     
 
 
Diluted EPS
  $ 2,227       6,291     $ 0.35     $ 6,202       6,331     $ 0.98  
 
 
   
     
     
     
     
     
 
                                                   
      Three Months Ended   Nine Months Ended
      September 30, 2001   September 30, 2001
      (Dollars in thousands)   (Dollars in thousands)
     
 
      Net   Average   Earnings   Net   Average   Earnings
      Income   Shares   Per Share   Income   Shares   Per Share
     
 
 
 
 
 
Net income/average shares issued
  $ 1,927       6,101             $ 5,177       6,101          
 
 
   
     
     
     
     
     
 
 
Basic EPS
    1,927       6,101     $ 0.32       5,177       6,101     $ 0.85  
Incremental shares under stock plans:
                                               
 
Stock options
            180                       159          
 
 
   
     
     
     
     
     
 
 
Diluted EPS
  $ 1,927       6,281     $ 0.31     $ 5,177       6,260     $ 0.83  
 
 
   
     
     
     
     
     
 

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Table of Contents

NORTHRIM BANCORP, INC.
PART I — FINANCIAL INFORMATION

ITEM TWO

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This Form 10-Q includes “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s beliefs and assumptions based on currently available information, and we have not undertaken to update these statements except as required by the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder. All statements other than statements of historical fact regarding our financial position, business strategy and management’s plans and objectives for future operations are forward-looking statements. When used in this report, the words “will,” “anticipate,” “believe,” “estimate,” “expect,” “should,” and “intend” and words or phrases of similar meaning, as they relate to the Company or management, are intended to help identify forward-looking statements. Although we believe that management’s expectations as reflected in forward-looking statements are reasonable, we cannot assure readers that those expectations will prove to be correct. 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 our ability to maintain or expand our market share or net interest margins, and to implement our marketing and growth strategies. Further, actual results may be affected by our ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry, including the events of September 11, 2001, and other potential further similar events. In addition, there are risks inherent in the Company’s industry relating to collectibility 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 in our other filings with the Federal Deposit Insurance Corporation (the “FDIC”). 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.

OVERVIEW

Northrim BanCorp, Inc. (the “Company”) is a publicly traded bank holding company (Nasdaq: NRIM) with a wholly-owned subsidiary, Northrim Bank (the “Bank”), that is a state chartered, full-service commercial bank. We are headquartered in Anchorage and have 10 branch locations, seven in Anchorage, and one each in Fairbanks, Eagle River and Wasilla. We offer a wide array of commercial bank loan and deposit products, including electronic banking services over the Internet.

We opened the Bank for business in Anchorage in 1990. We opened our second branch, in Fairbanks, in 1996, and our second location in Anchorage in 1997. During the third quarter of 1999, we purchased eight branches located in Anchorage, Eagle River and Wasilla from Bank of America. The Bank became the wholly-owned subsidiary of the Company effective December 31, 2001, when we completed our bank holding company reorganization.

One of our major objectives is to increase our market share in Anchorage and Fairbanks, Alaska’s two largest urban areas. We estimate that we hold a 21% share of the commercial bank deposit market in Anchorage and an 8% share of the Fairbanks market as of June 30, 2001.

In January of 2002, we moved from a supermarket branch into a full-service branch to provide a higher level of service to the growing Eagle River market. We plan to affect our future growth strategy through a combination of growth at existing branch locations, new branch openings, primarily in Anchorage, Wasilla, and Fairbanks, and strategic banking and non-banking acquisitions and investments. We plan to improve our presence in the Wasilla market by consolidating our existing supermarket branch and a loan production

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office into a freestanding branch late in 2002. The Company believes approximately $160,000 of leasehold improvements and lease termination costs will be incurred in 2002. In addition, in 2002, we are exploring other branching options, and are currently analyzing additional market opportunities in the Fairbanks area.

The Company’s total assets and deposits at September 30, 2002, were $708.8 million and $633.7 million, respectively, increases of 14% and 15%, respectively, from December 31, 2001. Total assets and deposits each increased 21% and 23%, respectively, from September 30, 2001. Net loans were $508.4 million at September 30, 2002, an increase of 7% from December 31, 2001, and 11% from September 30, 2001.

RESULTS OF OPERATION

NET INCOME

Net income for the third quarter ended September 30, 2002, was $2.2 million, or $0.35 per diluted share, an increase in net income of 16%, and 13% increase in diluted earnings per share as compared to $1.9 million and $0.31 in the same period of 2001.

Revenue (net interest income and other operating income) grew $1.1 million, or 12%, to $10.5 million for the third quarter of 2002, compared to $9.4 million for the third quarter of 2001. The provision for loan losses was $980,000 for the third quarter of 2002, compared to $615,000 for the same period one year ago. Other operating expenses increased $100,000 for the third quarter of 2002 from the same period in 2001.

Net income for the nine months ended September 30, 2002, was $6.2 million, an increase of $1 million, or 20% from the nine months ended September 30, 2001. Diluted earnings per share were $0.98, compared to $0.83 in the same period in 2001. The earnings increase for the nine-month period ended September 30, 2002, reflects moderate growth in assets, loans and deposits as compared to the nine months ended September 30, 2001.

NET INTEREST INCOME

Three Months ending September 30, 2002:

Net interest income for the third quarter of 2002 increased $947,000, or 12%, to $9.1 million from $8.1 million in 2001. The following table compares average balances and rates for the third quarter of 2002 and 2001:

                                                     
        Third Quarter           Third Quarter
        Average Balances           Average Yields/Costs
        (Dollars in thousands)    
       
 
        2002   2001   Change   2002   2001   Change
       
 
 
 
 
 
Loans
  $ 519,628     $ 465,963     $ 53,665       8.18 %     9.51 %     -1.33 %
Short-term investments
    16,758       19,955       (3,197 )     1.63 %     3.42 %     -1.79 %
Long-term investments
    73,699       64,449       9,250       4.62 %     5.84 %     -1.22 %
 
   
     
     
     
     
     
 
 
Interest-earning assets
    610,085       550,367       59,718       7.57 %     8.86 %     -1.29 %
 
                           
     
     
 
Non-earning assets
    42,293       43,801       (1,508 )                        
 
   
     
     
                         
   
Total
  $ 652,378     $ 594,168     $ 58,210                          
 
   
     
     
                         
Interest-bearing liabilities
  $ 445,492     $ 414,739     $ 30,753       2.26 %     3.92 %     -1.66 %
Demand deposits
    138,647       116,751       21,896                          
Other liabilities
    3,253       4,297       (1,044 )                        
Equity
    64,986       58,381       6,605                          
 
   
     
     
                         
   
Total
  $ 652,378     $ 594,168     $ 58,210                          
 
   
     
     
                         
 
                           
     
     
 
Net tax equivalent margin on earning assets
                            5.92 %     5.91 %     0.01 %
 
                           
     
     
 

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Interest-earning assets averaged $610.1 million for the third quarter of 2002, an increase of $59.7 million, or 11%, over the $550.4 million average for the comparable period in 2001. The tax equivalent yield on earning assets averaged 7.57% in 2002, a decrease of 129 basis points from 8.86% for the same period in 2001.

Loans, the largest category of interest-earning assets, increased by $53.7 million, or 12%, to an average of $519.6 million in the third quarter of 2002 from $466 million in the same period of 2001. Commercial loans, real estate term loans and construction loans increased by $20.7 million, $52.4 million and $2.3 million, respectively, on average between the third quarters. Consumer loans declined $4 million and real estate loans held for resale declined $17.6 million on average. The tax equivalent yield on the loan portfolio averaged 8.18% for the third quarter of 2002, a decrease of 133 basis points from 9.51% a year ago due, in large part, to a drop in the prime-lending rate of 125 basis points from September 30, 2001 to September 30, 2002. The Company had $150.8 million in loans indexed to the prime-lending rate on September 30, 2002, or 29%, of total loans as compared to $146.1 million, or 31%, on September 30, 2001. The uncommon drop in interest rates has also led to an increase in refinance activity in the Company’s commercial real estate portfolio, which is typically comprised of longer-term loans. A number of market analysts are predicting that the Federal Reserve will approve a further 25 basis point drop in November 2002 due to recent reports of lower consumer confidence. Continuing refinance activity as a result of lower rates may put further downward pressure on the Company’s interest margin in the future. However, the Company’s net loan fees amortized in the third quarter ended September 30, 2002, totaled $1.1 million, an increase of 22% from fees of $886,000 in the third quarter ended September 30, 2001, primarily as a result of larger loan volumes and an increase in refinance activity.

Interest-bearing liabilities averaged $445.5 million for the third quarter of 2002, an increase of $30.8 million, or 7%, compared to $414.7 million for the same period in 2001. The average cost of interest-bearing liabilities decreased 166 basis points to 2.26% for the third quarter of 2002 compared to 3.92% for the third quarter of 2001. The decrease in the average cost of funds was largely due to the repricing of deposit accounts in response to the Federal Reserve’s rate reductions during 2001. The weighted average life of the Company’s certificate of deposits is less than one year. The cost of these deposits should further decline if market interest rates remain at reduced levels, as deposits originated at higher interest rates during earlier periods mature, and are repriced to the current rates. However, as interest rates approach historically low levels, the Company may not be able to fully reprice these liabilities to maintain its net interest margin. Moreover, interest rates could increase in the future in response to an improvement in the general economy of the United States. An increase in general interest rates could cause an increase in the Company’s deposit accounts which could also have a negative impact on its net interest margin.

The Company’s net interest income as a percentage of average interest-earning assets (net tax-equivalent margin) was 5.92% for the third quarter of 2002, an increase of 1 basis point from 5.91% for the same period in 2001. The average net tax equivalent yield on interest-earning assets decreased 129 basis points to 7.57% in the third quarter of 2002, from 8.86% in the same period of 2001. The average cost of interest-bearing liabilities decreased 166 basis points in the third quarter of 2002 to 2.26% from 3.92% in the same quarter of 2001. Despite the fact that interest rates on the Company’s interest-bearing liabilities declined more than the rate on its interest-earning assets, the net interest margin only increased one basis point between third quarter 2002 and 2001. A reason for this level of increase is because approximately, 23% and 21% of interest-earning-assets were funded by non-interest-bearing deposits at September 30, 2002 and 2001, respectively, in which interest rate increases or decreases have no effect.

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Nine Months ending September 30, 2002:

         The following table compares average balances and rates for the nine-month period ending September 30, 2002 and 2001:

                                                     
        Nine-month   Nine-month
        Average Balances   Average Yields/Costs
        (Dollars in thousands)    
       
 
        2002   2001   Change   2002   2001   Change
       
 
 
 
 
 
Loans
  $ 496,756     $ 446,778     $ 49,978       8.15 %     9.93 %     -1.78 %
Short-term investments
    11,793       17,139       (5,346 )     1.63 %     4.32 %     -2.69 %
Long-term investments
    75,450       68,013       7,437       5.15 %     6.06 %     -0.91 %
 
   
     
     
     
     
     
 
 
Interest-earning assets
    583,999       531,930       52,069       7.63 %     9.26 %     -1.63 %
 
                           
     
     
 
Non-earning assets
    43,437       40,176       3,261                          
 
   
     
     
                         
   
Total
  $ 627,436     $ 572,106     $ 55,330                          
 
   
     
     
                         
Interest-bearing liabilities
  $ 431,605     $ 406,268     $ 25,337       2.45 %     4.45 %     -2.00 %
Demand deposits
    129,226       105,101       24,125                          
Other liabilities
    3,396       3,942       (546 )                        
Equity
    63,209       56,795       6,414                          
 
   
     
     
                         
   
Total
  $ 627,436     $ 572,106     $ 55,330                          
 
   
     
     
                         
 
                           
     
     
 
Net tax equivalent margin on earning assets
                            5.82 %     5.86 %     -0.04 %
 
                           
     
     
 

         Net interest income for the first nine months of 2002 increased $2.2 million, or 10% from $23 million in 2001. The increase was largely due to a $52.1 million increase in average interest-earning assets between the periods, funded in part by a $25.3 million increase in average interest-bearing liabilities. More asset growth was funded by non-interest-bearing sources of funds in 2002 than in 2001. The net tax equivalent yield on interest-earning assets in the first nine months of 2002 declined four basis points to 5.82% from 5.86% for the same period in 2001. The average net tax equivalent yield on interest-earning assets decreased 163 basis points to 7.63% for the first nine months in 2002 from 9.26% in the same nine-month period one year ago. The average cost of interest-bearing liabilities decreased 200 basis points to 2.45% for the first nine months of 2002, from 4.45% for the same six-month period in 2001.

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OTHER OPERATING INCOME

Other operating income (excluding gains on the sale of assets which can fluctuate significantly between periods) for the third quarter of 2002 was $1.4 million, an increase of $93,000 from the third quarter of 2001. For the first nine months of 2002, other operating income increased $131,000, or 4%, from $3.4 million for the same period in 2001.

Deposit service charges increased $51,000, or 13%, from $393,000 in the third quarter of 2001. For the first nine months of 2002, deposit service charges increased $21,000, or 2%, from $1.2 million for the same period in 2001.

Loan servicing fees decreased $25,000, or 20%, from $122,000 in the third quarter of 2001. For the first nine months of 2002, loan servicing fees decreased $92,000, or 27%, from $346,000 for the same period in 2001. These decreases are primarily the result of a drop in the volume of loans purchased from Residential Mortgage LLC (“RML”), the Bank’s affiliated mortgage company.

Electronic banking fees are largely comprised of interchange and surcharge income from the Company’s 16-machine ATM network and debit card transactions. Electronic banking fees decreased $50,000, or 25%, in the third quarter of 2002 compared to the third quarter of 2001. This decrease was due to a change in consumer practices, whereby consumers obtain more cash from point of sale transactions than from ATMs thus producing less fee income. For the first nine months of 2002, electronic banking fees were $461,000, a decrease of 1%, from the same period last year.

Income from Northrim Capital Investments Co. (“NCIC”), a wholly-owned subsidiary of Northrim Bank, increased by $135,000, or 37%, to $502,000 during the third quarter of 2002 as compared to $367,000 in the third quarter of 2001, primarily due to increased refinance activity. NCIC owns a 30% profit interest in RML. The large decrease in interest rates and a strong residential housing market has fueled increases in mortgage originations from refinances and home purchase loans as compared to the same period in 2001. Income from NCIC for the nine months ended September 30, 2002, was $1.1 million, compared to $782,000 in the same period last year, an increase of 35%. The improvement in the nine-month results was due in part to the recovery of $165,000 in legal defense costs related to a lawsuit that was settled earlier in 2002.

Set forth below is a schedule of the components of and change in Other Operating Income between the third quarters of 2002 and 2001:

                                                   
      Third Quarter   Nine Months
      (Dollars in thousands)   (Dollars in thousands)
     
 
      2002   %   2001   2002   %   2001
     
 
 
 
 
 
Deposit service charges
  $ 444       13 %   $ 393     $ 1,258       2 %   $ 1,237  
Loan servicing fees
    97       -20 %     122       254       -27 %     346  
Income from NCIC
    502       37 %     367       1,055       35 %     782  
Merchant & credit card fees
    131       18 %     111       313       6 %     295  
Electronic banking revenue
    152       -25 %     202       461       -1 %     468  
Other
    53       -42 %     91       187       -30 %     269  
 
   
     
     
     
     
     
 
 
Subtotal
    1,379       7 %     1,286       3,528       4 %     3,397  
Security gains (losses)
    57       0 %     0       113       146 %     46  
Gain on sale of ORE
    0       0 %     0       0       -100 %     38  
 
   
     
     
     
     
     
 
 
Total
  $ 1,436       12 %   $ 1,286     $ 3,641       5 %   $ 3,481  
 
   
     
     
     
     
     
 

OTHER OPERATING EXPENSE

Other operating expense for the third quarter of 2002 was $5.9 million, an increase of $100,000 from the same period in 2001. At the beginning of this year, the Company implemented Financial Accounting Standards Board Statement 142 that sets forth the accounting for goodwill and other intangible assets. As a

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result, the Company is no longer amortizing expense related to goodwill effective the beginning of 2002. Amortization expense for other intangible assets for the third quarter of 2002 was $92,000. Other operating expense for the nine months ended September 30, 2002, was $17.1 million, an increase of $222,000, or 1%, from the same period in 2001.

Set forth below is a schedule of the components of and change in Other Operating Expense between the third quarters of 2002 and 2001:

                                                   
      Third Quarter   Nine Months
      (Dollars in thousands)   (Dollars in thousands)
     
 
      2002   %   2001   2002   %   2001
     
 
 
 
 
 
Salaries & benefits
  $ 3,292       10 %   $ 2,980     $ 9,511       5 %   $ 9,022  
Occupancy
    513       -1 %     519       1,460       1 %     1,444  
Equipment
    322       -19 %     398       1,068       -9 %     1,169  
Marketing
    312       4 %     300       934       3 %     906  
Intangible asset amortization-goodwill
    0       -100 %     116       0       -100 %     349  
Intangible asset amortization-core deposit
    92       1 %     91       276       0 %     275  
Other expense
    1,353       -2 %     1,380       3,885       4 %     3,747  
 
   
     
     
     
     
     
 
 
Total
  $ 5,884       2 %   $ 5,784     $ 17,134       1 %   $ 16,912  
 
   
     
     
     
     
     
 

INCOME TAXES

The provision for income taxes increased $332,000, or 31%, to $1.4 million in the third quarter of 2002 compared to the same period in 2001. The effective tax rates for the third quarter of 2002 and 2001 were 39% and 36%, respectively, due to a decline of approximately $1 million on average of tax-exempt assets between periods. The provision for income taxes for the first nine months of 2002 totaled $3.7 million, an increase of $699,000, or 23%, from the same period in 2001. The effective tax rate for each of the first nine months of 2002 and 2001 was 37%.

LENDING ACTIVITIES

LOAN PORTFOLIO COMPOSITION

The following table sets forth the Company’s loan portfolio composition by loan type for the dates indicated:

                                                   
      September 30, 2002   December 31, 2001   September 30, 2001
     
 
 
      Dollar   Percent   Dollar   Percent   Dollar   Percent
      Amount   of Total   Amount   of Total   Amount   of Total
     
 
 
 
 
 
                      (Dollars in thousands)                
Commercial
  $ 182,151       35 %   $ 166,845       34 %   $ 164,496       35 %
Construction/development
    78,005       15 %     68,952       14 %     71,592       15 %
Commercial real estate
    203,209       39 %     177,493       37 %     158,004       34 %
Real estate loans for sale
    4,782       1 %     19,496       4 %     16,781       4 %
Consumer
    50,883       10 %     52,236       11 %     55,912       12 %
 
   
     
     
     
     
     
 
 
Total
    519,030       100 %     485,022       100 %     466,785       100 %
 
           
             
             
 
Other, net
    (2,361 )             (2,460 )             (1,859 )        
 
   
             
             
         
 
Net loans
  $ 516,669             $ 482,562             $ 464,926          
 
   
             
             
         

ORIGINATION AND SALE OF LOANS

Periodically, the Company invests its excess liquidity in single-family mortgage loans that have been originated by RML and which are committed for resale, generally within 45 days, at preset interest rates prior to the Company’s purchase. At September 30, 2002, these loans totaled $4.8 million, down from $19.5 million at December 31, 2001. RML sold fewer loans to the Company in 2002 because it developed other sources for warehousing its loans.

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PROVISION AND ALLOWANCE FOR LOAN LOSSES

The Company recorded a $980,000 provision for loan losses for the third quarter of 2002, compared to $615,000 for the third quarter of 2001. There was $271,000 in net loan charge-offs during the third quarter of 2002, compared to $273,000 of net loan charge-offs for the same period in 2001. For the first nine months of 2002, net loan charge-offs totaled $801,000, compared to $832,000 for the same period in 2001, for an annualized charge-off rate of 0.21% and 0.25%, respectively.

The Allowance for Loan Losses was $8.3 million, or 1.61% of total portfolio loans outstanding (which excludes $4.8 million of real estate loans for sale), at September 30, 2002, compared to $6.8 million, or 1.52%, of total portfolio loans, at September 30, 2001. The Allowance for Loan Losses represented 148% of non-performing loans at September 30, 2002, as compared to 243% of non-performing loans at September 30, 2001. Management considers the Allowance for Loan Losses to be adequate at this time to absorb inherent losses. Management anticipates additional provisions to the Allowance for Loan Losses in future periods due to expected growth in the loan portfolio and a perceived continued softening of the overall state and local economies.

The following table details activity in the Allowance for Loan Losses for the dates indicated:

                                     
        Third Quarter   Nine Months
        (Dollars in thousands)   (Dollars in thousands)
       
 
        2002   2001   2002   2001
       
 
 
 
Balance at beginning of period
  $ 7,545     $ 6,469     $ 7,200     $ 6,208  
Charge-offs:
                               
 
Commercial
    207       142       764       499  
 
Construction/development
    0       0       0       0  
 
Commercial real estate
    67       78       67       354  
 
Consumer
    49       73       211       122  
 
   
     
     
     
 
   
Total charge-offs
    323       293       1,042       975  
Recoveries:
                               
 
Commercial
    19       13       155       133  
 
Construction/development
    0       0       0       0  
 
Commercial real estate
    13       0       33       0  
 
Consumer
    20       7       53       10  
 
   
     
     
     
 
   
Total recoveries
    52       20       241       143  
Provision for loan losses
    980       615       1,855       1,435  
 
   
     
     
     
 
Balance at end of period
  $ 8,254     $ 6,811     $ 8,254     $ 6,811  
 
   
     
     
     
 

NONPERFORMING ASSETS

Nonperforming assets consist of nonaccrual loans, accruing loans that are 90 days or more past due, restructured loans, and real estate owned. The following table sets forth information with respect to nonperforming assets:

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      09/30/02   12/31/01   09/30/01
     
 
 
      (Dollars in thousands)
Nonaccrual loans
  $ 3,291     $ 2,615     $ 1,371  
Accruing loans past due 90 days or more
    635       965       1,383  
Restructured loans
    1,667             46  
 
   
     
     
 
Total nonperforming loans
    5,593       3,580       2,800  
Real estate owned
                 
 
   
     
     
 
 
Total nonperforming assets
  $ 5,593     $ 3,580     $ 2,800  
 
   
     
     
 
 
   
     
     
 
Allowance for loan losses
  $ 8,254     $ 7,200     $ 6,811  
 
   
     
     
 
Nonperforming loans to portfolio loans
    1.09 %     0.77 %     0.62 %
Nonperforming assets to total assets
    0.79 %     0.58 %     0.48 %
Allowance to portfolio loans
    1.61 %     1.55 %     1.52 %
Allowance to nonperforming loans
    148 %     201 %     243 %

Nonaccrual, Accruing Loans 90 Days or More Past Due and Restructured Loans. The Company’s financial statements are prepared on the accrual basis of accounting, including recognition of interest income on its loan portfolio, unless a loan is placed on a nonaccrual basis. For financial reporting purposes, amounts received on nonaccrual loans generally will be applied first to principal and then to interest only after all principal has been collected.

Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower, have been granted due to the borrower’s weakened financial condition. Interest on restructured loans will be accrued at the restructured rates when it is anticipated that no loss of original principal will occur and the interest can be collected.

Total nonperforming loans at September 30, 2002, were $5.6 million, or 1.09% of total portfolio loans, an increase of $2 million from $3.6 million at December 31, 2001, and an increase of $2.8 million from $2.8 million at September 30, 2001. The increase in nonperforming loans in the third quarter of 2002 was due in large part to one commercial loan relationship. The Company is taking steps to address this loan. The Company has also implemented procedures to improve the overall credit quality of its loan portfolio.

At September 30, 2002, December 31, 2001, and September 30, 2001, the Company had impaired loans of $4.5 million, $1.8 million, and $1.7 million, respectively. A specific allowance of $1 million, $262,000, and $312,000 was established for these periods.

Potential Problem Loans. At September 30, 2002, the Company had no potential problem loans, as compared to $3.2 million at December 31, 2001, and $2.1 million one year ago. Potential problem loans are loans which are currently performing and are not included in nonaccrual, accruing loans 90 days or more past due, or restructured loans at the end of the applicable period, but about which there has developed serious doubts as to the borrower’s ability to comply with present repayment terms and, which may later be included in nonaccrual, past due, or restructured loans.

CAPITAL

SHAREHOLDERS’ EQUITY

Shareholders’ equity was $66.4 million at September 30, 2002, compared to $60.8 million at December 31, 2001, an increase of 9%.

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CAPITAL REQUIREMENTS AND RATIOS

The Company is subject to minimum capital requirements. Federal banking agencies have adopted regulations establishing minimum requirements for the capital adequacy of banks and bank holding companies. The requirements address both risk-based capital and leverage capital. As of September 30, 2002, the Company and the Bank met all applicable capital adequacy requirements.

The FDIC has in place qualifications for banks to be classified as “well-capitalized.” As of June 14, 2002, the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There were no conditions or events since the FDIC notification that have changed the Bank’s classification.

The table below illustrates the capital requirements for the Company and its actual capital ratios that exceed these requirements. There is an immaterial difference between the capital ratios for the Bank and the Company.

                                 
                    September 30, 2002   December 31, 2001
                   
 
            Well-   Actual   Actual
    Minimum   Capitalized   Ratio   Ratio
   
 
 
 
Tier 1 risk-based capital
    4.00 %     6.00 %     10.25 %     10.25 %
Total risk-based capital
    8.00 %     10.00 %     11.50 %     11.74 %
Leverage ratio
    4.00 %     5.00 %     8.96 %     8.71 %

STOCK REPURCHASE PLAN

In September of this year, the Board of Directors of the Company approved a plan whereby the Company would periodically repurchase for cash up to approximately 5%, or 306,372, of its shares of stock in the open market. The Company purchased 35,000 shares of its stock under this program during the month of September 2002 at a cost of $431,000. The Company intends to continue to repurchase its stock from time to time depending upon market conditions.

LIQUIDITY AND SOURCE OF FUNDS

DEPOSITS

The Company’s primary sources of funds are customer deposits and to a lesser extent advances from the Federal Home Loan Bank of Seattle (the “FHLB”). These funds, together with loan repayments, loan sales, other borrowed funds, retained earnings and equity are used to make loans, to acquire securities and other assets, and to fund continuing operations.

Deposits are the Company’s primary source of new funds. Total deposits increased $83 million to $633.7 million at September 30, 2002, up 15% from $550.6 million at December 31, 2001, and 23% from $516.4 million at September 30, 2001.

The Company’s deposits generally are expected to fluctuate according to the level of the Company’s market share, economic conditions, and normal seasonal trends. The only deposit category with stated maturity dates is certificates of deposit. At September 30, 2002, Northrim had $167.9 million in certificates of deposit, of which $138 million, or 82%, are scheduled to mature over the next 12 months compared to $148.8 million, or 81%, at December 31, 2001, and to $151.4 million, or 81%, one year ago.

The following table sets forth the scheduled maturities of the Company’s certificates of deposit for the dates indicated:

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    September 30, 2002   December 31, 2001   September 30, 2001
   
 
 
    Dollar   Percent   Dollar   Percent   Dollar   Percent
    Amount   of Total   Amount   of Total   Amount   of Total
   
 
 
 
 
 
    (Dollars in thousands)
Remaining maturity:
                                               
Three months or less
  $ 62,372       37 %   $ 41,425       22 %   $ 73,695       40 %
Over three through six months
    33,380       20 %     45,407       25 %     29,533       16 %
Over six through twelve months
    42,279       25 %     61,956       34 %     48,200       26 %
Over twelve months
    29,904       18 %     35,829       19 %     34,649       19 %
 
   
     
     
     
     
     
 
Total
  $ 167,935       100 %   $ 184,617       100 %   $ 186,077       100 %
 
   
     
     
     
     
     
 

FHLB AND OTHER BORROWINGS

At September 30, 2002, the Company’s maximum borrowing line from the FHLB was approximately $85 million with $10 million committed to secure public deposits and $3.9 million in long-term advances, compared to $20 million to secure public deposits at December 31, 2001. Additional advances are dependent on availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Company’s assets.

The Company had a $3 million subordinated note and $1.5 million had been drawn on the line. The line was paid off in May of this year.

At September 30, 2002, the Company had no short-term original maturity of one year or less, borrowings that exceeded 30% of shareholders’ equity.

LOANS

Loans, excluding real estate loans for sale, increased to $511.9 million at September 30, 2002, from $463.1 million at December 31, 2001. At September 30, 2002, 53% of the portfolio was scheduled to mature over the next 12 months with 22% scheduled to mature between October 1, 2003, and September 30, 2007. Future growth in loans is generally dependent on new loan demand and deposit growth, and is constrained by the Company’s policy of being “well-capitalized.”

INVESTMENT SECURITIES

Investment securities totaled $81.3 million at September 30, 2002, an increase of $2.7 million, or 3%, from $78.6 million at December 31, 2001, and an increase of $7 million, or 9 %, from $74.3 million at September 30, 2001. Investment securities designated as available for sale comprised 96% of the investment portfolio at September 30, 2002, as compared to 94% at December 31, 2001, and 95% at September 31, 2001, and are available to meet liquidity requirements. Both available for sale and held to maturity securities may be pledged as collateral to secure public deposits. At September 30, 2002, $37.7 million in securities, or 46%, of the investment portfolio were pledged, as compared to $25.4 million, or 32%, at December 31, 2001, and $24.4 million, or 33%, at September 30, 2001.

CAPITAL EXPENDITURES AND COMMITMENTS

The Company purchased an item processing and imaging system in the second quarter ended June 30, 2002, totaling approximately $600,000. In addition, the Company purchased a limited liability company (“LLC”) for $1.8 million that owns another branch facility in the Anchorage area. The Company intends to dissolve the LLC and account for the new facility as an addition to its fixed assets.

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The Company plans to move its existing supermarket branch and a loan production office that are located in the Wasilla market into a freestanding branch late in 2002. The total commitments for the construction of this branch are $2.2 million.

ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142, Goodwill and Other Intangible Assets. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. The provisions of Statement 142 were required to be applied starting with fiscal years beginning after December 15, 2001.

The effect on the Company of Statement 142 for the third quarter of 2002 was the elimination of $116,000 of amortization expense related to goodwill. The expected effect on the Company for 2002 will be the elimination of $464,000 of this amortization expense. However, the Company will continue to accrue a benefit from this amortization expense for tax purposes, as it will continue to deduct it from taxable income. The Company will continue to amortize a core deposit intangible asset, as it believes it has a determinable useful life. Amortization expense related to the Company’s core deposit intangible asset was $92,000 for the third quarter of 2002. Basic and diluted earnings per share would have been $0.33 and $0.32 versus $0.32 and $0.31, respectively, if the amortization expense of $116,000 were not recorded in the third quarter of 2001. For the nine-month period in 2001, basic and diluted earnings per share would have been $0.88 and $0.86 versus $0.85 and $0.83, respectively, if the amortization expense of $349,000 were not recorded.

In April 2002, the Financial Accounting Standards Board issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Statement No. 145 eliminates the treatment of extinguishment of debt as extraordinary and clarifies the accounting for certain sale-leaseback transactions. The provisions of Statement No. 145 are required to be applied starting with fiscal years beginning after May 15, 2002, with early adoption encouraged. Northrim believes the adoption of Statement No. 145 will have no impact on its financial statements.

In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of Statement No. 146 are required to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Northrim believes the adoption of Statement No. 146 will have no impact on its financial statements.

In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain Financial Institutions. This Statement brings all business combinations involving financial institutions, except mutuals, into the scope of Statement No. 141, Business Combinations. Statement No. 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with Statement No. 141 and the related intangibles accounted for in accordance with Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 147 also amends Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets to include in its scope long-term customer-relationship intangible assets of financial institutions. Statement No. 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of Statement No. 72. Northrim believes the adoption of Statement No. 147 will have no impact on its financial statements.

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ITEM THREE

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate, credit, and operations risks are the most significant market risks, which affect the Company’s performance. The Company relies on loan review, prudent loan underwriting standards, and an adequate allowance for credit losses to mitigate credit risk.

The Company utilizes a simulation model to monitor and manage interest rate risk within parameters established by its internal policy. The model projects the impact of a 100 basis point increase and a 100 basis point decrease, from prevailing interest rates, on the balance sheet for a period of 12 months.

The Company is currently liability sensitive, meaning that interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period. Therefore, a significant increase in market rates of interest could adversely impact net interest income. Conversely, a declining interest rate environment may improve net interest income.

Generalized assumptions are made on how investment securities, classes of loans and various deposit products might respond to the interest rate changes. These assumptions are inherently uncertain, and as a result, the model cannot precisely estimate net interest income nor precisely predict the impact of higher or lower interest rates on net interest income. Actual results may differ materially from simulated results due to factors such as timing, magnitude, and frequency of rate changes, customer reaction to rate changes, changes in market conditions, the absolute level of interest rates, and management strategies, among other factors.

The results of the simulation model at September 30, 2002 indicate that, if interest rates increased an immediate 100 basis points, the Company would experience a decrease in net interest income of approximately $1.1 million over the next 12 months. Similarly, the simulation model indicates that, if interest rates decreased an immediate 100 basis points, the Company would experience an increase in net interest income of approximately $603,000 over the next 12 months.

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ITEM FOUR

CONTROLS AND PROCEDURES

The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) within 90 days prior to the filing date of this quarterly report. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls that could significantly affect its disclosure controls and procedures since the date of the evaluation.

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ITEM SIX

EXHIBITS AND REPORT ON FORM 8-K

(a)   EXHIBITS
     
99.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
99.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

(b)   REPORTS ON FORM 8-K
 
    On September 12, 2002, the Company filed a Form 8-K reporting Board of Director approval of a stock repurchase program authorizing the repurchase of up to 306,372 shares of the Company’s common stock. A copy of the Company’s News Release announcing the event was attached as an exhibit.

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SIGNATURES

Under the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
NORTHRIM BANCORP, INC.
     
November 13, 2002   By /s/ R. Marc Langland
   
    R. Marc Langland
President and CEO
(Principal Executive Officer)
     
November 13, 2002   By /s/ Joseph M. Shierhorn
   
    Joseph M. Schierhorn
Senior Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

    I, R. Marc Langland, certify that:
 
1.   I have reviewed this quarterly report on Form 10-Q of Northrim BanCorp, Inc.;
 
2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

  a)   Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

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  b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
  c)   Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the Audit Committee of registrant’s board of directors (or persons performing the equivalent function):

  a)   All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
     
Date: November 13, 2002    
     
    /s/ R. Marc Langland
   
    R. Marc Langland
Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER

    I, Joseph M. Schierhorn, certify that:
 
1.   I have reviewed this quarterly report on Form 10-Q of Northrim BanCorp, Inc.;
 
2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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  a)   Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
  b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
  c)   Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the Audit Committee of registrant’s board of directors (or persons performing the equivalent function):

  a)   All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
     
Date: November 13, 2002    
     
    /s/ Joseph M. Schierhorn
   
    Joseph M. Schierhorn
Chief Financial Officer

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