NORTHRIM BANCORP INC - Quarter Report: 2005 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

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.

Alaska (State or other jurisdiction of incorporation or organization)		92-0175752 (I.R.S. Employer Identification Number)

3111 C Street
Anchorage, Alaska		99503
(Address of principal executive offices)		(Zip Code)

(907) 562-0062

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

     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 for the past 90 days.

Yes þ No o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

     The number of shares of the issuer’s Common Stock outstanding at November 4, 2005 was 5,842,965.

 

 

TABLE OF CONTENTS

PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Financial Statements (unaudited)
		Consolidated Balance Sheets (unaudited)
		- September 30, 2005			4
		- December 31, 2004			4
		- September 30, 2004			4
		Consolidated Statements of Income (unaudited)
		- Three and nine months ended September 30, 2005 and 2004			5
		Consolidated Statements of Comprehensive Income (unaudited)
		- Three and nine months ended September 30, 2005 and 2004			6
		Consolidated Statements of Cash Flows (unaudited)
		- Nine months ended September 30, 2005 and 2004			7
		Notes to the Consolidated Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			26
Item 4.		Controls and Procedures			27
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			28
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3.		Defaults Upon Senior Securities			28
Item 4.		Submission of Matters to a Vote of Security Holders			28
Item 5.		Other Information			29
Item 6.		Exhibits			29
SIGNATURES					30
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

These consolidated financial statements should be read in conjunction with the financial statements, accompanying notes and other relevant information included in the Company’s Annual report on Form 10-K for the year ended December 31, 2004.

ITEM 1. FINANCIAL STATEMENTS

NORTHRIM BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

September 30, 2005, December 31, 2004, and September 30, 2004

		September 30,				December 31,				September 30,
		2005				2004				2004
		(unaudited)				(unaudited)				(unaudited)
		(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks		$	31,460			$	18,936			$	26,649
Money market investments			7,330				12,157				19,573
Investment securities held to maturity			936				724				889
Investment securities available for sale			57,618				59,449				62,835
Investment in Federal Home Loan Bank stock			1,556				1,302				1,414
Total investment securities			60,110				61,475				65,138
Real estate loans for sale			0				0				465
Portfolio loans			710,944				678,269				644,267
Allowance for loan losses			(11,248	)			(10,764	)			(10,692	)
Net loans			699,696				667,505				634,040
Premises and equipment, net			10,762				10,583				10,742
Purchased receivables			10,532				2,191				2,324
Accrued interest receivable			3,972				3,678				3,361
Intangible assets			6,358				6,634				6,726
Other assets			19,537				17,567				17,461
Total Assets		$	849,757			$	800,726			$	786,014
LIABILITIES
Deposits:
Demand		$	180,832			$	183,959			$	186,577
Interest-bearing demand			69,465				59,933				61,989
Savings			48,415				47,406				48,557
Alaska CDs			175,110				123,223				112,482
Money market			140,855				142,181				135,763
Certificates of deposit less than $100,000			60,776				59,872				61,296
Certificates of deposit greater than $100,000			70,805				82,487				80,425
Total deposits			746,258				699,061				687,089
Borrowings			7,622				6,478				4,960
Trust preferred securities			8,000				8,000				8,000
Other liabilities			4,879				3,829				4,789
Total liabilities			766,759				717,368				704,838
SHAREHOLDERS’ EQUITY
Common stock, $1 par value, 10,000,000 shares authorized, 5,840,265; 6,089,120; and 6,087,470 shares issued and outstanding at September 30, 2005, December 31, 2004, and September 30, 2004, respectively			5,840				6,089				6,087
Additional paid-in capital			40,016				45,876				45,783
Retained earnings			37,550				31,389				29,099
Accumulated other comprehensive income — unrealized gain (loss) on securities, net			(408	)			4				207
Total shareholders’ equity			82,998				83,358				81,176
Total Liabilities and Shareholders’ Equity		$	849,757			$	800,726			$	786,014

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(unaudited)								(unaudited)
		(Dollars in thousands, except per share data)
Interest Income
Interest and fees on loans		$	14,364			$	11,437			$	40,590			$	33,355
Interest on investment securities:
Assets available for sale			557				580				1,662				1,826
Assets held to maturity			10				23				11				73
Interest on money market investments			116				79				174				99
Total Interest Income			15,047				12,119				42,437				35,353
Interest Expense
Interest expense on deposits and borrowings			3,910				1,920				10,142				4,983
Net Interest Income			11,137				10,199				32,295				30,370
Provision for loan losses			428				143				528				1,001
Net Interest Income After Provision for Loan Losses			10,709				10,056				31,767				29,369
Other Operating Income
Service charges on deposit accounts			475				439				1,327				1,313
Purchased receivable income			308				63				654				143
Equity in earnings from RML			276				15				337				181
Equity in loss from Elliott Cove			(104	)			(110	)			(347	)			(357	)
Other income			539				478				1,436				1,396
Total Other Operating Income			1,494				885				3,407				2,676
Other Operating Expense
Salaries and other personnel expense			4,489				3,794				13,273				11,664
Occupancy, net			616				542				1,757				1,564
Equipment expense			332				325				1,025				1,016
Marketing expense			497				340				1,395				967
Intangible asset amortization expense			92				92				276				276
Other operating expense			1,579				1,452				4,381				4,198
Total Other Operating Expense			7,605				6,545				22,107				19,685
Income Before Income Taxes			4,598				4,396				13,067				12,360
Provision for income taxes			1,756				1,699				4,989				4,528
Net Income		$	2,842			$	2,697			$	8,078			$	7,832
Earnings Per Share, Basic		$	0.48			$	0.44			$	1.34			$	1.29
Earnings Per Share, Diluted		$	0.47			$	0.43			$	1.30			$	1.25
Weighted Average Shares Outstanding, Basic			5,925,212				6,086,677				6,039,990				6,075,439
Weighted Average Shares Outstanding, Diluted			6,111,146				6,259,297				6,227,120				6,269,060

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(unaudited)								(unaudited)
		(Dollars in thousands)								(Dollars in thousands)
Net income		$	2,842			$	2,697			$	8,078			$	7,832
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period			(259	)			269				(407	)			(328	)
Less: reclassification adjustment for gains			0				0				5				89
Comprehensive Income		$	2,583			$	2,966			$	7,666			$	7,415

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

		Nine Months Ended
		September 30,
		2005				2004
		(unaudited)
		(Dollars in thousands)
Operating Activities:
Net income		$	8,078			$	7,832
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Security (gains), net			(9	)			(151	)
Depreciation and amortization of premises and equipment			919				841
Amortization of software			407				424
Intangible asset amortization			276				276
Amortization of investment security premium, net of discount accretion			8				117
Deferred tax (benefit)			(1,077	)			(1,244	)
Deferral of loan fees and costs, net			444				320
Provision for loan losses			528				1,001
Equity in (earnings) from RML			(337	)			(181	)
Equity in loss from Elliott Cove			347				357
(Increase) in accrued interest receivable			(294	)			(61	)
(Increase) in other assets			(468	)			(430	)
Increase of other liabilities			1,050				845
Net Cash Provided by Operating Activities			9,872				9,946
Investing Activities:
Investment in securities:
Purchases of investment securities:
Available-for-sale			(10,873	)			(20,338	)
Held-to-maturity			(277	)			0
Proceeds from sales / maturities of securities:
Available-for-sale			12,005				27,546
Held-to-maturity			65				56
Investment in Federal Home Loan Bank stock, net			(254	)			132
Investments in loans:
Sales of loans and loan participations			14,350				18,070
Loans made, net of repayments			(47,513	)			(62,498	)
Investment in Elliott Cove			(150	)			(250	)
Investment in purchased receivables			(8,341	)			(1,862	)
Dividends received from RML			482				367
Investment in NBG			(237	)			0
Purchases of premises and equipment			(1,098	)			(476	)
Net Cash (Used) by Investing Activities			(41,841	)			(39,253	)
Financing Activities:
Increase (decrease) in deposits			47,197				40,892
Increase (decrease) in borrowings			1,144				(183	)
Loan to Elliott Cove			(650	)			(550	)
Proceeds from issuance of common stock			287				205
Repurchase of common stock			(6,395	)			0
Cash dividends paid			(1,917	)			(1,730	)
Net Cash Provided by Financing Activities			39,666				38,634
Net Increase in Cash and Cash Equivalents			7,697				9,327
Cash and cash equivalents at beginning of period			31,093				36,895
Cash and cash equivalents at end of period		$	38,790			$	46,222
Supplemental Information:
Income taxes paid		$	5,075			$	4,575
Interest paid		$	9,704			$	5,014
Conversion of Elliott Cove loan to equity		$	0			$	625

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

(unaudited)

September 30, 2005 and 2004

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, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2005, are not necessarily indicative of the results anticipated for the year ending December 31, 2005. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

2.

STOCK REPURCHASE

In September 2002, 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 common stock in the open market. In August of 2004, the Board of Directors of the Company amended the stock repurchase plan (“Plan”) and increased the number of shares available under the program by 5% of total shares outstanding, or 304,283 shares. As a result, the total shares available under the Plan at that time increased to 385,855 shares. In the three-month period ending September 30, 2005, the Company repurchased 235,502 shares, which brought the total shares repurchased under this program to 493,442 shares since its inception at a total cost of $9.5 million. As a result, there were 117,213 shares remaining under the Plan at September 30, 2005. The Company intends to continue to repurchase its common stock from time to time depending upon market conditions, but it can make no assurances that it will repurchase all of the shares authorized for repurchase under the Plan.

3.

ACCOUNTING PRONOUNCEMENTS

Between November of 2004 and May of 2005, the Financial Accounting Standards Board (“FASB”) issued Statement No. 151, Inventory Costs, Statement No. 152, Accounting for Real Estate Time-Sharing Transactions, Statement No. 153, Exchanges of Nonmonetary Assets, and Statement No. 154, Accounting Changes and Error Corrections. The Company believes the adoption of these Statements will have no impact on its financial statements.

In December 2004, the FASB issued Statement No. 123R, Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services primarily in share-based payment transactions with its employees. This Statement supersedes the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The Company intends to apply the provisions of this Statement in accordance with the modified prospective application method and begin to expense a portion of the costs associated with its stock options in the first quarter of 2006. Furthermore, outlined below at Note 9 the Company provides disclosures of the proforma amounts. The Company does not expect the effect of the adoption of Statement No. 123R to be significantly different from the proforma disclosures.

4.

LENDING ACTIVITIES

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

		September 30, 2005								December 31, 2004								September 30, 2004
		Dollar				Percent				Dollar				Percent				Dollar				Percent
		Amount				of Total				Amount				of Total				Amount				of Total
		(Dollars in thousands)
Commercial		$	295,246				42	%		$	267,737				39	%		$	238,987				37	%
Construction/development			121,468				17	%			122,873				18	%			115,859				18	%
Commercial real estate			260,138				37	%			251,665				37	%			252,465				39	%
Consumer			36,939				5	%			38,668				6	%			38,944				6	%
Other, net of unearned and discount			(2,847	)			0	%			(2,674	)			0	%			(1,988	)			0	%
Sub total			710,944								678,269								644,267
Real estate loans for sale			—				0	%			—				0	%			465				0	%
Total loans		$	710,944				100	%		$	678,269				100	%		$	644,732				100	%

5.

ALLOWANCE FOR LOAN LOSSES, NONPERFORMING ASSETS, AND LOANS MEASURED FOR IMPAIRMENT

The Company maintains an Allowance for Loan Losses to absorb losses from its loan portfolio. On a quarterly basis, the Company uses three methods to analyze the Allowance by taking percentage allocations for criticized and classified assets, making percentage allocations based upon its internal risk classifications and other specifically identified portions of its loan portfolio, and using ratio analysis and peer comparisons.

The Allowance for Loan Losses is decreased by loan charge-offs and increased by loan recoveries and provisions for loan losses. The following table details activity in the allowance for the periods indicated:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(Dollars in thousands)
Balance at beginning of period		$	10,882			$	10,293			$	10,764			$	10,186
Charge-offs:
Commercial			104				3				405				827
Construction/development			0				0				0				0
Commercial real estate			0				0				0				0
Consumer			21				34				54				82
Total charge-offs			125				37				459				909
Recoveries:
Commercial			58				118				358				185
Construction/development			0				162				15				172
Commercial real estate			0				0				15				0
Consumer			5				13				27				57
Total recoveries			63				293				415				414
Charge-offs, net			62				(256	)			44				495
Provision for loan losses			428				143				528				1,001
Balance at end of period		$	11,248			$	10,692			$	11,248			$	10,692

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:

		September 30, 2005 December 31, 2004 September 30, 2004
		(Dollars in thousands)
Nonaccrual loans		$	5,407			$	5,876			$	6,879
Accruing loans past due 90 days or more			446				290				1,046
Restructured loans			0				424				443
Total nonperforming loans			5,853				6,590				8,368
Real estate owned			0				0				0
Total nonperforming assets		$	5,853			$	6,590			$	8,368
Allowance for loan losses		$	11,248			$	10,764			$	10,692

At September 30, 2005, December 31, 2004, and September 30, 2004, the Company had loans measured for impairment of $18.9 million, $6.7 million, and $7.9 million, respectively. A specific allowance of $1.6 million, $357,000, and $576,000, respectively, was established for these periods. The increase in loans measured for impairment at September 30, 2005, as compared to December 31, 2004, resulted mainly from the addition of four large loans ranging in size from $1.2 million to $5 million that are all part of one borrower relationship.

6.

INVESTMENT SECURITIES

Investment securities, which include Federal Home Loan Bank stock, totaled $60.1 million at September 30, 2005, a decrease of $1.4 million from $61.5 million at December 31, 2004, and a decrease of $5 million, or 8%, from $65.1 million at September 30, 2004. Investment securities designated as available for sale comprised 96% of the investment portfolio at September 30, 2005, 97% at December 31, 2004, and 96% at September 30, 2004, 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, 2005, $18.6 million in securities, or 31%, of the investment portfolio was pledged, as compared to $31.2 million, or 51%, at December 31, 2004, and $20.8 million, or 32%, at September 30, 2004.

7.

OTHER OPERATING INCOME

Residential Mortgage, LLC (“RML”) was formed in 1998 and has offices throughout Alaska. During the third quarter of 2004, RML reorganized and became a wholly-owned subsidiary of a newly formed holding company, Residential Mortgage Holding Company, LLC (“RML Holding Company”). In this process, RML Holding Company acquired another mortgage company, Pacific Alaska Mortgage Company. Prior to the reorganization, the Company, through Northrim Bank’s wholly-owned subsidiary, Northrim Capital Investments Co. (“NCIC”), owned a 30% interest in the profits and losses of RML. Following the reorganization, the Company’s interest in RML Holding Company decreased to 23.5%. The Company’s share of the earnings from RML Holding Company and its predecessor, RML, increased by $261,000 to $276,000 during the third quarter of 2005 as compared to earnings of $15,000 in the third quarter of 2004. In the nine-month period ending September 30, 2005, the Company’s earnings from RML Holding Company and its predecessor, RML, increased by $156,000 to $337,000 as compared to earnings of $181,000 for the nine-month period ending September 30, 2004. In both cases, RML Holding Company benefited from an increase in gross income from its expanded operations with income growing at a faster rate than expenses, particularly in the three-month period ending September 30, 2005 as compared to the same period in 2004. As RML Holding Company completed its reorganization in the third quarter of 2004, it incurred higher costs associated with the reorganization and the retention of key personnel. These costs were concentrated more in the third quarter of 2004, which explains in part the larger increase in earnings from RML Holding Company in the third quarter of 2005 as opposed to a smaller increase in earnings in the nine-month period ending September 30, 2005 as compared to the same period in 2004.

The Company owns a 50% equity interest in Elliott Cove Capital Management LLC (“Elliott Cove”), an investment advisory services company, through its wholly-owned subsidiary, Northrim Investment Services Company (“NISC”). Elliott Cove began active operations in the fourth quarter of 2002 and has

had start-up losses since that time as it continues to build its assets under management. In July of 2003, the Company made a commitment to loan $625,000 to Elliott Cove. In the second quarter of 2004, the Company converted the loan into an additional equity interest in Elliott Cove. At the time of the conversion, the amount outstanding on this loan was $625,000. During the first, second, and third quarters of 2004, other investors made additional investments in Elliott Cove. In addition, the Company made a separate commitment to loan Elliott Cove $500,000 during the first quarter of 2004. In the first quarter of 2005, the Company increased this loan commitment to $750,000. The balance outstanding on this commitment at September 30, 2005 was $750,000. Finally, in the third quarters of 2004 and 2005, the Company made additional investments of $250,000 and $150,000, respectively, in Elliott Cove. As a result of the additional investments in Elliott Cove by other investors and the Company’s conversion of its $625,000 loan and its additional investments, its interest in Elliott Cove increased from 43% to 50% between December 31, 2003 and September 30, 2005.

The Company’s share of the loss from Elliott Cove for the third quarter of 2005 was $104,000, as compared to a loss of $110,000 in the third quarter of 2004. In the nine-month period ending September 30, 2005, the Company’s share of the loss from Elliott Cove was $347,000 as compared to a loss of $357,000 for the nine-month period ending September 30, 2004. The loss that the Company realized on its investment in Elliott Cove decreased for the three and nine-month periods ending September 30, 2005 as compared to the same periods in 2004 as Elliott Cove continued to increase its assets under management which caused its income to increase slightly more than its expenses and resulted in a lower operating loss.

8.

DEPOSIT ACTIVITIES

The Alaska Permanent Fund Corporation may invest in certificates of deposit at Alaska banks in an aggregate amount with respect to each bank, not to exceed its capital and at specified rates and terms. The depository bank must collateralize the deposit. At September 30, 2005, the Company held $25 million in certificates of deposit for the Alaska Permanent Fund, collateralized by letters of credit issued by the Federal Home Loan Bank (“FHLB”).

9.

EARNINGS PER SHARE

The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net income would have been reduced to the pro forma amounts indicated below for the third quarter and nine months ending September 30, 2005 and 2004:

						Three Months								Nine Months
						2005				2004				2005				2004
						(Dollars in thousands, except per share data)
Net income		As reported				$	2,842			$	2,697			$	8,078			$	7,832
Less stock-based employee compensation							(42	)			(46	)			(126	)			(139	)
Net income		Pro forma				$	2,800			$	2,651			$	7,952			$	7,693
Earnings per share, basic		As reported				$	0.48			$	0.44			$	1.34			$	1.29
		Pro forma				$	0.47			$	0.44			$	1.32			$	1.27
Earnings per share, diluted		As reported				$	0.47			$	0.43			$	1.30			$	1.25
		Pro forma				$	0.46			$	0.42			$	1.28			$	1.23

The per share weighted-average fair value of stock options granted during December 2004, April 2003, and October 2001, was $8.91, $4.71, and $5.51, respectively, on the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions: 2004—expected dividends of $0.44 per share, risk-free interest rate of 4.09%, volatility of 39.28%, and an expected life of 8 years; 2003—expected dividends of $0.38 per share, risk-free interest rate of 3.83%, volatility of 31.05%, and

an expected life of 10 years; 2001—expected dividends of $0.20 per share, risk-free interest rate of 5.83%, volatility of 31.7%, and an expected life of 10 years.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

This report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements describe Northrim’s management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of Northrim’s style of banking, and the strength of the local economy. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this report are forward-looking. We use words such as “anticipates,” “believes,” “expects,” “intends” and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management’s current 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 margins; and our ability to maintain asset quality. 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 and economy. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in our filings with the SEC. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition, you should note that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements.

OVERVIEW

GENERAL

Northrim BanCorp, Inc. (the “Company”) is a publicly traded bank holding company (Nasdaq: NRIM) with three wholly-owned subsidiaries: Northrim Bank (the “Bank”), a state chartered, full-service commercial bank, Northrim Investment Services Company (“NISC”), which we formed in November 2002 to hold the Company’s 50% equity interest in Elliott Cove Capital Management LLC (“Elliott Cove”), an investment advisory services company; and Northrim Capital Trust I (“NCTI”), an entity that we formed in May 2003 to facilitate a trust preferred securities offering by the Company. We also hold a 23.5% interest in the profits and losses of a residential mortgage holding company, Residential Mortgage Holding Company, LLC (“RML Holding Company”), through the Bank’s wholly-owned subsidiary, Northrim Capital Investments Co. (“NCIC”). Residential Mortgage LLC (“RML”), the predecessor of RML Holding Company, was formed in 1998 and has offices throughout Alaska. In addition, we are now operating in the Washington and Oregon market areas through Northrim Funding Services (“NFS”), a division of the Bank that we started in the third quarter of 2004. NFS purchases accounts receivable from its customers and provides them with working capital. Finally, through NCIC, we hold a 10% interest in Northrim Benefits Group, LLC (“NBG”), an insurance brokerage company that focuses on the sale and servicing of employee benefit plans.

SUMMARY OF THIRD QUARTER RESULTS

At September 30, 2005, the Company had assets of $849.8 million and gross portfolio loans of $710.9 million, respectively, an increase of 8% and 10%, respectively, as compared to the balances for these accounts at September 30, 2004. The Company’s net income and diluted earnings per share at September 30, 2005, were $2.8 million and $0.47, respectively, an increase of 5% and 9%, respectively, as compared to the same period in 2004. During the same time, the Company’s net interest income increased $938,000, or 9%, its provision for loan losses increased $285,000, or 199%, its other operating income increased $609,000, or 69%, and its other operating expenses increased $1.1 million, or 16%. The Company’s provision for loan losses increased by 199% due to net loan charge-offs of $62,000 for the three-month period ending September 30, 2005 as compared to net loan recoveries of $256,000 in the same period in 2004.

RESULTS OF OPERATIONS

NET INCOME

Net income for the quarter ended September 30, 2005, was $2.8 million, or $0.47 per diluted share, an increase in net income of 5%, and a 9% increase in diluted earnings per share as compared to net income of $2.7 million and diluted earnings per share of $0.43, respectively, in the same period of 2004.

Net income for the nine months ending September 30, 2005, was $8.1 million, an increase of $246,000, or 3%, from the nine months ending September 30, 2004. Diluted earnings per share were $1.30 for the nine-month period ended September 30, 2005, compared to diluted earnings per share of $1.25 in the same period in 2004.

The increase in net income for the three-month period ending September 30, 2005 was the result of several factors. The most significant factors were the increase in net interest income of $938,000, or 9%, as compared to the same period in 2004. In addition, other operating income increased $609,000, or 69%, as compared to the same period in 2004. These increases were offset in part by increases in other operating expenses, which increased by $1.1 million, or 16%, as compared to the same period in 2004 due mainly to increases in salary and benefit expenses and marketing expenses. The provision for loan losses also increased by $285,000, or 199%, as compared to the same period in 2004. The increase in earnings per diluted share for the third quarter of 2005 was due in part to the increase in net income and also due to a decrease in shares of common stock outstanding that resulted from shares of common stock repurchased under the Company’s stock repurchase plan.

Net income and earnings per share for the nine-month period ending September 30, 2005 increased when compared to net income and earnings per share for the nine-month period ending September 30, 2004 as a result of similar changes in the major factors noted above. First, net interest income increased by $1.9 million, or 6%, as compared to the same period ending September 30, 2004. Second, the provision for loan losses declined by $473,000, or 47%, due to a decrease in non-performing loans and loan charge-offs. Third, other operating income increased by $731,000, or 27%, as compared to the same period in 2004. Fourth, these increases were offset in part by a $2.4 million increase in other operating expenses that was caused mainly by increases in salary and benefit costs, as well as increases to marketing expenses. Finally, the increase in earnings per diluted share was caused in part by the increase in net income and also caused by a decrease in shares of common stock outstanding that resulted from shares of common stock repurchased under the Company’s stock repurchase plan.

NET INTEREST INCOME

The primary component of income for most financial institutions is net interest income, which represents the institution’s interest income from loans and investment securities minus interest expense, ordinarily on deposits and other interest bearing liabilities. Net interest income for the third quarter of 2005 increased $938,000, or 9%, to $11.1 million from $10.2 million in 2004. Net interest income for the nine-month period ending September 30, 2005 increased $1.9 million, or 6%, to $32.3 million from $30.4 million in the same period last year. The following table compares average balances and rates for the third quarter and nine months ending September 30, 2005 and 2004:

		Three Months Ended September 30,
														Average Yields/Costs
		Average Balances												Tax Equivalent
		2005				2004				Change				2005				2004				Change
		(Dollars in thousands)
Loans		$	703,933			$	626,891			$	77,042				8.11	%			7.28	%			0.83	%
Short-term investments			13,483				23,328				(9,845	)			3.36	%			1.31	%			2.05	%
Long-term investments			62,141				63,856				(1,715	)			3.65	%			3.78	%			-0.13	%
Interest-earning assets			779,557				714,075				65,482				7.67	%			6.77	%			0.90	%
Nonearning assets			66,535				55,877				10,658
Total		$	846,092			$	769,952			$	76,140
Interest-bearing liabilities		$	570,185			$	492,505			$	77,680				2.72	%			1.55	%			1.17	%
Demand deposits			185,291				192,369				(7,078	)
Other liabilities			5,915				5,232				683
Equity			84,701				79,846				4,855
Total		$	846,092			$	769,952			$	76,140
Net tax equivalent margin on earning assets															5.68	%			5.70	%			-0.02	%

		Nine Months Ended September 30,
														Average Yields/Costs
		Average Balances												Tax Equivalent
		2005				2004				Change				2005				2004				Change
		(Dollars in thousands)
Loans		$	692,980			$	616,693			$	76,287				7.85	%			7.25	%			0.60	%
Short-term investments			7,491				11,062				(3,571	)			3.07	%			1.17	%			1.90	%
Long-term investments			61,966				64,701				(2,735	)			3.63	%			3.95	%			-0.32	%
Interest-earning assets			762,437				692,456				69,981				7.46	%			6.84	%			0.62	%
Nonearning assets			60,738				54,233				6,505
Total		$	823,175			$	746,689			$	76,486
Interest-bearing liabilities		$	553,680			$	485,616			$	68,064				2.45	%			1.37	%			1.08	%
Demand deposits			179,343				178,329				1,014
Other liabilities			5,074				4,613				461
Equity			85,078				78,131				6,947
Total		$	823,175			$	746,689			$	76,486
Net tax equivalent margin on earning assets															5.68	%			5.88	%			-0.20	%

Interest-earning assets averaged $779.6 million and $762.4 million for the three and nine-month periods ending September 30, 2005, respectively, increases of $65.5 million and $70.0 million, respectively, or 9% and 10%, over the $714.1 million and $692.5 million average for the three and nine-month periods ending September 30, 2004. The tax equivalent yield on interest-earning assets averaged 7.67% and 7.46%, respectively, in the three and nine-month periods ending September 30, 2005, increases of 90 and 62 basis points, respectively, from 6.77% and 6.84%, respectively, for the three and nine-month periods ending September 30, 2004. We expect this trend of increasing yields on our earning assets to continue this year with expected increases by the Federal Reserve in short-term interest rates.

Loans, the largest category of interest-earning assets, increased by $77.0 million, or 12%, to an average of $703.9 million in the third quarter of 2005 from $626.9 million in the same period of 2004. During the nine-month period ending September 30, 2005, loans increased by $76.3 million, or 12%, to an average of $693.0 million from an average of $616.7 million for the nine-month period ending September 30, 2004. Commercial loans, real estate term loans and construction loans increased by $59.6 million, $13.6 million, and $5.5 million, respectively, on average between the third quarters of 2004 and 2005. Consumer loans increased $110,000 on average during the same period. During the nine-month period ending September 30, 2005, commercial loans, real estate term loans and construction loans increased by $51.2 million, $15.0 million, and $12.1 million, respectively, on average as compared to the nine-month period ending September 30, 2004. Consumer loans increased $62,000 on average between the nine-month periods ending September 30, 2005 and September 30, 2004. We expect the loan portfolio to continue to grow in the same manner with more growth in the commercial loan area, slower growth in commercial real estate and construction loans, and either no growth or small declines in consumer loans. The growth in the commercial real estate area is expected to be slower than the commercial loan area due to continued refinance activity and competitive pressures. In addition, residential construction activity in Anchorage, the Company’s largest market, is expected to decline in 2005 due to a decline in available building lots. This decline in residential construction activity is expected to cause a decline in residential construction loans in the Anchorage market that is expected to be offset in part by growth in the Matanuska-Susitna Valley and Fairbanks markets where there is more land available for future housing growth. The tax equivalent yield on the loan portfolio averaged 8.11% for the third quarter of 2005, an increase of 83 basis points from 7.28% over the same quarter a year ago. During the nine-month period ending September 30, 2005, the tax equivalent yield on the loan portfolio averaged 7.85%, an increase of 60 basis points from 7.25% over the same nine-month period in 2004.

Interest-bearing liabilities averaged $570.2 million for the third quarter of 2005, an increase of $77.7 million, or 16%, compared to $492.5 million for the same period in 2004. During the nine-month period ending September 30, 2005, interest-bearing liabilities averaged $553.7 million, an increase of $68.1 million, or 14%, compared to $485.6 million for the same nine-month period in 2004. The average cost of interest-bearing liabilities increased 117 basis points to 2.72% for the third quarter of 2005 compared to 1.55% for the third quarter of 2004. During the nine-month period ending September 30, 2005, the average cost of interest bearing-liabilities increased 108 basis points to 2.45% as compared to 1.37% for the same nine-month period in 2004. The average cost of funds has increased in response to recent interest rate increases by the Federal Reserve. We expect the Federal Reserve to continue to increase short-term interest rates this year, which will increase the cost of the Company’s deposit accounts and 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 5.68% for the third quarter of 2005 and 5.70% for the same period in 2004. During the nine-month period ending September 30, 2005, the Company’s net tax equivalent margin was 5.68%, which was a 20 basis point decrease from the 5.88% margin for the nine-month period ending September 30, 2004. The decline in the Company’s net interest margin during these periods was due to increased deposit costs. The deposit costs have been more sensitive to changes in short-term interest rates while the loan yields have increased at a slower rate in the face of competitive pressures, which accounts for a large part of the decline in the Company’s net interest margin. Moreover, the Federal Reserve began to increase interest rates at the end of June of 2004 and has continued to increase them in a consistent manner through September 30, 2005. Consequently, the net interest margin for the nine-month period ending September 30, 2004 was less affected by these interest rate changes than the net interest margin for the nine-month period ending September 30, 2005. As a result, there was a larger change in the nine-month net interest margins for 2005 versus 2004 than there were for the changes in the net interest margins for the three-month periods ending September 30, 2005 and 2004.

OTHER OPERATING INCOME

Other operating income consists of earnings on service charges, fees and other items as well as gains from the sale of securities. Set forth below is the change in Other Operating Income between the third quarters and nine-month periods ending September 30, 2005 and 2004:

		Three Months Ended September 30,																Nine Months Ended September 30,
		2005				2004				$ Chg				% Chg				2005				2004				$ Chg				% Chg
		(Dollars in thousands)																(Dollars in thousands)
Deposit service charges		$	475			$	439			$	36				8	%		$	1,327			$	1,313			$	14				1	%
Purchased receivable income			308				63				245				389	%			654				143				511				357	%
Electronic banking revenue			156				153				3				2	%			448				438				10				2	%
Loan servicing fees			92				90				2				2	%			285				246				39				16	%
Merchant & credit card fees			140				134				6				4	%			336				306				30				10	%
Equity in earnings from RML			276				15				261				1740	%			337				181				156				86	%
Equity in loss from Elliott Cove			(104	)			(110	)			6				-5	%			(347	)			(357	)			10				-3	%
Security gains (losses)			0				0				—				0	%			9				151				(142	)			-94	%
Other			151				101				50				50	%			358				255				103				40	%
Total		$	1,494			$	885			$	609				69	%		$	3,407			$	2,676			$	731				27	%

Total other operating income for the third quarter of 2005 was $1.5 million, an increase of $609,000 from $885,000 in the third quarter of 2004. During the nine-month period ending September 30, 2005, total other operating income was $3.4 million, an increase of $731,000 from $2.7 million for the same nine-month period in 2004.

Income from the Company’s purchased receivable products increased by $245,000 to $308,000, or 389%, in the third quarter of 2005 from $63,000 in the same period a year ago. The Company uses these products to purchase accounts receivable from its customers and provide them with working capital for their businesses. The Company earns income from the product by charging finance charges to its customers for the purchase of their accounts receivable. The income from this product has grown as the Company has used it to purchase more receivables from its customers. The Company expects the income level from this product to show growth in the fourth quarter of this year and in a year-over-year comparative basis as the Company increases this line of business at NFS, a division of the Bank that began operations in Bellevue, Washington in the third quarter of last year.

During the third quarter of 2004, RML reorganized and became a wholly-owned subsidiary of a newly formed holding company, RML Holding Company. In this process, RML Holding Company acquired another mortgage company, Pacific Alaska Mortgage Company. Prior to the reorganization, the Company, through Northrim Bank’s wholly-owned subsidiary, NCIC, owned a 30% interest in the profits and losses of RML. Following the reorganization, the Company’s interest in RML Holding Company decreased to 23.5%.

The Company’s share of the earnings from RML Holding Company and its predecessor, RML, increased by $261,000 to $276,000 during the third quarter of 2005 as compared to $15,000 in the third quarter of 2004. In the nine-month period ended September 30, 2005, the Company’s earnings from RML Holding Company and its predecessor, RML, increased by $156,000 to $337,000 as compared to earnings of $181,000 for the nine-month period ended September 30, 2004. In both cases, RML Holding Company benefited from an increase in gross income from its expanded operations with income growing at a faster rate than expenses, particularly in the three-month period ending September 30, 2005 as compared to the same period in 2004. As RML Holding Company completed its reorganization in the third quarter of 2004, it incurred higher costs associated with the reorganization and the retention of key personnel. These costs were concentrated more in the third quarter of 2004, which explains in part the larger increase in earnings from RML Holding Company in the third quarter of 2005 as opposed to a smaller increase in earnings in the nine-month period ending September 30, 2005 as compared to the same period in 2004.

The Company’s share of the loss from Elliott Cove was $104,000 for the third quarter of 2005 as compared to a loss of $110,000 for the same period in 2004. In the nine-month period ended September 30, 2005, the Company’s share of the loss from Elliott Cove was $347,000 as compared to a loss of $357,000 for the nine-month period ended September 30, 2004. Elliott Cove began active operations in the fourth quarter of 2002. Since that time, Elliott Cove has gradually increased its assets under management and decreased its operating losses. The fee income that Elliott Cove earns on its assets under management still does not cover its operating costs. The loss that the Company realized on its investment in Elliott Cove decreased slightly for the three and nine-month periods ending September 30, 2005 as compared to the same periods in 2004 as Elliott Cove continued to increase its assets under management which caused its income to increase slightly more than its expenses and resulted in a lower operating loss. As Elliott Cove continues to build its assets under management, the Company expects that its losses from its investment in Elliott Cove will decrease over time and that Elliott Cove will reach a breakeven point in its operations late in 2006.

The Company has made additional loans to and investments in Elliott Cove. In the first quarter of 2005, the Company increased this loan commitment to $750,000 from the previous commitment of $500,000. The balance outstanding on this commitment at September 30, 2005 was $750,000. As a result of the additional investments in Elliott Cove by other investors and the Company’s conversion of certain loans and additional investments, the Company’s interest in Elliott Cove increased from a low of 25% to 50% between March 31, 2004 and September 30, 2005.

Other income increased by $50,000, or 50%, in the third quarter of 2005 from $101,000 for the same period in 2004. During the nine-month period ending September 30, 2005, other income was $358,000, an increase of $103,000 from the same nine-month period in 2004. The Company receives commissions for its sales of the Elliott Cove investment products and interest on its loan to Elliott Cove, which on a combined basis accounted for approximately one-half of the increase in other income in the three and nine-month periods ending September 30, 2005.

EXPENSES

Other Operating Expense

The following table breaks out the components of and changes in Other Operating Expense between the third quarters and nine-month periods ending September 30, 2005 and 2004:

		Three Months Ended September 30,																Nine Months Ended September 30,
		2005				2004				$ Chg				% Chg				2005				2004				$ Chg				% Chg
		(Dollars in thousands)																(Dollars in thousands)
Salaries & benefits		$	4,489			$	3,794			$	695				18	%		$	13,273			$	11,664			$	1,609				14	%
Occupancy			616				542				74				14	%			1,757				1,564				193				12	%
Equipment			332				325				7				2	%			1,025				1,016				9				1	%
Marketing			497				340				157				46	%			1,395				967				428				44	%
Intangible asset amortization-core deposit			92				92				0				0	%			276				276				0				0	%
Software amortization and maintenance			286				301				(15	)			-5	%			857				838				19				2	%
Professional and outside services			315				202				113				56	%			671				661				10				2	%
Other expense			978				949				29				3	%			2,853				2,699				154				6	%
Total		$	7,605			$	6,545			$	1,060				16	%		$	22,107			$	19,685			$	2,422				12	%

Total other operating expense for the third quarter of 2005 was $7.6 million, an increase of $1.1 million from the same period in 2004. During the nine-month period ending September 30, 2005, total operating expense was $22.1 million, an increase of $2.4 million from the same nine-month period in 2004.

Salaries and benefits increased by $695,000 and $1.6 million, or 18% and 14%, respectively, for the three and nine-month periods ending September 30, 2005 due primarily to salary increases driven by competitive pressures and additional staff, as well as increases in health insurance costs. Due to the tight labor market in the Company’s major markets and ongoing competition for employees, the Company expects further

increases in this area of expenses. In addition to salaries and benefits, occupancy expense increased by $74,000 and $193,000, or 14% and 12%, respectively, for the three and nine-month periods ending September 30, 2005 due in part to new rental costs for NFS, expansion into additional square footage in the Company’s headquarters, and increased depreciation and amortization expense due to capital improvements at other facilities. Marketing expenses increased by $157,000 and $428,000, or 46% and 44%, respectively, for the three and nine-month periods ending September 30, 2005 due in large part to increased marketing costs related to our High Performance Checking product offerings (“HPC Program”), which is a comprehensive approach to restructure and market the Bank’s personal demand deposit accounts. The Bank initiated the HPC Program in the latter part of the second quarter of 2005. The Company expects to incur similar increases in its marketing expenses from the HPC Program in future quarters. In addition, the Company expects that the Bank will increase its deposit accounts and balances in them as it fully implements the HPC Program over the next year. Furthermore, the Company expects that the additional deposit accounts will generate increased fee income that will offset a majority of the increased marketing costs associated with the HPC Program. Professional and outside services increased by $113,000 and $10,000, or 56% and 2%, respectively, for the three and nine-month periods ending September 30, 2005 mainly due to outside audit services in both periods that were offset in large part by decreases in legal fees and other outside services during the nine-month period ending September 30, 2005. Finally, other expense increased by $29,000 and $154,000, or 3% and 6%, respectively, for the three and nine-month periods ending September 30, 2005 due to increases in a variety of expense items during those periods.

Income Taxes

The provision for income taxes increased by $57,000, or 3%, to $1.8 million in the third quarter of 2005 compared to $1.7 million in the same period in 2004. The effective tax rates for the third quarter of 2005 and 2004 were 38% and 39%, respectively. The Company expects that its tax rate for the rest of this year will be approximately similar to the tax rate of the third quarter of this year. The provision for income taxes increased $461,000, or 10%, to $5.0 million in the first nine months of 2005 compared to $4.5 million in the same period in 2004. The effective tax rates for the first nine months of 2005 and 2004 were 38% and 37%, respectively.

CHANGES IN FINANCIAL CONDITION

ASSETS

Loans and Lending Activities

General: Our loan products include short- and medium-term commercial loans, commercial credit lines, construction and real estate loans, and consumer loans. From our inception, we have emphasized commercial, land development and home construction, and commercial real estate lending. These types of lending have provided us with market opportunities and higher net interest margins than other types of lending. However, they also involve greater risks, including greater exposure to changes in local economic conditions, than certain other types of lending.

Loans are the highest yielding component of our earning assets. Average loans were $77.0 million, or 12%, greater in the third quarter of 2005 than in the same period of 2004. Loans comprised 90% of total average earning assets for the quarter ending September 30, 2005, compared to 88% of total average earning assets for the quarter ending September 30, 2004. The yield on loans averaged 8.11% for the quarter ended September 30, 2005, compared to 7.28% during the same period in 2004.

The loan portfolio, excluding real estate loans for sale, grew $66.7 million, or 10% from September 30, 2004, to September 30, 2005. Commercial loans increased $56.3 million, or 24%, commercial real estate loans increased $7.7 million, or 3%, construction loans increased $5.6 million, or 5%, and consumer loans decreased $2.0 million, or 5%, from September 30, 2004 to September 30, 2005. Funding for the growth in loans between the periods came from an increase in non interest-bearing and interest-bearing

sources of funds and capital. We expect the loan portfolio to continue to grow in the same manner with more growth in the commercial loan area, slower growth in commercial real estate and construction loans, and small declines in consumer loans. The growth in the commercial real estate area is expected to be slower than the commercial loan area due to continued refinance activity and competitive pressures. In addition, residential construction activity in Anchorage, the Company’s largest market, is expected to decline in 2005 due to a decline in available building lots. This decline in residential construction activity in the Anchorage market is anticipated to be offset in part by growth in the Matanuska-Susitna Valley and Fairbanks markets where there is more land available for future housing growth.

Loan Portfolio Composition: Loans, excluding real estate loans for sale, increased to $710.9 million at September 30, 2005, from $678.3 million at December 31, 2004. At September 30, 2005, 48% of the portfolio was scheduled to mature over the next 12 months, and 21% was scheduled to mature between October 1, 2006, and September 30, 2010. 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.”

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

		September 30, 2005								December 31, 2004								September 30, 2004
		Dollar				Percent				Dollar				Percent				Dollar				Percent
		Amount				of Total				Amount				of Total				Amount				of Total
		(Dollars in thousands)
Commercial		$	295,246				42	%		$	267,737				39	%		$	238,987				37	%
Construction/development			121,468				17	%			122,873				18	%			115,859				18	%
Commercial real estate			260,138				37	%			251,665				37	%			252,465				39	%
Consumer			36,939				5	%			38,668				6	%			38,944				6	%
Other, net of unearned and discount			(2,847	)			0	%			(2,674	)			0	%			(1,988	)			0	%
Sub total			710,944								678,269								644,267
Real estate loans for sale			—				0	%			—				0	%			465				0	%
Total loans		$	710,944				100	%		$	678,269				100	%		$	644,732				100	%

Nonperforming Loans; Real Estate Owned: 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:

		September 30, 2005 December 31, 2004 September 30, 2004
		(Dollars in thousands)
Nonaccrual loans		$	5,407			$	5,876			$	6,879
Accruing loans past due 90 days or more			446				290				1,046
Restructured loans			0				424				443
Total nonperforming loans			5,853				6,590				8,368
Real estate owned			0				0				0
Total nonperforming assets		$	5,853			$	6,590			$	8,368
Allowance for loan losses		$	11,248			$	10,764			$	10,692
Nonperforming loans to portfolio loans			0.82	%			0.97	%			1.30	%
Nonperforming assets to total assets			0.69	%			0.82	%			1.06	%
Allowance to portfolio loans			1.58	%			1.59	%			1.66	%
Allowance to nonperforming loans			192	%			163	%			128	%

Nonaccrual, Accruing Loans 90 Days or More Past Due and Restructured Loans: The Company’s financial statements are prepared based on the accrual basis of accounting, including recognition of interest income on the Company’s 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, 2005, were $5.9 million, or 0.82%, of total portfolio loans, a decrease of $737,000 from $6.6 million at December 31, 2004, and a decrease of $2.5 million from $8.4 million at September 30, 2004. The decrease in the non-performing loans in the third quarter of 2005 from the third quarter of 2004, was due in part to concentrated collection activities by the Company. In addition, the Company continues to write down assets to their estimated fair market value when they are in a non-performing status.

At September 30, 2005, December 31, 2004, and September 30, 2004, the Company had loans measured for impairment of $18.9 million, $6.7 million, and $7.9 million, respectively. A specific allowance of $1.6 million, $357,000, and $576,000, respectively, was established for these periods. The increase in loans measured for impairment at September 30, 2005, as compared to December 31, 2004, resulted mainly from the addition of four large loans ranging in size from $1.2 million to $5 million that are all part of one borrower relationship.

Potential Problem Loans: At September 30, 2005 the Company had $9.1 million in potential problem loans, as compared to $936,000 at September 30, 2004. At December 31, 2004, the Company had potential problem loans of $922,000. 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, about which the Company has developed 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.

Analysis of Allowance for Loan Losses and Loan Loss Provision: The Company maintains an Allowance for Loan Losses to absorb losses from its loan portfolio. On a quarterly basis, the Company uses three methods to analyze the Allowance by taking percentage allocations for criticized and classified assets, making percentage allocations based upon its internal risk classifications and other specifically identified portions of its loan portfolio, and using ratio analysis and peer comparisons.

The Allowance for Loan Losses was $11.2 million, or 1.58% of total portfolio loans outstanding, at September 30, 2005, compared to $10.7 million, or 1.66%, of total portfolio loans at September 30, 2004. The Allowance for Loan Losses represented 192% of non-performing loans at September 30, 2005, as compared to 128% of non-performing loans at September 30, 2004.

The Allowance for Loan Losses is decreased for loan charge-offs and increased for loan recoveries and provisions for loan losses. The following table details activity in the Allowance for Loan Losses for the dates indicated:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(Dollars in thousands)
Balance at beginning of period		$	10,882			$	10,293			$	10,764			$	10,186
Charge-offs:
Commercial			104				3				405				827
Construction/development			0				0				0				0
Commercial real estate			0				0				0				0
Consumer			21				34				54				82
Total charge-offs			125				37				459				909
Recoveries:
Commercial			58				118				358				185
Construction/development			0				162				15				172
Commercial real estate			0				0				15				0
Consumer			5				13				27				57
Total recoveries			63				293				415				414
Charge-offs, net			62				(256	)			44				495
Provision for loan losses			428				143				528				1,001
Balance at end of period		$	11,248			$	10,692			$	11,248			$	10,692

The provision for loan losses for the three and nine-month periods ending September 30, 2005 was $428,000 and $528,000, respectively, as compared to provisions for loan losses of $143,000 and $1.0 million, respectively, for the three and nine-month periods ending September 30, 2004. During the three-month period ending September 30, 2005, there was $62,000 in net loan charge-offs as compared to $256,000 of net loan recoveries for the same period in 2004. The increase in net loan charge-offs resulted from an increase in gross charge-offs, which increased from $37,000 to $125,000 during these periods. In addition, loan recoveries also decreased during these same time periods from $293,000 for the three-month period ending September 30, 2004 to $63,000 for the three-month period ending September 30, 2005. During the nine-month period ending September 30, 2005 there were $44,000 in net loan charge-offs as compared to $495,000 in net loan charge-offs for the same period in 2004. The decrease in net loan charge-offs during this nine-month period resulted mainly from a decrease in gross loan charge-offs, which decreased by $450,000 to $459,000 for the nine-month period ending September 30, 2005. The increase in net loan charge-offs in the three-month period ending September 30, 2005 and the contrasting decrease in net loan charge-offs during the nine-month period ending September 30, 2005 explains in part the corresponding changes in the provision for loan losses.

Management believes that on the basis of its review of the performance of the loan portfolio and the various methods that it uses to analyze its Allowance for Loan Losses that at September 30, 2005 the Allowance for Loan Losses was adequate to cover losses in the loan portfolio at the balance sheet date.

Investment Securities

Investment securities, which include Federal Home Loan Bank stock, totaled $60.1 million at September 30, 2005, a decrease of $1.4 million from $61.5 million at December 31, 2004, and a decrease of $5 million, or 8%, from $65.1 million at September 30, 2004. Investment securities designated as available for sale comprised 96% of the investment portfolio at September 30, 2005, 97% at December 31, 2004, and 96% at September 30, 2004, 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, 2005, $18.6 million in securities, or 31%, of the investment portfolio was pledged, as compared to $31.2 million, or 51%, at December 31, 2004, and $20.8 million, or 32%, at September 30, 2004.

LIABILITIES

Deposits

General: Deposits are the Company’s primary source of new funds. Total deposits increased $47.2 million to $746.3 million at September 30, 2005, up from $699.1 million at December 31, 2004, and increased $59.2 million from $687.1 million at September 30, 2004. 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. As mentioned earlier, as the Bank implements its HPC Program, the Company expects further increases in the number of deposit accounts and the balances associated with them.

Certificates of Deposit: The only deposit category with stated maturity dates is certificates of deposit. At September 30, 2005, the Company had $131.6 million in certificates of deposit, of which $114.2 million, or 87% of total certificates of deposit, are scheduled to mature over the next 12 months compared to $114.4 million, or 80% of total certificates of deposit, at December 31, 2004, and to $107.9 million, or 76% of total certificates of deposit at September 30, 2004.

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

		September 30, 2005								December 31, 2004								September 30, 2004
		Dollar				Percent				Dollar				Percent				Dollar				Percent
		Amount				of Total				Amount				of Total				Amount				of Total
		(Dollars in thousands)
Remaining maturity:
Three months or less		$	60,079				46	%		$	32,834				23	%		$	57,172				40	%
Over three through twelve months			54,168				41	%			81,580				57	%			50,687				36	%
Over twelve months			17,334				13	%			27,945				20	%			33,862				24	%
Total		$	131,581				100	%		$	142,359				100	%		$	141,721				100	%

Alaska Certificates of Deposit: The Alaska Certificate of Deposit (“Alaska CD”) is a savings deposit product with an open-ended maturity, interest rate that adjusts to an index that is tied to the two-year United States Treasury Note, and limited withdrawals. The total balance in the Alaska CD at September 30, 2005, was $175.1 million, an increase of $62.6 million as compared to the balance of $112.5 million at September 30, 2004.

Alaska Permanent Fund Deposits: The Alaska Permanent Fund Corporation may invest in certificates of deposit at Alaska banks in an aggregate amount with respect to each bank, not to exceed its capital and at specified rates and terms. The depository bank must collateralize the deposit. At September 30, 2005, the Company held $25 million in certificates of deposit for the Alaska Permanent Fund, collateralized by a letter of credit issued by the Federal Home Loan Bank (“FHLB”).

Borrowings

Federal Home Loan Bank: A portion of the Company’s borrowings were from the FHLB. At September 30, 2005, the Company’s maximum borrowing line from the FHLB was $94.2 million, approximately 11% of the Company’s assets. At September 30, 2005, there was $2.7 million outstanding on the line and an additional $25.6 million committed to secure public deposits, compared to an outstanding balance of $3 million and additional commitments of $25.2 million at December 31, 2004. Additional advances are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Company’s assets.

In addition to the borrowings from the FHLB, the Company had $4.9 million in other borrowings outstanding at September 30, 2005, as compared to $3.5 million in other borrowings outstanding at

December 31, 2004. In each time period, the other borrowings were split between security repurchase arrangements and short-term borrowings from the Federal Reserve Bank for payroll tax deposits.

Other Short-term Borrowings: At September 30, 2005, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

LIQUIDITY AND CAPITAL RESOURCES

Shareholders’ Equity

Shareholders’ equity was $83.0 million at September 30, 2005, compared to $83.4 million at December 31, 2004. The Company earned net income of $8.1 million during the nine-month period ending September 30, 2005, authorized dividends of $1.9 million, and repurchased 268,642 shares of its common stock at a total cost of $6.4 million.

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, 2005, 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 15, 2005, 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 following table illustrates the capital requirements for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements as of September 30, 2005:

		Adequately-				Well-				Actual Ratio				Actual Ratio
		Capitalized				Capitalized				BHC				Bank
Tier 1 risk-based capital			4.00	%			6.00	%			10.91	%			10.26	%
Total risk-based capital			8.00	%			10.00	%			12.16	%			11.51	%
Leverage ratio			4.00	%			5.00	%			10.12	%			9.52	%

The capital ratios for the Company exceed those for the Bank primarily because the $8 million trust preferred securities offering that the Company completed in the second quarter of 2003 is included in the Company’s capital for regulatory purposes although such securities are accounted for as a long-term debt in its financial statements. The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital. As a result, the Company has $8 million more in regulatory capital than the Bank, which explains most of the difference in the capital ratios for the two entities.

Stock Repurchase Plan

The Company repurchased 235,502 of its outstanding common stock, in an unsolicited private transaction, pursuant to its share repurchase plan during the third quarter of 2005. The Company intends to continue to repurchase shares of its common stock from time to time depending upon market conditions, but it can make no assurances that it will continue this program or that it will repurchase all of the 117,213 remaining shares authorized for repurchase under the plan.

Trust Preferred Issuance

On May 8, 2003, the Company’s newly formed subsidiary, Northrim Capital Trust I, issued trust preferred securities in the principal amount of $8 million. These securities carry an interest rate of LIBOR plus 3.15% that was initially set at 4.45% and adjusted quarterly. The securities currently have an interest rate of 6.94%, maturity date of May 15, 2033, and are callable by the Company after the first five years. These securities are treated as Tier 1 capital by the Company’s regulators for capital adequacy calculations.

CAPITAL EXPENDITURES AND COMMITMENTS

During the nine-month period ending September 30, 2005, the Company made commitments in the amount of $800,000 for the construction of tenant improvements at its headquarters, which is located in Anchorage, Alaska. The Company expects that the work on this project will be completed during the balance of 2005.

ITEM 3. QUANTITATIVE AND QUALITATIVE 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. However, due to the fact that interest rates are coming off of historically low levels, the Company may be unable to pass additional reductions through to its deposit customers, which could have an adverse effect on its net interest income.

Generalized assumptions are made on how investment securities, classes of loans, and various deposit products might respond to 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, competitive response, 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, 2005, indicate that, if interest rates immediately increased by 100 basis points, the Company would experience a decrease in net interest income of approximately $1.8 million over the next 12 months. Similarly, the simulation model indicates that, if interest rates immediately decreased by 100 basis points, the Company would experience an increase in net interest income of approximately $1.5 million over the next 12 months. Due to the fact that interest rates are coming off of historically low levels, the simulation model did not take the 100-point decrease in interest rates into full effect. As a result, this decrease in interest rates in the simulation model had less of a positive effect on net interest income because interest-bearing liabilities did not bear the full effect of the interest rate decline, which resulted in a larger interest expense in this situation.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Our principal executive and financial officers supervised and participated in this evaluation. Based on this evaluation, our principal executive and financial officers each concluded that the disclosure controls and procedures are effective in timely alerting them to material information required to be included in the periodic reports to the Securities and Exchange Commission. The design of any system of controls is based in part upon various assumptions about the likelihood of future events, and there can be no assurance that any of our plans, products, services or procedures will succeed in achieving their intended goals under future conditions. There were no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.