NORTHRIM BANCORP INC - Quarter Report: 2005 June (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 June 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 (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 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

The number of shares of the issuer’s Common Stock outstanding at August 3, 2005 was 6,071,237.

 

 

TABLE OF CONTENTS

PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements Consolidated Financial Statements (unaudited)
		Consolidated Balance Sheets (unaudited)
		- June 30, 2005			4
		- December 31, 2004			4
		- June 30, 2004			4
		Consolidated Statements of Income (unaudited)
		- Three and six months ended June 30, 2005 and 2004			5
		Consolidated Statements of Comprehensive Income (unaudited)
		- Three and six months ended June 30, 2005 and 2004			6
		Consolidated Statements of Cash Flows (unaudited)
		- Six months ended June 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			12
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			24
Item 4.		Controls and Procedures			25
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			26
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3.		Defaults Upon Senior Securities			26
Item 4.		Submission of Matters to a Vote of Security Holders			26
Item 5.		Other Information			27
Item 6.		Exhibits			27
SIGNATURES					28
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 report on Form 10K for the year ended December 31, 2004.

ITEM 1. FINANCIAL STATEMENTS

NORTHRIM BANCORP, INC.

CONSOLIDATED BALANCE SHEETS
June 30, 2005, December 31, 2004, and June 30, 2004

		June 30,				December 31,				June 30,
		2005				2004				2004
		(unaudited)				(unaudited)				(unaudited)
		(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks		$	29,168			$	18,936			$	24,564
Money market investments			8,392				12,157				6,917
Investment securities held to maturity			724				724				945
Investment securities available for sale			59,569				59,449				58,624
Investment in Federal Home Loan Bank stock			1,556				1,302				1,401
Total investment securities			61,849				61,475				60,970
Portfolio loans			699,663				678,269				617,151
Allowance for loan losses			(10,882	)			(10,764	)			(10,293	)
Net loans			688,781				667,505				606,858
Premises and equipment, net			10,950				10,583				11,002
Purchased receivables			8,661				2,191				1,365
Accrued interest receivable			3,793				3,678				3,330
Intangible assets			6,450				6,634				6,818
Other assets			18,521				17,567				17,445
Total Assets		$	836,565			$	800,726			$	739,269
LIABILITIES
Deposits:
Demand		$	191,953			$	183,959			$	184,775
Interest-bearing demand			66,288				59,933				57,991
Savings			48,452				47,406				46,246
Alaska CDs			158,627				123,223				85,040
Money market			124,441				142,181				117,697
Certificates of deposit less than $100,000			61,664				59,872				63,095
Certificates of deposit greater than $100,000			80,348				82,487				87,689
Total deposits			731,773				699,061				642,533
Borrowings			5,761				6,478				5,327
Trust perferred securities			8,000				8,000				8,000
Other liabilities			5,009				3,829				5,220
Total liabilities			750,543				717,368				661,080
SHAREHOLDERS’ EQUITY
Common stock, $1 par value, 10,000,000 shares authorized, 6,071,237; 6,089,120; and 6,085,657 shares issued and outstanding at June 30, 2005, December 31, 2004, and June 30, 2004, respectively			6,071				6,089				6,085
Additional paid-in capital			45,393				45,876				45,763
Retained earnings			34,708				31,389				26,403
Accumulated other comprehensive income — unrealized gain (loss) on securities, net			(150	)			4				(62	)
Total shareholders’ equity			86,022				83,358				78,189
Total Liabilities and Shareholders’ Equity		$	836,565			$	800,726			$	739,269

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(unaudited)								(unaudited)
		(Dollars in thousands, except per share data)
Interest Income
Interest and fees on loans		$	13,501			$	11,236			$	26,226			$	21,918
Interest on investment securities:
Assets available for sale			552				593				1,095				1,246
Assets held to maturity			(8	)			21				11				50
Interest on money market investments			33				9				59				20
Total Interest Income			14,078				11,859				27,391				23,234
Interest Expense
Interest expense on deposits and borrowings			3,403				1,580				6,233				3,063
Net Interest Income			10,675				10,279				21,158				20,171
Provision for loan losses			100				429				100				858
Net Interest Income After Provision for Loan Losses			10,575				9,850				21,058				19,313
Other Operating Income
Service charges on deposit accounts			450				443				851				874
Equity in earnings from RML			82				123				61				166
Equity in loss from Elliott Cove			(134	)			(58	)			(243	)			(247	)
Other income			667				447				1,244				998
Total Other Operating Income			1,065				955				1,913				1,791
Other Operating Expense
Salaries and other personnel expense			4,426				4,031				8,784				7,871
Occupancy, net			574				495				1,141				1,023
Equipment expense			349				327				693				691
Marketing expense			541				338				898				627
Intangible asset amortization expense			92				92				184				184
Other operating expense			1,391				1,224				2,803				2,744
Total Other Operating Expense			7,373				6,507				14,503				13,140
Income Before Income Taxes			4,267				4,298				8,468				7,964
Provision for income taxes			1,611				1,536				3,232				2,829
Net Income		$	2,656			$	2,762			$	5,236			$	5,135
Earnings Per Share, Basic		$	0.44			$	0.45			$	0.86			$	0.85
Earnings Per Share, Diluted		$	0.42			$	0.44			$	0.83			$	0.82
Weighted Average Shares Outstanding, Basic			6,095,922				6,081,658				6,097,797				6,069,816
Weighted Average Shares Outstanding, Diluted			6,278,673				6,260,985				6,285,520				6,273,931

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(unaudited)								(unaudited)
		(Dollars in thousands)								(Dollars in thousands)
Net income		$	2,656			$	2,762			$	5,236			$	5,135
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period			306				(749	)			(149	)			(596	)
Less: reclassification adjustment for gains			0				0				5				89
Comprehensive Income		$	2,962			$	2,013			$	5,082			$	4,450

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

		Six Months Ended
		June 30,
		2005				2004
		(unaudited)
		(Dollars in thousands)
Operating Activities:
Net income		$	5,236			$	5,135
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Security (gains) losses, net			(9	)			(151	)
Depreciation and amortization of premises and equipment			595				557
Amortization of software			269				253
Intangible asset amortization			184				184
Amortization of investment security premium, net of discount accretion			10				77
Deferred tax (benefit)			(586	)			(1,046	)
Deferral of loan fees and costs, net			533				197
Provision for loan losses			100				858
Equity in (earnings) loss from RML			(61	)			(166	)
Equity in loss from Elliott Cove			243				247
(Increase) in accrued interest receivable			(115	)			(30	)
(Increase) decrease in other assets			(339	)			(973	)
Increase of other liabilities			512				698
Net Cash Provided by Operating Activities			6,572				5,840
Investing Activities:
Investment in securities:
Purchases of investment securities:
Available-for-sale			(10,874	)			(10,333	)
Proceeds from sales / maturities of securities:
Available-for-sale			10,491				21,816
Investment in Federal Home Loan Bank stock, net			(254	)			145
Investments in loans:
Sales of loans and loan participations			2,350				15,572
Loans made, net of repayments			(24,259	)			(32,552	)
Investment in purchased receivables			(6,470	)			(903	)
Dividends received from RML			365				277
Investment in NBG			(237	)			0
Purchases of premises and equipment			(962	)			(452	)
Net Cash (Used) by Investing Activities			(29,850	)			(6,430	)
Financing Activities:
Increase (decrease) in deposits			32,712				(3,664	)
Increase (decrease) in borrowings			(717	)			184
Loan to Elliott Cove			(500	)			(375	)
Proceeds from issuance of common stock			242				183
Repurchase of common stock			(743	)			0
Cash dividends paid			(1,249	)			(1,152	)
Net Cash Provided (Used) by Financing Activities			29,745				(4,824	)
Net Increase (Decrease) in Cash and Cash Equivalents			6,467				(5,414	)
Cash and cash equivalents at beginning of period			31,093				36,895
Cash and cash equivalents at end of period		$	37,560			$	31,481
Supplemental Information:
Income taxes paid		$	3,525			$	2,750
Interest paid		$	5,874			$	3,044
Conversion of Elliott Cove loan to equity		$	0			$	625
Dividends declared but not paid		$	668			$	577

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 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 June 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 June 30, 2005, the Company repurchased 33,140 shares, which brought the total shares repurchased under this program to 257,940 shares since its inception at a total cost of $3.8 million. As a result, there were 352,715 shares remaining under the Plan at June 30, 2005. The Company intends to continue to repurchase its 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. In accordance with the provisions of this Statement, as amended by the April 2005 Security and Exchange Commission’s ruling on the implementation date, the Company will begin to expense a portion of the costs associated with its stock options in the first quarter of 2006.

4. LENDING ACTIVITIES

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

		June 30, 2005								December 31, 2004								June 30, 2004
		Dollar				Percent				Dollar				Percent				Dollar				Percent
		Amount				of Total				Amount				of Total				Amount				of Total
		(Dollars in thousands)
Commercial		$	302,735				43	%		$	267,737				39	%		$	239,335				39	%
Construction/development			109,212				16	%			122,873				18	%			105,200				17	%
Commercial real estate			252,715				36	%			251,665				37	%			237,150				38	%
Consumer			38,113				5	%			38,668				6	%			37,652				6	%
Other, net of unearned and discount			(3,112	)			0	%			(2,674	)			0	%			(2,186	)			0	%
Total loans		$	699,663				100	%		$	678,269				100	%		$	617,151				100	%

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

		Second Quarter								Six Months Ended
		2005				2004				2005				2004
		(Dollars in thousands)
Balance at beginning of period		$	10,733			$	10,229			$	10,764			$	10,186
Charge-offs:
Commercial			230				415				301				824
Construction/development			0				0				0				0
Commercial real estate			0				0				0				0
Consumer			26				26				33				48
Total charge-offs			256				441				334				872
Recoveries:
Commercial			294				31				300				67
Construction/development			0				10				15				10
Commercial real estate			0				0				15				0
Consumer			11				35				22				44
Total recoveries			305				76				352				121
Charge-offs, net			(49	)			365				(18	)			751
Provision for loan losses			100				429				100				858
Balance at end of period		$	10,882			$	10,293			$	10,882			$	10,293

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:

		June 30, 2005				December 31, 2004				June 30, 2004
		(Dollars in thousands)
Nonaccrual loans		$	5,706			$	5,876			$	5,988
Accruing loans past due 90 days or more			1,095				290				2,541
Restructured loans			0				424				453
Total nonperforming loans			6,801				6,590				8,982
Real estate owned			0				0				0
Total nonperforming assets		$	6,801			$	6,590			$	8,982
Allowance for loan losses		$	10,882			$	10,764			$	10,293

At June 30, 2005, December 31, 2004, and June 30, 2004, the Company had loans measured for impairment of $10.7 million, $6.7 million, and $10.8 million, respectively. A specific allowance of $502,000, $357,000, and $521,000, respectively, was established for these periods. The increase

in loans measured for impairment at June 30, 2005, as compared to December 31, 2004, resulted mainly from the addition of one large loan to loans measured for impairment during the three-month period ending June 30, 2005.

5. INVESTMENT SECURITIES

Investment securities, which include Federal Home Loan Bank stock, totaled $61.8 million at June 30, 2005, a decrease of $374,000 from $61.5 million at December 31, 2004, and an increase of $879,000 million, or 1%, from $61 million at June 30, 2004. Investment securities designated as available for sale comprised 96% of the investment portfolio at June 30, 2005, 97% at December 31, 2004, and 96% at June 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 June 30, 2005, $27 million in securities, or 44%, of the investment portfolio was pledged, as compared to $31.2 million, or 51%, at December 31, 2004, and $16 million, or 26%, at June 30, 2004.

6. 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, decreased by $41,000 to $82,000 during the second quarter of 2005 as compared to earnings of $123,000 in the second quarter of 2004. In the six month period ending June 30, 2005, the Company’s earnings from RML Holding Company and its predecessor, RML, decreased by $105,000 to $61,000 as compared to earnings of $166,000 for the six month period ending June 30, 2004. In both cases, the decrease in earnings was due mainly to strong competition for mortgages and key personnel.

The Company owns a 47% 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 June 30, 2005 was $600,000. Finally, in the third quarter of 2004, the Company made an additional $250,000 investment 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 investment, its interest in Elliott Cove increased from 43% to 47% between December 31, 2003 and June 30, 2005.

The Company’s share of the loss from Elliott Cove for the second quarter of 2005 was $134,000, as compared to a loss of $58,000 in the second quarter of 2004. In the six-month period ending June 30, 2005, the Company’s share of the loss for Elliott Cove was $243,000 as compared to a loss of $247,000 for the six month period ending June 30, 2004. The loss that the Company realized on its investment in Elliott Cove increased for the three and six month periods ending June 30, 2005 as compared to the same periods in 2004 in part due to the increased investments by the Company in Elliott Cove. During this period, the Company’s ownership interest in Elliott Cove increased from a low of

25.43% at March 31, 2004 to its current level of 47.2% at June 30, 2005. As a result, the Company incurred an increased percentage of the total Elliott Cove losses for the three and six month periods ending June 30, 2005 as compared to the three and six month periods ending June 30, 2004.

7. 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 June 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”).

8. 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 second quarter and six months ending June 30, 2005 and 2004:

				Three Months								Six Months
				2005				2004				2005				2004
				(Dollars in thousands, except per share data)
Net income		As reported		$	2,656			$	2,762			$	5,236			$	5,135
Less stock-based employee compensation					(42	)			(46	)			(84	)			(92	)
Net income		Pro forma		$	2,614			$	2,716			$	5,152			$	5,043
Earnings per share, basic		As reported		$	0.44			$	0.45			$	0.86			$	0.85
		Pro forma		$	0.43			$	0.45			$	0.84			$	0.83
Earnings per share, diluted		As reported		$	0.42			$	0.44			$	0.83			$	0.82
		Pro forma		$	0.42			$	0.43			$	0.82			$	0.80

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 47% 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, a division of the Bank that we started in the third quarter of 2004. 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 SECOND QUARTER RESULTS

At June 30, 2005, the Company had assets of $836.6 million and gross portfolio loans of $699.7 million, respectively, an increase of 13% for each, as compared to the balances for these accounts at June 30, 2004. The Company’s net income and diluted earnings per share at June 30, 2005, were $2.7 million and $0.42, respectively, a decrease of 4% and 5%, respectively, as compared to the same period in 2004. During the same time, the Company’s net interest income increased $396,000, or 4%, its provision for loan losses decreased $329,000, or 77%, its other operating income increased $110,000, or 12%, and its other operating expenses increased $866,000, or 13%. The Company’s provision for loan losses declined by 77% due to a decrease in its non-performing loans for the quarter ending June 30, 2005 as compared to the quarter ending June 30, 2004 and loan recoveries.

RESULTS OF OPERATIONS

NET INCOME

Net income for the quarter ended June 30, 2005, was $2.7 million, or $0.42 per diluted share, a decrease in net income of 4%, and a 5% decrease in diluted earnings per share as compared to net income of $2.8 million and diluted earnings per share of $0.44, respectively, in the same period of 2004.

Net income for the six months ending June 30, 2005, was $5.2 million, an increase of $101,000, or 2%, from the six months ending June 30, 2004. Diluted earnings per share were $0.83 for the six month period ended June 30, 2005, compared to diluted earnings per share of $0.82 in the same period in 2004.

The decrease in net income for the three-month period ending June 30, 2005 was the result of several factors. The most significant factors were the reduction of provision for loan losses by $329,000 over the same period in 2004 due to a decrease in non-performing loans and loan recoveries. In addition, net interest income increased by $396,000, or 4%, as compared to the same period in 2004. The increases set forth above were more than offset by increases in other operating expenses, most notably increases in salary and benefit expenses and marketing expenses. The decrease in earnings per diluted share for the second quarter of 2005 was due to the decrease in net income.

Net income and earnings per share for the six month period ending June 30, 2005 increased when compared to net income and earnings per share for the six month period ending June 30, 2004 as a result of similar changes in the major factors noted above. First, the provision for loan losses declined by $758,000, or 88% to $100,000 as compared $858,000 for the period ending June 30, 2005 due to a decrease in non-performing loans and loan recoveries. Second, net interest income increased by $987,000, or 5% as compared to the same period in 2004. Third, the increase in net interest income and the decrease in the loan loss provision were offset in large part by a $1.4 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 share was caused by the increase in net income.

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 second quarter of 2005 increased $396,000, or 4%, to $10.7 million from $10.3 million in 2004. The following table compares average balances and rates for the second quarter and six months ending June 30, 2005 and 2004:

		Three Months Ended June 30,
														Average Yields/Costs
		Average Balances												Tax Equivalent
		2005				2004				Change				2005				2004				Change
		(Dollars in thousands)
Loans		$	691,815			$	621,466			$	70,349				7.85	%			7.29	%			0.56	%
Short-term investments			4,570				4,392				178				2.77	%			0.79	%			1.98	%
Long-term investments			62,108				62,907				(799	)			3.62	%			3.98	%			-0.36	%
Interest-earning assets			758,493				688,765				69,728				7.47	%			6.95	%			0.52	%
Nonearning assets			60,000				53,844				6,156
Total		$	818,493			$	742,609			$	75,884
Interest-bearing liabilities		$	551,327			$	484,781			$	66,546				2.47	%			1.31	%			1.16	%
Demand deposits			176,679				175,559				1,120
Other liabilities			4,294				4,220				74
Equity			86,193				78,049				8,144
Total		$	818,493			$	742,609			$	75,884
Net tax equivalent margin on earning assets															5.67	%			6.03	%			-0.36	%

		Six Months Ended June 30,
		Average Balances												Average Yields/Costs
		2005				2004				Change				2005				2004				Change
		(Dollars in thousands)
Loans		$	687,413			$	611,539			$	75,874				7.71	%			7.23	%			0.48	%
Short-term investments			4,445				4,861				(416	)			2.63	%			0.82	%			1.81	%
Long-term investments			61,877				65,127				(3,250	)			3.61	%			4.03	%			-0.42	%
Interest-earning assets			753,735				681,527				72,208				7.35	%			6.88	%			0.47	%
Nonearning assets			57,791				53,402				4,389
Total		$	811,526			$	734,929			$	76,597
Interest-bearing liabilities		$	545,291			$	482,134			$	63,157				2.30	%			1.28	%			1.02	%
Demand deposits			176,320				171,231				5,089
Other liabilities			4,646				4,300				346
Equity			85,269				77,264				8,005
Total		$	811,526			$	734,929			$	76,597
Net tax equivalent margin on earning assets															5.68	%			5.97	%			-0.29	%

Interest-earning assets averaged $758.5 million and $753.7 million for the three and six month periods ending June 30, 2005, respectively, increases of $69.7 million and $72.2 million, respectively, or 10% and 11%, over the $688.8 million and $681.5 million average for the three and six month periods ending June 30, 2004. The tax equivalent yield on interest-earning assets averaged 7.47% and 7.35%, respectively, in the three and six month periods ending June 30, 2005, increases of 52 and 47 basis points, respectively, from 6.95% and 6.88%, respectively, for the three and six month periods ending June 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 $70.3 million, or 11%, to an average of $691.8 million in the second quarter of 2005 from $621.5 million in the same period of 2004. During the six-month period ending June 30, 2005, loans increased by $75.9 million, or 12%, to an average of $687.4 million from an average of $611.5 million for the six-month period ending June 30, 2004. Commercial loans, real estate term loans and construction loans increased by $44.8 million, $16 million, and $11.7 million, respectively, on average between the second quarters of 2004 and 2005. Consumer loans increased $529,000 on average during the same period. During the six month period ending June 30, 2005, commercial loans, real estate term loans and construction loans increased by $46.9 million, $15.7 million, and $15.4 million, respectively, on average as compared to the six month period ending June 30, 2004. Consumer loans increased $38,000 on average between the six-month periods ending June 30, 2005 and June 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 7.85% for the second quarter of 2005, an increase of 56 basis points from 7.29% over the same quarter a year ago. During the six-month period ending June 30, 2005, the tax equivalent yield on the loan portfolio averaged 7.71%, an increase of 48 basis points from 7.23% over the same six-month period in 2004.

Interest-bearing liabilities averaged $551.3 million for the second quarter of 2005, an increase of $66.5 million, or 14%, compared to $484.8 million for the same period in 2004. During the six-month period ending June 30, 2005, interest-bearing liabilities averaged $545.3 million, an increase of $63.2 million, or 13%, compared to $482.1 million for the same six-month period in 2004. The average cost of interest-bearing liabilities increased 116 basis points to 2.47% for the second quarter of 2005 compared to 1.31% for the second quarter of 2004. During the six-month period ending June 30, 2005, the average cost of interest bearing-liabilities increased 102 basis points to 2.30% as compared to 1.28% for the same six-month period in 2004. The average cost of funds has increased in response to recent interest rate increases by the Federal Reserve. As a result, the interest rates on interest bearing deposit products have begun to increase. 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 5.67% for the second quarter of 2005 and 6.03% for the same period in 2004. During the six-month period ending June 30, 2005, the Company’s net tax equivalent margin was 5.68%, which was a 29 basis point decrease from the 5.97% margin for the six-month period ending June 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.

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 second quarters and six-month periods ending June 30, 2005 and 2004:

		Three Months Ended June 30,																Six Months Ended June 30,
		2005				2004				$ Chg				% Chg				2005				2004				$ Chg				% Chg
		(Dollars in thousands)																(Dollars in thousands)
Deposit service charges		$	450			$	443			$	7				2	%		$	851			$	874			($	23	)			-3	%
Purchased receivable income			186				45				141				313	%			347				80				267				334	%
Electronic banking revenue			148				145				3				2	%			292				285				7				2	%
Loan servicing fees			109				82				27				33	%			193				156				37				24	%
Merchant & credit card fees			101				103				(2	)			-2	%			196				172				24				14	%
Equity in earnings from RML			82				123				(41	)			-33	%			61				166				(105	)			-63	%
Equity in loss from Elliott Cove			(134	)			(58	)			(76	)			131	%			(243	)			(247	)			4				-2	%
Security gains (losses)			0				0				—				0	%			9				151				(142	)			-94	%
Other			123				72				51				71	%			207				154				53				34	%
Total		$	1,065			$	955			$	110				12	%		$	1,913			$	1,791			$	122				7	%

Total other operating income for the second quarter of 2005 was $1.1 million, an increase of $110,000 from the second quarter of 2004. During the six-month period ending June 30, 2005, total other operating income was $1.9 million, an increase of $122,000 from the same six-month period in 2004.

Income from the Company’s purchased receivable products increased by $141,000, or 313%, in the second quarter of 2005 from $45,000 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 future quarters of this year and in a year-over-year comparative basis as the Company increases this line of business at NFS, its division, which 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, decreased by $41,000 to $82,000 during the second quarter of 2005 as compared to $123,000 in the second quarter of 2004. In the six month period ended June 30, 2005, the Company’s earnings from RML Holding Company and its predecessor, RML, decreased by $105,000 to $61,000 as compared to earnings of $166,000 for the six-month period ended June 30, 2004. In both cases, the decrease in earnings was due mainly to strong competition for mortgages and key personnel. The Company expects these trends to continue during the rest of this year. However, earnings from RML Holding Company are expected to increase in future quarters due to seasonal increases in the housing industry.

The Company’s share of the loss from Elliott Cove was $134,000 for the second quarter of 2005 as compared to a loss of $58,000 for the same period in 2004. In the six month period ended June 30, 2005, the Company’s share of the loss from Elliott Cove was $243,000 as compared to a loss of $247,000 for the six-

month period ended June 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 increased for the three and six month periods ending June 30, 2005 as compared to the same periods in 2004 in part due to the increased investments by the Company in Elliott Cove. During this period, the Company’s ownership interest in Elliott Cove increased from a low of 25.43% at March 31, 2004 to its current level of 47.2%. As a result, the Company incurred an increased percentage of the total Elliott Cove losses for the three and six month periods ending June 30, 2005 as compared to the three and six month periods ending June 30, 2004. 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 later in 2006.

The Company has made additional investments in Elliott Cove mainly through loan commitments. 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 June 30, 2005 was $600,000. As a result of the additional investments in Elliott Cove by other investors and the Company’s conversion of certain loans and additional investment, the Company’s interest in Elliott Cove increased from a low of 25% to 47% between March 31, 2004 and June 30, 2005.

EXPENSES

Provision for Loan Losses

The provision for loan losses for the three and six month periods ending June 30, 2005 was $100,000 as compared to provisions for loan losses of $429,000 and $858,000, respectively, for the three and six month periods ending June 30, 2004. Between June 30, 2004, and June 30, 2005, the Company decreased its nonperforming loans from $9 million to $6.8 million. As a result of this reduction in our nonperforming loans and realized loan recoveries, we decreased our provision for loan losses and increased the ratio of our allowance for loan losses to nonperforming loans from 115% at June 30, 2004, to 160% at June 30, 2005. The allowance for loan losses was $10.9 million, or 1.56% of total portfolio loans outstanding, which excludes real estate loans for sale, at June 30, 2005, compared to $10.3 million, or 1.67%, of total portfolio loans, at June 30, 2004.

Charge-offs

There was $49,000 in net loan recoveries during the second quarter of 2005, compared to $365,000 of net charge-offs for the same period in 2004. The decrease in net charge-offs during the second quarter of 2005 resulted mainly from a decrease in gross loan charge-offs, which declined to $256,000 in the second quarter of 2005 as compared to $441,000 in gross loan charge-offs for the same period in 2004. In addition, loan recoveries increased to $305,000 in the second quarter of 2005 versus $76,000 in loan recoveries for the same period of 2004. For the first six months of 2005, net loan recoveries were $18,000 compared to net loan charge-offs of $751,000 for the same period in 2004 due to similar changes in loan charge-offs and recoveries.

Other Operating Expense

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

		Three Months Ended June 30,																Six Months Ended June 30,
		2005				2004				$ Chg				% Chg				2005				2004				$ Chg				% Chg
		(Dollars in thousands)																(Dollars in thousands)
Salaries & benefits		$	4,426			$	4,031			$	395				10	%		$	8,784			$	7,871			$	913				12	%
Occupancy			574				495				79				16	%			1,141				1,023				118				12	%
Equipment			349				327				22				7	%			693				691				2				0	%
Marketing			541				338				203				60	%			898				627				271				43	%
Intangible asset amortization-core deposit			92				92				0				0	%			184				184				0				0	%
Software amortization and maintenance			293				281				12				4	%			571				536				35				7	%
Professional and outside services			170				227				(57	)			-25	%			356				459				(103	)			-22	%
Other expense			928				716				212				30	%			1,876				1,749				127				7	%
Total		$	7,373			$	6,507			$	866				13	%		$	14,503			$	13,140			$	1,363				10	%

Total other operating expense for the second quarter of 2005 was $7.4 million, an increase of $866,000 from the same period in 2004. During the six-month period ending June 30, 2005, total operating expense was $14.5 million, an increase of $1.4 million from the same six month period in 2004.

Salaries and benefits increased by $395,000 and $1.4 million, or 10% and 12%, respectively, for the three and six month periods ending June 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. Also, the Company began to amortize the salary cost associated with the issuance of 7,119 restricted stock units (“RSUs”) that the Company issued in December of 2004. The RSUs vest in three years and are expensed pro rata over that time. The total salary cost for the RSUs in the quarter ended June 30, 2005 was $30,000. In addition to salaries and benefits, occupancy increased by $79,000 and $118,000, or 16% and 12%, respectively, for the three and six month periods ending June 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 $203,000 and $271,000, or 60% and 43%, respectively, for the three and six month periods ending June 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 decreased by $57,000 and $103,000, or 25% and 22%, respectively, for the three and six month periods ending June 30, 2005 mainly due to lower legal costs and accounting fees. Finally, other expense increased by $212,000 and $127,000, or 30% and 7%, respectively, for the three and six-month periods ending June 30, 2005 due to increases in a variety of expense items during those periods.

Income Taxes

The provision for income taxes increased by $75,000, or 5%, to $1.6 million in the second quarter of 2005 compared to $1.5 million in the same period in 2004. The effective tax rates for the second quarter of 2005 and 2004 were 38% and 36%, respectively. The tax rate in the second quarter of 2005 increased as compared to the same period in 2004 due to the accounting for amended tax returns and a larger amount of items permanently excluded from the Company’s income for tax purposes, both of which occurred in the period ended June 30, 2004. The Company expects that its tax rate for the rest of this year will be approximately similar to the tax rate of the second quarter of this year. The provision for income taxes increased $403,000, or 14%, to $3.2 million in the first six months of 2005 compared to $2.8 million in the same period in 2004. The effective tax rates for the first six months of 2005 and 2004 were 38% and 36%, respectively.

MATERIAL CHANGES TO 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 needed 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 $70.3 million, or 11%, greater in the second quarter of 2005 than in the same period of 2004. Loans comprised 91% of total average earning assets for the quarter ending June 30, 2005, compared to 90% of total average earning assets for the quarter ending June 30, 2004. The yield on loans averaged 7.85% for the quarter ended June 30, 2005, compared to 7.29% during the same period in 2004.

The loan portfolio, excluding real estate loans for sale, grew $82.5 million, or 13% from June 30, 2004, to June 30, 2005. Commercial loans increased $63.4 million, or 26%, commercial real estate loans increased $15.6 million, or 7%, construction loans increased $4 million, or 4%, and consumer loans increased $461,000, or 1%, during the second quarter of 2005 from the same period in 2004. Funding for the growth in loans during the second quarter of 2005 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 $699.7 million at June 30, 2005, from $678.3 million at December 31, 2004. At June 30, 2005, 44% of the portfolio was scheduled to mature over the next 12 months, and 23% was scheduled to mature between July 1, 2006, and June 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:

		June 30, 2005								December 31, 2004								June 30, 2004
		Dollar				Percent				Dollar				Percent				Dollar				Percent
		Amount				of Total				Amount				of Total				Amount				of Total
		(Dollars in thousands)
Commercial		$	302,735				43	%		$	267,737				39	%		$	239,335				39	%
Construction/development			109,212				16	%			122,873				18	%			105,200				17	%
Commercial real estate			252,715				36	%			251,665				37	%			237,150				38	%
Consumer			38,113				5	%			38,668				6	%			37,652				6	%
Other, net of unearned and discount			(3,112	)			0	%			(2,674	)			0	%			(2,186	)			0	%
Total loans		$	699,663				100	%		$	678,269				100	%		$	617,151				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:

		June 30, 2005				December 31, 2004				June 30, 2004
		(Dollars in thousands)
Nonaccrual loans		$	5,706			$	5,876			$	5,988
Accruing loans past due 90 days or more			1,095				290				2,541
Restructured loans			0				424				453
Total nonperforming loans			6,801				6,590				8,982
Real estate owned			0				0				0
Total nonperforming assets		$	6,801			$	6,590			$	8,982
Allowance for loan losses		$	10,882			$	10,764			$	10,293
Nonperforming loans to portfolio loans			0.97	%			0.97	%			1.46	%
Nonperforming assets to total assets			0.81	%			0.82	%			1.21	%
Allowance to portfolio loans			1.56	%			1.59	%			1.67	%
Allowance to nonperforming loans			160	%			163	%			115	%

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 June 30, 2005, were $6.8 million, or 0.97%, of total portfolio loans, an increase of $211,000 from $6.6 million at December 31, 2004, and a decrease of $2.2 million from $9 million at June 30, 2004. The decrease in the non-performing loans in the second quarter of 2005 from the second quarter of 2004, was due in large 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 June 30, 2005, December 31, 2004, and June 30, 2004, the Company had loans measured for impairment of $10.7 million, $6.7 million, and $10.8 million, respectively. A specific allowance of $502,000, $357,000, and $521,000, respectively, was established for these periods. The increase in loans measured for impairment at June 30, 2005, as compared to December 31, 2004, resulted mainly from the addition of one large loan to the loans measured for impairment during the three-month period ending June 30, 2005.

Potential Problem Loans: At June 30, 2005 the Company had $5 million in potential problem loans, as compared to no potential problem loans at June 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 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.

Analysis of Allowance for Loan Losses: The Allowance for Loan Losses was $10.9 million, or 1.56% of total portfolio loans outstanding, at June 30, 2005, compared to $10.3 million, or 1.67%, of total portfolio loans at June 30, 2004. The Allowance for Loan Losses represented 160% of non-performing loans at June 30, 2005, as compared to 115% of non-performing loans at June 30, 2004. Management believes that at June 30, 2005, the Allowance for Loan Losses was adequate to cover losses that are reasonably likely in light of our current loan portfolio and existing and expected economic conditions.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Dollars in thousands)
Balance at beginning of period		$	10,733			$	10,229			$	10,764			$	10,186
Charge-offs:
Commercial			230				415				301				824
Construction/development			0				0				0				0
Commercial real estate			0				0				0				0
Consumer			26				26				33				48
Total charge-offs			256				441				334				872
Recoveries:
Commercial			294				31				300				67
Construction/development			0				10				15				10
Commercial real estate			0				0				15				0
Consumer			11				35				22				44
Total recoveries			305				76				352				121
Charge-offs, net			(49	)			365				(18	)			751
Provision for loan losses			100				429				100				858
Balance at end of period		$	10,882			$	10,293			$	10,882			$	10,293

Investment Securities

Investment securities, which include Federal Home Loan Bank stock, totaled $61.8 million at June 30, 2005, a decrease of $374,000 from $61.5 million at December 31, 2004, and a decrease of $879,000, or 1%, from $61 million at June 30, 2004. Investment securities designated as available for sale comprised 96% of the investment portfolio at June 30, 2005, 97% at December 31, 2004, and 96% at June 30, 2004, and are available to meet liquidity requirements. These investment securities are comprised primarily of debt issue by government agencies and the United States Treasury. Both available for sale and held to maturity securities may be pledged as collateral to secure public deposits. At June 30, 2005, $27 million in securities, or 44%, of the investment portfolio was pledged, as compared to $31.2 million, or 51%, at December 31, 2004, and $16 million, or 26%, at June 30, 2004.

LIABILITIES

Deposits

General: Deposits are the Company’s primary source of new funds. Total deposits increased $32.7 million to $731.8 million at June 30, 2005, up from $699.1 million at December 31, 2004, and increased $89.2 million from $642.5 million at June 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 June 30, 2005, the Company had $142 million in certificates of deposit, of which $122.2 million, or 86% 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 $120.1 million, or 80% of total certificates of deposit at June 30, 2004.

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

		June 30, 2005								December 31, 2004								June 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		$	29,559				21	%		$	32,834				23	%		$	45,211				30	%
Over three through twelve months			92,623				65	%			81,580				57	%			74,893				50	%
Over twelve months			19,830				14	%			27,945				20	%			30,680				20	%
Total		$	142,012				100	%		$	142,359				100	%		$	150,784				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 Bill, and limited withdrawals. The total balance in the Alaska CD at June 30, 2005, was $159 million, an increase of $74 million as compared to the balance of $85 million at June 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 June 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: The majority of the Company’s borrowings are from the FHLB. At June 30, 2005, the Company’s maximum borrowing line from the FHLB was $94.2 million, approximately 11% of the Company’s assets. At June 30, 2005, there was $2 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 $3.8 million in other borrowings outstanding at June 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 Borrowing: At June 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 $86 million at June 30, 2005, compared to $83.4 million at December 31, 2004, an increase of 3%. The Company earned net income of $5.2 million during the six-month period ending June 30, 2005 and authorized dividends of $1.9 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 June 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 June 30, 2005:

		Adequately-				Well-				Actual Ratio				Actual Ratio
		Capitalized				Capitalized				BHC				Bank
Tier 1 risk-based capital			4.00	%			6.00	%			11.65	%			10.20	%
Total risk-based capital			8.00	%			10.00	%			12.90	%			11.46	%
Leverage ratio			4.00	%			5.00	%			10.80	%			9.46	%

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 33,140 of its outstanding stock pursuant to its share repurchase plan during the second quarter of 2005. The Company intends to continue to repurchase its 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 352,715 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 6.42%, maturity date of May 15, 2033, and are callable by the Company within 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 six-month period ending June 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 declines 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 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, 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 June 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 $1.6 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 $1.3 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.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEDINGS

During the normal course of its business, the Company is a party to various debtor-creditor legal actions, which individually or in the aggregate, could be material to the Company’s business, operations, or financial condition. These include cases filed as a plaintiff in collection and foreclosure cases, and the enforcement of creditors’ rights in bankruptcy proceedings.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)-(b) Not applicable

(c) The Company repurchased 33,140 shares, in the aggregate, during the second quarter of 2005 for the dates indicated:

														(d) Maximum
														Number (or
										(c) Total Number				Approximate Dollar
										of Shares (or Units)				Value) of Shares (or
										Purchased as Part				Units) that May Yet
		(a) Total Number of				(b) Average Price				of Publicly				Be Purchased
		Shares (or Units)				Paid per Share (or				Announced Plans				Under the Plans or
Period		Purchased				Unit)				or Programs				Programs (1)
Month #1 April 1, 2005 — April 30, 2005			-0-				-0-				-0-				385,855
Month #2 May 1, 2005 — May 31, 2005			23,140			$	22.38				23,140				362,715
Month #3 June 1, 2005 — June 30, 2005			10,000			$	22.55				10,000				352,715
Total			33,140			$	22.43				33,140				352,715

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Northrim BanCorp, Inc. held its Annual Shareholders’ Meeting on May 5, 2005. The matter voted on by shareholders was the election of directors.

1. ELECTION OF DIRECTORS

The following individuals were nominated and elected by the shareholders to serve as directors until the 2006 election of directors or until their successors are elected and have qualified:

Larry S. Cash		R. Marc Langland
Mark G. Copeland		Richard L. Lowell
Frank A. Danner		Irene Sparks Rowan
Ronald A. Davis		John C. Swalling
Anthony Drabek		Joseph E. Usibelli
Christopher N. Knudson

DIRECTOR		FOR				WITHHOLD				VOTES CAST				NONVOTES				TOTAL SHARES
CASH, LARRY S.			5,906,594				36,743				5,943,337				145,783				6,089,120
COPELAND, MARK G.			5,865,891				77,446				5,943,337				145,783				6,089,120
DANNER, FRANK A.			4,771,621				1,171,716				5,943,337				145,783				6,089,120
DAVIS, RONALD A.			5,901,294				42,043				5,943,337				145,783				6,089,120
DRABEK, ANTHONY			5,890,126				53,211				5,943,337				145,783				6,089,120
KNUDSON, CHRISTOPHER N.			4,823,551				1,119,786				5,943,337				145,783				6,089,120
LANGLAND, R. MARC			4,815,851				1,127,486				5,943,337				145,783				6,089,120
LOWELL, RICHARD L.			5,901,941				41,396				5,943,337				145,783				6,089,120
ROWAN, IRENE SPARKS			5,887,991				55,346				5,943,337				145,783				6,089,120
SWALLING, JOHN C.			5,918,841				24,496				5,943,337				145,783				6,089,120
USIBELLI, JOSEPH E.			5,894,854				48,483				5,943,337				145,783				6,089,120