NORTHRIM BANCORP INC - Quarter Report: 2009 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

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

Commission File Number 000-33501

NORTHRIM BANCORP, INC.

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files).

Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 August 7, 2009 was 6,338,138.

 

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets
- June 30, 2009 (unaudited)			3
- December 31, 2008			3
- June 30, 2008 (unaudited)			3
Consolidated Statements of Income (unaudited)
-Three and six months ended June 30, 2009 and 2008			4
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (unaudited)
- Three and six months ended June 30, 2009 and 2008			5
Consolidated Statements of Cash Flows (unaudited)
- Three and six months ended June 30, 2009 and 2008			6
Notes to the Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			44
PART II OTHER INFORMATION
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3. Defaults Upon Senior Securities			45
Item 4. Submission of Matters to a Vote of Security Holders			45
Item 5. Other Information			46
Item 6. Exhibits			46
SIGNATURES			47
EX-3.3
EX-31.1
EX-31.2
EX-32.1
EX-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, 2008.

ITEM 1. FINANCIAL STATEMENTS

NORTHRIM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2009, DECEMBER 31, 2008, AND JUNE 30, 2008

		June 30,				December 31,				June 30,
		2009				2008				2008
		(unaudited)								(unaudited)
				(Dollars in thousands)
ASSETS
Cash and due from banks		$	23,509			$	30,925			$	30,567
Money market investments			43,142				6,905				49,746
Domestic certificates of deposit			—				9,500				45,000
Investment securities held to maturity			10,128				9,431				11,906
Investment securities available for sale			124,566				141,010				116,498
Investment in Federal Home Loan Bank stock			2,003				2,003				2,003
Total investment securities			136,697				152,444				130,407
Real estate loans for sale			3,426				—				—
Loans			684,897				711,286				710,074
Allowance for loan losses			(13,187	)			(12,900	)			(13,519	)
Net loans			675,136				698,386				696,555
Purchased receivables, net			9,822				19,075				15,973
Accrued interest receivable			3,860				4,812				4,742
Premises and equipment, net			29,171				29,733				17,034
Goodwill and intangible assets			9,156				9,320				9,483
Other real estate owned			11,576				12,617				11,147
Other assets			33,624				32,675				32,703
Total Assets		$	975,693			$	1,006,392			$	1,043,357
LIABILITIES
Deposits:
Demand		$	253,118			$	244,391			$	222,117
Interest-bearing demand			112,385				101,065				99,249
Savings			61,331				58,214				52,576
Alaska CDs			104,906				108,101				137,546
Money market			119,944				158,114				253,726
Certificates of deposit less than $100,000			70,773				76,738				63,431
Certificates of deposit greater than $100,000			96,684				96,629				73,350
Total deposits			819,141				843,252				901,995
Borrowings			20,858				30,106				10,310
Junior subordinated debentures			18,558				18,558				18,558
Other liabilities			9,089				9,792				10,534
Total liabilities			867,646				901,708				941,397
SHAREHOLDERS’ EQUITY
Common stock, $1 par value, 10,000,000 shares authorized, 6,338,138, 6,331,372, and 6,311,807 shares issued and outstanding at June 30, 2009, December 31, 2008, and June 30, 2008, respectively			6,338				6,331				6,312
Additional paid-in capital			51,760				51,458				51,125
Retained earnings			48,511				45,958				44,543
Accumulated other comprehensive income — unrealized gain (loss) on securities, net			1,406				901				(51	)
Total Northrim Bancorp shareholders’ equity			108,015				104,648				101,929
Non-controlling interest			32				36				31
Total shareholders’ equity			108,047				104,684				101,960
Total Liabilities and Shareholders’ Equity		$	975,693			$	1,006,392			$	1,043,357

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(unaudited)								(unaudited)
		(Dollar in thousands, except per share data)
Interest Income
Interest and fees on loans		$	12,396			$	13,265			$	24,454			$	27,711
Interest on investment securities:
Securities available for sale			937				1,170				2,000				2,776
Securities held to maturity			106				107				197				218
Interest on money market investments			15				171				33				321
Interest on domestic certificate of deposit			1				174				58				219
Total Interest Income			13,455				14,887				26,742				31,245
Interest Expense
Interest expense on deposits and borrowings			1,789				3,421				3,900				7,584
Net Interest Income			11,666				11,466				22,842				23,661
Provision for loan losses			2,117				1,999				3,492				3,699
Net Interest Income After Provision for Loan Losses			9,549				9,467				19,350				19,962
Other Operating Income
Service charges on deposit accounts			775				888				1,478				1,750
Equity in earnings from mortgage affiliate			764				273				1,612				306
Purchased receivable income			474				521				1,232				1,051
Employee benefit plan income			447				352				813				659
Electronic banking income			351				292				661				538
Equity in loss from Elliott Cove			(28	)			(16	)			(93	)			(53	)
Other income			867				531				1,529				1,022
Total Other Operating Income			3,650				2,841				7,232				5,273
Other Operating Expense
Salaries and other personnel expense			5,708				5,440				11,159				10,843
Insurance expense			959				224				1,764				594
Occupancy			897				829				1,812				1,663
OREO expense net, including impairment			448				1,042				844				1,135
Marketing expense			316				391				634				781
Professional and outside services			309				403				687				712
Equipment expense			297				291				601				587
Intangible asset amortization expense			83				88				165				176
Other operating expense			1,515				1,700				3,386				3,392
Total Other Operating Expense			10,532				10,408				21,052				19,883
Income Before Income Taxes			2,667				1,900				5,530				5,352
Provision for income taxes			681				367				1,508				1,596
Net Income			1,986				1,533				4,022				3,756
Less: Net income attributable to the non-controlling interest			109				94				190				169
Net income attributable to Northrim Bancorp		$	1,877			$	1,439			$	3,832			$	3,587
Earnings Per Share, Basic		$	0.29			$	0.23			$	0.60			$	0.56
Earnings Per Share, Diluted		$	0.29			$	0.22			$	0.60			$	0.55
Weighted Average Shares Outstanding, Basic			6,396,341				6,350,109				6,394,965				6,349,645
Weighted Average Shares Outstanding, Diluted			6,402,502				6,393,006				6,398,045				6,395,067

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

																		Accumulated
		Common Stock								Additional								Other
		Number				Par				Paid-in				Retained				Comprehensive				Non-controlling
		of Shares				Value				Capital				Earnings				Income				Interest				Total
		(unaudited)
		(Dollar in thousands)
Six months ending June 30, 2009:
Balance as of January 1, 2009			6,331			$	6,331			$	51,458			$	45,958			$	901			$	36			$	104,684
Cash dividend declared			—				—				—				(1,279	)			—								(1,279	)
Stock option expense			—				—				299				—				—								299
Exercise of stock options			7				7				(4	)			—				—								3
Excess tax benefits from share-based payment arrangements			—				—				7				—				—								7
Distributions to noncontrolling interest																							(194	)			(194	)
Comprehensive income:
Change in unrealized holding (gain/loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				505								505
Net income attributable to the noncontrolling interest																							190				190
Net Income			—				—				—				3,832				—								3,832
Total Comprehensive Income																							(4	)			4,527
Balance as of June 30, 2009			6,338			$	6,338			$	51,760			$	48,511			$	1,406			$	28			$	108,047
Three months ending June 30, 2008:
Balance as of January 1, 2008			6,300			$	6,300			$	50,798			$	44,068			$	225			$	24			$	101,415
Cash dividend declared			—				—				—				(3,112	)			—								(3,112	)
Stock option expense			—				—				304				—				—								304
Exercise of stock options			12				12				(67	)			—				—								(55	)
Excess tax benefits from share-based payment arrangements			—				—				90				—				—								90
Distributions to noncontrolling interest			—				—				—				—				—				(162	)			(162	)
Comprehensive income:
Change in unrealized holding (gain/loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				(276	)							(276	)
Net income attributable to the noncontrolling interest																							169				169
Net Income			—				—				—				3,587				—								3,587
Total Comprehensive Income																							7				3,480
Balance as of June 30, 2008			6,312			$	6,312			$	51,125			$	44,543			$	(51	)		$	38			$	101,960

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

		Six Months Ended
		June 30,
		2009				2008
		(unaudited)
		(Dollars in thousands)
Operating Activities:
Net income		$	4,022			$	3,756
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Security (gains), net			(196	)			(100	)
Depreciation and amortization of premises and equipment			827				567
Amortization of software			81				94
Intangible asset amortization			165				176
Amortization of investment security premium, net of discount accretion			217				(93	)
Deferred tax (benefit)			(744	)			(2,050	)
Stock-based compensation			299				304
Excess tax benefits from share-based payment arrangements			(7	)			(90	)
Deferral of loan fees and costs, net			(155	)			(310	)
Provision for loan losses			3,492				3,699
Purchased receivable recovery			(16	)			(13	)
Purchases of loans held for sale			(75,096	)			—
Proceeds from the sale of loans held for sale			71,670				—
(Gain) loss on sale of other real estate owned			(223	)			18
Impairment on other real estate owned			495				977
Distributions (proceeds) in excess of earnings from RML			585				(63	)
Equity in loss from Elliott Cove			93				53
Decrease in accrued interest receivable			952				490
(Increase) decrease in other assets			(1,226	)			1,230
(Decrease) of other liabilities			(703	)			(1,136	)
Net Cash Provided by Operating Activities			4,532				7,509
Investing Activities:
Investment in securities:
Purchases of investment securities-available-for-sale			(34,110	)			(43,045	)
Purchases of investment securities-held-to-maturity			(1,217	)			(508	)
Proceeds from sales/maturities of securities-available-for-sale			51,390				74,283
Proceeds from calls/maturities of securities-held-to-maturity			520				300
Proceeds from maturities of domestic certificates of deposit			14,500				15,000
Purchases of domestic certificates of deposit			(5,000	)			(60,000	)
Investment in purchased receivables, net of repayments			9,269				3,477
Investments in loans:
Loan participations			493				5,254
Loans made, net of repayments			19,955				(8,472	)
Proceeds from sale of other real estate owned			4,832				50
Investment in other real estate owned			(1,172	)			(1,339	)
Loan to Elliott Cove, net of repayments			(54	)			(32	)
Purchases of premises and equipment			(265	)			(1,980	)
Purchases of software			(37	)			(75	)
Net Cash Provided by Investing Activities			59,104				(17,087	)
Financing Activities:
Increase (decrease) in deposits			(24,111	)			34,619
Repayment of borrowings			(9,248	)			(6,460	)
Distributions to non-controlling interest			(194	)			(162	)
Proceeds from issuance of common stock			3				—
Excess tax benefits from share-based payment arrangements			7				90
Cash dividends paid			(1,272	)			(2,002	)
Net Cash Used by Financing Activities			(34,815	)			26,085
Net Increase in Cash and Cash Equivalents			28,821				16,507
Cash and cash equivalents at beginning of period			37,830				63,806
Cash and cash equivalents at end of period		$	66,651			$	80,313
Supplemental Information:
Income taxes paid		$	1,441			$	2,385
Interest paid		$	4,251			$	7,518
Transfer of loans to other real estate owned		$	2,891			$	6,340
Cash dividends declared but not paid		$	12			$	1,109

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 2009 and 2008

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. Certain reclassifications have been made to prior year amounts to maintain consistency with the current year with no impact on net income or total shareholders’ equity, except for changes in the presentation of shareholder’s equity in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 160. The Company has evaluated the requirements of FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (as amended) and determined that the Company operates as a single operating segment. Operating results for the interim period ended June 30, 2009, are not necessarily indicative of the results anticipated for the year ending December 31, 2009. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

2. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements (as amended) (“SFAS 160”). The FASB issued FAS 160 during 2007 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. The Company adopted SFAS 160 on January 1, 2009 and affected presentation and disclosure items retroactively. The adoption of SFAS 160 did not significantly impact the Company’s financial condition and results of operations.

Recently Issued Accounting Pronouncements

In January 2009, the FASB issued FSP EITF No. 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (“FSP EITF 99-20-1”). FSP EITF 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Asset (“EITF 99-20”), to achieve more consistent determination of whether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”), and other related guidance. FSP EITF 99-20-1 applies to beneficial interests within the scope of Issue 99-20 and amends EITF 99-20 to align the impairment guidance therein with that in SFAS 115 and related implementation guidance. FSP EITF No.99-20-1 is effective for the Company’s financial statements for the year beginning on January 1, 2009 and

has been adopted prospectively. The adoption of FSP EITF No. 99-20-1 did not impact the Company’s financial condition and results of operations.

In April 2009, the FASB issued FSP No. 141(r)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP 141(r)-1”). FSP 141(r)-1 amends and clarifies FASB Statement No. 141 (revised 2007), Business Combinations, (“SFAS 141(r)”) to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP 141(r)-1 applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of FASB Statement No. 5, Accounting for Contingencies (as amended), if not acquired or assumed in a business combination, except for assets or liabilities arising from contingencies that are subject to specific guidance in SFAS 141(r). FSP 141(r)-1 requires that an acquirer shall recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. FSP 141(r)-1 is effective for the Company’s financial statements for the year beginning on January 1, 2009 and has been adopted prospectively. The adoption of FSP 141(r)-1 did not impact the Company’s financial condition and results of operations.

In April 2009, the FASB issued FSP No.115-2, Recognition and Presentation of Other-Than-Temporary-Impairment (“FSP 115-2”). FSP 115-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. Under certain circumstances, only the amount of the estimated credit loss on debt securities with other-than-temporary-impairment will be recorded through earnings while the remaining mark-to-market loss is recognized through other comprehensive income. FSP 115-2 is effective for the Company’s financial statements for interim and annual periods ending after June 15, 2009 and has been adopted prospectively. The adoption of FSP 115-2 did not impact the Company’s financial condition and results of operations.

In April 2009, the FASB issued FSP No.157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions that are Not Orderly (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP 157-4 is effective for the Company’s financial statements for interim and annual periods ending after June 15, 2009 and has been adopted prospectively. The adoption of FSP 157-4 did not impact the Company’s financial condition and results of operations.

In April 2009, the FASB issued FSP No.107-1, Interim Disclosures About Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP 107-1 also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP 107-1 is effective for the Company’s financial statements for interim and annual periods ending after June 15, 2009 and has been adopted prospectively. The adoption of FSP 107-1 did not impact the Company’s financial condition and results of operations.

In May 2009, the FASB issued SFAS 165, Subsequent Events (“SFAS 165”). The objective of SFAS 165 is to establish general standards of accounting for, and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for the Company’s financial statements for interim and annual periods

ending after June 15, 2009 and has been adopted prospectively. Management has reviewed events occurring through August 7, 2009, the date the financial statements were issued, and no subsequent events occurred requiring accrual or disclosure.

In June 2009, the FASB issued SFAS 166, Accounting for Transfers of Financial Assets (“SFAS 166”). SFAS 166 addresses practices that have developed since the issuance of SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that are not consistent with the original intent and key requirements of that Statement as well as concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. SFAS 166 is effective for the Company’s financial statements for interim and annual periods beginning after November 15, 2009 and must be adopted prospectively. SFAS 166 must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities (as defined under previous accounting standards) should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. If the evaluation on the effective date results in consolidation, the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidation. Additionally, the disclosure provisions of SFAS 166 should be applied to transfers that occurred both before and after the effective date. The Company does not expect that adoption of SFAS 166 will impact its financial condition and results of operations.

In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation 46(R) (as amended) (“SFAS 167”). The FASB’s objective in issuing SFAS 167 is to improve financial reporting by enterprises involved with variable interest entities. SFAS 167 addresses the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”) as a result of the elimination of the qualifying special-purpose entity concept in SFAS 166, and constituent concerns about the application of certain key provisions of FIN 46R, including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS 167 is effective for the Company’s financial statements for annual and interim periods beginning after November 15, 2009 and must be adopted prospectively. The Company does not expect that adoption of SFAS 167 will impact its financial condition and results of operations.

In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). The FASB Accounting Standards Codification™ (“Codification”) will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. Following this Statement, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”). The Board will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on changes in the Codification. FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”) which became effective on November 13, 2008, identified the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 arranged these sources of GAAP in a hierarchy for users to apply accordingly. Once the Codification is in effect, all of its content will carry the same level of authority, effectively superseding SFAS 162. In other words, the GAAP hierarchy will be modified to include only two levels of GAAP: authoritative and non-authoritative. As a result, SFAS 168 replaces SFAS 162 to indicate this change to the GAAP hierarchy. In June 2009, the FASB also issued ASU No. 2009-01, Topic 105 — Generally Accepted Accounting Principals (“ASU 2009-01”). ASU 2009-01 amends the Codification for the issuance of SFAS 168. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and must be adopted prospectively.

3. GOODWILL AND OTHER INTANGIBLES

As part of the acquisition of branches from Bank of America in 1999, the Company recorded $6.9 million of goodwill and $2.9 million of core deposit intangible (“CDI”). In 2007, the Company finished amortizing the CDI related to the Bank of America acquisition. As part of the stock acquisition of Alaska First Bank & Trust, N.A. (“Alaska First”) in October 2007, the Company recorded $2.1 million of goodwill and $1.3 million of CDI for the acquisition of Alaska First stock. The Company is amortizing the CDI related to the Alaska First acquisition using the sum of years’ digits method over the estimated useful life of 10 years. In the first quarter of 2008, the Company recorded a $289,000 decrease in goodwill related to the Alaska First acquisition to adjust the net deferred tax assets carried over to the Company’s financial statements in accordance with FASB Statement No. 141, Business Combinations (Revised 2007).

The Company performed goodwill impairment testing at June 30, 2009 in accordance with the policy described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. There was no triggering event at June 30, 2009 that would require the Company to perform impairment testing. The Company continues to monitor the Company’s goodwill for potential impairment on an ongoing basis. No assurance can be given that we will not charge earnings during 2009 for goodwill impairment, if, for example, our stock price declines further and continues to trade at a significant discount to its book value, although there are many factors that we analyze in determining the impairment of goodwill.

4. LENDING ACTIVITIES

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

		June 30, 2009								December 31, 2008								June 30, 2008
		Dollar				Percent				Dollar				Percent				Dollar				Percent
		Amount				of Total				Amount				of Total				Amount				of Total
		(Dollars in thousands)
Commercial		$	266,227				39	%		$	293,173				41	%		$	295,532				42	%
Construction/development			79,464				12	%			100,441				14	%			115,637				16	%
Commercial real estate			294,249				43	%			268,864				38	%			249,123				35	%
Home equity lines and other consumer			47,266				7	%			51,357				7	%			51,961				7	%
Loans in process			248				0	%			163				0	%			255				0	%
Unearned loan fees, net			(2,557	)			0	%			(2,712	)			0	%			(2,434	)			0	%
Sub total			684,897								711,286								710,074
Real estate loans for sale			3,426				0	%			—				0	%			—				0	%
Total loans		$	688,323				100	%		$	711,286				100	%		$	710,074				100	%

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

The Company maintains an Allowance for Loan Losses (the “Allowance”) to reflect inherent losses from its loan portfolio as of the balance sheet date. The Allowance is decreased by loan charge-offs and increased by loan recoveries and provisions for loan losses. On a quarterly basis, the Company calculates the Allowance based on an established methodology which has been consistently applied.

In determining its total Allowance, the Company first estimates a specific allowance for impaired loans. This analysis is based upon a specific analysis for each impaired loan, including appraisals on loans secured by real property, management’s assessment of the current market, recent payment history and an evaluation of other sources of repayment.

The Company then estimates an allowance for all loans that are not impaired. This allowance is based on loss factors applied to loans that are quality graded according to an internal risk classification system

(“classified loans”). The Company’s internal risk classifications are based in large part upon regulatory definitions for classified loans. The loss factors that the Company applies to each group of loans within the various risk classifications are based on industry standards, historical experience and management’s judgment.

Portfolio components also receive specific attention in the Allowance analysis when those components constitute a significant concentration as a percentage of the Company’s capital, when current market or economic conditions point to increased scrutiny, or when historical or recent experience suggests that additional attention is warranted in the analysis process.

Once the Allowance is determined using the methodology described above, management assesses the adequacy of the overall Allowance through an analysis of the size and mix of the loan portfolio, historical and recent credit performance of the loan portfolio (including the absolute level and trends in delinquencies and impaired loans), industry metrics and ratio analysis.

Our banking regulators, as an integral part of their examination process, periodically review the Company’s Allowance. Our regulators may require the Company to recognize additions to the allowance based on their judgments related to information available to them at the time of their examinations.

The Company recorded a provision for loan losses in the amount of $2.1 million and $3.5 million, respectively, for the three and six-month periods ending June 30, 2009 based upon its analysis of its loan portfolio as noted above. The following table details activity in the Allowance for the periods indicated:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Dollars in thousands)
Balance at beginning of period		$	13,364			$	12,571			$	12,900			$	11,735
Charge-offs:
Commercial			1,137				534				1,148				1,463
Construction/development			207				737				1,070				816
Commercial real estate			998				—				1,058				—
Home equity lines and other consumer			57				32				141				32
Total charge-offs			2,399				1,303				3,417				2,311
Recoveries:
Commercial			97				166				167				305
Construction/development			—				51				—				51
Commercial real estate			—				—				9				—
Home equity lines and other consumer			8				35				36				40
Total recoveries			105				252				212				396
Net, (recoveries) charge-offs			2,294				1,051				3,205				1,915
Provision for loan losses			2,117				1,999				3,492				3,699
Balance at end of period		$	13,187			$	13,519			$	13,187			$	13,519

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

		June 30, 2009				December 31, 2008				June 30, 2008
		(Dollars in thousands)
Nonaccrual loans		$	18,111			$	20,593			$	11,855
Accruing loans past due 90 days or more			1,893				5,411				6,199
Restructured loans			—				—				—
Total nonperforming loans			20,004				26,004				18,054
Other real estate owned			11,576				12,617				11,147
Total nonperforming assets		$	31,580			$	38,621			$	29,201
Allowance for loan losses		$	13,187			$	12,900			$	13,519
Nonperforming loans to loans			2.92	%			3.66	%			2.54	%
Nonperforming assets to total assets			3.24	%			3.84	%			2.80	%
Allowance to loans			1.93	%			1.81	%			1.90	%
Allowance to nonperforming loans			66	%			50	%			75	%

At June 30, 2009, December 31, 2008, and June 30, 2008, the Company had impaired loans of $67.1 million, $79.7 million, and $84.9 million, respectively. A specific allowance of $3.3 million, $3.2 million, and $3.7 million, respectively, was established for these loans for the periods noted. The decrease in impaired loans at June 30, 2009, as compared to December 31, 2008, resulted mainly from payoffs, pay-downs, or charge-offs of five commercial real estate properties, two land development projects, three commercial loans, and one residential construction project, and the transfer of twenty five residential lots in two different developments and three condominiums to OREO in the six months ended June 30, 2009. These decreases were partially offset by the addition of two land development projects, one commercial real estate property, two commercial properties, and one residential construction project. The decrease in impaired loans at December 31, 2008, as compared to June 30, 2008, resulted from the payoffs, pay-downs, or charge-offs of three land development projects, two residential construction projects, one commercial loan, two commercial real estate loans, and the transfer of one condominium to OREO in the six months ended December 31, 2008. These decreases were partially offset by the addition of three residential construction projects, three land development projects, three commercial loans and two commercial real estate loans that were not included in impaired loans at June 30, 2008.

At June 30, 2009, December 31, 2008, and June 30, 2008 the Company held $11.6 million, $12.6 million and $11.1 million, respectively, as OREO. The Company expects to expend approximately $370,000 in 2009 to complete construction of these projects with an estimated completion date of September 30, 2009.

6. INVESTMENT SECURITIES

The carrying values and approximate fair values of investment securities at June 30, 2009 are presented below:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(In Thousands)
Securities Available for Sale
U.S. Treasury		$	501			$	—			$	1			$	500
Government Sponsored Entities			95,010				1,261				66				96,205
Mortgage-backed Securities			94				1				—				95
Corporate Bonds			26,574				1,195				3				27,766
Total		$	122,179			$	2,457			$	70			$	124,566
Securities Held to Maturity
Municipal Securities		$	10,128			$	179				—			$	10,307
Federal Home Loan Bank Stock		$	2,003			$	—			$	—			$	2,003

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2009 were as follows:

		Less Than 12 Months								More Than 12 Months								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
										(In Thousands)
Securities Available for Sale
Government Sponsored Entities		$	2,665			$	20			$	2,814			$	47			$	5,479			$	67
Corporate Bonds			3,995				3				—				—				3,995				3
Total		$	6,660			$	23			$	2,814			$	47			$	9,474			$	70

The unrealized losses on investments in government sponsored entities, corporate bonds and municipal securities were caused by interest rate increases. At June 30, 2009, there were four available-for-sale securities in an unrealized loss position of $70,000. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

The amortized cost and fair values of debt securities at June 30, 2009, are distributed by contractual maturity as shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

										Weighted
		Amortized								Average
		Cost				Fair Value				Yield
		(In Thousands)
Government Sponsored Entities
Within 1 Year		$	19,998			$	20,042				0.80	%
1-5 Years			68,161				69,367				2.99	%
5-10 Years			5,168				5,131				5.00	%
Over 10 Years			2,184				2,165				0.00	%
Total		$	95,511			$	96,705				2.56	%
Mortgage-backed Securities
Within 1 Year		$	—			$	—				0.00	%
1-5 Years			—				—				0.00	%
5-10 Years			94				95				4.59	%
Over 10 Years			—				—				0.00	%
Total		$	94			$	95				4.59	%
Corporate Bonds
Within 1 Year		$	6,053			$	6,131				2.90	%
1-5 Years			20,521				21,635				4.80	%
5-10 Years			—				—				0.00	%
Over 10 Years			—				—				0.00	%
Total		$	26,574			$	27,766				4.36	%
Municipal Securities
Within 1 Year		$	3,415			$	3,436				3.80	%
1-5 Years			4,858				4,988				3.91	%
5-10 Years			931				940				4.21	%
Over 10 Years			924				943				4.54	%
Total		$	10,128			$	10,307				3.96	%
The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities are as follows:
						Gross				Gross
June 30,		Proceeds				Gains				Losses
		(In Thousands)
2009:
Available-for-Sale Securities		$	5,429			$	201			$	5
Held-to-Maturity Securities		$	—			$	—			$	—

A summary of taxable interest income for the six months ending June 30, 2009 on available for sale investment securities is as follows:

(In Thousands)
Government Sponsored Entities		$	1,320
Other			638
Total		$	1,958

Investment securities, which include Federal Home Loan Bank (“FHLB”) stock, totaled $136.7 million at June 30, 2009, a decrease of $15.7 million, or 10%, from $152.4 million at December 31, 2008, and an increase of $6.3 million, or 5%, from $130.4 million at June 30, 2008. Investment securities designated as available-for-sale comprised 91% of the investment portfolio at June 30, 2009, 92% at December 31, 2008, and 89% at June 30, 2008, and are available to meet liquidity requirements. At June 30, 2009, December 31, 2008, and June 30, 2008 the Company had gross unrealized losses on available for sale

securities of $70,000, $446,000 and $354,000, respectively. Both available for sale and held to maturity securities may be pledged as collateral to secure public deposits. At June 30, 2009, $51.3 million in securities, or 49%, of the investment portfolio was pledged, as compared to $67.4 million, or 44%, at December 31, 2008, and $47.8 million, or 37%, at June 30, 2008.

The Company evaluated its investment in FHLB stock for other-than-temporary impairment as of June 30, 2009, consistent with its accounting policy. Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment, the liquidity position of the FHLB of Seattle, the actions being taken by the FHLB of Seattle to address its regulatory capital situation and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the par value, the Company did not recognize an other-than-temporary impairment loss. Even though the Company did not recognize an other-than-temporary impairment loss during the six-month period ending June 30, 2009, continued deterioration in the FHLB of Seattle’s financial position may result in future impairment losses.

7. OTHER OPERATING INCOME

The Company, through Northrim Capital Investments Co. (“NCIC”), a wholly-owned subsidiary of Northrim Bank, owns a 50.1% interest in Northrim Benefits Group, LLC (“NBG”). The Company consolidates the balance sheet and income statement of NBG into its financial statements and notes the non controlling interest in this subsidiary as a separate line item on its financial statements. In the three-month periods ending June 30, 2009 and 2008, the Company included employee benefit plan income from NBG of $447,000 and $352,000, respectively, in its Other Operating Income. The Company included employee benefit plan income from NBG of $813,000 and $659,000, respectively, in its Other Operating Income in the six-month periods ending June 30, 2009 and 2008. These increases are the result of an increase in NBG’s customers as well as an increase in the commission income that NBG earned from the sale of employee benefit plans.

The Company also owns a 24% interest in Residential Mortgage Holding Company, LLC (“RML Holding Company”) through NCIC. In the three-month period ending June 30, 2009, the Company’s earnings from RML Holding Company increased by $491,000 to $764,000 as compared to $273,000 for the three-month period ending June 30, 2008. In the six-month period ending June 30, 2009, the Company’s earnings from RML Holding Company increased by $1.3 million to $1.6 million as compared to $306,000 for the six-month period ending June 30, 2008. These increases are the result of increased refinancing activity in response to the decrease in home mortgage interest rates.

The Company owns a 48% 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”). In addition to its ownership interest, the Company provides Elliott Cove with a line of credit that has a commitment amount of $750,000 and an outstanding balance of $610,000 as of June 30, 2009. The Company’s share of the loss from Elliott Cove for the second quarter of 2009 was $28,000, as compared to a loss of $16,000 in the second quarter of 2008. In the six-month period ending June 30, 2009, the Company’s share of the loss from Elliott Cove was $93,000 as compared to a loss of $53,000 for the six-month period ending June 30, 2008. The losses from Elliott Cove were offset by commissions that the Company receives for its sales of Elliott Cove investment products. These commissions are accounted for as other operating income and totaled $37,000 in the second quarter of 2009 and $80,000 for the six months ending June 30, 2009 as compared to $64,000 in the second quarter of 2008 and $136,000 for the six months ending June 30, 2008. A portion of these commissions are paid to the Company’s employees and accounted for as salary expense. There were no commission payments in the six months ending June 30, 2009. Payments totaled $9,000 and $14,000 for the three and six-month periods ending June 30, 2008.

The Company also owns a 24% interest in Pacific Wealth Advisors, LLC (“PWA”) through NISC. PWA is a holding company that owns Pacific Portfolio Consulting, LLC (“PPC”) and Pacific Portfolio Trust Company (“PPTC”). PPC is an investment advisory company with an existing client base while PPTC is a start-up operation. During the three-month period ending June 30, 2009, the Company’s earnings from

PWA decreased by $21,000 to a loss of $16,000 as compared to earnings of $5,000 for the three-month period ending June 30, 2008. During the six-month period ending June 30, 2009, the Company’s earnings from PWA decreased by $37,000 to a loss of $21,000 as compared to earnings of $16,000 for the six-month period ending June 30, 2008.

8. DEPOSIT ACTIVITIES

Total deposits at June 30, 2009, December 31, 2008 and June 30, 2008 were $819.1 million, $843.4 million and $902.0 million, respectively. The decrease in deposits is largely due to a decrease in deposits for one customer that was offset in part by an increase in public deposits that the Company holds in certificates of deposit for the Alaska Permanent Fund Corporation. At June 30, 2009, December 31, 2008 and June 30, 2008, the Company held $35.2 million, $45 million and $25 million, respectively, in certificates of deposit for the Alaska Permanent Fund. 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 deposits either with pledged securities or a letter of credit. There were no depositors with deposits representing 10% or more of total deposits at June 30, 2009, December 31, 2008 or June 30, 2008.

9. STOCK INCENTIVE PLAN

The Company has set aside 330,750 shares of authorized stock for the 2004 Stock Incentive Plan (“2004 Plan”) under which it may grant stock options and restricted stock units. The Company’s policy is to issue new shares to cover awards. The total number of shares under the 2004 Plan and previous stock incentive plans at June 30, 2009 was 481,431, which includes 220,246 shares granted under the 2004 Plan leaving 63,298 shares available for future awards. Under the 2004 Plan, certain key employees have been granted the option to purchase set amounts of common stock at the market price on the day the option was granted. Optionees, at their own discretion, may cover the cost of exercise through the exchange, at then fair market value, of already owned shares of the Company’s stock. Options are granted for a 10-year period and vest on a pro rata basis over the initial three years from grant. In addition to stock options, the Company has granted restricted stock units to certain key employees under the 2004 Plan. These restricted stock grants cliff vest at the end of a three-year time period.

The Company recognized expenses of $90,000 and $75,000 on the fair value of restricted stock units and $60,000 and $77,000 on the fair value of stock options for a total of $150,000 and $152,000 in stock-based compensation expense for the three-month periods ending June 30, 2009 and 2008, respectively. For the six-month periods ending June 30, 2009 and 2008, the Company recognized expense of $178,000 and $151,000, respectively, on the fair value of restricted stock units and $121,000 and $153,000, respectively, on the fair value of stock options for a total of $299,000 and $304,000, respectively, in stock-based compensation expense.

Proceeds from the exercise of stock options for the three months ended June 30, 2009 were $71,000. The Company withheld shares valued at $68,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options or the vesting of restricted stock units for the three-month period ending June 30, 2009. The Company recognized tax deductions of $15,000 related to the exercise of these stock options and $41,000 related to the vesting of restricted stock units during the quarter ended June 30, 2009. There were no stock options exercised or restricted stock units that vested during the second quarter of 2008.

Proceeds from the exercise of stock options for the six months ended June 30, 2009 and 2008 were $71,000 and $232,000, respectively. The Company withheld shares valued at $72,000 and $287,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options or the vesting of restricted stock units for the six-month periods ending June 30, 2009 and 2008, respectively. The Company recognized tax deductions of $15,000 and $90,000, respectively, related to the exercise of stock options during the six-months ended June 30, 2009 and 2008, respectively. The Company recognized tax deductions of $41,000 related to the vesting of restricted stock units during the six months ended June 30, 2009. There were no restricted stock units that vested during the six months ended June 30, 2008.

10. FAIR VALUE OF ASSETS AND LIABILITIES

In accordance with FASB Statement 157, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

     Level 1 : Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and federal agency securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

     Level 2 : Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

     Level 3 : Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimation of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following methods and assumptions were used to estimate fair value disclosures. All financial instruments are held for other than trading purposes.

Cash and Money Market Investments: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Investment Securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Investments in Federal Home Loan Bank stock are recorded at cost, which also represents fair value.

Loans: In 2009, fair value adjustments for loans are mainly related to credit risk, interest rate risk, and liquidity risk. Credit risk is primarily addressed in the financial statements through the allowance for loan losses (see Note 5). Impaired loans are recorded at fair value through the specific valuation allowance which is based on the estimated value of underlying collateral less estimated selling costs. Specific valuation allowances are included in the allowance for loan losses. Interest rate risk on fixed rate loans is addressed using a discounted cash flow methodology. A discount rate was developed based on the relative risk of the cash flows, taking into account the maturity of the loans and comparable average interest rates for loans within each maturity band. An additional liquidity risk is estimated for both fixed and variable loans primarily using observable, historical sales of loans during periods of similar economic conditions. The carrying amount of accrued interest receivable approximates its fair value. Loan values presented for comparative purposes at June 30, 2008 were discounted using expected future cash flows, and impaired loans were recorded as described above in accordance with SFAS 114.

Purchased Receivables: Fair values for purchased receivables are based on their carrying amounts due to their short duration and repricing frequency.

Other real estate owned: Other real estate owned represents properties acquired through foreclosure or its equivalent. The fair value of other real estate owned is determined based on management’s estimate of the fair value of individual properties. Significant inputs into this estimate include independently prepared appraisals, resent sales data for similar properties, our assessment of current market conditions and estimated costs to complete projects. These valuation inputs generally result in a fair value measurement that is categorized as a Level 3 measurement, including when management determines that discounts on appraised values are required. When appraised values are not discounted, fair value measurements are categorized as Level 2 measurements.

Deposit Liabilities: The fair values of demand and savings deposits are equal to the carrying amount at the reporting date. The carrying amount for variable-rate time deposits approximate their fair value. Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies currently offered interest rates to a schedule of aggregate expected monthly maturities of time deposits. The carrying amount of accrued interest payable approximates its fair value.

Borrowings: Due to the short term nature of these instruments, the carrying amount of short-term borrowings reported in the balance sheet approximate the fair value. Fair values for fixed-rate long-term borrowings are estimated using a discounted cash flow calculation that applies currently offered interest rates to a schedule of aggregate expected monthly payments.

Junior Subordinated Debentures: Fair value adjustments for junior subordinated debentures are based on the current discounted cash flows to maturity. Management utilized a market approach to determine the appropriate discount rate for junior subordinated debentures.

Assets subject to non-recurring adjustment to fair value: Effective January 1, 2009, in accordance with FASB Staff Position 157-2, the Company may be required to measure certain assets such as equity method investments, intangible assets or OREO at fair value on a nonrecurring basis. Any nonrecurring adjustments to fair value usually result from the write down of individual assets.

Commitments to Extend Credit and Standby Letters of Credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

June 30,		2009
		Carrying				Fair
		Amount					Value
		(In Thousands)
Financial Assets:
Cash and money market investments		$	66,651			$	66,651
Investment securities			134,309				136,877
Net loans			675,136				630,747
Purchased receivables			9,822				9,822
Accrued interest receivable			3,860				3,860
Financial Liabilities:
Deposits		$	819,141			$	817,777
Accrued interest payable			552				552
Borrowings			20,858				19,352
Junior subordinated debentures			18,558				7,443
Unrecognized Financial Instruments:
Commitments to extend credit(a)			173,448			$	1,734
Standby letters of credit(a)			18,858				189

The following table sets forth the balances of assets and liabilities measured at fair value on a recurring basis (in thousands):

						Quoted Prices in				Signifcant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable Inputs
		Total				Assets (Level 1)				Inputs (Level 2)				(Level 3)
Available-for-sale securities		$	124,566				—			$	124,566				—
Total		$	124,566				—			$	124,566				—

As of and for the six months ending June 30, 2009, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis, except for certain assets as shown in the following table (in thousands):

						Quoted Prices in				Signifcant
						Active Markets				Other				Significant				Total
						for Identical				Observable				Unobservable Inputs				(gains)
		Total				Assets (Level 1)				Inputs (Level 2)				(Level 3)				losses
Loans measured for impairment1		$	14,481				—			$	6,007			$	8,474			$	660
Other real estate owned2			3,134				—				—				3,134				495
Total		$	17,615				—			$	6,007			$	11,608			$	1,155

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 Bancorp, Inc.’s (the “Company”) management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of the Company’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 plans and expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations, and those variations may be both material and adverse. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the general condition of, and changes in, the Alaska economy; factors that impact our net interest margins; and our ability to maintain asset quality. Further, actual results may be affected by competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. 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 four 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 equity interest in Elliott Cove Capital Management LLC (“Elliott Cove”), an investment advisory services company; Northrim Capital Trust 1 (“NCT1”), an entity that we formed in May 2003 to facilitate a trust preferred securities offering by the Company, and Northrim Statutory Trust 2 (“NST2”), an entity that we formed in December 2005 to facilitate a trust preferred securities offering by the Company. The Company also holds a 24% 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. We also operate 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. This division also began operating in Alaska in the second quarter of 2008. NFS purchases accounts receivable from its customers and provides them with working capital. In addition, through NCIC, we hold a 50.1% interest in Northrim Benefits Group, LLC (“NBG”), an insurance brokerage company that focuses on the sale and servicing of employee benefit plans. In the first quarter of 2006, through NISC, we purchased a 24% interest in Pacific Wealth Advisors, LLC (“PWA”), an investment advisory and wealth management business located in Seattle, Washington. Finally, in the third quarter of 2008, the Bank formed another wholly-owned subsidiary, Northrim Building, LLC (“NBL”), which owns and operates the Company’s main office facility at 3111 C Street in Anchorage. NBL purchased the building in the third quarter of 2008.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. The Company has identified three policies as being critical because they require management to make estimates, assumptions and judgments that affect the reported amount of assets and liabilities, contingent assets and liabilities, and revenues and expenses included in the consolidated financial statements. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Circumstances and events that differ significantly from those underlying the Company’s estimates,

assumptions and judgments could cause the actual amounts reported to differ significantly from these estimates.

The Company’s critical accounting policies include those that address the accounting for the allowance for loan losses, the valuation of goodwill and other intangible assets, and the valuation of other real estate owned. The Company has not made any significant changes in its critical accounting policies or its estimates and assumptions from those disclosed in its Form 10-K as of December 31, 2008. These critical accounting policies are further described in Management’s Discussion and Analysis and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company’s Form 10-K as of December 31, 2008. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements.

Several new accounting pronouncements became effective for the Company on January 1, 2009. See Note 2 of this Form 10-Q for a summary of the pronouncements and discussion of the impact of their adoption on the Company’s consolidated financial statements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See note 2 of the Notes to the Consolidated Financial Statements in this Form 10-Q for further details.

SUMMARY OF SECOND QUARTER RESULTS

At June 30, 2009, the Company had assets of $975.7 million and gross loans of $684.9 million, decreases of 6% and 4%, respectively, as compared to the balances for these accounts at June 30, 2008. As compared to balances at December 31, 2008, total assets and total loans at June 30, 2009 decreased by 3% and 4%, respectively. The Company’s net income and diluted earnings per share for the three months ended June 30, 2009, were $1.9 million and $0.29, respectively, increases of 30% and 32%, respectively, as compared to the same period in 2008. For the quarter ended June 30, 2009, the Company’s net interest income increased by $200,000, or 2%, its provision for loan losses increased by $118,000, or 6%, its other operating income increased $809,000, or 28%, and its other operating expenses increased by $124,000, or 1%, as compared to the second quarter a year ago.

RESULTS OF OPERATIONS

NET INCOME

Net income attributable to Northrim Bancorp for the quarter ended June 30, 2009, was $1.9 million, or $0.29, per diluted share, increases of 30% and 32%, respectively, each as compared to net income of $1.4 million and diluted earnings per share of $0.22, respectively, for the second quarter of 2008.

The increase in net income attributable to Northrim Bancorp for the three-month period ending June 30, 2009 as compared to the same period a year ago is the result of an increase in other operating income of $809,000 and an increase in net interest income of $200,000. These increases were partially offset by a $314,000 increase in the provision for income taxes, a $124,000 increase in other operating expenses and a $118,000 increase in the loan loss provision for the three-month period ending June 30, 2009 as compared to the same period a year ago. The increase in other operating income for the second quarter of 2009 was primarily the result of a $491,000 increase in earnings from the Company’s mortgage affiliate, a $191,000 increase in rental income, and a $133,000 increase in gain on the sale other real estate owned. The slight increase in the Company’s net interest income for the second quarter of 2009 as compared to the second quarter of 2008 was caused by larger declines in its cost of funds as compared to decreases in the yield of its earning assets. The Company’s cost of funds declined due to a decrease in interest-bearing liabilities and an increase in demand deposits. The provision for income taxes increased by $314,000 in the second quarter of 2009 as compared to the same period in 2008 due to increased pre-tax income, as well as a decreased tax credits relative to the level of taxable income. The increase in other operating expense for the second quarter of 2009

is primarily the result of a $735,000 increase in insurance expense related to FDIC insurance which was partially offset by a $594,000 decrease in expenses related to OREO. The provision for loan losses increased slightly by $118,000 in the second quarter of 2009 to account for the combined effect of loan charge-offs and changes in the specific allowance for impaired loans. The increase in earnings per diluted share for the second quarter of 2009 as compared to the second quarter of 2008 was caused by the increase in net income in the second quarter of 2009.

Net income attributable to Northrim Bancorp for the six months ended June 30, 2009, was $3.8 million, or $0.60 per diluted share, increases of 7% and 7%, respectively, as compared to $3.6 million and diluted earnings per share of $0.56, respectively, for the same period in 2008.

The increase in net income attributable to Northrim Bancorp for the six-month period ending June 30, 2009 as compared to the same period a year ago is the result of an increase in other operating income of $2 million, a decrease in the loan loss provision of $207,000 and an $88,000 decrease in the provision for income taxes. These changes were partially offset by a $1.2 million increase in other operating expenses and an $819,000 decrease in net interest income for the six-month period ending June 30, 2009 as compared to the same period a year ago. The increase in other operating income for the six-month period ending June 30, 2009 was primarily the result of a $1.3 million increase in earnings from the Company’s mortgage affiliate, a $387,000 increase in rental income, and a $241,000 increase in gain on the sale of other real estate owned. The decrease in the Company’s loan loss provision for the six-month period ending June 30, 2009 was due to the decrease in the specific allowance for impaired loans which was due to charge offs and payoffs of loans measured for impairment. The slight decrease in the Company’s provision for income taxes in the six-month period ending June 30, 2009 as compared to the same period in 2008 was due to increased tax credits relative to the level of taxable income for the two periods. The increase in other operating expense for the six-month period ending June 30, 2009 was primarily the result of a $1.2 million increase in insurance expense related to FDIC insurance and a $316,000 increase in salary and benefit costs due mainly to increased group medical costs. These increases in other operating costs for the six month period ending June 30, 2009 were partially offset by a $291,000 decrease in expenses related to OREO. The decrease in the Company’s net interest income for the six-month period ending June 30, 2009 was caused by a 0.87% decrease in the yield on its interest-earning assets. Interest-earning assets averaged $868.5 million and $885.4 million, respectively, for the six months ending June 30, 2009 and 2008. The Company’s cost of funds on interest-bearing liabilities, which averaged $635.6 million and $672.4 million, respectively, for the six months ending June 30, 2009 and 2008, decreased by 1.02% for the six months ending June 30, 2009 as compared to the same period in 2008. The Company’s average cost of funds decreased more than the yield on average interest-earning assets for the six months ending June 30, 2009 as compared to the same period in 2008. However, the decrease in yield on interest-earning assets for the six month period ending June 30, 2009 had a greater affect on the margin during the period than the decrease in cost of funds for interest-bearing liabilities, because the average balances of interest-earning assets were approximately $230 million higher than the average balances of interest-bearing liabilities. The increase in earnings per diluted share for the second quarter of 2009 as compared to the second quarter of 2008 was caused by the increase in net income in the second quarter of 2009.

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. Both the Company’s loans and deposits consist largely of variable interest rate arrangements, with the result that as loans and deposits reprice, the Company can expect fluctuations in net interest income. Net interest income for the second quarter of 2009 increased $200,000, or 2%, to $11.7 million from $11.5 million in the second quarter of 2008 because of larger reductions in interest expense, accompanied by a smaller decrease in the yields on the Company’s loans. Net interest income for the six-month period ending June 30, 2009 decreased $819,000, or 3%, to $22.8 million from $23.7 million in the same period in 2008 due to a decrease in interest income, accompanied by a smaller decrease in interest expense. The following table compares average balances and rates for the quarters ending June 30, 2009 and 2008:

		Three Months Ended June 30,
																		Average Yields/Costs
		Average Balances								Change								Tax Equivalent
		2009				2008				$				%				2009				2008				Change
						(Dollars in thousands)
Commercial		$	277,519			$	283,679			$	(6,160	)			-2	%			7.08	%			7.34	%			-0.26	%
Construction/development			82,831				121,416				(38,585	)			-32	%			8.01	%			8.49	%			-0.48	%
Commercial real estate			280,661				247,960				32,701				13	%			7.01	%			7.52	%			-0.51	%
Home equity lines and other consumer			48,143				51,777				(3,634	)			-7	%			6.81	%			6.89	%			-0.08	%
Real estate loans for sale			10,503				—				10,503			NA					4.77	%		NA				NA
Other loans			(1,416	)			(1,044	)			(372	)			36	%
Total loans			698,241				703,788				(5,547	)			-1	%			7.13	%			7.59	%			-0.46	%
Short-term investments			25,185				59,480				(34,295	)			-58	%			0.25	%			2.29	%			-2.04	%
Long-term investments			136,734				130,066				6,668				5	%			3.25	%			4.10	%			-0.85	%
Total investments			161,919				189,546				(27,627	)			-15	%			2.79	%			3.56	%			-0.77	%
Interest-earning assets			860,160				893,334				(33,174	)			-4	%			6.31	%			6.73	%			-0.42	%
Nonearning assets			105,317				99,706				5,611				6	%
Total		$	965,477			$	993,040			$	(27,563	)			-3	%
Interest-bearing liabilities		$	605,435			$	676,271			$	(70,836	)			-10	%			1.19	%			2.03	%			-0.84	%
Demand deposits			243,299				203,881				39,418				19	%
Other liabilities			8,496				9,345				(849	)			-9	%
Equity			108,247				103,543				4,704				5	%
Total		$	965,477			$	993,040			$	(27,563	)			-3	%
Net tax equivalent margin on earning assets																			5.48	%			5.20	%			0.28	%