NORTHRIM BANCORP INC - Quarter Report: 2010 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

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.

(Exact name of registrant as specified in its charter)

Alaska		92-0175752
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification 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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 small reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer 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 November 5, 2010 was 6,409,779.

 

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited): September 30, 2010, December 31, 2009 and September 30, 2009			4
Consolidated Statements of Income (unaudited): Three and nine months ended September 30, 2010 and 2009			5
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (unaudited): Nine months ended September 30, 2010 and 2009			6
Consolidated Statements of Cash Flows (unaudited): Nine months ended September 30, 2010 and 2009			7
Notes to the Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			35
PART II OTHER INFORMATION
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3. Defaults Upon Senior Securities			36
Item 4. Reserved			36
Item 5. Other Information			36
Item 6. Exhibits			36
SIGNATURES			37
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, 2009.

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.

Consolidated Balance Sheets

September 30, 2010, December 31, 2009 and September 30, 2009

		September 30,				December 31,				September 30,
		2010				2009				2009
		(Unaudited)								(Unaudited)
		(In Thousands, Except Share Data)
ASSETS
Cash and due from banks		$	22,367			$	19,395			$	24,979
Overnight investments			60,939				47,326				51,120
Investment securities available for sale			206,342				178,159				142,373
Investment securities held to maturity			6,692				7,285				9,896
Investment in Federal Home Loan Bank stock			2,003				2,003				2,003
Total investment securities			215,037				187,447				154,272
Loans held for sale			20,082				—				—
Loans			635,475				655,039				674,191
Allowance for loan losses			(14,711	)			(13,108	)			(13,452	)
Net loans			640,846				641,931				660,739
Purchased receivables, net			8,654				7,261				8,202
Accrued interest receivable			3,234				3,986				3,472
Premises and equipment, net			28,769				28,523				28,889
Goodwill and intangible assets			8,767				8,996				9,072
Other real estate owned			11,019				17,355				10,118
Other assets			38,302				40,809				34,829
Total assets		$	1,037,934			$	1,003,029			$	985,692
LIABILITIES
Deposits:
Demand		$	281,972			$	276,532			$	267,291
Interest-bearing demand			126,056				134,899				115,337
Savings			77,971				66,647				62,761
Alaska CDs			111,526				104,840				108,057
Money market			132,349				125,339				123,239
Certificates of deposit less than $100,000			56,984				64,652				62,603
Certificates of deposit greater than $100,000			91,870				80,199				97,820
Total deposits			878,728				853,108				837,108
Securities sold under repurchase agreements			9,996				6,733				5,090
Other borrowings			5,506				5,587				5,649
Junior subordinated debentures			18,558				18,558				18,558
Other liabilities			8,290				8,023				9,356
Total liabilities			921,078				892,009				875,761
SHAREHOLDERS’ EQUITY
Preferred Stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding			—				—				—
Common stock, $1 par value, 10,000,000 shares authorized, 6,409,799 6,371,455, and 6,359,650 shares issued and outstanding at September 30, 2010, December 31, 2009, and September 30, 2009, respectively			6,410				6,371				6,360
Additional paid-in capital			52,660				52,139				51,994
Retained earnings			56,268				51,121				49,819
Accumulated other comprehensive income			1,476				1,341				1,727
Total Northrim BanCorp shareholders’ equity			116,814				110,972				109,900
Noncontrolling interest			42				48				31
Total shareholders’ equity			116,856				111,020				109,931
Total liabilities and shareholders’ equity		$	1,037,934			$	1,003,029			$	985,692

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Income

For the Three and Nine Months Ended September 30, 2010 and 2009

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Unaudited)								(Unaudited)
		(In Thousands, Except Per Share Data)
Interest Income
Interest and fees on loans		$	11,249			$	12,218			$	33,883			$	36,672
Interest on investment securities:
Securities available for sale			895				1,057				3,394				3,057
Securities held to maturity			68				98				213				295
Interest on overnight investments			54				31				119				64
Interest on domestic certificate of deposit			—				—				—				58
Total Interest Income			12,266				13,404				37,609				40,146
Interest Expense
Interest expense on deposits, borrowings and junior subordianted debentures			1,370				1,662				4,306				5,562
Net Interest Income			10,896				11,742				33,303				34,584
Provision for loan losses			417				1,374				3,167				4,866
Net Interest Income After Provision for Loan Losses			10,479				10,368				30,136				29,718
Other Operating Income
OREO gain on sale and rental income			1,277				206				1,930				446
Service charges on deposit accounts			659				791				2,121				2,269
Equity in earnings from RML			570				385				679				1,997
Purchased receivable income			485				474				1,394				1,706
Employee benefit plan income			466				469				1,417				1,282
Electronic banking income			449				463				1,284				1,124
Gain on sale of securities			58				24				471				220
Equity in earnings (loss) from Elliott Cove			(4	)			(13	)			(1	)			(106	)
Other income			517				566				1,650				1,676
Total Other Operating Income			4,477				3,365				10,945				10,614
Other Operating Expense
Salaries and other personnel expense			5,394				5,730				16,416				16,889
Occupancy			1,016				977				2,832				2,789
Insurance expense			502				502				1,482				2,266
Marketing expense			445				317				1,323				951
Professional and outside services			338				374				903				1,061
OREO expense net, including impairment			308				309				1,023				1,170
Equipment expense			304				286				821				887
Intangible asset amortization expense			76				82				229				247
Prepayment penalty on long term debt			—				718				—				718
Purchased receivable losses (gains)			(3	)			—				404				(16	)
Other operating expense			1,607				1,577				4,889				4,979
Total Other Operating Expense			9,987				10,872				30,322				31,941
Income Before Provision for Income Taxes			4,969				2,861				10,759				8,391
Provision for income taxes			1,629				810				3,243				2,318
Net Income			3,340				2,051				7,516				6,073
Less: Net income attributable to the noncontrolling interest			162				102				298				292
Net Income Attributable to Northrim BanCorp		$	3,178			$	1,949			$	7,218			$	5,781
Earnings Per Share, Basic		$	0.50			$	0.31			$	1.13			$	0.91
Earnings Per Share, Diluted		$	0.49			$	0.30			$	1.11			$	0.90
Weighted Average Shares Outstanding, Basic			6,401,069				6,348,519				6,391,252				6,388,757
Weighted Average Shares Outstanding, Diluted			6,479,813				6,422,262				6,473,915				6,406,117

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Changes in
Shareholders’ Equity and Comprehensive Income

For the Nine Months Ended September 30, 2010 and 2009

																		Accumulated
		Common Stock								Additional								Other
		Number				Par				Paid-in				Retained				Comprehensive				Noncontrolling
		of Shares				Value				Capital				Earnings				Income				Interest				Total
														(Unaudited)
														(In Thousands)
Nine months ending September 30, 2009:
Balance as of January 1, 2009			6,331			$	6,331			$	51,458			$	45,958			$	901			$	36			$	104,684
Cash dividend declared			—				—				—				(1,920	)			—				—				(1,920	)
Stock option expense			—				—				445				—				—				—				445
Exercise of stock options			29				29				33				—				—				—				62
Excess tax benefits from share-based payment arrangements			—				—				58				—				—				—				58
Distributions to noncontrolling interest			—				—				—				—				—				(297	)			(297	)
Comprehensive income:
Change in unrealized holding gain (loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				826				—				826
Net income attributable to the noncontrolling interest																							292				292
Net income attributable to Northrim BanCorp			—				—				—				5,781				—				—				5,781
Total Comprehensive Income																											6,899
Balance as of September 30, 2009			6,360			$	6,360			$	51,994			$	49,819			$	1,727			$	31			$	109,931
Nine months ending September 30, 2010:
Balance as of January 1, 2010			6,371			$	6,371			$	52,139			$	51,121			$	1,341			$	48			$	111,020
Cash dividend declared			—				—				—				(2,071	)			—				—				(2,071	)
Stock option expense			—				—				387				—				—				—				387
Exercise of stock options			39				39				(43	)			—				—				—				(4	)
Excess tax benefits from share-based payment arrangements			—				—				177				—				—				—				177
Distributions to noncontrolling interest																							(304	)			(304	)
Comprehensive income:
Change in unrealized holding gain (loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				135				—				135
Net income attributable to the noncontrolling interest																							298				298
Net income attributable to Northrim BanCorp			—				—				—				7,218				—				—				7,218
Total Comprehensive Income																											7,651
Balance as of September 30, 2010			6,410			$	6,410			$	52,660			$	56,268			$	1,476			$	42			$	116,856

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statement of Cash Flows

For the Nine Months Ended September 30, 2010 and 2009

		Nine Months Ended
		September 30,
		2010				2009
		(Unaudited)
		(In Thousands)
Operating Activities:
Net income		$	7,516			$	6,073
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Security (gains), net			(471	)			(220	)
Depreciation and amortization of premises and equipment			1,165				1,234
Amortization of software			130				121
Intangible asset amortization			229				247
Amortization of investment security premium, net of discount accretion			306				214
Deferred tax liability (benefit)			2,054				(1,221	)
Stock-based compensation			387				445
Excess tax benefits from share-based payment arrangements			(177	)			(58	)
Deferral of loan fees and costs, net			153				(6	)
Provision for loan losses			3,167				4,866
Purchased receivable loss (recovery)			404				(16	)
Purchases of loans held for sale			(43,593	)			(75,096	)
Proceeds from the sale of loans held for sale			23,530				75,160
Gain on sale of loans held for sale			(19	)			(64	)
Gain on sale of other real estate owned			(1,443	)			(424	)
Impairment on other real estate owned			250				516
Earnings in excess of proceeds from RML			(848	)			522
Equity in loss from Elliott Cove			1				106
Decrease in accrued interest receivable			752				1,340
(Increase) decrease in other assets			1,260				(2,091	)
Decrease (increase) of deferred gain on sales of other real estate owned			328				(90	)
Decrease (increase) of other liabilities			418				(372	)
Net Cash (Used) Provided by Operating Activities			(4,501	)			11,186
Investing Activities:
Investment in securities:
Purchases of investment securities-available-for-sale			(169,199	)			(87,722	)
Purchases of investment securities-held-to-maturity			(517	)			(1,217	)
Proceeds from sales/maturities of securities-available-for-sale			141,416				87,769
Proceeds from calls/maturities of securities-held-to-maturity			1,105				750
Proceeds from maturities of domestic certificates of deposit			—				14,500
Purchases of domestic certificates of deposit			—				(5,000	)
Investment in (repayment from) purchased receivables			(1,797	)			10,889
Loan paydowns, net of new advances			15,857				29,269
Proceeds from sale of other real estate owned			9,225				7,466
Investment in other real estate owned			(34	)			(1,470	)
Loan to Elliott Cove, net of repayments			60				(106	)
Purchases of premises and equipment			(1,411	)			(390	)
Purchases of software			(145	)			(60	)
Net Cash (Used) Provided by Investing Activities			(5,540	)			54,678
Financing Activities:
(Decrease) increase in deposits			25,620				(6,144	)
Increase in securities sold under repurchase agreements			3,263				3,460
Decrease in borrowings			(81	)			(22,827	)
Distributions to noncontrolling interest			(304	)			(297	)
Proceeds from issuance of common stock			(4	)			62
Excess tax benefits from share-based payment arrangements			177				58
Cash dividends paid			(2,045	)			(1,907	)
Net Cash (Used) Provided by Financing Activities			26,626				(27,595	)
Net Increase in Cash and Cash Equivalents			16,585				38,269
Cash and Cash Equivalents at Beginning of Period			66,721				37,830
Cash and Cash Equivalents at End of Period		$	83,306			$	76,099
Supplemental Information:
Income taxes paid		$	1,263			$	4,720
Interest paid		$	4,310			$	6,017
Transfer of loans to other real estate owned		$	1,990			$	3,518
Loans made to facilitate sales of other real estate owned		$	5,967			$	2,404
Cash dividends declared but not paid		$	26			$	18

See notes to the consolidated financial statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2010 and 2009

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. The Company determined that it operates as a single operating segment. Operating results for the interim period ended September 30, 2010, are not necessarily indicative of the results anticipated for the year ending December 31, 2010. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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, 2009.

          In July 2010, the FASB issued ASU 2010-20, an update to ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality. This update is intended to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The update requires expanded disclosures that will facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses. ASU 2010-20 is effective for the Company’s financial statements for annual and interim periods ending after December 15, 2010 and must be adopted prospectively. The Company does not expect that adoption will impact its financial position, results of operations, and earnings per share.

3. Investment Securities

          The carrying values and approximate fair values of investment securities at September 30, 2010 and September 30, 2009, respectively, are presented below. 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. There were eight securities with unrealized losses as of September 30, 2010 and no securities with unrealized losses as of September 30, 2009, respectively, that had been in a loss position for less than twelve months. There were no securities with unrealized losses as of September 30, 2010 and 2009 that had been in a loss position for more than twelve months. Because the Company does not intend to sell, nor is it required to sell these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In Thousands)
2010:
Securities available for sale
U.S. Treasury & government sponsored entities		$	151,614			$	805			$	7			$	152,411
Municpal Securities			6,169				300				—				6,469
U.S. Agency Mortgage-backed Securities			76				3				—				79
Corporate bonds			45,980				1,440				37				47,383
Total securities available for sale		$	203,839			$	2,548			$	44			$	206,342
Securities held to maturity
Municipal securities		$	6,692			$	304			$	—			$	6,996
Total securities held to maturity		$	6,692			$	304			$	—			$	6,996
Federal Home Loan Bank stock		$	2,003			$	—			$	—			$	2,003
2009:
Securities available for sale
U.S. Treasury & government sponsored entities		$	107,537			$	1,174			$	—			$	108,711
Municpal Securities			5,041				193				—				5,234
U.S. Agency Mortgage-backed Securities			91				—				—				91
Corporate bonds			26,770				1,567				—				28,337
Total securities available for sale		$	139,439			$	2,934			$	—			$	142,373
Securities Held to Maturity
Municipal Securities		$	9,896			$	311			$	—			$	10,207
Total securities held to maturity		$	9,896			$	311			$	—			$	10,207
Federal Home Loan Bank Stock		$	2,003			$	—			$	—			$	2,003

          The amortized cost and fair values of debt securities at September 30, 2010, 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.

          The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the nine months ending September 30, 2010 and September 30, 2009, respectively, are as follows:

						Gross				Gross
September 30,		Proceeds				Gains				Losses
		(In Thousands)
2010:
Available for sale securities		$	20,261			$	471			$	—
Held to maturity securities		$	—			$	—			$	—
2009:
Available for sale securities		$	7,550			$	220			$	—
Held to maturity securities		$	—			$	—			$	—

          A summary of interest income for the nine months ending September 30, 2010 and 2009 on available for sale investment securities is as follows:

September 30,		2010				2009
		(In Thousands)
US Treasury and government sponsored entities		$	2,096			$	1,860
U.S. Agency Mortgage-backed Securities			3				5
Other			1,080				1,011
Total taxable interest income		$	3,179			$	2,876
Municipal Securities			215				181
Total tax-exempt interest income			215				181
Total		$	3,394			$	3,057

          For the periods ending September 30, 2010, December 31, 2009 and September 30, 2009, we held Federal Home Loan Bank of Seattle (“FHLB”) stock with a book value approximately equal to its market value in the amounts of $2.0 million for each period. The Company evaluated its investment in FHLB stock for other-than-temporary impairment as of September 30, 2010, 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 nine-month period ending September 30, 2010, continued deterioration in the FHLB of Seattle’s financial position may result in future impairment losses.

          The Company has never had any investment in the common or preferred stock of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, which are commonly known as Fannie Mae and Freddie Mac, respectively. Additionally, we held no securities of any single issuer (other than government sponsored entities) that exceeded 10% of our shareholders’ equity at September 30, 2010, December 31, 2009 or September 30, 2009.

4. Lending Activities

          At September 30, 2010, 28% of the portfolio was scheduled to mature over the next 12 months, and 28% was scheduled to mature between October 1, 2011, and September 30, 2015. The following table sets forth the Company’s loan portfolio composition by loan type for the dates indicated:

		September 30, 2010								December 31, 2009								September 30, 2009
		Dollar				Percent				Dollar				Percent				Dollar				Percent
		Amount				of Total				Amount				of Total				Amount				of Total
		(In Thousands)
Commercial		$	237,667				37	%		$	248,195				38	%		$	249,171				37	%
Construction/development			50,979				8	%			62,573				10	%			82,160				12	%
Commercial real estate			305,808				48	%			301,816				46	%			298,828				44	%
Home equity lines and other consumer			43,882				7	%			45,168				7	%			46,047				7	%
Loans in process			90				0	%			85				0	%			691				0	%
Unearned loan fees, net			(2,951	)			0	%			(2,798	)			0	%			(2,706	)			0	%
Sub total			635,475				100	%			655,039				100	%			674,191				100	%
Loans held for sale			20,082								—								—
Total loans		$	655,557							$	655,039							$	674,191

          Loans held for sale: The Company has purchased residential loans from our mortgage affiliate, RML Holding Company (“RML”), from time to time since 1998. The Company then sells these loans in the secondary market. During 2009, the Company renewed its agreement with RML in anticipation of higher than normal refinance activity in the Anchorage market. The Company purchased $43.6 million and sold $23.5 million in loans in the nine-month period ending September 30, 2010. The Company purchased and sold $75.1 million in loans in the nine-month period ending September 30, 2009.

5. Allowance for Loan Losses, Nonperforming Assets and Loans Measured for Impairment

          The Company recorded a provision for loan losses in the amount of $417,000 and $3.2 million for the three and nine-month periods ending September 30, 2010 based upon its analysis of its loan portfolio.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(In Thousands)
Balance at beginning of period		$	14,427			$	13,187			$	13,108			$	12,900
Charge-offs:
Commercial			519				987				2,153				2,135
Construction/development			—				231				79				1,301
Commercial real estate			222				159				342				1,217
Home equity lines and other consumer			52				145				305				286
Total charge-offs			793				1,522				2,879				4,939
Recoveries:
Commercial			638				398				1,256				565
Construction/development			—				—				4				—
Commercial real estate			—				1				11				10
Home equity lines and other consumer			23				14				45				50
Total recoveries			660				413				1,315				625
Net, (recoveries) charge-offs			133				1,109				1,564				4,314
Provision for loan losses			417				1,374				3,167				4,866
Balance at end of period		$	14,711			$	13,452			$	14,711			$	13,452

          At September 30, 2010, the Allowance was $14.7 million as compared to $13.5 million, at September 30, 2009. The increase in the Allowance at September 30, 2010 as compared to September 30, 2009 was the result of a $3.2 million provision and $1.6 million in net charge-offs. The Company’s ratio of nonperforming loans compared to portfolio loans at September 30, 2010 was 2.19% as compared to 4.28% as of September 30, 2009. The Company’s ratio of Allowance compared to portfolio loans at September 30, 2010 was 2.31% as compared to 2.00% as of September 30, 2009. While the Company’s ratio of nonperforming loans compared to portfolio loans has decreased as of September 30, 2010, the Company believes that a higher reserve is appropriate to address the impact of the current economic environment on our loan portfolio.

          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:

		September 30, 2010				December 31, 2009				September 30, 2009
		(In Thousands)
Nonaccrual loans		$	13,688			$	12,738			$	22,432
Accruing loans past due 90 days or more			200				1,000				2,625
Restructured loans			—				3,754				3,800
Total nonperforming loans			13,888				17,492				28,857
Other real estate owned			11,019				17,355				10,118
Repossessed assets			105				—				—
Total nonperforming assets		$	25,012			$	34,847			$	38,975
Allowance for loan losses		$	14,711			$	13,108			$	13,452
Nonperforming loans to gross loans			2.19	%			2.67	%			4.28	%
Nonperforming assets to total assets			2.41	%			3.47	%			3.95	%
Allowance to gross loans			2.31	%			2.00	%			2.00	%
Allowance to nonperforming loans			105.93	%			74.94	%			46.62	%

6. Goodwill and Other Intangibles

          The Company performs goodwill impairment testing 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, 2009. There was no indication of impairment as of September 30, 2010. The Company continues to monitor the Company’s goodwill for potential impairment on an ongoing basis. No assurance can be given that there will not be an impairment charge to earnings during 2010 for goodwill impairment, if, for example, our stock price declines 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.

7. Variable Interest Entities

          The Company has analyzed all of its affiliate relationships in accordance with GAAP and determined that Elliott Cove is a variable interest entity (“VIE”). However, the Company does not have a controlling interest in Elliott Cove. The Company owns a 48% equity interest in Elliott Cove, an investment advisory services company, through its wholly—owned subsidiary, Northrim Investment Services Company (“NISC”). The Company determined that Elliott Cove is a VIE based on the fact that the Company provides Elliott Cove with a line of credit for which the majority owner of Elliott Cove provides additional subordinated financial support in the form of a 50% guarantee. This line of credit has a committed amount of $750,000 and an outstanding balance of $617,000 as of September 30, 2010. Furthermore, Elliott Cove does not have access to any other financial support through other institutions, nor is it likely that they would be able to obtain additional lines of credit based on their operational losses to date and their resulting lack of equity. As such, it appears that Elliott Cove cannot finance its activities without additional subordinated financial support and is therefore considered a VIE under GAAP. However, the Company has determined that it does not have a controlling interest in Elliott Cove based on the following facts and circumstances:

	a.		Neither the Company nor any members of the Company’s management have control over the budgeting or operational processes of Elliott Cove.
	b.		While the President, CEO and Chairman of the Company is a member of Elliott Cove’s board, he does not exert influence on decisions beyond Northrim Investment Services Company’s ownership percentage in Elliott Cove.
	c.		The Company has no veto rights with respect to decisions affecting the operations of Elliott Cove

          The Company has the obligation to absorb losses of Elliott Cove up to its ownership percentage of 47.6%. There are no caps or guarantees on returns, and there are no protections to limit any investor’s share of losses. Additionally, the Company provides Elliott Cove with a $750,000 line of credit. This line includes a 50% personal guarantee by the majority owner of Elliott Cove. Therefore, the Company does have the obligation to absorb losses and the right to receive benefits that could be significant to Elliott Cove and which, as a result of it’s exposure to 50% of any losses incurred on the line of credit that the Company has extended to Elliott Cove, may be greater than the Company’s 47.6% ownership therein.

          However, GAAP requires that the Company have both the power to control the activities of Elliott Cove that most significantly impact its economic performance, and the obligation to absorb losses or the right to receive benefits from Elliott Cove that could potentially be significant to Elliott Cove. The Company has determined that the facts and circumstances of its relationship with Elliott Cove including its overall involvement in the operations, decision-making capabilities and proportionate share in earnings and losses does not satisfy the criteria for a controlling interest because it does not have the power to direct the activities of Elliott Cove according to GAAP.

          The Company also provides a line of credit to our mortgage affiliate, RML. While the Company also provides a line of credit to RML, which is also guaranteed by the other owners of RML, RML has other available lines of credit with unrelated financial institutions which have been in place for many years. Additionally, RML has a history of profitability and has sufficient capital to support its operations. RML had $17.9 million in equity, $87.8 million in assets and net income of $9.1 million as of and for the year ended December 31, 2009 (see Note 9 in the Company’s Form 10-K for the year ended December 31, 2009). As such, the total equity investment in the entity, which is provided by the Company and the other owners, is adequate to finance the activities of RML. Therefore, the Company has concluded that RML is not a VIE.

8. Deposit Activities

          Total deposits at September 30, 2010, December 31, 2009 and September 30, 2009 were $878.7 million, $853.1 million and $837.1 million, respectively. The only deposit category with stated maturity dates is certificates of deposit. At September 30, 2010, the Company had $148.9 million in certificates of deposit as compared to certificates of deposit of $144.9 million and $160.4 million, for the periods ending December 31, 2009 and September 30, 2009, respectively. At September 30, 2010, $105.9 million, or 71%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $100.1 million, or 69%, of total certificates of deposit at December 31, 2009, and $125.7 million, or 78%, of total certificates of deposit at September 30, 2009.

9. Stock Incentive Plan

          The Company 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. During the second quarter ended June 30, 2010, the Company’s shareholders approved the 2010 Stock Option Plan (“2010 Plan”) under which it may grant 325,000 shares of stock in the form of stock options and restricted stock units. The Company’s policy is to issue new shares to cover awards. The total number of stock options and restricted stock units outstanding under the 2004 Plan and previous stock incentive plans at September 30, 2010 was 359,684. There are 23,232 shares available for future awards under the 2004 Plan. All 325,000 shares in the 2010 Plan are also available for future awards. Under both the 2004 and 2010 Plans, 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 the 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 $94,000 and $85,000 on the fair value of restricted stock units and $35,000 and $61,000 on the fair value of stock options for a total of $129,000 and $146,000 in stock-based compensation expense for the three-month periods ending September 30, 2010 and 2009, respectively. For the nine-month periods ending September 30, 2010 and 2009, the Company recognized expense of $283,000 and $263,000, respectively, on the fair value of restricted stock units and $104,000 and $182,000, respectively, on the fair value of stock options for a total of $387,000 and $445,000, respectively, in stock-based compensation expense.

          Proceeds from the exercise of stock options for the three months ended September 30, 2010 and 2009 were $292,000 and $262,000, respectively. The Company withheld shares valued at $297,000 and $204,000 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 September 30, 2010 and 2009, respectively. The Company recognized tax deductions of $75,000 and $51,000 related to the exercise of these stock options during the quarter ended September 30, 2010 and 2009, respectively.

          Proceeds from the exercise of stock options for the nine months ended September 30, 2010 and 2009 were $789,000 and $334,000, respectively. The Company withheld shares valued at $794,000 and $276,000 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 nine-month periods ending September 30, 2010 and 2009, respectively. The Company recognized tax deductions of $177,000 and $58,000, respectively, related to the exercise of stock options during the nine months ended September 30, 2010 and 2009, respectively. The Company recognized tax deductions of $41,000 related to the vesting of restricted stock units during the nine months ended September 30, 2009. There were no restricted stock units that vested during the nine months ended September 30, 2010.

10. Fair Value of Assets and Liabilities

          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, Due from Banks and Overnight 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 Held for Sale: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Loans: Fair value adjustments for loans are mainly related to credit risk, interest rate risk, required equity return, and liquidity risk. Credit risk is primarily addressed in the financial statements through the Allowance (see Note 5). Loans are valued using a discounted cash flow methodology and are pooled based on type of interest rate (fixed or adjustable) and maturity. A discount rate was developed based on the relative risk of the cash flows, taking into account the maturity of the loans and liquidity risk. Impaired loans are carried at fair value. Specific valuation allowances are included in the Allowance. The carrying amount of accrued interest receivable approximates its fair value.

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

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 approximates 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.

Securities sold under repurchase agreements: Fair values for securities sold under repurchase agreements are based on their carrying amounts due to their short duration and repricing frequency.

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 nonrecurring adjustment to fair value: The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets or OREO at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the write down of individual assets.

The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and impaired loans as of each reporting date. In-house appraisals are considered Level 3 inputs and external appraisals are considered Level 2 inputs.. The Company’s determination of which method to use is based upon several factors. The Company takes into account compliance with legal and regulatory guidelines, the amount of the loan, the size of the assets, the location and type of property to be valued and how critical the timing of completion of the analysis is to the assessment of value. Those factors are balanced with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists.

The Company uses external sources to estimate fair value for projects that are not fully constructed as of the date of valuation. These projects are generally valued as if complete, with an appropriate allowance for cost of completion, including contingencies developed from external sources such as vendors, engineers and contractors. The Company believes that recording other real estate owned that is not fully constructed based on as if complete values is more appropriate than recording other real estate owned that is not fully constructed using as is values. We concluded that as if complete values are appropriate for these types of projects based on the guidance for capitalization of project costs and subsequent measurement of the value of real estate contained in ASC 970-340. ASC 970-340-35-1 specifically states that estimates and cost allocations must be reviewed at the end of each reporting period and reallocated based on revised estimates. The Company adjusts the carry value of other real estate owned in

accordance with this guidance for increases in estimated cost to complete that exceed the fair value of the real estate at the end of each reporting period.

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.

          Estimated fair values as of September 30, 2010 and December 31, 2009 are as follows:

		September 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	83,306			$	83,306			$	66,721			$	66,721
Investment securities			212,534				215,341				187,447				187,678
Loans held for sale			20,082				20,082				—				—
Net loans			640,846				596,689				641,931				616,476
Purchased receivables			8,654				8,654				7,261				7,261
Accrued interest receivable			3,234				3,234				3,986				3,986
Financial liabilities:
Deposits		$	878,728			$	877,152			$	853,108			$	841,629
Accrued interest payable			390				390				394				394
Securities sold under repurchase			9,996				9,996				6,733				6,733
Other Borrowings			5,506				4,810				5,587				4,941
Junior subordinated debentures			18,558				9,066				18,558				10,111
Unrecognized financial instruments:
Commitments to extend credit(1)		$	188,300			$	1,883			$	166,704			$	1,667
Standby letters of credit(1)			18,231				182				16,913				169

          The following table sets forth the balances as of September 30, 2010 and 2009 of assets and liabilities measured at fair value on a recurring basis:

						Quoted Prices in				Signifcant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable Inputs
		Total				Assets (Level 1)				Inputs (Level 2)				(Level 3)
		(In Thousands)
2010:
Available for sale securities
U.S. Treasury & government sponsored		$	152,411				—			$	152,411				—
Municipal Securities			6,469				—				6,469				—
U.S. Agency Mortgage-backed Securities			79								79
Corporate bonds			47,383				—				47,383				—
Total		$	206,342				—			$	206,342				—
2009:
Available for sale securities
U.S. Treasury & government sponsored		$	108,711				—			$	108,711				—
Municipal Securities			5,234				—				5,234				—
U.S. Agency Mortgage-backed Securities			91								91
Corporate bonds			28,337				—				28,337				—
Total		$	142,373				—			$	142,373				—

          As of and for the nine months ending September 30, 2010 and 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:

						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
		(In Thousands)
2010:
Loans measured for impairment1		$	5,163				—			$	3,928			$	1,235			$	(793	)
Other real estate owned2			640				—				—				640				250
Total		$	5,803				—			$	3,928			$	1,875			$	(543	)
2009:
Loans measured for impairment1		$	17,753				—			$	6,143			$	11,610			$	(416	)
Other real estate owned2			6,171				—				—				6,171				516
Total		$	23,924				—			$	6,143			$	17,781			$	100

     For loans measured for impairment, the Company classifies fair value measurements using observable inputs, such as external appraisals, as level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as level 3 valuations in the fair value hierarchy.

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

     This discussion should be read in conjunction with the unaudited financial statements of Northrim BanCorp, Inc. (the “Company”) and the notes thereto presented elsewhere in this report and with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Note Regarding Forward Looking-Statements

          This quarterly report on Form 10-Q includes forward-looking statements, which are not historical facts. These forward-looking statements describe management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of the 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 “anticipate,” “believe,” “expect,” “intend” and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management’s current plans and expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations, and those variations may be both material and adverse. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the general condition of, and changes in, the Alaska economy; factors that impact our net interest margin; and our ability to maintain asset quality. 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 Item 1A Risk Factors of this report, and in our other 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, other than as required by law.

Critical Accounting Policies

          The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.

          The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. The Company’s critical accounting policies include those that address the accounting for the Allowance, the valuation of goodwill and other intangible assets, and the valuation of other real estate owned. 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, 2009. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements.

          See Note 2 of the Notes to the Consolidated Financial Statements in this Form 10-Q for a summary of the pronouncements that became effective in 2010 and discussion of the impact of their adoption on the Company’s consolidated financial statements.

Economic Conditions

          According to the Department of Labor, “Alaska’s seasonally adjusted unemployment rate for August was 7.7%, unchanged from July. The comparable national jobless rate for August was 9.6%, up slightly from 9.5% in July. One year ago, the national unemployment rate was 9.7% compared to 8.2% for Alaska. August was the 22nd consecutive month that Alaska’s unemployment rate was lower than the nation’s.” The average monthly payroll job count in Alaska has increased 1% (from 322,550 to 325,875) through August of 2010 when compared to the first eight months of 2009..

          According to the Bureau of Economic Analysis personal income in Alaska rose 3.5% between the second quarter of 2009 and 2010. This is compared to 2.2% growth over the same period in the US. Personal income in Alaska has grown for six consecutive quarters between the first quarter of 2009 and the second quarter of 2010.

          The retail sector is currently benefitting from the seasonal boost in consumption generated from the Permanent Fund Dividend, which paid $1,281 to every Alaska resident early in October.

Highlights and Summary of Performance — Third Quarter of 2010

	§		Northrim continued to maintain strong capital ratios with Tier 1 Capital/risk adjusted assets of 14.46% as compared to 14.77% in the immediate prior quarter and 13.96% a year ago. Because the Company elected not to participate in the Capital Purchase Program sponsored by the U. S. Treasury in 2008, these ratios do not reflect any government investment in Northrim.
	§		Northrim’s tangible common equity to tangible assets at quarter end was 10.50%, up from 10.32% a year earlier and consistent with the previous quarter which was 10.53%. Tangible common equity to tangible assets is a non-GAAP ratio that represents total equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. The GAAP measure of equity to assets is total equity divided by total assets. Total equity to total assets was 11.26% at September 30, 2010 as compared to 11.15% at September 30, 2009.
	§		Nonperforming assets declined in the quarter to $25.0 million or 2.41% of total assets, compared to $39 million or 3.95% at September 30, 2009.
	§		Book value was $18.22 per share and tangible book value was $16.86 per share, up from $17.28 and $15.85 respectively a year earlier. Tangible book value is shareholder’s equity, less intangible assets, divided by common stock outstanding.
	§		The allowance for loan losses continued to increase, now totaling 2.31% of total portfolio loans at September 30, 2010, compared to 2.00% at September 30, 2009. The allowance for loan losses to nonperforming loans also increased to 105.93% from 46.62% a year ago.
	§		Other operating income, which includes revenues from service charges, electronic banking, and financial services affiliates, contributed 29% of total third quarter revenues and 25% of year-to-date revenues.
	§		The cash dividend paid on September 17, 2010, rose 20% to $0.12 per diluted share from $0.10 per diluted share paid in the prior quarter.

          The Company reported net income and diluted earnings per share of $3.2 million and $0.49, respectively, for the quarter ending September 30, 2010 compared to net income and diluted earnings per share of $1.9 million and $0.30, respectively, for the quarter ending September 30, 2009. The increase in net income from the prior year was primarily attributable to an increase in other operating income and decreases in other operating expense and the provision for loan losses. These changes were partially offset by a decrease in net interest income and an increase in the provision for income taxes.

          Northrim’s total assets grew 5% to $1.04 billion at September 30, 2010 from $986 million at September 30, 2009, with increases in portfolio investments, loans held for sale, overnight investments, and cash and due from banks more than offsetting continuing declines in portfolio loans. The loan portfolio decreased 6% in the third quarter to $635 million from $674 million a year ago. This decrease

was primarily due to continued decreases in Construction loans and a lower level of Commercial loans.

          The loan portfolio remains diversified with commercial loans accounting for 37% of the portfolio and commercial real estate accounting for 48% of the portfolio at September 30, 2010. Construction and land development loans, which account for 8% of the loan portfolio at September 30, 2010 are down 38% to $51 million from $82.2 million a year ago, reflecting the maturing of projects funded in past years, the reduction in new projects started in the past two years, and continuing successful collection efforts.

Credit Quality and Nonperforming Assets

          Nonperforming assets at September 30, 2010, declined by $14 million year-over-year and $3.4 million from the preceding quarter. The risk profile of the portfolio improved as a result of the following developments:

	§		Loans measured for impairment decreased to $22.2 million at September 30, 2010, compared to $25.1 million at June 30, 2010, and $52.6 million in the third quarter a year ago.
	§		Nonperforming loans totaled $13.9 million, or 2.19% of total portfolio loans at September 30, 2010, compared to $28.9 million, or 4.28% of total portfolio loans a year ago.
	§		The $4.8 million condominium conversion project in Anchorage that moved into OREO during the fourth quarter of 2009 continues to generate rental income producing an average yield of approximately 2%. Of the 68 original units, 35 condos have been sold and 22 are rented, providing positive year-to-date cash flow for the project.
	§		Sales of OREO continued during the third quarter, with 26 properties sold for an aggregate of $3.3 million, generating a $332,000 net gain over current carrying value in the third quarter of 2010. The Company also recognized $830,000 in deferred gains on sales of OREO property that occurred in previous periods and now meet the accounting requirements for gain recognition. Of the current period gain, $422,000 was related to a deferred gain for one commercial property that was sold in 2007, and the remainder of the gains recognized in the current quarter were from the sale of ten condominiums and two lots sold in late 2009 and throughout the first half of 2010. At September 30, 2010 the Company had $194,000 in remaining deferred gains on sale of OREO property.
	§		Year-to-date OREO sales generated $9.2 million in gross proceeds, including $613,000 in gain on sale of 62 properties. Year-to-date gain on the sale of OREO totaled $1.4 million including the recognition of the $830,000 in deferred gains discussed above.
	§		Net charge-offs in the third quarter of 2010 totaled $132,000, or 0.02% of average loans, reflecting the effects of $661,000 in recoveries, compared to net charge-offs of $1.1 million, or 0.16% of average loans during the third quarter of 2009. Year-to-date net charge-offs totaled $1.6 million, or 0.32%, annualized, of average loans, down from $4.3 million, 0.83%, annualized, of average loans in the first nine months of 2009.
	§		The coverage ratio of the allowance to nonperforming loans increased to 105.93% at September 30, 2010, compared to 46.62% in the third quarter a year ago.

          At September 30, 2010, management had identified potential problem loans of $11.7 million as compared to potential problem loans of $17.0 million at December 31, 2009 and $6.5 million at September 30, 2009. Potential problem loans are loans which are currently performing and are not included in nonaccrual loans, accruing loans 90 days or more past due, impaired loans or troubled debt restructurings (“TDRs”) that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, impaired or TDRs. The $5.3 million decrease in potential problem loans at September 30, 2010 from December 31, 2009 is primarily due to the transfer of one $3.3 million residential land development loan and 2 commercial loans to nonaccrual status.

          At September 30, 2010, December 31, 2009 and September 30, 2009 the Company held OREO of $11.0 million, $17.4 million and $10.1 million, respectively. As of September 30, 2010, OREO consists of $6.3 million in condominiums, $3.2 million in residential lots in various stages of development, $1.2 million

in single family residences and $399,000 in commercial property. During the third quarter of 2010, additions to OREO included two single family residences valued at $907,000, one commercial building valued at $99,000, and one condominium valued at $49,000. During the third quarter of 2010, the Company received approximately $3.3 million in proceeds for the sale of OREO, which included $2.1 million from the sale of condominiums, $1 million from the sale of residential lots and $228,000 from the sale of a single family residence. Total net gains on the sale of OREO properties were $1.2 million and $1.4 million for the three and nine-month periods ending September 30, 2010.

          The following summarizes OREO activity for the three and nine-month periods ending September 30, 2010 and 2009:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
		(In Thousands)
Balance, beginning of the period		$	12,973			$	11,576			$	17,355			$	12,617
Transfers from loans, net			1,059				627				1,990				3,518
Investment in other real estate owned			7				298				34				1,470
Proceeds from the sale of other real estate owned			(3,337	)			(2,634	)			(9,225	)			(7,466	)
Gain on sale of other real estate owned, net			1,162				201				1,443				424
Deferred gain on sale of other real estate owned			(771	)			71				(328	)			71
Impairment on other real estate owned			(74	)			(21	)			(250	)			(516	)
Balance at end of period		$	11,019			$	10,118			$	11,019			$	10,118