NORTHRIM BANCORP INC - Quarter Report: 2010 March (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 (State or other jurisdiction of incorporation or organization)		92-0175752 (I.R.S. Employer Identification Number)

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

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, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Small 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 May 7, 2010 was 6,386,925.

 

 

TABLE OF CONTENTS

PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements			3
		Consolidated Financial Statements			4
		Consolidated Balance Sheets
		- March 31, 2010 (unaudited)			4
		- December 31, 2009			4
		- March 31, 2009 (unaudited)			4
		Consolidated Statements of Income (unaudited)
		-Three months ended March 31, 2010 and 2009			5
		Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (unaudited)
		- Three months ended March 31, 2010 and 2009			6
		Consolidated Statements of Cash Flows (unaudited)
		- Three months ended March 31, 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			28
Item 4.		Controls and Procedures			29
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			29
Item 1A.		Risk Factors			29
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3.		Defaults Upon Senior Securities			29
Item 4.		Reserved			29
Item 5.		Other Information			29
Item 6.		Exhibits			29
SIGNATURES					31
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
March 31, 2010, December 31, 2009 and March 31, 2009

		March 31,				December 31,				March 31,
		2010				2009				2009
		(Unaudited)								(Unaudited)
		(In Thousands, Except Share Data)
ASSETS
Cash and due from banks		$	18,920			$	19,395			$	24,236
Overnight investments			59,259				47,326				55,345
Domestic certificates of deposit			—				—				5,000
Investment securities held to maturity			7,666				7,285				10,649
Investment securities available for sale			164,017				178,159				125,496
Investment in Federal Home Loan Bank stock			2,003				2,003				2,003
Total investment securities			173,686				187,447				138,148
Real estate loans for sale			—				—				4,160
Loans			646,917				655,039				678,709
Allowance for loan losses			(14,046	)			(13,108	)			(13,364	)
Net loans			632,871				641,931				669,505
Purchased receivables, net			6,962				7,261				10,789
Accrued interest receivable			3,683				3,986				3,789
Premises and equipment, net			28,140				28,523				29,551
Goodwill and intangible assets			8,920				8,996				9,238
Other real estate owned			16,065				17,355				13,737
Other assets			40,050				40,809				33,245
Total Assets		$	988,556			$	1,003,029			$	992,583
LIABILITIES
Deposits:
Demand		$	260,817			$	276,532			$	241,039
Interest-bearing demand			120,373				134,899				108,048
Savings			70,033				66,647				60,259
Alaska CDs			111,019				104,840				108,373
Money market			126,156				125,339				125,973
Certificates of deposit less than $100,000			61,287				64,652				82,950
Certificates of deposit greater than $100,000			85,370				80,199				114,963
Total deposits			835,055				853,108				841,605
Borrowings			14,591				12,320				16,594
Junior subordinated debentures			18,558				18,558				18,558
Other liabilities			7,938				8,023				9,663
Total liabilities			876,142				892,009				886,420
SHAREHOLDERS’ EQUITY
Common stock, $1 par value, 10,000,000 shares authorized, 6,386,925, 6,371,455, and 6,332,236 shares issued and outstanding at March 31, 2010, December 31, 2009, and March 31, 2009, respectively			6,387				6,371				6,332
Additional paid-in capital			52,355				52,139				51,609
Retained earnings			52,374				51,121				47,273
Accumulated other comprehensive income			1,295				1,341				919
Total Northrim Bancorp shareholders’ equity			112,411				110,972				106,133
Noncontrolling interest			3				48				30
Total shareholders’ equity			112,414				111,020				106,163
Total Liabilities and Shareholders’ Equity		$	988,556			$	1,003,029			$	992,583

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Income
For the Three Months Ended March 31, 2010 and 2009

		Three Months Ended
		March 31,
		2010				2009
		(Unaudited)
		(In Thousands,
		Except Per Share Data)
Interest Income
Interest and fees on loans		$	11,422			$	12,058
Interest on investment securities:
Securities available for sale			1,254				1,063
Securities held to maturity			75				91
Interest on overnight investments			23				18
Interest on domestic certificate of deposit			—				57
Total Interest Income			12,774				13,287
Interest Expense
Interest expense on deposits, borrowings and junior subordianted debentures			1,470				2,111
Net Interest Income			11,304				11,176
Provision for loan losses			1,375				1,375
Net Interest Income After Provision for Loan Losses			9,929				9,801
Other Operating Income
Service charges on deposit accounts			700				703
Employee benefit plan income			421				366
Electronic banking income			400				310
Purchased receivable income			314				758
Equity in earnings (loss) from Elliott Cove			5				(65	)
Equity in earnings (loss) from RML			(73	)			848
Other income			1,096				670
Total Other Operating Income			2,863				3,590
Other Operating Expense
Salaries and other personnel expense			5,620				5,451
Occupancy			919				915
Insurance expense			558				805
Marketing expense			439				318
OREO expense net, including impairment			372				404
Equipment expense			273				304
Professional and outside services			242				545
Intangible asset amortization expense			76				82
Other operating expense			1,665				1,704
Total Other Operating Expense			10,164				10,528
Income Before Provision for Income Taxes			2,628				2,863
Provision for income taxes			702				827
Net Income			1,926				2,036
Less: Net income attributable to the noncontrolling interest			26				81
Net income attributable to Northrim Bancorp		$	1,900			$	1,955
Earnings Per Share, Basic		$	0.30			$	0.31
Earnings Per Share, Diluted		$	0.29			$	0.31
Weighted Average Shares Outstanding, Basic			6,385,760				6,393,589
Weighted Average Shares Outstanding, Diluted			6,468,310				6,393,589

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Changes in
Shareholders’ Equity and Comprehensive Income
For the Three Months Ended March 31, 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)
Three months ending March 31, 2009:
Balance as of January 1, 2009			6,331			$	6,331			$	51,458			$	45,958			$	901			$	36			$	104,684
Cash dividend declared			—				—				—				(640	)			—				—				(640	)
Stock option expense			—				—				149				—				—				—				149
Exercise of stock options			1				1				(4	)			—				—				—				(3	)
Excess tax benefits from share-based payment arrangements			—				—				6				—				—				—				6
Distributions to noncontrolling interest			—				—				—				—				—				(87	)			(87	)
Comprehensive income:
Change in unrealized holding (gain/loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				18				—				18
Net income attributable to the noncontrolling interest																							81				81
Net income attributable to Northrim Bancorp			—				—				—				1,955				—				—				1,955
Total Comprehensive Income																											2,054
Balance as of March 31, 2009			6,332			$	6,332			$	51,609			$	47,273			$	919			$	30			$	106,163
Three months ending March 31, 2010:
Balance as of January 1, 2010			6,371			$	6,371			$	52,139			$	51,121			$	1,341			$	48			$	111,020
Cash dividend declared			—				—				—				(647	)			—				—				(647	)
Stock option expense			—				—				129				—				—				—				129
Exercise of stock options			16				16				(15	)			—				—				—				1
Excess tax benefits from share-based payment arrangements			—				—				102				—				—				—				102
Distributions to noncontrolling interest																							(71	)			(71	)
Comprehensive income:
Change in unrealized holding (gain/loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				(46	)			—				(46	)
Net income attributable to the noncontrolling interest																							26				26
Net income attributable to Northrim Bancorp			—				—				—				1,900				—				—				1,900
Total Comprehensive Income																											1,880
Balance as of March 31, 2010			6,387			$	6,387			$	52,355			$	52,374			$	1,295			$	3			$	112,414

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2010 and 2009

		Three Months Ended
		March 31,
		2010				2009
		(Unaudited)
		(In Thousands)
Operating Activities:
Net income		$	1,926			$	2,036
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Security (gains), net			(281	)			—
Depreciation and amortization of premises and equipment			385				416
Amortization of software			40				41
Intangible asset amortization			76				82
Amortization of investment security premium, net of discount accretion			40				94
Deferred tax (benefit)			1,770				(624	)
Stock-based compensation			129				149
Excess tax benefits from share-based payment arrangements			(102	)			(6	)
Deferral of loan fees and costs, net			(221	)			(358	)
Provision for loan losses			1,375				1,375
Purchased receivable loss (recovery)			1				(16	)
Purchases of loans held for sale			—				(35,978	)
Proceeds from the sale of loans held for sale			—				31,818
Gain\ on sale of other real estate owned			(70	)			(108	)
Impairment on other real estate owned			176				196
Earnings in excess of proceeds (proceeds in excess of earnings) from RML			245				(67	)
Equity in (income) loss from Elliott Cove			(5	)			65
Decrease in accrued interest receivable			303				1,023
(Increase) decrease in other assets			(1,143	)			75
Decrease of other liabilities			(40	)			(131	)
Net Cash Provided by Operating Activities			4,604				82
Investing Activities:
Investment in securities:
Purchases of investment securities-available-for-sale			(26,028	)			(20,500	)
Purchases of investment securities-held-to-maturity			(517	)			(1,218	)
Proceeds from sales/maturities of securities-available-for-sale			40,334				35,949
Proceeds from calls/maturities of securities-held-to-maturity			135				—
Purchases of domestic certificates of deposit			—				9,500
Investment in Federal Home Loan Bank stock, net			—				(5,000	)
Investment in purchased receivables, net of repayments			298				8,302
Investments in loans:
Loan participations			3,834				—
Loans made, net of repayments			3,328				29,258
Proceeds from sale of other real estate owned			1,981				2,104
Investment in other real estate owned			(4	)			(546	)
Loan to Elliott Cove, net of repayments			(43	)			(34	)
Purchases of premises and equipment			(2	)			(234	)
Purchases of software			(73	)			(37	)
Net Cash Provided by Investing Activities			23,243				57,544
Financing Activities:
Decrease in deposits			(18,053	)			(1,647	)
Increase (decrease) in borrowings			2,271				(13,512	)
Distributions to noncontrolling interest			(71	)			(87	)
Proceeds from issuance of common stock			1				—
Excess tax benefits from share-based payment arrangements			102				6
Cash dividends paid			(639	)			(635	)
Net Cash Used by Financing Activities			(16,389	)			(15,875	)
Net Increase in Cash and Cash Equivalents			11,458				41,751
Cash and cash equivalents at beginning of period			66,721				37,830
Cash and cash equivalents at end of period		$	78,179			$	79,581
Supplemental Information:
Income taxes paid		$	4			$	—
Interest paid		$	1,456			$	2,383
Transfer of loans to other real estate owned		$	744			$	2,766
Loans made to facilitate sales of other real estate owned		$	291			$	—
Cash dividends declared but not paid		$	8			$	6

See notes to the consolidated financial statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 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 the Company operates as a single operating segment. Operating results for the interim period ended March 31, 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 June 2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) 166, Accounting for Transfers of Financial Assets (“SFAS 166”). ASU 2009-01 identified SFAS 166 as authoritative until such time that each is integrated into the Codification. This accounting standard 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 SFAS 140 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 has been adopted prospectively. The adoption of SFAS 166 did not have a material effect on the Company’s financial condition and results of operations.

     In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation 46(R) (as amended) (“SFAS 167”). ASU 2009-01 identified SFAS 166 as authoritative until such time that each is integrated into the Codification. The FASB’s objective in issuing this accounting standard 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. This accounting standard is effective for the Company’s financial statements for annual and interim periods beginning after November 15, 2009 and has been adopted prospectively. The adoption of SFAS 167 did not have a material effect on the Company’s financial condition and results of operations.

     In January 2010, the FASB issued ASU 2010-06, an update to ASC 820-10, Fair Value Measurements. This update adds a new requirement to disclose transfers in and out of level 1 and level 2, along with the reasons for the transfers, and requires a gross presentation of purchases and sales of level 3 activities. Additionally, the update clarifies that entities provide fair value measurement disclosures for each class of assets and liabilities and that entities provide enhanced disclosures around level 2 valuation techniques and inputs. The Company adopted the disclosure requirements for level 1 and level 2 transfers and the expanded fair value measurement and valuation disclosures effective January 1, 2010. The disclosure requirements for level 3 activities are effective for the Company on January 1, 2011. The adoption of the disclosure requirements for level 1 and level 2 transfers and the expanded qualitative disclosures had no impact on the Company’s financial position, results of operations, and earnings per share. The Company does

not expect the adoption of the level 3 disclosure requirements to have an impact on its financial position, results of operations, and earnings per share.

3. Investment Securities

     The carrying values and approximate fair values of investment securities at March 31, 2010 and March 31, 2009, respectively, are presented below. There were five and four securities with unrealized losses as of March 31, 2010 and 2009, respectively, that had been in a loss position for less than twelve months. 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 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		$	127,730			$	768			$	115			$	128,383
Municpal Securities			6,179				109				—				6,288
U.S. Agency Mortgage-backed Securities			82				2				—				84
Corporate bonds			27,827				1,435				—				29,262
Total		$	161,818			$	2,314			$	115			$	164,017
Securities held to maturity
Municipal securities		$	7,666			$	224			$	3			$	7,887
Federal Home Loan Bank stock		$	2,003			$	—			$	—			$	2,003
2009:
Securities available for sale
U.S. Treasury & government sponsored entities		$	94,871			$	1,292			$	—			$	96,162
Municpal Securities			5,049				2				61				4,991
U.S. Agency Mortgage-backed Securities			309				29				—				338
Corporate bonds			23,707				469				171				24,005
Total		$	123,936			$	1,792			$	232			$	125,496
Securities Held to Maturity
Municipal Securities		$	10,649			$	137			$	35			$	10,751
Federal Home Loan Bank Stock		$	2,003			$	—			$	—			$	2,003

     The amortized cost and fair values of debt securities at March 31, 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.

										Weighted
		Amortized								Average
		Cost				Fair Value				Yield
		(In Thousands)
US Treasury and government sponsored entities
Within 1 year		$	32,076			$	32,601				2.24	%
1-5 years			95,655				95,782				2.98	%
Total		$	127,731			$	128,383				2.80	%
U.S. Agency Mortgage-backed securities 5-10 years		$	82			$	84				4.47	%
Total		$	82			$	84				4.47	%
Corporate bonds
Within 1 year		$	10,125			$	10,455				5.18	%
1-5 years			15,220				16,295				3.78	%
5-10 years			2,482				2,512				4.82	%
Total		$	27,827			$	29,262				4.38	%
Municipal securities
Within 1 year		$	1,359			$	1,372				3.78	%
1-5 years			5,084				5,270				3.85	%
5-10 years			5,221				5,305				4.58	%
Over 10 years			2,181				2,228				4.75	%
Total		$	13,845			$	14,175				4.26	%

     The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the three months ending March 31, 2010 and March 31, 2009, respectively, are as follows:

						Gross				Gross
March 31,		Proceeds				Gains				Losses
		(In Thousands)
2010:
Available for sale securities		$	7,332			$	281			$	—
Held to maturity securities		$	—			$	—			$	—
2009:
Available for sale securities		$	—			$	—			$	—
Held to maturity securities		$	—			$	—			$	—

     A summary of interest income for the three months ending March 31, 2010 on available for sale investment securities is as follows:

March 31,		2010				2009				2008
		(In Thousands)
US Treasury and government sponsored entities		$	835			$	696			$	1,495
U.S. Agency Mortgage-backed Securities			1				2				5
Other			348				304				105
Total taxable interest income			1,184				1,002				1,605
Municipal Securities			70				61				1
Total tax-exempt interest income			70				61				1
Total		$	1,254			$	1,063			$	1,606

     For the periods ending March 31, 2010, December 31, 2009 and March 31, 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 March 31, 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 three-month period ending March 31, 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 March 31, 2010, December 31, 2009 or March 31, 2009.

4. Lending Activities

     At March 31, 2010, 31% of the portfolio was scheduled to mature over the next 12 months, and 30% was scheduled to mature between April 1, 2011, and March 31, 2015. The following table sets forth the Company’s loan portfolio composition by loan type for the dates indicated:

		March 31, 2010								December 31, 2009								March 31, 2009
		Dollar				Percent				Dollar				Percent				Dollar				Percent
		Amount				of Total				Amount				of Total				Amount				of Total
		(In Thousands)
Commercial			$248,732				38	%			$248,195				38	%			$278,459				41	%
Construction/development			54,238				8	%			62,573				10	%			83,490				12	%
Commercial real estate			298,887				46	%			301,816				46	%			269,721				39	%
Home equity lines and other consumer			47,391				7	%			45,168				7	%			49,136				7	%
Loans in process			246				0	%			85				0	%			257				0	%
Unearned loan fees, net			(2,577	)			0	%			(2,798	)			0	%			(2,354	)			0	%
Sub total			646,917								655,039								678,709
Real estate loans for sale			—				0	%			—				0	%			4,160				1	%
Total loans			$646,917				100	%			$655,039				100	%		$	682,869				100	%

     During 2009, the Company entered into an agreement to purchase residential loans from our mortgage affiliate, RML Holding Company, in anticipation of higher than normal refinance activity in the Anchorage market. The Company then sold these loans in the secondary market. The Company

purchased $36 million and sold $31.8 million in loans in the three-month period ending March 31, 2009. The Company did not purchase or sell any loans in the first quarter of 2010, and there were no loans held for sale as of March 31, 2010.

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

     The Company recorded a provision for loan losses in the amount of $1.4 million for the three-month period ending March 31, 2010 based upon its analysis of its loan portfolio. The following table details activity in the Allowance for the periods indicated:

		Three Months Ended
		March 31,
		2010				2009
		(In Thousands)
Balance at beginning of period		$	13,108			$	12,900
Charge-offs:
Commercial			792				11
Construction/development			79				863
Commercial real estate			—				60
Home equity lines and other consumer			79				84
Total charge-offs			950				1,018
Recoveries:
Commercial			504				70
Construction/development			—				—
Commercial real estate			—				9
Home equity lines and other consumer			9				28
Total recoveries			513				107
Net, (recoveries) charge-offs			437				911
Provision for loan losses			1,375				1,375
Balance at end of period		$	14,046			$	13,364

     At March 31, 2010, the allowance for loan losses was $14.0 million as compared to $13.4 million, at March 31, 2009. The increase in the allowance for loan losses at March 31, 2010 as compared to March 31, 2009 was the result of a $1.4 million provision and $437,000 in net charge-offs. The Company’s ratio of nonperforming loans compared to portfolio loans at March 31, 2010 was 2.41% as compared to 3.18% as of March 31, 2009. The Company’s ratio of allowance for loan losses compared to portfolio loans at March 31, 2010 was 2.17% as compared to 1.97% as of March 31, 2009. While the Company’s ratio of nonperforming loans compared to portfolio loans has decreased as of March 31, 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:

		March 31, 2010				December 31, 2009				March 31, 2009
		(In Thousands)
Nonaccrual loans		$	13,950			$	12,738			$	20,210
Accruing loans past due 90 days or more			1,614				1,000				210
Restructured loans			—				3,754				1,186
Total nonperforming loans			15,564				17,492				21,606
Other real estate owned			16,065				17,355				13,737
Total nonperforming assets		$	31,629			$	34,847			$	35,343
Allowance for loan losses		$	14,046			$	13,108			$	13,364
Nonperforming loans to loans			2.41	%			2.67	%			3.18	%
Nonperforming assets to total assets			3.20	%			3.47	%			3.56	%
Allowance to loans			2.17	%			2.00	%			1.97	%
Allowance to nonperforming loans			90.25	%			74.94	%			61.85	%

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 March 31, 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 Accounting Standards Codification 810-10-50-12 and 50-13 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 that has a committed amount of $750,000 and an outstanding balance of $721,000 as of March 31, 2010. 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 does not have a controlling interest in Elliott Cove because it does not have the power to direct Elliott Cove’s activities, nor does it have an obligation to absorb losses or receive benefits from earnings that are disproportionate to its ownership. The Company does not have any arrangements or guarantees to Elliott Cove outside of the line of credit, and it does not have any exposure to additional losses outside of its share in Elliott Cove’s net income. The line of credit to Elliott Cove is included in other assets in the Company’s Consolidated Balance Sheets.

8. Deposit Activities

     Total deposits at March 31, 2010, December 31, 2009 and March 31, 2009 were $835.1 million, $853.1 million and $841.6 million, respectively. The only deposit category with stated maturity dates is certificates of deposit. At March 31, 2010, the Company had $146.7 million in certificates of deposit as compared to certificates of deposit of $144.9 million and $197.9 million, for the periods ending December 31, 2009 and March 31, 2009, respectively. At March 31, 2010, $107.5 million, or 73%, 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 $166.5 million, or 84%, of total certificates of deposit at March 31, 2009.

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 March 31, 2010 was 418,049, which includes 322,448 shares granted under the 2004 Plan leaving 23,232 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 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 $88,000 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 $149,000 in stock-based compensation expense for the three-month periods ending March 31, 2010 and 2009, respectively.

     Proceeds from the exercise of stock options for the three months ended March 31, 2010 were $497,000. The Company did not receive proceeds from the exercise of stock options for the three months ended March 31, 2009. The Company withheld shares valued at $496,000 and $4,000 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 periods ending March 31, 2010 and 2009, respectively. The Company recognized tax deductions of $102,000 and $6,000 related to the exercise of these stock options during the quarter ended March 31, 2010 and 2009, respectively.

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 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: 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 for loan losses (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 for loan losses. 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 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 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.

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 March 31, 2010 are as follows:

		Carrying				Fair
		Amount				Value
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	78,179			$	78,179
Investment securities			171,487				173,907
Net loans			632,871				591,570
Purchased receivables			6,962				6,962
Accrued interest receivable			3,683				3,683
Financial liabilities:
Deposits		$	835,055			$	833,705
Accrued interest payable			408				408
Borrowings			14,591				13,930
Junior subordinated debentures			18,558				11,306
Unrecognized financial instruments:
Commitments to extend credit(1)		$	159,227			$	1,592
Standby letters of credit(1)			17,815				178

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

						Quoted Prices in				Significant
						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		$	128,383				—			$	128,383				—
Municipal Securities			6,288				—				6,288				—
U.S. Agency Mortgage-backed Securities			84								84
Corporate bonds			29,262				—				29,262				—
Total		$	164,017				—			$	164,017				—
2009:
Available for sale securities
U.S. Treasury & government sponsored		$	96,162				—			$	96,162				—
Municipal Securities			4,991				—				4,991				—
U.S. Agency Mortgage-backed Securities			338								338
Corporate bonds			24,005				—				24,005				—
Total		$	125,496				—			$	125,496				—

     As of and for the three months ending March 31, 2010, 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				Significant
						Active Markets				Other								Total
						for Identical				Observable				Unobservable Significant				(gains)
		Total				Assets (Level 1)				Inputs (Level 2)				Inputs (Level 3)				losses
		(In Thousands)
2010:
Loans measured for impairment1		$	12,651				—			$	8,480			$	4,171			$	258
Other real estate owned2			498				—				—				498				176
Total		$	13,149				—			$	8,480			$	4,669			$	434
2009:
Loans measured for impairment1		$	28,028				—			$	9,691			$	18,337				( $312	)
Other real estate owned2			256				—				—				256				196
Total		$	28,284				—			$	9,691			$	18,593				( $116	)

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 Item 1A Risk Factors, and 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, 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 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, 2009. 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.

     There were new accounting pronouncements that became effective for the Company on January 1, 2010. See Note 2 of the Notes to the Consolidated Financial Statements in 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.

Economic Conditions

     Alaska’s economy continues to be healthier than the nation as a whole, with the third lowest level of delinquencies and second lowest level of foreclosed homes of all 50 states in the country, according to the fourth quarter 2009 National Mortgage Bankers Association survey of delinquencies and foreclosures for 1-4 unit residences. Alaska also leads the nation by a large margin in having the lowest levels of subprime loans either delinquent or in foreclosure. The national rate for all subprime loans delinquencies was 27.8% and there is no other state in the country less than 20%; however, in Alaska only 11.3% are delinquent.

     Though Alaska is doing better than the rest of the nation in these important indicators, both the U.S. and Alaska continue to have higher than average historical delinquency rates. At the end of 2009, 4.8% of all residential mortgage loans were delinquent in Alaska up from 3.8% a year ago. This delinquency rate was a 0.3% decline from the third quarter and the first improvement in five quarters. Nationally, delinquencies were 10.4% at the end of 2009, up from 8.6% a year ago. Total foreclosures in Alaska at December, 2009 were 1.4%, up from 0.9% one year earlier. Nationally, total foreclosures have grown to 4.6% at December 31, 2009 from 3.3% at December 31, 2008.

Highlights and Summary of Performance — First Quarter of 2010

•

Northrim remains well-capitalized with Tier 1 Capital to risk adjusted assets at 14.31%, up from 13.98% in the immediate prior quarter and 13.60% in the first quarter a year ago.

•

Northrim’s total tangible common equity to total tangible assets at quarter end was 10.56%, up from 9.85% a year earlier. 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 11.37% at March 31, 2010 as compared to 10.70% at March 31, 2009.

•

These ratios above do not reflect any government investment in Northrim as the Company elected not to participate in the Capital Purchase Program sponsored by the U. S. Treasury in 2008.

•

Book value per share grew 5% to $17.60 and tangible book value grew 6% to $16.20 per share from the prior year.

•

Nonperforming assets declined to $31.6 million, or 3.20% of total assets at March 31, 2010, compared to $35.3 million, or 3.56% of assets a year ago.

•

The allowance for loan losses totaled 2.17% of gross loans at March 31, 2010, compared to 1.97% a year ago.

•

Northrim continues to pay a quarterly cash dividend which provides a yield of approximately 2.4% at current market share prices.

     The Company reported net income and diluted earnings per share of $1.9 million and $0.29, respectively, for the first quarter of 2010 compared to net income and diluted earnings per share of $2.0 million and $0.31, respectively, for the first quarter of 2009. The slight decline in net income from the prior year was primarily attributable to a large decrease in the other operating income, net of a slight increase in net interest income and decreases in other operating expenses and the provision for income taxes.

     Net loans fell 5% from the year-ago period with fewer construction and development projects and declines in commercial loans partially offset by growth in commercial real estate loans. About 85% of the portfolio consists of loans made to customers in the greater Anchorage market and 15% are in the Fairbanks market. Total deposits at March 31, 2010, were $835.1 million, down 1% compared to a year-ago and down 2% compared to December 31, 2009.

Credit Quality and Nonperforming Assets

     Nonperforming assets at March 31, 2010, declined by $3.7 million year-over-year and fell $3.2 million from the preceding quarter. Nonperforming assets consist of nonaccrual loans, accruing loans 90 days or more past due, troubled debt restructurings, and OREO. The risk profile of the portfolio improved as a result of the following developments:

•

Loans measured for impairment decreased to $44 million at March 31, 2010, compared to $46.3 million at December 31, 2009 and $69.9 million in the first quarter a year ago.

•

All construction and development projects in OREO are substantially complete and are being marketed.

•

The $7.0 million condominium conversion project in Anchorage that moved into OREO last quarter continues to generate rental income producing an average yield of approximately 6%. Of the sixty-eight original units, twenty condos have been sold and forty-two are rented, providing positive cash flow for the project.

•

Net charge-offs in the first quarter of 2010, totaled $437,000, or 0.27% annualized of average loans as compared to net charge-offs of $910,000, or 0.52% annualized of average loans during the first quarter of 2009.

•

Restructured loans decreased to zero at March 31, 2010, compared to $3.8 million at December 31, 2009, and $1.2 million in the first quarter a year ago. The $1.2 million in restructured loans at March 31, 2009, moved to a nonaccrual status at June 30, 2009, and have remained in nonaccrual loans through the quarter ending March 31, 2010. The $3.8 million restructured loan at December 31, 2009, was transferred to a performing status at March 31, 2010, as the loan is current and at current market rates.

•

Sales of OREO continued during the quarter ending March 31, 2010, with eleven properties sold for $2 million, generating a $70,000 net gain over current carrying value.

     At the end of the first quarter, nonperforming loans totaled $15.6 million, or 2.41% of total loans, compared to $17.5 million, or 2.67% of total loans at December 31, 2009, and $21.6 million, or 3.18% of total loans a year ago. Total nonperforming assets were $31.6 million, or 3.20% of total assets at March 31, 2010, compared to $34.8 million, or 3.47% of total assets three months earlier, and $35.3 million, or 3.56% of total assets a year ago. The decrease in nonperforming loans at March 31, 2010 as compared to December 31, 2009 is due to a $3.8 million decrease in troubled debt restructurings, offset by a $1.2 million increase in nonaccrual loans and a $614,000 increase in accruing loans past due 90 days or more.

     At March 31, 2010, management had identified potential problem loans of $16.4 million as compared to potential problem loans of $17 million at December 31, 2009 and $16.3 million at March 31, 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, 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, or TDRs. The $557,000 decrease in potential problem loans at March 31, 2010 from December 31, 2009 is primarily due to the transfer of one $3.3 million residential land development loan to nonaccrual status. This decrease was partially offset by the addition of three commercial loans.

     At March 31, 2010, December 31, 2009 and March 31, 2009 the Company held OREO of $16.1 million, $17.4 million and $13.7 million, respectively. As of March 31, 2010, OREO consists of $11 million in condominiums, $4.3 million in residential lots in various stages of development, $322,000 in commercial property and $471,000 in single family residences. During the first quarter of 2010, additions to OREO totaled $1 million and included $751,000 in residential lots and $248,000 in single family residences. During the first quarter of 2010, the Company received approximately $2.0 million in proceeds for the sale of OREO which included $1.6 million from the sale of condominiums and $369,000 from the sale of residential lots.

     The following summarizes OREO activity for the three-month periods ending March 31, 2010 and 2009:

		March 31, 2010				March 31, 2009
		(In Thousands)
Balance, beginning of the year		$	17,355			$	12,617
Transfers from loans, net			744				2,766
Investment in other real estate owned			4				546
Proceeds from the sale of other real estate owned			(1,981	)			(2,104	)
Gain on sale of other real estate owned, net			70				108
Deferred gain on sale of other real estate owned			49				—
Impairment on other real estate owned			(176	)			(196	)
Balance at end of period		$	16,065			$	13,737

RESULTS OF OPERATIONS

Income Statement

     Net Income

     Net income attributable to Northrim Bancorp for the quarter ended March 31, 2010, was $1.9 million or $0.29 per diluted share, or a decrease of $55,000 and $0.02 or 3% and 6%, respectively, as compared to the same period in 2009. For the quarter ended March 31, 2010, the Company’s net interest income increased by $128,000, or 1%; its other operating income decreased $727,000, or 20%, primarily due to a decrease in the Company’s earnings from RML; its other operating expenses decreased by $364,000, or 3%, due to decreases in insurance and audit expenses; and its provision for income taxes decreased by $125,000, or 15%, due to lower pretax income and increased tax exempt income as compared to the first quarter a year ago. The provision for loan losses was consistent for the three months ending March 31, 2010 and 2009. See further discussion of these individual items in the sections below.

     Net Interest Income / Net Interest Margin

     Net interest income for the first quarter of 2010 increased $128,000, or 1%, to $11.3 million from $11.2 million in the first quarter of 2009 because of larger reductions in interest expense, accompanied by a smaller decrease in the yields on the Company’s interest-earning assets. The Company’s net interest income as a percentage of average interest-earning assets on a tax equivalent basis was 5.34% and 5.20%, respectively, for the three-month periods ending March 31, 2010 and 2009. The decrease in funding costs coupled with smaller decreases in the yields on its earning assets for the three-month period ending March 31, 2010 as compared to the same period in 2009 resulted in an increase in the net tax-equivalent margin.

     Average loans, the largest category of interest-earning assets, decreased by $56.9 million in the first quarter of 2010 as compared to the first quarter of 2009. Commercial, construction, home equity lines and other consumer loans and real estate loans for sale all decreased between the first quarters of 2010 and 2009 while commercial real estate loans increased during the same period. The overall decline in the loan portfolio resulted from a combination of refinance and loan payoff activity and a decrease in construction loan originations.

     Average investments increased $43.7 million in the first quarter of 2010 as compared to the first quarter of 2009. This increase arose as loan totals decreased and total deposits increased.

     Interest-bearing liabilities decreased during the first quarter of 2010, as compared to the same period in 2009. This decrease arose from the payoff of the Company’s long term borrowings from FHLB of $9.9 million in the third quarter of 2009 as well as a shift in customer deposits from interest-bearing to noninterest-bearing demand deposits. Lastly, the Company had average public certificates of deposits from the Alaska Permanent Fund Corporation of $58.8 million in the first quarter of 2009 and had no public deposits in the first quarter of 2010. 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.

     The decrease in public certificates of deposit was partially offset by an increase in other certificate of deposit products in the first quarter of 2010 as compared to the same period in 2009. The average cost of interest-bearing liabilities decreased 39 basis points for the first quarter of 2010 compared to the first quarter of 2009 due mainly to declining market rates and the payoff of the Company’s FHLB borrowings.

     Components of Net Interest Margin

     The following table compares average balances and rates as well as net tax equivalent margin on earning assets for the quarters ending March 31, 2010 and 2009:

		Three Months Ended March 31,
																		Interest income/																Average Yields/Costs
		Average Balances								Change								expense								Change								Tax Equivalent
		2010				2009				$				%				2010				2009				$				%				2010				2009				Change
														(In Thousands)
Commercial		$	244,074			$	280,342			$	(36,268	)			-13	%		$	4,360			$	4,669			$	(309	)			-7	%			7.24	%			6.76	%			0.48	%
Construction/development			60,004				97,056				(37,052	)			-38	%			1,204				1,722				(518	)			-30	%			8.14	%			7.20	%			0.94	%
Commercial real estate			297,934				271,347				26,587				10	%			5,051				4,719				332				7	%			6.88	%			7.05	%			-0.17	%
Home equity lines and other consumer			48,544				50,562				(2,018	)			-4	%			807				850				(43	)			-5	%			6.75	%			6.81	%			-0.06	%
Real estate loans for sale			—				8,101				(8,101	)		NA					—				98				(98	)		NA					0.00	%			4.91	%		NA
Other loans			(1,886	)			(1,820	)			(66	)			4	%
Total loans1, 2			648,670				705,588				(56,918	)			-8	%			11,422				12,058				(636	)			-5	%			7.15	%			6.94	%			0.21	%
Short-term investments			36,887				36,640				247				1	%			23				75				(52	)			-69	%			0.25	%			0.82	%			-0.57	%
Long-term investments			178,229				134,766				43,463				32	%			1,329				1,154				175				15	%			3.11	%			3.61	%			-0.50	%
Total investments			215,116				171,406				43,710				26	%			1,352				1,229				123				10	%			2.66	%			3.06	%			-0.40	%
Interest-earning assets			863,786				876,994				(13,208	)			-2	%			12,774				13,287				(513	)			-4	%			6.03	%			6.18	%			-0.15	%
Nonearning assets			109,244				113,099				(3,855	)			-3	%
Total		$	973,030			$	990,093			$	(17,063	)			-2	%
Interest-bearing deposits		$	577,497			$	629,518			$	(52,021	)			-8	%		$	1,275			$	1,721			$	(446	)			-26	%			0.90	%			1.11	%			-0.21	%
Borrowings			32,460				36,538				(4,078	)			-11	%			195				390				(195	)			-50	%			2.39	%			4.27	%			-1.88	%
Total interest-bearing liabilities			609,957				666,056				(56,099	)			-8	%			1,470				2,111				(641	)			-30	%			0.98	%			1.28	%			-0.30	%
Demand deposits and other noninterest-bearing liabilities			250,483				217,544				32,939				15	%
Equity			112,590				106,493				6,097				6	%
Total		$	973,030			$	990,093			$	(17,063	)			-2	%
Net interest income																		$	11,304			$	11,176			$	128				1	%
Net tax equivalent margin on earning assets																																			5.34	%			5.20	%			0.14	%