NORTHRIM BANCORP INC - Quarter Report: 2011 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.

(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 (Address of principal executive offices)		99503 (Zip Code)

(907) 562-0062

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (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 smaller 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 (do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the issuer’s Common Stock outstanding at May 9, 2011 was 6,430,267.

 

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited): March 31, 2011, December 31, 2010 and March 31, 2010			4
Consolidated Statements of Income (unaudited): Three months ended March 31, 2011 and 2010			5
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (unaudited): Three months ended March 31, 2011 and 2010			6
Consolidated Statements of Cash Flows (unaudited): Three months ended March 31, 2011 and 2010			7
Notes to the Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			35
PART II OTHER INFORMATION
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
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, 2010.

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.

Consolidated Balance Sheets
March 31, 2011, December 31, 2010 and March 31, 2010

		March 31,				December 31,				March 31,
		2011				2010				2010
		(Unaudited)								(Unaudited)
		(In Thousands, Except Share Data)
ASSETS
Cash and due from banks		$	29,109			$	15,953			$	18,920
Overnight investments			138,707				50,080				59,259
Investment securities available for sale			181,800				214,010				164,017
Investment securities held to maturity			6,068				6,125				7,666
Total portfolio investments			187,868				220,135				171,683
Investment in Federal Home Loan Bank stock			2,003				2,003				2,003
Loans held for sale			—				5,558				—
Loans			654,341				671,812				646,917
Allowance for loan losses			(15,139	)			(14,406	)			(14,046	)
Net loans			639,202				662,964				632,871
Purchased receivables,net			13,611				16,531				6,962
Accrued interest receivable			3,184				3,401				3,683
Premises and equipment, net			28,827				29,048				28,140
Goodwill and intangible assets			8,626				8,697				8,920
Other real estate owned			10,343				10,355				16,065
Other assets			34,183				35,362				40,050
Total assets		$	1,095,663			$	1,054,529			$	988,556
LIABILITIES
Deposits:
Demand		$	340,943			$	289,061			$	260,817
Interest-bearing demand			133,031				138,072				120,373
Savings			76,058				77,411				70,033
Alaska CDs			96,919				100,315				111,019
Money market			151,594				149,104				126,156
Certificates of deposit less than $100,000			51,931				53,858				61,287
Certificates of deposit greater than $100,000			82,748				84,315				85,370
Total deposits			933,224				892,136				835,055
Securities sold under repurchase agreements			11,595				12,874				8,997
Borrowings			5,421				5,386				5,594
Junior subordinated debentures			18,558				18,558				18,558
Other liabilities			8,091				8,453				7,938
Total liabilities			976,889				937,407				876,142
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, 6,429,476, 6,427,237 and 6,386,925 shares issued and outstanding at March 31, 2011, December 31, 2010, and March 31, 2010, respectively			6,429				6,427				6,387
Additional paid-in capital			52,807				52,658				52,355
Retained earnings			59,012				57,339				52,374
Accumulated other comprehensive income			498				648				1,295
Total Northrim BanCorp shareholders’ equity			118,746				117,072				112,411
Noncontrolling interest			28				50				3
Total shareholders’ equity			118,774				117,122				112,414
Total liabilities and shareholders’ equity		$	1,095,663			$	1,054,529			$	988,556

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Income
For the Three Months Ended March 31, 2011 and 2010

		Three Months Ended
		March 31,
		2011				2010
		(Unaudited)
		(In Thousands, Except Per Share Data)
Interest Income
Interest and fees on loans		$	10,687			$	11,422
Interest on investment securities-available for sale			871				1,254
Interest on investment securities-held to maturity			61				75
Interest on overnight investments			33				23
Total Interest Income			11,652				12,774
Interest Expense
Interest expense on deposits, borrowings and junior subordianted debentures			977				1,470
Net Interest Income			10,675				11,304
Provision for loan losses			549				1,375
Net Interest Income After Provision for Loan Losses			10,126				9,929
Other Operating Income
Purchased receivable income			626				314
Service charges on deposit accounts			524				700
Employee benefit plan income			500				421
Electronic banking income			449				400
Gain on sale of securities			263				281
Equity in earnings (loss) from Elliott Cove			(7	)			5
Equity in (loss) from RML			(52	)			(73	)
Other income			475				545
Total Other Operating Income			2,778				2,593
Other Operating Expense
Salaries and other personnel expense			5,316				5,620
Occupancy			910				919
Marketing expense			437				439
Insurance expense			436				558
Professional and outside services			337				242
Equipment expense			304				273
Software expense			240				219
Amortization of low income housing tax investments			216				226
Internet banking expense			153				146
Operation losses, net			79				73
Intangible asset amortization expense			70				76
Impairment on purchased receivables, net			2				1
OREO (income) expense, net of rental income and gains on sale			(139	)			102
Other operating expense			965				1,000
Total Other Operating Expense			9,326				9,894
Income Before Provision for Income Taxes			3,578				2,628
Provision for income taxes			1,034				702
Net Income			2,544				1,926
Less: Net income attributable to the noncontrolling interest			89				26
Net Income Attributable to Northrim BanCorp		$	2,455			$	1,900
Earnings Per Share, Basic		$	0.38			$	0.30
Earnings Per Share, Diluted		$	0.37			$	0.29
Weighted Average Shares Outstanding, Basic			6,428,730				6,385,760
Weighted Average Shares Outstanding, Diluted			6,548,480				6,468,310

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, 2011 and 2010

																		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, 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
Three months ending March 31, 2011:
Balance as of January 1, 2011			6,427			$	6,427			$	52,658			$	57,339			$	648			$	50			$	117,122
Cash dividend declared			—				—				—				(782	)			—				—				(782	)
Stock option expense			—				—				134				—				—				—				134
Exercise of stock options			2				2				(2	)			—				—				—				—
Excess tax benefits from share-based payment arrangements			—				—				17				—				—				—				17
Distributions to noncontrolling interest			—				—				—				—				—				(111	)			(111	)
Comprehensive income:
Change in unrealized holding gain (loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				(150	)			—				(150	)
Net income attributable to the noncontrolling interest			—				—				—				—				—				89				89
Net income attributable to Northrim BanCorp			—				—				—				2,455				—				—				2,455
Total Comprehensive Income																											2,394
Balance as of March 31, 2011			6,429			$	6,429			$	52,807			$	59,012			$	498			$	28			$	118,774

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2011 and 2010

		Three Months Ended
		March 31,
		2011				2010
		(Unaudited)
		(In Thousands)
Operating Activities:
Net income		$	2,544			$	1,926
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Security (gains), net			(263	)			(281	)
Depreciation and amortization of premises and equipment			436				385
Amortization of software			51				40
Intangible asset amortization			70				76
Amortization of investment security premium, net of discount accretion			69				40
Deferred tax (benefit) liability			(505	)			1,770
Stock-based compensation			134				129
Excess tax benefits from share-based payment arrangements			(17	)			(102	)
Deferral of loan fees and costs, net			(210	)			(221	)
Provision for loan losses			549				1,375
Purchased receivable loss (recovery)			2				1
Proceeds from the sale of loans held for sale			5,558				—
Gain on sale of other real estate owned			(72	)			(70	)
Impairment on other real estate owned			—				176
Proceeds in excess of earnings from RML			301				245
Equity in loss (income) from Elliott Cove			7				(5	)
Decrease in accrued interest receivable			217				303
(Increase) decrease in other assets			1,367				(1,143	)
Decrease (increase) of deferred gain on sales of other real estate owned			68				49
Decrease (increase) of other liabilities			(517	)			(89	)
Net Cash (Used) Provided by Operating Activities			9,789				4,604
Investing Activities:
Investment in securities:
Purchases of investment securities-available-for-sale			(31,839	)			(26,028	)
Purchases of investment securities-held-to-maturity			—				(517	)
Proceeds from sales/maturities of securities-available-for-sale			63,991				40,334
Proceeds from calls/maturities of securities-held-to-maturity			55				135
Investment in (repayment from) purchased receivables			2,918				298
Loan paydowns, net of new advances			16,891				7,162
Proceeds from sale of other real estate owned			1,140				1,981
Investment in other real estate owned			(14	)			(4	)
Loan to Elliott Cove, net of repayments			75				(43	)
Purchases of premises and equipment			(215	)			(2	)
Purchases of software			(12	)			(73	)
Net Cash (Used) Provided by Investing Activities			52,990				23,243
Financing Activities:
(Decrease) increase in deposits			41,088				(20,317	)
(Decrease) increase in securities sold under repurchase agreements			(1,279	)			2,264
Increase in borrowings			35				2,271
Distributions to noncontrolling interest			(111	)			(71	)
Proceeds from issuance of common stock			—				1
Excess tax benefits from share-based payment arrangements			17				102
Cash dividends paid			(746	)			(639	)
Net Cash (Used) Provided by Financing Activities			39,004				(16,389	)
Net Increase in Cash and Cash Equivalents			101,783				11,458
Cash and Cash Equivalents at Beginning of Period			66,033				66,721
Cash and Cash Equivalents at End of Period		$	167,816			$	78,179
Supplemental Information:
Income taxes paid		$	4			$	4
Interest paid		$	1,015			$	1,456
Transfer of loans to other real estate owned		$	974			$	744
Loans made to facilitate sales of other real estate owned		$	417			$	291
Cash dividends declared but not paid		$	36			$	8

See notes to the consolidated financial statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2011 and 2010

1. Basis of Presentation

     The accompanying unaudited consolidated 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 March 31, 2011, are not necessarily indicative of the results anticipated for the year ending December 31, 2011. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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, 2010.

     In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring” (“ASU 2011-02”). ASU 2011-02 provides guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties in order to determine when a restructured loan is a troubled debt restructuring. This ASU is effective for the Company’s financial statements for annual and interim periods beginning on or after June 15, 2011, and must be applied retrospectively to the beginning of the period of adoption. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

3. Investment Securities

     The carrying values and approximate fair values of investment securities at March 31, 2011 and 2010, 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 nine and five securities with unrealized losses as of March 31, 2011 and 2010, respectively, that had been in a loss position for less than twelve months. There were no securities with unrealized losses as of March 31, 2011 and 2010 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
March 31,		Cost				Gains				Losses				Fair Value
		(In Thousands)
2011:
Securities available for sale
U.S. Treasury and government sponsored entities		$	145,745			$	343			$	407			$	145,681
Muncipal Securities			12,080				177				—				12,257
U.S. Agency Mortgage-backed Securities			66				3				—				69
Corporate bonds			23,061				740				8				23,793
Total securities available for sale		$	180,952			$	1,263			$	415			$	181,800
Securities held to maturity
Municipal securities		$	6,068			$	173			$	—			$	6,241
Total securities held to maturity		$	6,068			$	173			$	—			$	6,241
2010:
Securities available for sale
U.S. Treasury and government sponsored entities		$	127,730			$	768			$	115			$	128,383
Muncipal Securities			6,179				109				—				6,288
U.S. Agency Mortgage-backed Securities			82				2				—				84
Corporate bonds			27,827				1,435				—				29,262
Total securities available for sale		$	161,818			$	2,314			$	115			$	164,017
Securities Held to Maturity
Municipal Securities		$	7,666			$	224			$	3			$	7,887
Total securities held to maturity		$	7,666			$	224			$	3			$	7,887

     The amortized cost and fair values of debt securities at March 31, 2011, 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		$	3,297			$	3,380				3.06	%
1-5 years			142,448				142,301				0.96	%
Total		$	145,745			$	145,681				1.00	%
U.S. Agency Mortgage-backed securities
5-10 years		$	66			$	69				4.45	%
Total		$	66			$	69				4.45	%
Corporate bonds
Within 1 year		$	—			$	—				0.00	%
1-5 years			8,544				8,986				3.41	%
5-10 years			14,517				14,807				2.27	%
Total		$	23,061			$	23,793				2.69	%
Municipal securities
Within 1 year		$	2,547			$	2,561				3.46	%
1-5 years			5,323				5,455				2.78	%
5-10 years			7,128				7,291				4.24	%
Over 10 years			3,150				3,191				4.79	%
Total		$	18,148			$	18,498				3.80	%

     The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the three months ending March 31, 2011 and 2010, respectively, are as follows:

						Gross				Gross
March 31,		Proceeds				Gains				Losses
		(In Thousands)
2011:
Available for sale securities		$	6,987			$	263			$	—
2010:
Available for sale securities		$	7,332			$	281			$	—

     A summary of interest income for the three months ending March 31, 2011 and 2010 on available for sale investment securities is as follows:

March 31,		2011				2010
		(In Thousands)
US Treasury and government sponsored entities		$	456			$	835
U.S. Agency Mortgage-backed Securities			1				1
Other			310				348
Total taxable interest income		$	767			$	1,184
Municipal Securities			104				70
Total tax-exempt interest income			104				70
Total		$	871			$	1,254

     For the periods ending March 31, 2011, December 31, 2010 and March 31, 2010, 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, 2011, 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, 2011, 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, 2011, December 31, 2010 or March 31, 2010.

4. Loans

     The composition of the loan portfolio, excluding loans held for resale, is presented below:

		March 31, 2011								December 31, 2010								March 31, 2010
		Dollar				Percent				Dollar				Percent				Dollar				Percent
		Amount				of Total				Amount				of Total				Amount				of Total
		(In Thousands)
Commercial		$	241,540				37	%		$	256,971				38	%		$	248,873				38	%
Real estate construction			62,082				9	%			62,620				9	%			54,238				8	%
Real estate term			311,080				48	%			312,128				46	%			298,887				46	%
Home equity lines and other consumer			42,600				7	%			43,264				6	%			47,496				7	%
Subtotal		$	657,302							$	674,983							$	649,494
Less: Unearned origination fee, net of origination costs			(2,961	)			0	%			(3,171	)			0	%			(2,577	)			0	%
Total loans		$	654,341							$	671,812							$	646,917

     At March 31, 2011, approximately 27% of the portfolio was scheduled to mature over the next 12 months, and 28% was scheduled to mature between April 1, 2012, and March 31, 2016.

          As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends in past due and nonaccrual loans, gross and net charge offs, and movement in loan balances within the risk classifications. The Company utilizes a risk grading matrix to assign a risk classification to each of its loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the 8 risk classifications are as follows:

	•		Risk Code 1 — Excellent: Loans in this grade are those where the borrower has substantial financial capacity, above average profit margins, and excellent liquidity. Cash flow has been consistent and is well in excess of debt servicing requirements. Loans in this grade may secured by cash and/or negotiable securities having a readily ascertainable market value and may also be fully guaranteed by the U.S. Government, and other approved governments and financial institutions. Loans in this grade have borrowers with exceptional credit ratings and would compare to AA ratings as established by Standard & Poor’s.
	•		Risk Code 2 — Good: Loans in this grade are those to borrowers who have demonstrated satisfactory asset quality, earnings history, liquidity and other adequate margins of creditor protection. Borrowers exhibit positive fundamentals in terms of working capital, cash flow sufficient to service the debt, and debt to worth ratios. Borrowers for loans in this grade are capable of absorbing normal economic or other setbacks without difficulty. The borrower may exhibit some weaknesses or varying historical profitability. Management is considered adequate in all cases. Borrowing facilities may be unsecured or secured by customary acceptable collateral with well-defined market values. Additional support for the loan is available from secondary repayment sources and/or adequate guarantors.
	•		Risk Code 3 — Satisfactory: Loans in this grade represent moderate credit risk due to some instability in borrower capacity and financial condition. These loans generally require average loan officer attention. Characteristics of assets in this classification may include: marginal debt service coverage, newly established ventures, limited or unstable earnings history, some difficulty in absorbing normal setbacks, and atypical maturities, collateral or other exceptions to established loan policies. In all cases, such weaknesses are offset by well secured collateral positions and/or acceptable guarantors.
	•		Risk Code 4 — Watch List: Loans in this grade are acceptable, but additional attention is needed. This is an interim classification reserved for loans that are intrinsically creditworthy but which require specific attention. Loans may have documentation deficiencies that are deemed correctable, may be contrary to current lending policies, or may have insufficient credit or financial information. Loans in this grade may also be characterized by borrower failure to comply with loan covenants or to provide other required information. If such conditions are not resolved within 90 days from the date of the assignment of Risk Code 4, the loan may warrant further downgrade.
	•		Risk Code 5 — Special Mention: Loans in this grade have had a deterioration of financial condition or collateral value, but are still reasonably secured by collateral or net worth of the borrower. Although the Company is presently protected from loss, potential weaknesses are apparent which, if not corrected, could cause future problems. Loans in this classification warrant more than the ordinary amount of attention but have not yet reached the point of concern for loss. Loans in this category have deteriorated sufficiently that they would have difficulty in refinancing. Loans in this classification may show one or more of the following characteristics: inadequate loan documentation, deteriorating financial condition or control over collateral, economic or market conditions which may adversely impact the borrower in the future, unreliable or insufficient credit or collateral information, adverse trends in operations that are not yet jeopardizing repayment, or adverse trends in secondary repayment sources.
	•		Risk Code 6 — Substandard: Loans in this grade are no longer adequately protected due to declining net worth of the borrower, lack of earning capacity, or insufficient collateral. The possibility for loss of some portion of the loan principal cannot be ruled out. Loans in this grade exhibit well-defined

			weaknesses that bring normal repayment into doubt. Some of these weaknesses may include: unprofitable or poor earnings trends of the borrower or property, declining liquidity, excessive debt, significant unfavorable industry comparisons, secondary repayment sources are not available, or there is a possibility of a protracted work-out.
	•		Risk Code 7 — Doubtful: Loans in this grade exhibit the same weaknesses as those classified Substandard, but the traits are more pronounced. Collection in full is improbable, however the extent of the loss may be indeterminable due to pending factors which may yet occur that could salvage the loan, such as possible pledge of additional collateral, sale of assets, merger, acquisition or refinancing. Borrowers in this grade may be on the verge of insolvency or bankruptcy, and stringent action is required on the part of the loan officer.
	•		Risk Code 8 — Loss: Loans in this grade are those that are largely non-collectible or those in which ultimate recovery is too distant in the future to warrant continuance as a bankable asset. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer charging the loan off even though recovery may be affected in the future.

          A risk rating is assigned for each loan at origination. The risk ratings for commercial, real estate construction, and real estate term loans may change throughout the life of the loan as a multitude of risk factors change. The risk rating for consumer loans may change as loans become delinquent. Delinquent loans are those that are thirty days or more past due.

          The loan portfolio, segmented by risk class at March 31, 2011, is shown below:

														Home equity
						Real estate								lines and other
		Commercial				construction				Real estate term				consumer				Total
		(In Thousands)
Risk Code 1 - Excellent		$	891			$	—			$	—			$	701			$	1,592
Risk Code 2 - Good			79,425				326				65,430				943				146,124
Risk Code 3 - Satisfactory			127,985				47,862				229,595				37,764				443,206
Risk Code 4 - Watch			11,549				3,229				2,429				2,108				19,315
Risk Code 5 - Special Mention			15,180				—				3,199				560				18,939
Risk Code 6 - Substandard			5,932				10,665				10,427				524				27,548
Risk Code 7 - Doubtful			578				—				—				—				578
Subtotal		$	241,540			$	62,082			$	311,080			$	42,600			$	657,302
Less: Unearned origination fees, net of origination costs																			(2,961	)
																		$	654,341

          Loans are carried at their principal amount outstanding, net of unamortized fees and direct loan origination costs. Interest income on loans is accrued and recognized on the principal amount outstanding except for loans in a nonaccrual status. All classes of loans are placed on nonaccrual when management believes doubt exists as to the collectability of the interest or principal. Cash payments received on nonaccrual loans are directly applied to the principal balance. Generally, a loan may be returned to accrual status when the delinquent principal and interest are brought current in accordance with the terms of the loan agreement and certain ongoing performance criteria have been met.

          Nonaccrual loans totaled $10.3 million, $11.4 million and $13.9 million at March 31, 2011, December 31, 2010, and March 31, 2010, respectively. Nonaccrual loans, by major loan type, are presented below:

		(In Thousands)
Commercial		$	4,514
Real estate construction			2,184
Real estate term			3,239
Home equity lines and other consumer			385
Total		$	10,322

          Past due loans at March 31, 2011 are presented below:

																										Recorded
		30-59																								Investment > 90
		DaysPast				60-89 Days				Greater Than				Total Past								Total Financing				Days and
		Due				Past Due				90 Days				Due				Current				Receivables				Accruing
		(In Thousands)
Risk Code 1 - Excellent		$	—			$	—			$	—			$	—			$	1,592			$	1,592			$	—
Risk Code 2 - Good			—				—				—				—				146,124				146,124				—
Risk Code 3 - Satisfactory			813				—				—				813				442,393				443,206				—
Risk Code 4 - Watch			—				—				—				—				19,315				19,315				—
Risk Code 5 - Special Mention			1,151				13				—				1,164				17,775				18,939				—
Risk Code 6 - Substandard			1,498				24				—				1,522				26,026				27,548				—
Risk Code 7 - Doubtful			—				—				—				—				578				578				—
Subtotal		$	3,462			$	37			$	—			$	3,499			$	653,803			$	657,302			$	—
Less: Unearned origination fees, net of origination costs																							(2,961	)
																						$	654,341			$	—

          The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, except that if the loan is collateral dependant, the impairment is measured by using the fair value of the loan’s collateral. Nonperforming loans greater than $50,000 are individually evaluated for impairment based upon the borrower’s overall financial condition, resources, and payment record, and the prospects for support from any financially responsible guarantors.

          At March 31, 2011, December 31, 2010 and March 31, 2010, the recorded investment in loans that are considered to be impaired was $14.1 million, $18.3 million $44 million, respectively. The following table presents information about impaired loans as of March 31, 2011:

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
		(In Thousands)
With no related allowance recorded
Commercial		$	3,663			$	4,261			$	—			$	3,703			$	14
Real estate construction			1,599				1,678				—				1,616				—
Real estate term			5,886				5,886				—				5,848				57
Home equity lines and other consumer			215				215				—				202				1
		$	11,363			$	12,040			$	—			$	11,369			$	72
With an allowance recorded
Commercial		$	885			$	885			$	415			$	891			$	1
Real estate construction			1,568				1,613				57				1,573				—
Real estate term			251				251				62				253				—
Home equity lines and other consumer			50				50				11				50				—
		$	2,754			$	2,799			$	545			$	2,767			$	1
Total
Commercial		$	4,548			$	5,146			$	415			$	4,594			$	15
Real estate construction			3,167				3,291				57				3,189				—
Real estate term			6,137				6,137				62				6,101				57
Home equity lines and other consumer			265				265				11				252				1
		$	14,117			$	14,839			$	545			$	14,136			$	73

          The unpaid principle balance included in the table above represents the recorded investment at March 31, 2011 and amounts charged off for book purposes.

          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 sold $5.6 million in loans in the three-month period ending March 31, 2011. The Company did not purchase any loans in the three-month period ending March 31, 2011, and the Company did not purchase or sell any loans in the three-month period ending March 31, 2010.

5. Allowance for Loan Losses

     The following table details activity in the Allowance for Loan Losses (“Allowance”) for the quarter ended March 31, 2011:

														Home equity
						Real estate								lines and other
		Commercial				construction				Real estate term				consumer				Unallocated				Total
		(In Thousands)
Balance, beginning of period		$	6,374			$	1,035			$	4,270			$	741			$	1,986			$	14,406
Charge-Offs			(473	)			—				—				—				—				(473	)
Recoveries			590				1				53				13				—				657
Provision			(353	)			840				(18	)			(153	)			233				549
Balance, end of period		$	6,138			$	1,876			$	4,305			$	601			$	2,219			$	15,139
Balance, end of period: Individually evaluated for impairment		$	415			$	57			$	62			$	11			$	—			$	545
Balance, end of period: Collectively evaluated for impairment		$	5,723			$	1,819			$	4,243			$	590			$	2,219			$	14,594

     The following is a detail of the recorded investment in the loan portfolio, segregated by amounts evaluated individually or collectively in the Allowance at March 31, 2011:

														Home equity
						Real estate								lines and other
		Commercial				construction				Real estate term				consumer				Total
		(In Thousands)
Balance, end of period		$	241,540			$	62,082			$	311,080			$	42,600			$	657,302
Balance, end of period: Individually evaluated for impairment		$	4,548			$	3,167			$	6,137			$	265			$	14,117
Balance, end of period: Collectively evaluated for impairment		$	236,992			$	58,915			$	304,943			$	42,335			$	643,185

          The following represents the balance of the Allowance as March 31, 2011 segregated by segment and class:

																		Home equity
										Real estate				Real estate				lines and other
		Total				Commercial				Construction				term				consumer				Unallocated
		(In Thousands)
Individually evaluated for impairment:
Risk Code 6 - Substandard		$	545			$	415			$	57			$	62			$	11			$	—
Collectively evaluated for impairment:
Risk Code 3 - Satisfactory			8,835				3,333				1,407				3,559				536				—
Risk Code 4 - Watch			622				432				81				92				17				—
Risk Code 5 - Special Mention			1,953				1,834				—				83				36				—
Risk Code 6 - Substandard			960				119				331				509				1				—
Risk Code 7 - Doubtful			5				5				—				—				—				—
Unallocated			2,219				—				—				—				—				2,219
		$	15,139			$	6,138			$	1,876			$	4,305			$	601			$	2,219

          At March 31, 2011, the Allowance was $15.1 million, and the Company’s ratio of nonperforming loans compared to portfolio loans was 1.80%. The Company’s ratio of Allowance compared to portfolio loans at March 31, 2011 was 2.31%.

6. Goodwill and Other Intangibles

          The Company performs goodwill impairment testing annually 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, 2010. There was no indication of impairment as of March 31, 2011. 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 2011 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 qualitative and quantitative 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 40.8% 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 $437,000 as of March 31, 2011. 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 40.8%. 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 40.8% 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 $19.9 million in equity, $108.4 million in assets and net income of $5.9 million as of and for the year ended December 31, 2010 (see Note 9 in the Company’s Form 10-K for the year ended December 31, 2010). 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 March 31, 2011, December 31, 2010 and March 31, 2010 were $933.2 million, $892.1 million and $835.1 million, respectively. The only deposit category with stated maturity dates is certificates of deposit. At March 31, 2011, the Company had $134.7 million in certificates of deposit as compared to certificates of deposit of $138.2 million and $146.7 million, for the periods ending December 31, 2010 and March 31, 2010, respectively. At March 31, 2011, $96.4 million, or 72%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $103.7 million, or 75%, of total certificates of deposit at December 31, 2010, and $107.5 million, or 73%, of total certificates of deposit at March 31, 2010.

9. Stock Incentive Plan

          The Company set aside 325,000 shares of authorized stock for the 2010 Stock Incentive Plan (“2010 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 stock options and restricted stock units outstanding under the 2010 Plan and previous stock incentive plans at March 31, 2011 was 351,703. Under the 2010 plan and previous stock incentive 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 2010 Plan and previous stock incentive plans. These restricted stock grants cliff vest at the end of a three-year time period.

          The Company recognized expenses of $117,000 and $94,000 on the fair value of restricted stock units and $17,000 and $35,000 on the fair value of stock options for a total of $134,000 and $129,000 in stock-based compensation expense for the three-month periods ending March 31, 2011 and 2010, respectively.

          Proceeds from the exercise of stock options for the three months ended March 31, 2011 and 2010 were $76,000 and $497,000, respectively. The Company withheld shares valued at $76,000 and $496,000 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 March 31, 2011 and 2010, respectively. The Company recognized tax deductions of $17,000 and $102,000 related to the exercise of these stock options during the quarters ended March 31, 2011 and 2010, 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, 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 4). 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.

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

Accrued Interest Receivable: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

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.

Accrued Interest Payable: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

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 discounted cash flows to maturity using current interest rates for similar financial instruments. 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 accounting guidance for capitalization of project costs and subsequent measurement of the value of real estate. GAAP 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 March 31, 2011 and December 31, 2010 are as follows:

		March 31, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	167,816			$	167,816			$	66,033			$	66,033
Investment securities			187,868				190,044				220,135				222,299
Investment in Federal Home Loan Bank stock			2,003				2,003				2,003				2,003
Loans			639,202				636,007				662,964				659,650
Loans held for sale			—				—				5,558				5,558
Purchased receivables			13,611				13,611				16,531				16,531
Accrued interest receivable			3,184				3,184				3,401				3,401
Financial liabilities:
Deposits		$	933,224			$	932,150			$	892,136			$	890,729
Accrued interest payable			262				262				300				300
Securities sold under repurchase agreements			11,595				11,595				12,874				12,874
Borrowings			5,421				4,774				5,386				4,759
Junior subordinated debentures			18,558				15,106				18,558				15,106
Unrecognized financial instruments:
Commitments to extend credit(1)		$	198,437			$	1,984			$	181,305			$	1,813
Standby letters of credit(1)			19,290				193				19,085				191