Edgar Filing: NORTHRIM BANCORP INC

789796fa72e04c0

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

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

For the transition period from_____to____

Commission File Number 000-33501

NORTHRIM BANCORP, INC.

_{(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 N}_o.₎

3111 C Street

Anchorage, Alaska 99503

_{(Address of principal executive offices)}_{(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 x No ⁬

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 x No ⁬

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 ⁬ Accelerated filer x Non-accelerated filer ⁬ 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 ⁬ No x

The number of shares of the issuer's Common Stock outstanding at August 6, 2012 was 6,470,518.

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets: June 30, 2012, December 31, 2011 and June 30, 2011	3
	Consolidated Statements of Income: Three and six months ended June 30, 2012 and 2011	4
	Consolidated Statements of Comprehensive Income: Three and six months ended June 30 2012 and 2011	5
	Consolidated Statements of Changes in Shareholders’ Equity: Six months ended June 30, 2012 and 2011	6
	Consolidated Statements of Cash Flows: Six months ended June 30, 2012 and 2011	7
	Notes to the Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

PART II	OTHER INFORMATION	35
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.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	36
SIGNATURES		36

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 Northrim Bancorp, Inc’s Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS

NORTHRIM BANCORP, INC.

Consolidated Balance Sheets

June 30, 2012, December 31, 2011 and June 30, 2011



	June 30,		December 31,		June 30,
	2012		2011		2011
		(Unaudited)
		(In Thousands, Except Share Data)
ASSETS
Cash and due from banks	$	34,560	$	30,644	$	33,101
Interest bearing deposits in other banks		76,144		60,886		112,730
Investment securities available for sale		189,247		222,083		182,878
Investment securities held to maturity		3,601		3,819		5,142
Total portfolio investments		192,848		225,902		188,020

Investment in Federal Home Loan Bank stock		2,003		2,003		2,003
Loans held for sale		22,629		27,822		-
Loans		656,850		645,562		634,130
Allowance for loan losses		(16,490)		(16,503)		(15,574)
Net loans		662,989		656,881		618,556
Purchased receivables, net		23,650		30,209		14,743
Accrued interest receivable		2,801		2,898		2,745
Other real estate owned		6,448		5,183		5,083
Premises and equipment, net		27,797		27,993		28,774
Goodwill and intangible assets		8,292		8,421		8,556
Other assets		34,545		34,238		35,026
Total assets	$	1,072,077	$	1,085,258	$	1,049,337

LIABILITIES
Deposits:
Demand	$	298,953	$	324,039	$	296,508
Interest-bearing demand		139,220		141,572		130,736
Savings		83,100		79,610		74,142
Alaska CDs		102,481		102,384		101,945
Money market		164,942		154,987		152,004
Certificates of deposit less than $100,000		42,634		45,468		49,458
Certificates of deposit greater than $100,000		63,443		63,188		79,377
Total deposits		894,773		911,248		884,170
Securities sold under repurchase agreements		15,265		16,348		11,616
Borrowings		4,553		4,626		4,696
Junior subordinated debentures		18,558		18,558		18,558
Other liabilities		8,503		9,043		8,288
Total liabilities		941,652		959,823		927,328

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, 6,470,518; 6,466,763; and 6,433,438
shares issued and outstanding at June 30, 2012, December 31, 2011 and June 30, 2011		6,471		6,467		6,433
Additional paid-in capital		53,411		53,164		52,953
Retained earnings		69,482		65,469		61,412
Accumulated other comprehensive income		984		283		1,169
Total Northrim BanCorp shareholders' equity		130,348		125,383		121,967
Noncontrolling interest		77		52		42
Total shareholders' equity		130,425		125,435		122,009
Total liabilities and shareholders' equity	$	1,072,077	$	1,085,258	$	1,049,337

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Income

For the Three and Six Months Ended June 30, 2012 and 2011



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
		(Unaudited)
	(In Thousands, Except Per Share Data)
Interest Income
Interest and fees on loans	$	10,305	$	10,709	$	20,530	$	21,396
Interest on investment securities-available for sale		718		663		1,467		1,534
Interest on investment securities-held to maturity		37		59		75		120
Interest on deposits in other banks		63		55		103		88
Total Interest Income		11,123		11,486		22,175		23,138

Interest Expense
Interest expense on deposits,
borrowings and junior subordinated debentures		627		904		1,325		1,881
Net Interest Income		10,496		10,582		20,850		21,257

Provision for loan losses		89		550		178		1,099
Net Interest Income After Provision for Loan Losses		10,407		10,032		20,672		20,158

Other Operating Income
Purchased receivable income		712		565		1,424		1,191
Employee benefit plan income		616		593		1,156		1,093
Service charges on deposit accounts		569		594		1,137		1,118
Electronic banking income		493		467		976		916
Equity in earnings from RML		405		270		706		218
Rental income		204		191		402		387
Gain on sale of securities		246		-		273		263
Other income		480		390		858		662
Total Other Operating Income		3,725		3,070		6,932		5,848

Other Operating Expense
Salaries and other personnel expense		5,154		5,200		10,860		10,516
Occupancy		920		997		1,916		1,907
Marketing expense		435		443		872		880
Equipment expense		342		292		636		596
Insurance expense		301		295		419		731
Professional and outside services		287		304		676		617
Software expense		270		277		521		517
Amortization of low income housing tax investments		234		235		462		451
Internet banking expense		185		158		357		311
OREO (income) expense, net rental income and gains on sale		118		(742)		215		(881)
Intangible asset amortization expense		65		71		129		141
Other operating expense		984		1,059		1,990		2,129
Total Other Operating Expense		9,295		8,589		19,053		17,915

Income Before Provision for Income Taxes		4,837		4,513		8,551		8,091
Provision for income taxes		1,551		1,198		2,577		2,232
Net Income		3,286		3,315		5,974		5,859
Less: Net income attributable to the noncontrolling interest		144		133		256		222
Net Income Attributable to Northrim BanCorp	$	3,142	$	3,182	$	5,718	$	5,637

Earnings Per Share, Basic	$	0.49	$	0.49	$	0.88	$	0.88
Earnings Per Share, Diluted	$	0.48	$	0.49	$	0.87	$	0.86
Weighted Average Shares Outstanding, Basic		6,469,909		6,431,060		6,468,724		6,429,895
Weighted Average Shares Outstanding, Diluted		6,573,729		6,549,744		6,570,094		6,548,557

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended June 30, 2012 and 2011



	Three Months Ended June 30, 2011				Six Months Ended June 30, 2011
Net income			$	3,315			$	5,859
Other comprehensive income, net of tax:
Unrealized gains arising during the period	$	934			$	784
Reclassification adjustment for net gain realized in earnings		-				(263)
Net change in unrealized gains	$	934			$	521
Other comprehensive income				934				521
Comprehensive income				4,249				6,380
Less: comprehensive income attributable to the noncontrolling interest				(133)				(222)
Comprehensive income attributable to Northrim BanCorp			$	4,116			$	6,158

	Three Months Ended June 30, 2012					Six Months Ended June 30, 2012
Net income			$	3,286			$	5,974
Other comprehensive income, net of tax:
Unrealized gains arising during the period	$	92			$	974
Reclassification adjustment for net gain realized in earnings		(246)				(273)
Net change in unrealized gains	$	(154)			$	701
Other comprehensive income				(154)				701
Comprehensive income				3,132				6,675
Less: comprehensive income attributable to the noncontrolling interest				(144)				(256)
Comprehensive income attributable to Northrim BanCorp			$	2,988			$	6,419

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Changes in Shareholders’ Equity

For the Six Months Ended June 30, 2012 and 2011



								Accumulated
	Common Stock			Additional				Other		Non-
	Number		Par	Paid-in		Retained		Comprehensive		controlling
	of Shares		Value	Capital		Earnings		Income		Interest			Total
	(Unaudited)
	(In Thousands)
Six Months Ended June 30, 2011
Balance as of January 1, 2011	6,427	$	6,427	$	52,658	$	57,339	$	648	$	50	$	117,122

Cash dividend declared	-		-		-		(1,564)		-		-		(1,564)
Stock based compensation expense	-		-		263		-		-		-		263
Exercise of stock options	6		6		(6)		-		-		-		-
Excess tax benefits from share-based payment arrangements	-		-		38		-		-		-		38
Distributions to noncontrolling interest	-		-		-		-		-		(230)		(230)
Change in unrealized holding gain
on available for sale securities, net of tax	-		-		-		-		521		-		521
Net income attributable to the noncontrolling interest	-		-		-		-		-		222		222
Net income attributable to Northrim BanCorp	-		-		-		5,637		-		-		5,637
Six Months Ended June 30, 2011	6,433	$	6,433	$	52,953	$	61,412	$	1,169	$	42	$	122,009

Six Months Ended June 30, 2012
Balance as of January 1, 2012	6,467	$	6,467	$	53,164	$	65,469	$	283	$	52	$	125,435

Cash dividend declared	-		-		-		(1,705)		-		-		(1,705)
Stock based compensation expense	-		-		225		-		-		-		225
Exercise of stock options	4		4		(6)		-		-		-		(2)
Excess tax benefits from share-based payment arrangements	-		-		28		-		-		-		28
Distributions to noncontrolling interest	-		-		-		-		-		(231)		(231)
Change in unrealized holding gain
on available for sale securities, net of tax	-		-		-		-		701		-		701
Net income attributable to the noncontrolling interest	-		-		-		-		-		256		256
Net income attributable to Northrim BanCorp	-		-		-		5,718		-		-		5,718
Six Months Ended June 30, 2012	6,471	$	6,471	$	53,411	$	69,482	$	984	$	77	$	130,425

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2012 and 2011



		Six Months Ended
		June 30,
		2012		2011
		(Unaudited)
		(In Thousands)
Operating Activities:
Net income	$	5,974	$	5,859
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Gain on sale of securities, net		(273)		(263)
Depreciation and amortization of premises and equipment		821		868
Amortization of software		98		102
Intangible asset amortization		129		141
Amortization of investment security premium, net of discount accretion		145		117
Deferred tax (benefit) liability		(240)		(396)
Stock-based compensation		225		263
Excess tax benefits from share-based payment arrangements		(28)		(38)
Deferral of loan fees and costs, net		253		(346)
Provision for loan losses		178		1,099
Purchases of loans held for sale		(86,576)		-
Proceeds from the sale of loans held for sale		91,769		5,558
Gain on sale of other real estate owned		(26)		(805)
Impairment on other real estate owned		81		-
Equity in undistributed earnings from mortgage affiliate		37		181
Net changes in assets and liabilities:
(Increase) decrease in accrued interest receivable		97		656
Decrease in other assets		(784)		(4)
(Decrease) in other liabilities		(535)		(341)
Net Cash Provided by Operating Activities		11,345		12,651
Investing Activities:
Investment in securities:
Purchases of investment securities-available-for-sale		(39,603)		(56,832)
Proceeds from sales/maturities of securities-available-for-sale		73,760		88,987
Proceeds from calls/maturities of securities-held-to-maturity		215		992
Purchases of domestic certificates of deposit		(1,500)		(2,000)
Investment in purchased receivables, net of repayments		6,559		1,786
(Increase) decrease in loans, net		(13,231)		37,115
Proceeds from sale of other real estate owned		199		7,294
Investment in other real estate owned		(18)		(28)
Loan to Elliott Cove, net of repayments		93		110
Purchases of premises and equipment		(625)		(627)
Net Cash (Used) Provided by Investing Activities		25,849		76,797
Financing Activities:
(Decrease) increase in deposits		(16,475)		(7,966)
(Decrease) in securities sold under repurchase agreements		(1,083)		(1,258)
(Decrease) increase in borrowings		(73)		(690)
Distributions to noncontrolling interest		(231)		(230)
Excess tax benefits from share-based payment arrangements		28		38
Cash dividends paid		(1,686)		(1,544)
Net Cash (Used) Provided by Financing Activities		(19,520)		(11,650)

Net Increase in Cash and Cash Equivalents		17,674		77,798
Cash and Cash Equivalents at Beginning of Period		79,530		66,033
Cash and Cash Equivalents at End of Period	$	97,204	$	143,831
Supplemental Information:
Income taxes paid	$	3,197	$	2,844
Interest paid	$	1,327	$	1,942
Transfer of loans to other real estate owned	$	1,499	$	982
Loans made to facilitate sales of other real estate owned	$	199	$	780
Cash dividends declared but not paid	$	19	$	20

See notes to the consolidated financial statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2012 and 2011

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 June 30, 2012, are not necessarily indicative of the results anticipated for the year ending December 31, 2012. 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, 2011.

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, 2011.

In May 2011, the Financial Accounting Standard Board (“FASB”) issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). Some of the amendments contained in ASU 2011-04 clarify the FASB’s intent about the application of existing fair value measurement requirements, and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This ASU was effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2011, and has been applied prospectively. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 amends Topic 220, “Comprehensive Income”, to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor does it change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05 (“ASU 2011-12”). This ASU defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. ASU 2011-12 was issued in order to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, the Company will continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before the issuance of ASU 2011-05. ASU 2011-12 was effective for the Company’s financial statements for annual and interim periods beginning after December 31, 2011, and has been applied prospectively. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

3. Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with other banks, banker’s acceptances, commercial paper, securities purchased under agreement to resell, federal funds sold, and securities with maturities of less than 90 days at acquisition.

4. Investment Securities

The carrying values and approximate fair values of investment securities at the periods indicated are presented below:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
		(In Thousands)
June 30, 2012
Securities available for sale
U.S. Treasury and government sponsored entities	$	119,002	$	504	$	3	$	119,503
Municipal securities		18,970		699		1		19,668
U.S. Agency mortgage-backed securities		47		3		-		50
Corporate bonds		46,518		515		186		46,847
Preferred stock		3,037		142		-		3,179
Total securities available for sale	$	187,574	$	1,863	$	190	$	189,247
Securities held to maturity
Municipal securities	$	3,601	$	242	$	-	$	3,843
Total securities held to maturity	$	3,601	$	242	$	-	$	3,843

December 31, 2011
Securities available for sale
U.S. Treasury and government sponsored entities	$	160,529	$	625	$	50	$	161,104
Municipal securities		16,260		675		-		16,935
U.S. Agency mortgage-backed securities		52		2		-		54
Corporate bonds		43,767		343		1,119		42,991
Preferred stock		996		3		-		999
Total securities available for sale	$	221,604	$	1,648	$	1,169	$	222,083
Securities held to maturity
Municipal securities	$	3,819	$	258	$	-	$	4,077
Total securities held to maturity	$	3,819	$	258	$	-	$	4,077

June 30, 2011
Securities available for sale
U.S. Treasury and government sponsored entities	$	137,256	$	874	$	4	$	138,126
Municipal securities		14,023		379		-		14,402
U.S. Agency mortgage-backed securities		58		2		-		60
Corporate bonds		29,553		785		48		30,290
Total securities available for sale	$	180,890	$	2,040	$	52	$	182,878
Securities held to maturity
Municipal securities	$	5,142	$	196	$	-	$	5,338
Total securities held to maturity	$	5,142	$	196	$	-	$	5,338

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 five securities with unrealized losses as of June 30, 2012 and 2011, respectively, that have been in a loss position for less than twelve months. There were no securities with unrealized losses as of June 30, 2012 and June 30, 2011 that have been in an unrealized 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.

(other than government sponsored entities) that exceeded 10% of our shareholders’ equity at June 30, 2012, December 31, 2011 or June 30, 2011.

The amortized cost and fair values of debt securities at June 30, 2012, 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. Although preferred stock has no stated maturity, it is aggregated in the calculation of weighted average yields presented below in the category of investments that mature in ten years or more.



	Amortized Cost		Fair Value		Weighted Average Yield
		(In Thousands)
US Treasury and government sponsored entities
Within 1 year	$	29,996	$	30,034	0.76	%
1-5 years		89,006		89,469	0.73	%
Total	$	119,002	$	119,503	0.74	%

U.S. Agency mortgage-backed securities
5-10 years	$	47	$	50	4.45	%
Total	$	47	$	50	4.45	%

Corporate bonds
Within 1 year	$	3,160	$	3,195	2.88	%
1-5 years		43,358		43,652	2.45	%
Total	$	46,518	$	46,847	2.48	%

Preferred stock
Over 10 years		3,037		3,179	5.88	%
Total	$	3,037	$	3,179	5.88	%

Municipal securities
Within 1 year	$	2,414	$	2,422	1.79	%
1-5 years		9,897		10,137	2.01	%
5-10 years		7,305		7,776	4.58	%
Over 10 years		2,955		3,176	4.79	%
Total	$	22,571	$	23,511	3.18	%

The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the six months ending June 30, 2012 and 2011, respectively, are as follows:



	Proceeds		Gross Gains		Gross Losses
	(In Thousands)
2012
Available for sale securities	$	30,424	$	273	$	-
2011
Available for sale securities	$	6,987	$	263	$	-

A summary of interest income for the six months ending June 30, 2012 and 2011 on available for sale investment securities is as follows:



		2012		2011
		(In Thousands)
US Treasury and government sponsored entities	$	553	$	816
U.S. Agency mortgage-backed securities		1		1
Other		630		482
Total taxable interest income	$	1,184	$	1,299

Municipal securities	$	283	$	235
Total tax-exempt interest income		283		235
Total	$	1,467	$	1,534

For the periods ending June 30, 2012, December 31, 2011 and June 30, 2011, we held Federal Home Loan Bank of Seattle (“FHLB”) stock with a book value approximately equal to its market value in the amount of $2.0 million for each period. The Company evaluated its investment in FHLB stock for other-than-temporary impairment as of June 30, 2012, consistent with its accounting policy. Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment, the liquidity position of the FHLB of Seattle, the actions being taken by the FHLB of Seattle to address its regulatory capital situation, and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the par value, the Company did not recognize an other-than-temporary impairment loss. Even though the Company did not recognize an other-than-temporary impairment loss during the six-month period ending June 30, 2012, continued deterioration in the FHLB of Seattle’s financial position may result in future impairment losses.

5. Loans Held for Sale

The Company has purchased residential loans from our mortgage affiliate, Residential Mortgage Holding Company LLC (“RML”), from time to time since 1999. The Company then sells these loans in the secondary market. The Company purchased $86.6 million and sold $91.8 in loans in the three-month period ending June 30, 2012. The Company sold $5.6 million loans and did not purchase any loans in the three-month period ending June 30, 2011.

6. Loans

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



		June 30, 2012				December 31, 2011				June 30, 2011
	Dollar		Percent		Dollar		Percent		Dollar		Percent
	Amount		of Total		Amount		of Total		Amount		of Total
		(In Thousands)
Commercial	$	240,395	36.6	%	$	252,689	39.1	%	$	232,765	36.7	%
Real estate construction		40,922	6.2	%		40,182	6.2	%		47,639	7.5	%
Real estate term		340,530	51.8	%		315,860	48.9	%		314,093	49.5	%
Home equity lines and other consumer		38,260	5.8	%		39,834	6.2	%		42,458	6.7	%
Subtotal	$	660,107			$	648,565			$	636,955
Less: Unearned origination fee,
net of origination costs		(3,257)	(0.5)	%		(3,003)	(0.5)	%		(2,825)	(0.4)	%
Total loans	$	656,850			$	645,562			$	634,130

At June 30, 2012, approximately 19% of the portfolio was scheduled to mature over the next 12 months, and 20% was scheduled to mature between July 1, 2013, and June 30, 2017.

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 eight 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 be 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 government 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 for the periods indicated, is shown below:



	Commercial		Real estate construction		Real estate term		Home equity lines and other consumer		Total
		(In Thousands)
June 30, 2012
Risk Code 1 - Excellent	$	968	$	-	$	-	$	426	$	1,394
Risk Code 2 - Good		61,999		289		62,521		818		125,627
Risk Code 3 - Satisfactory		159,236		36,769		264,425		34,274		494,704
Risk Code 4 - Watch		6,837		451		1,370		1,909		10,567
Risk Code 5 - Special Mention		8,717		370		3,910		167		13,164
Risk Code 6 - Substandard		2,215		3,043		8,132		666		14,056
Risk Code 7 - Doubtful		423		-		172		-		595
Subtotal	$	240,395	$	40,922	$	340,530	$	38,260	$	660,107
Less: Unearned origination fees, net of origination costs										(3,257)
									$	656,850

December 31, 2011
Risk Code 1 - Excellent	$	540	$	-	$	-	$	575	$	1,115
Risk Code 2 - Good		65,315		-		55,617		849		121,781
Risk Code 3 - Satisfactory		164,767		29,063		247,330		35,914		477,074
Risk Code 4 - Watch		8,033		3,579		1,102		1,497		14,211
Risk Code 5 - Special Mention		9,671		-		3,339		364		13,374
Risk Code 6 - Substandard		3,694		7,540		8,026		635		19,895
Risk Code 7 - Doubtful		669		-		446		-		1,115
Subtotal	$	252,689	$	40,182	$	315,860	$	39,834	$	648,565
Less: Unearned origination fees, net of origination costs										(3,003)
									$	645,562

June 30, 2011
Risk Code 1 - Excellent	$	725	$	-	$	-	$	704	$	1,429
Risk Code 2 - Good		75,285		-		58,182		908		134,375
Risk Code 3 - Satisfactory		131,788		33,918		240,814		37,698		444,218
Risk Code 4 - Watch		8,842		3,431		1,285		2,193		15,751
Risk Code 5 - Special Mention		10,834		-		3,260		496		14,590
Risk Code 6 - Substandard		4,822		10,290		10,552		459		26,123
Risk Code 7 - Doubtful		469		-		-		-		469
Subtotal	$	232,765	$	47,639	$	314,093	$	42,458	$	636,955
Less: Unearned origination fees, net of origination costs										(2,825)
									$	634,130

Loans are carried at their principal amount outstanding, net of charge-offs, unamortized fees and direct loan origination costs. Loan balances are charged to the Allowance for Loan Losses (“Allowance”) when management believes that collection of principal is unlikely. 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 and considered impaired 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. Additionally, certain ongoing performance criteria, which generally includes a performance period of six months, must be met in order for a loan to be returned to accrual status. Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms.

Nonaccrual loans totaled $5.9 million, $7.4 million and $9.6 million at June 30, 2012, December 31, 2011, and June 30, 2011, respectively. Nonaccrual loans at the periods indicated, by segment are presented below:



	June 30, 2012		December 31, 2011		June 30, 2011
		(In Thousands)
Commercial	$	2,169	$	3,360	$	4,218
Real estate construction		843		2,355		2,033
Real estate term		2,602		1,477		3,094
Home equity lines and other consumer		308		169		286
Total	$	5,922	$	7,361	$	9,631

Past due loans and nonaccrual loans at the periods indicated are presented below by loan class:



	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Still Accruing		Nonaccrual		Total Past Due		Current		Total Financing Receivables
		(In Thousands)
June 30, 2012
Risk Code 1 - Excellent	$	-	$	-	$	-	$	-	$	-	$	1,394	$	1,394
Risk Code 2 - Good		-		-		-		-		-		125,627		125,627
Risk Code 3 - Satisfactory		111		-		-		-		111		494,593		494,704
Risk Code 4 - Watch		3,037		-		-		-		3,037		7,530		10,567
Risk Code 5 - Special Mention		-		-		-		148		148		13,016		13,164
Risk Code 6 - Substandard		54		-		91		5,179		5,324		8,732		14,056
Risk Code 7 - Doubtful		-		-		-		595		595		-		595
Subtotal	$	3,202	$	-	$	91	$	5,922	$	9,215	$	650,892	$	660,107
Less: Unearned origination fees, net of origination costs														(3,257)
													$	656,850

December 31, 2011
Risk Code 1 - Excellent	$	-	$	-	$	-	$	-	$	-	$	1,115	$	1,115
Risk Code 2 - Good		-		-		-		-		-		121,781		121,781
Risk Code 3 - Satisfactory		-		-		-		-		-		477,074		477,074
Risk Code 4 - Watch		387		170		-		-		557		13,654		14,211
Risk Code 5 - Special Mention		86		-		-		170		256		13,118		13,374
Risk Code 6 - Substandard		-		21		-		6,076		6,097		13,798		19,895
Risk Code 7 - Doubtful		2		-		-		1,115		1,117		(2)		1,115
Subtotal	$	475	$	191	$	-	$	7,361	$	8,027	$	640,538	$	648,565
Less: Unearned origination fees, net of origination costs														(3,003)
													$	645,562

June 30, 2011
Risk Code 1 - Excellent	$	-	$	-	$	-	$	-	$	-	$	1,429	$	1,429
Risk Code 2 - Good		-		-		-		-		-		134,375		134,375
Risk Code 3 - Satisfactory		-		-		-		-		-		444,218		444,218
Risk Code 4 - Watch		99		22		-		-		121		15,630		15,751
Risk Code 5 - Special Mention		240		443		225		-		908		13,682		14,590
Risk Code 6 - Substandard		1,247		-		-		9,163		10,410		15,713		26,123
Risk Code 7 - Doubtful		-		-		-		468		468		1		469
Subtotal	$	1,586	$	465	$	225	$	9,631	$	11,907	$	625,048	$	636,955
Less: Unearned origination fees, net of origination costs														(2,825)
													$	634,130

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 dependent, 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 June 30, 2012, December 31, 2011 and June 30, 2011, the recorded investment in loans that are considered to be impaired was $14.2 million, $9.5 million, and $12.7 million, respectively. The following table presents information about impaired loans by class as of the periods indicated:



	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
		(In Thousands)
June 30, 2012
With no related allowance recorded
Commercial - risk code 4 watch	$	192	$	192	$	-	$	260	$	7
Commercial - risk code 5 special mention		294		294		-		285		11
Commercial - risk code 6 substandard		1,559		2,203		-		1,822		6
Commercial - risk code 8 loss		-		224		-		112		-
Real estate construction - risk code 3 satisfactory		2,827		2,827		-		2,900		134
Real estate term - risk code 5 special mention		1,074		1,152		-		1,068		32
Real estate term - risk code 6 substandard		4,035		4,035		-		4,071		163
Home equity lines and other consumer - risk code 4 watch		94		94		-		96		3
Home equity lines and other consumer - risk code 6 substandard		113		113		-		118		4
	$	10,188	$	11,134	$	-	$	10,732	$	360
With an allowance recorded
Commercial - risk code 6 substandard	$	265	$	265	$	141	$	280	$	-
Commercial - risk code 7 doubtful		423		423		401		434		-
Real estate construction - risk code 6 substandard		843		843		263		924		-
Real estate term - risk code 6 substandard		2,078		2,358		61		2,398		-
Real estate term - risk code 7 doubtful		172		446		6		309		-
Home equity lines and other consumer - risk code 6 substandard		227		227		49		228		-
	$	4,008	$	4,562	$	921	$	4,573	$	-
Total
Commercial - risk code 4 watch	$	192	$	192	$	-	$	260	$	7
Commercial - risk code 5 special mention		294		294		-		285		11
Commercial - risk code 6 substandard		1,824		2,468		141		2,102		6
Commercial - risk code 7 doubtful		423		423		401		434		-
Commercial - risk code 8 loss		-		224		-		112		-
Real estate construction - risk code 3 satisfactory		2,827		2,827		-		2,900		134
Real estate construction - risk code 6 substandard		843		843		263		924		-
Real estate term - risk code 5 special mention		1,074		1,152		-		1,068		32
Real estate term - risk code 6 substandard		6,113		6,393		61		6,469		163
Real estate term - risk code 7 doubtful		172		446		6		309		-
Home equity lines and other consumer - risk code 4 watch		94		94		-		96		3
Home equity lines and other consumer - risk code 6 substandard		340		340		49		346		4
	$	14,196	$	15,696	$	921	$	15,305	$	360

December 31, 2011
With no related allowance recorded
Commercial - risk code 5 special mention	$	327	$	327	$	-	$	430	$	23
Commercial - risk code 6 substandard		2,166		2,810		-		2,380		5
Real estate construction - risk code 6 substandard		1,349		1,527		-		1,463		-
Real estate term - risk code 5 special mention		170		248		-		193		-
Real estate term - risk code 6 substandard		2,455		2,545		-		2,371		102
Home equity lines and other consumer - risk code 5 special mention		97		97		-		49		5
Home equity lines and other consumer - risk code 6 substandard		52		52		-		53		-
	$	6,616	$	7,606	$	-	$	6,939	$	135
With an allowance recorded
Commercial - risk code 6 substandard	$	511	$	511	$	44	$	687	$	-
Commercial - risk code 7 doubtful		669		669		576		707		-
Real estate construction - risk code 6 substandard		1,006		1,006		494		1,024		-
Real estate term - risk code 6 substandard		204		204		5		215		-
Real estate term - risk code 7 doubtful		446		446		62		447		-
	$	2,836	$	2,836	$	1,181	$	3,080	$	-
Total
Commercial - risk code 5 special mention	$	327	$	327	$	-	$	430	$	23
Commercial - risk code 6 substandard		2,677		3,321		44		3,067		5
Commercial - risk code 7 doubtful		669		669		576		707		-
Real estate construction - risk code 6 substandard		2,355		2,533		494		2,487		-
Real estate term - risk code 5 special mention		170		248		-		193		-
Real estate term - risk code 6 substandard		2,659		2,749		5		2,586		102
Real estate term - risk code 7 doubtful		446		446		62		447		-
Home equity lines and other consumer - risk code 5 special mention		97		97		-		49		5
Home equity lines and other consumer - risk code 6 substandard		52		52		-		53		-
	$	9,452	$	10,442	$	1,181	$	10,019	$	135

June 30, 2011
With no related allowance recorded
Commercial - risk code 5 special mention	$	3,327	$	3,925	$	-	$	3,423	$	17
Commercial - risk code 6 substandard		552		552		-		596		19
Real estate construction - risk code 6 substandard		1,381		1,460		-		1,407		9
Real estate term - risk code 6 substandard		4,688		4,778		-		4,718		42
Home equity lines and other consumer - risk code 6 substandard		209		209		-		163		2
	$	10,157	$	10,924	$	-	$	10,307	$	89
With an allowance recorded
Commercial - risk code 6 Substandard	$	499	$	499	$	183	$	678	$	-
Commercial - risk code 7 doubtful		465		465		456		475		-
Real estate construction - risk code 6 substandard		1,568		1,613		57		1,573		-
Real estate term - risk code 6 Substandard		-		-		-		-		-
Home equity lines and other consumer - risk code 6 Substandard		-		-		-		-		-
	$	2,532	$	2,577	$	696	$	2,726	$	-
Total
Commercial - risk code 5 special mention	$	3,327	$	3,925	$	-	$	3,423	$	17
Commercial - risk code 6 substandard		1,051		1,051		183		1,274		19
Commercial - risk code 7 doubtful		465	-	465	-	456	-	475	-	-
Real estate construction - risk code 6 substandard		2,949		3,073		57		2,980		9
Real estate term - risk code 6 substandard		4,688		4,778		-		4,718		42
Home equity lines and other consumer - risk code 6 substandard		209		209		-		163		2
	$	12,689	$	13,501	$	696	$	13,033	$	89

The unpaid principal balance included in the table above represents the recorded investment at the dates indicated, plus amounts charged off for book purposes.

Loans classified as troubled debt restructurings totaled $12.1 million, $4.5 million, and $3.7 million at June 30, 2012, December 31, 2011, and June 30, 2011, respectively. A troubled debt restructuring is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession of some kind. The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Payment Modification: A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time are included in this category.

Combination Modification: Any other type of modification, including the use of multiple categories above.

The following table presents newly restructured loans that occurred during the six months ended June 30, 2012:



		June 30, 2012
	Accrual		Nonaccrual		Total
	Status		Status		Modifications
New Troubled Debt Restructurings		(In Thousands)
Commercial risk code 5 - special mention	$	107	$	-	$	107
Commercial risk code 6 - substandard		85		-		85
Real estate construction risk code 3 - satisfactory		2,827		-		2,827
Real estate construction risk code 6 - substandard				843		843
Real estate term risk code 5 - special mention		397		-		397
Real estate term risk code 6 - substandard		1,886		2,077		3,963
Subtotal	$	5,302	$	2,920	$	8,222

Existing Troubled Debt Restructurings		2,840		1,067		3,907
Total	$	8,142	$	3,987	$	12,129

The following table presents newly restructured loans that occurred during the six months ended June 30, 2012 by concession (terms modified):



			June 30, 2012
	Number	Rate		Term		Payment		Combination		Total
	of Contracts	Modification		Modification		Modification		Modification		Modifications
Pre-Modification Outstanding Recorded Investment:			(In Thousands)
Commercial risk code 5 - special mention	1	$	-	$	108	$	-	$	-	$	108
Commercial risk code 6 - substandard	1		-		86		-		-		86
Real estate construction risk code 3 - satisfactory	1		-		-				2,827		2,827
Real estate construction risk code 6 - substandard	1		-		1,015		-		-		1,015
Real estate term risk code 5 - special mention	1		-		-		-		403		403
Real estate term risk code 6 - substandard	3		-		-		2,589		1,886		4,475
Total	8	$	-	$	1,209	$	2,589	$	5,116	$	8,914

Post-Modification Outstanding Recorded Investment:
Commercial risk code 5 - special mention	1	$	-	$	107	$	-	$	-	$	107
Commercial risk code 6 - substandard	1		-		85		-		-		85
Real estate construction risk code 3 - satisfactory	1		-		-		-		2,827		2,827
Real estate construction risk code 6 - substandard	1		-		843		-		-		843
Real estate term risk code 5 - special mention	1		-		-		-		397		397
Real estate term risk code 6 - substandard	3		-		-		2,077		1,886		3,963
Total	8	$	-	$	1,035	$	2,077	$	5,110	$	8,222

The following table presents TDRs that occurred during the last twelve months that have defaulted in 2012. These loans are past due, and they are nonaccrual loans:



		June 30, 2012		June 30, 2011
	Number	Recorded		Recorded
	of Contracts	Investment		Investment
Troubled Debt Restructurings that Subsequently Defaulted:	(In Thousands)
Commercial risk code 5 - special mention	1	$	192	$	-
Commercial risk code 6 - substandard	2		478		-
Commercial risk code 7 - doubtful	1		216		-
Real estate construction risk code 6 - substandard	1		842		-
Real estate term risk code 6 - substandard	1		881		-
Home equity lines and other consumer risk code 5 - special mention	1		94		-
Total	7	$	2,703	$	-

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in troubled debt restructurings. All troubled debt restructurings are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the Allowance. There were two charge offs totaling $280,000 in the six months ended June 30, 2012 on loans that were later classified as troubled debt restructurings in the real estate term category. Six troubled debt restructurings with a total recorded investment of $3.5 million had a specific impairment amount totaling $815,000 at June 30, 2012.

7. Allowance for Loan Losses

The following tables detail activity in the Allowance for the periods indicated:



Three Months Ended June 30,	Commercial		Real estate construction		Real estate term		Home equity lines and other consumer		Unallocated		Total
		(In Thousands)
2012
Balance, beginning of period	$	6,083	$	1,218	$	5,197	$	599	$	3,191	$	16,288
Charge-Offs		-		-		(127)		-		-		(127)
Recoveries		223		12		-		5		-		240
Provision		880		22		323		270		(1,406)		89
Balance, end of period	$	7,186	$	1,252	$	5,393	$	874	$	1,785	$	16,490

Balance, end of period: Individually evaluated
for impairment	$	542	$	263	$	67	$	49	$	-	$	921

Balance, end of period: Collectively evaluated
for impairment	$	6,644	$	989	$	5,326	$	825	$	1,785	$	15,569

2011
Balance, beginning of period	$	6,138	$	1,876	$	4,305	$	601	$	2,219	$	15,139
Charge-Offs		(91)		-		(90)		(65)		-		(246)
Recoveries		109		12		-		10		-		131
Provision		547		(256)		755		373		(869)		550
Balance, end of period	$	6,703	$	1,632	$	4,970	$	919	$	1,350	$	15,574

Balance, end of period: Individually evaluated
for impairment	$	513	$	183	$	0	$	0	$	-	$	696

Balance, end of period: Collectively evaluated
for impairment	$	6,190	$	1,449	$	4,970	$	919	$	1,350	$	14,878


Six Months Ended June 30,	Commercial		Real estate construction		Real estate term		Home equity lines and other consumer		Unallocated		Total
		(In Thousands)
2012
Balance, beginning of period	$	6,783	$	1,143	$	5,529	$	792	$	2,256	$	16,503
Charge-Offs		(231)		-		(553)		-		-		(784)
Recoveries		572		12		-		9		-		593
Provision		62		97		417		73		(471)		178
Balance, end of period	$	7,186	$	1,252	$	5,393	$	874	$	1,785	$	16,490

Balance, end of period: Individually evaluated
for impairment	$	542	$	263	$	67	$	49	$	-	$	921

Balance, end of period: Collectively evaluated
for impairment	$	6,644	$	989	$	5,326	$	825	$	1,785	$	15,569

2011
Balance, beginning of period	$	6,374	$	1,035	$	4,270	$	741	$	1,986	$	14,406
Charge-Offs		(564)		-		(90)		(65)		-		(719)
Recoveries		699		13		53		23		-		788
Provision		194		584		737		220		(636)		1,099
Balance, end of period	$	6,703	$	1,632	$	4,970	$	919	$	1,350	$	15,574

Balance, end of period: Individually evaluated
for impairment	$	513	$	183	$	0	$	0	$	-	$	696

Balance, end of period: Collectively evaluated
for impairment	$	6,190	$	1,449	$	4,970	$	919	$	1,350	$	14,878

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



	Commercial		Real estate construction		Real estate term		Home equity lines and other consumer		Total
		(In Thousands)
June 30, 2012
Balance, end of period	$	240,395	$	40,922	$	340,530	$	38,260	$	660,107

Balance, end of period: Individually evaluated
for impairment	$	2,733	$	3,670	$	7,359	$	434	$	14,196

Balance, end of period: Collectively evaluated
for impairment	$	237,662	$	37,252	$	333,171	$	37,826	$	645,911

June 30, 2011
Balance, end of period	$	232,765	$	47,639	$	314,093	$	42,458	$	636,955

Balance, end of period: Individually evaluated
for impairment	$	4,843	$	2,949	$	4,688	$	209	$	12,689

Balance, end of period: Collectively evaluated
for impairment	$	227,922	$	44,690	$	309,405	$	42,249	$	624,266

The following represents the balance of the Allowance for the periods indicated segregated by segment and class:



	Total		Commercial		Real estate construction		Real estate term		Home equity lines and other consumer		Unallocated
				(In Thousands)
June 30, 2012
Individually evaluated for impairment:
Risk Code 6 - Substandard	$	515	$	141	$	-	$	325	$	49	$	-
Risk Code 7 - Doubtful		406		400		-		6		-		-

Collectively evaluated for impairment:
Risk Code 2 - Good		14		8		-		6
Risk Code 3 - Satisfactory		11,364		4,888		1,065		4,845		566		-
Risk Code 4 - Watch		413		139		10		16		248		-
Risk Code 5 - Special Mention		1,630		1,584		6		32		8		-
Risk Code 6 - Substandard		363		26		171		163		3		-
Risk Code 7 - Doubtful		-		-		-		-		-		-
Unallocated		1,785		-		-		-		-		1,785
	$	16,490	$	7,186	$	1,252	$	5,393	$	874	$	1,785

June 30, 2011
Individually evaluated for impairment:
Risk Code 6 - Substandard	$	240	$	57	$	183	$	-	$	-	$	-
Risk Code 7 - Doubtful		456		456		-		-		-		-

Collectively evaluated for impairment:
Risk Code 3 - Satisfactory		9,512		3,809		1,041		4,094		568		-
Risk Code 4 - Watch		513		143		68		13		289		-
Risk Code 5 - Special Mention		2,271		2,180		-		31		60		-
Risk Code 6 - Substandard		1,232		58		340		832		2		-
Risk Code 7 - Doubtful		-		-		-		-		-		-
Unallocated		1,350		-		-		-		-		1,350
	$	15,574	$	6,703	$	1,632	$	4,970	$	919	$	1,350

At June 30, 2012, the Company’s ratio of nonperforming loans compared to portfolio loans was 0.92%. The Company’s ratio of Allowance compared to portfolio loans at June 30, 2012 was 2.51%.

8. 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, 2011. There was no indication of impairment as of June 30, 2012. 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 2012 for goodwill impairment, if, for example, our stock price declines and trades 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.

9. Deposit Activities

Total deposits at June 30, 2012, December 31, 2011 and June 30, 2011 were $894.8 million, $911.2 million and $884.2 million, respectively. The only deposit category with stated maturity dates is certificates of deposit. At June 30, 2012, the Company had $106.1 million in certificates of deposit as compared to certificates of deposit of $108.7 million and $128.8 million, for the periods ending December 31, 2011 and June 30, 2011, respectively. At June 30, 2012, $73.9 million, or 70%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $75.1 million, or 69%, of total certificates of deposit at December 31, 2011, and $89.2 million, or 69%, of total certificates of deposit at June 30, 2011.

10. Stock Incentive Plan

The Company adopted the 2010 Stock Option Plan (“2010 Plan”) following shareholder approval of the 2010 Plan at the 2010 Annual Meeting. Subsequent to the adoption of the 2010 Plan, no additional grants may be issued under the prior plans. The 2010 Plan provides for grants of up to 348,232 shares, which includes any shares subject to stock awards under the previous stock option plans.

Stock Options: Under the 2010 Plan and previous 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 then fair 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.

The Company measures the fair value of each stock option at the date of grant using the Black-Scholes option pricing model. For the quarters ended June 30, 2012 and 2011, the Company recognized $15,000 and $17,000, respectively, in stock option compensation expense as a component of salaries and other personnel expense. For the six months ended June 30, 2012 and 2011, the Company recognized $30,000 and $34,000, respectively, in stock option compensation expense as a component of salaries and other personnel expense.

Proceeds from the exercise of stock options in the three months ended June 30, 2012 and 2011, were $94,000 and $103,000, respectively. The Company withheld $98,000 and $103,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options in the three months ended June 30, 2012 and 2011, respectively. Proceeds from the exercise of stock options in the six months ended June 30, 2012 and 2011, were $158,000 and $179,000, respectively. The Company withheld $161,000, and $179,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options in the six months ended June 30, 2012 and 2011, respectively.

Restricted Stock Units: The Company grants restricted stock units to certain key employees periodically. Recipients of restricted stock units do not pay any cash consideration to the Company for the shares and receive all dividends with respect to such shares when the shares vest. Restricted stock units cliff vest at the end of a three-year time period. For the three months ended June 30, 2012 and 2011, the Company recognized $98,000 and $112,000, respectively, in restricted stock unit compensation expense as a component of salaries and other personnel expense. For the six months ended June 30, 2012 and 2011, the Company recognized $196,000 and $229,000, respectively, in restricted stock unit compensation expense as a component of salaries and other personnel expense.

11. 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. 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 cash equivalents: 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 7). 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.

Deposits: 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, impaired loans, and other real estate owned (“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 is 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 carrying 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 the periods indicated are as follows:



		June 30, 2012				December 31, 2011				June 30, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
		(In Thousands)
Financial assets:
Level 1 inputs:
Cash, due from banks and deposits in other banks	$	110,704	$	110,704	$	91,530	$	91,530	$	143,831	$	143,831

Level 2 inputs:
Investment securities		194,851		195,093		227,905		228,163		188,020		188,216
Accrued interest receivable		2,801		2,801		2,898		2,898		2,745		2,745

Level 3 inputs:
Loans and loans held for sale, net		662,989		655,950		656,881		649,907		618,556		615,464
Purchased receivables		23,650		23,650		30,209		30,209		14,743		14,743

Financial liabilities:
Level 2 inputs:
Deposits	$	894,773	$	894,358	$	911,248	$	910,927	$	884,170	$	883,317
Securities sold under repurchase agreements		15,265		15,265		16,348		16,348		11,616		11,616
Borrowings		4,553		4,193		4,626		4,066		4,696		3,993
Junior subordinated debentures		18,558		17,620		18,558		17,356		18,558		15,106
Accrued interest payable		50		50		52		52		239		239

Unrecognized financial instruments:
Commitments to extend credit⁽¹⁾	$	223,832	$	2,238	$	173,834	$	1,738	$	204,899	$	2,049
Standby letters of credit⁽¹⁾		21,484		215		16,172		162		18,240		182
⁽¹⁾Carrying amounts reflect the notional amount of credit exposure under these financial instruments.

The following table sets forth the balances as of the periods indicated of assets measured at fair value on a recurring basis:



	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2012		(In Thousands)
Available for sale securities
U.S. Treasury and government sponsored entities	$	119,503	$	-	$	119,503	$	-
Municipal securities		19,668		-		19,668		-
U.S. Agency mortgage-backed securities		50		-		50		-
Corporate bonds		46,847		-		46,847		-
Preferred stock		3,179		-		3,179		-
Total	$	189,247	$	-	$	189,247	$	-

December 31, 2011
Available for sale securities
U.S. Treasury and government sponsored entities	$	161,104	$	-	$	161,104	$	-
Municipal securities		16,935		-		16,935		-
U.S. Agency mortgage-backed securities		54		-		54		-
Corporate bonds		42,991		-		42,991		-
Preferred stock		999		-		999		-
Total	$	222,083	$	-	$	222,083	$	-

June 30, 2011
Available for sale securities
U.S. Treasury and government sponsored entities	$	138,126		-	$	138,126	$	-
Municipal securities		14,402		-		14,402		-
U.S. Agency mortgage-backed securities		60		-		60		-
Corporate bonds		30,290		-		30,290		-
Total	$	182,878	$	-	$	182,878	$	-

As of and for the three months ending June 30, 2012 and 2011, 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. For loans measured for impairment, the Company classifies fair value measurements using observable inputs, such as external appraisals, as level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as level 3 valuations in the fair value hierarchy.



	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (gains) losses
June 30, 2012		(In Thousands)
Loans measured for impairment¹	$	4,008	$	-	$	2,920	$	1,088	$	(259)
Other real estate owned²		639		-		-		639		81
Total	$	4,647	$	-	$	2,920	$	1,727	$	(178)
December 31, 2011
Loans measured for impairment¹	$	2,836	$	-	$	204	$	2,632	$	797
Other real estate owned²	$	1,432	$	-	$	-	$	1,432	$	92
Total	$	4,268	$	-	$	204	$	4,064	$	889
June 30, 2011
Loans measured for impairment¹	$	2,532	$	-	$	1,636	$	896	$	313
Total	$	2,532	$	-	$	1,636	$	896	$	313
¹Relates to certain impaired collateral dependent loans. The impairment was measured based on the fair value of collateral, in accordance with U.S. GAAP.
²Relates to certain impaired other real estate owned. This impairment arose from an adjustment to the Company’s estimate of the fair market value of these properties based on changes in estimated costs to complete the projects and changes in market conditions.

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

This discussion should be read in conjunction with the unaudited consolidated 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, 2011.

Note Regarding Forward Looking-Statements

This quarterly report on Form 10-Q includes forward-looking statements, which are not historical facts. These forward-looking statements describe management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of the Company’s style of banking, and the strength of the local economy. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this report are forward-looking. We use words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management’s current plans and expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations, and those variations may be both material and adverse. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the general condition of, and changes in, the Alaska economy; factors that impact our net interest margin; and our ability to maintain asset quality. Further, actual results may be affected by competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Item 1A Risk Factors of this report, and in our other filings with the SEC. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition, you should note that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements, other than as required by law.

Critical Accounting Policies

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

The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. The Company’s critical accounting policies include those that address the accounting for the Allowance, the valuation of goodwill and other intangible assets, and the valuation of other real estate owned. These critical accounting policies are further described in Item 7, 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 for the year ended December 31, 2011. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements.

See Note 2 of the Notes to Consolidated Financial Statements in this Form 10-Q for a summary of the pronouncements that became effective in 2012 and discussion of the impact of their adoption on the Company’s consolidated financial statements.

Update on Economic Conditions

The Company continues to see progress on a number of resource development projects including a significant project located offshore of Alaska’s north coast in the Chukchi and Beaufort Seas.

The Company’s business activities are currently focused primarily in the state of Alaska. Consequently, our results of operations and financial condition are dependent upon the general trends in the Alaska economy, which is significantly affected by the development of natural resources. Bloomberg recently reported on Interior Secretary Ken Salazar’s comments on June 26, 2012 as follows: “Royal Dutch Shell Plc (RDSA) will begin drilling off Alaska’s north coast in the third quarter,” Interior Secretary Ken Salazar said as he outlined U.S. plans to advance Arctic energy production. “We anticipate that there will be exploration with the initial wells going in by Shell this summer,” Salazar said in an interview at a meeting of energy ministers in Trondheim, Norway. “We have now pending exploration plans that have been submitted by other companies as well.’ Shell is awaiting U.S. approval of the final permits to develop leases bought in 2005 and 2008. ConocoPhillips (COP) and Statoil ASA (STL) also won rights in the region and plan to join The Hague-based Shell in the area last explored in the early 1990s.

Recent Developments

New Proposed Capital Rules: On June 12, 2012, the three federal banking regulators (including the Federal Reserve and the FDIC) jointly announced that they were seeking comment on three sets of proposed regulations relating to capital (the “Proposed Rules”). The Proposed Rules would apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies. Although parts of the Proposed Rules would apply only to large, complex financial institutions, substantial portions of the Proposed Rules would apply to the Bank and the Company. The Proposed Rules include requirements contemplated by Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010, which standards are commonly referred to as “Basel III”.

The Proposed Rules include new risk-based and leverage capital ratio requirements, which would be phased in beginning in 2013 and be fully implemented January 1, 2015, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to the Company and the Bank under the Proposed Rules would be: (i) a new common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. Common equity Tier 1 capital would consist of retained earnings and common stock instruments, subject to certain adjustments.

The Proposed Rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conservation buffer would consist entirely of common equity Tier 1 capital and, when added to the capital requirements, would result in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffer amount.

The Proposed Rules would also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds. These revisions would be phased in beginning in 2013 and be fully implemented January 1, 2015. The prompt correction action rules would be modified to include a common equity Tier 1 capital component and to increase certain other capital requirements for the various thresholds. For example, under the proposed prompt corrective action rules, insured depository institutions would be required to meet the following capital levels in order to qualify as “well capitalized”: (i) a new common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (iii) a total risk-based capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from current rules).

The Proposed Rules set forth certain changes in the methods of calculating certain risk-weighted assets, which in turn would affect the calculation of risk based ratios. These new calculations would take effect beginning January 1, 2015. Under the Proposed Rules, higher or more sensitive risk weights would be assigned to various categories of assets, including residential mortgages, certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on accrual, foreign exposures and certain corporate exposures. In addition, the Proposal Rules include (i) alternative standards of creditworthiness consistent with the Dodd-Frank Act; (ii) greater recognition of collateral and guarantees; and (iii) revised capital treatment for derivatives and repo-style transactions.

The deadline for comments on the Proposed Rules is September 7, 2012. We cannot predict at this time when or in what form final rules will be adopted.

Highlights and Summary of Performance – Second Quarter of 2012

§	Diluted earnings per share in the second quarter of 2012 were $0.48, compared to $0.49 per diluted share in the quarter ended June 30, 2011.

§	Northrim paid a quarterly cash dividend of $0.13 per share in the second quarter of 2012, compared to a quarterly cash dividend of $0.12 per share in the second quarter of 2011, which provides a yield of approximately 2.4% at current market share prices.

At quarter end, tangible book value was $18.86 per share, up from $18.09 at December 31, 2011 and $17.63 per share at June 30, 2011. Tangible book value is a non-GAAP ratio that represents total shareholders’ equity less goodwill and intangible assets divided by the number of common shares outstanding. The GAAP measure of book value is total shareholders’ equity divided by the number of common shares outstanding. Book value was $20.14 at June 30, 2012 as compared to $19.39 at December 31, 2011 and $18.96 at June 30, 2011.

§	Other operating income, which includes revenues from financial services affiliates, service charges, and electronic banking, contributed 26.2% to second quarter 2012 total revenues, compared to 22.5% of second quarter 2011 total revenues.

Northrim remains well-capitalized with Tier 1 Capital to Risk Adjusted Assets at June 30, 2012 of 15.44%, compared to 15.20% at December 31, 2011 and 15.59% at June 30, 2011. Tangible common equity to tangible assets was 11.47% at June 30, 2012, up from 10.86% at December 31, 2011 and 10.90% a year ago. 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 12.17% at June 30, 2012 as compared to 11.56% at December 31, 2011 and 11.63% at June 30, 2011.

§	At June 30, 2012, nonperforming assets were $12.5 million, or 1.16% of total assets, compared to $12.5 million, or 1.16% of total assets at the end of December 2011, and $16.9 million, or 1.61% of total assets a year ago.

§	The allowance for loan losses totaled 2.51% of gross loans at June 30, 2012, down from 2.56% at December 31, 2011 and up from 2.46% a year ago. The allowance for loan losses to nonperforming loans also increased to 274% at June 30, 2012, from 224% at December 31, 2011 and 133% a year ago.

§	Second quarter 2012, net interest margin was 4.51%, down 14 basis points from the second quarter a year ago.

The Company reported net income and diluted earnings per share of $3.1 million and $0.48, respectively, for the second quarter of 2012 compared to net income and diluted earnings per share of $3.2 million and $0.49, respectively, for the second quarter of 2011. The slight decrease in net income from the prior year was the result of a number of factors. The largest change in net income for the second quarter of 2012 as compared to the same period in 2011 is attributable to an increase in other operating expense due to decreased rental income and gains on the sale of other real estate owned (“OREO”). The increase in other operating expense was nearly entirely offset by an increase in other operating income primarily due to increased gains on the sale of securities, purchased receivable income, and earnings from Residential Mortgage Holding Company LLC (“RML”), the Company’s mortgage affiliate. Lastly, the provision for loan losses also decreased significantly in the second quarter of 2012 as compared to the same period in 2011, and the provision for income taxes increased primarily due to increased taxable income.

Northrim’s total assets increased by 2% at June 30, 2012 as compared to June 30, 2011, with increases in loans, portfolio investments, and purchased receivables partially offset by a decrease in interest bearing deposits in other banks. Total assets at June 30, 2012 decreased 1% as compared to December 31, 2011 primarily due to decreases in portfolio investments and purchased

receivables, which were partially offset with increases in interest bearing deposits in other banks and loan growth. Net loans increased to $663.0 million at June 30, 2012 as compared to $656.9 million at December 31, 2011 and $618.6 million a year ago. This increase in the loan portfolio in the first six months of 2012 was primarily due to increases in real estate term loans.

Credit Quality

Nonperforming assets: Nonperforming assets at June 30, 2012 were consistent with December 31, 2011 and decreased by $2.5 million, or 17%, as compared June 30, 2011. Nonaccrual loans at June 30, 2012 decreased $3.7 million, or 39%, year-over-year. Other real estate owned increased $1.4 million, or 27%, as compared to and June 30, 2011, as a result of the addition of a property in Fairbanks which includes thirty seven lots that are ready for building and some unrestricted acreage.

The following table summarizes total OREO activity for the three and six month periods ending June 30, 2012 and 2011:



		Three Months Ended June 30,				Six Months Ended June 30,
		2012		2011		2012		2011
		(In Thousands)
Balance, beginning of the period	$	6,657	$	10,343	$	5,183	$	10,355
Transfers from loans, net		-		8		1,499		982
Investment in other real estate owned		1		14		18		28
Proceeds from the sale of other real estate owned		(149)		(6,154)		(199)		(7,294)
Gain on sale of other real estate owned, net		7		733		26		805
Deferred gain on sale of other real estate owned		13		139		2		207
Impairment on other real estate owned		(81)		-		(81)		-
Balance at end of period	$	6,448	$	5,083	$	6,448	$	5,083

Potential problem loans: 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 impaired loans 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 impaired loans. At June 30, 2012, management had identified potential problem loans of $2.4 million as compared to potential problem loans of $4.6 million at December 31, 2011 and $8.6 million at June 30, 2011. The decrease in potential problem loans at June 30, 2012 from December 31, 2011 is primarily due to the movement of two real estate term loans to the same borrower totaling $2.7 million from potential problem loans to nonaccrual status. The decrease at June 30, 2012 as compared to June 30, 2011 is due to the movement of $4.8 million in loans to nonaccrual or OREO status, as well as pay downs and upgrades on several loans.

Troubled debt restructurings (“TDRs”): TDRs are those loans for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower, have been granted due to the borrower’s weakened financial condition. Interest on TDRs will be accrued at the restructured rates when it is anticipated that no loss of original principal will occur, and the interest can be collected, which is generally after a period of six months. The Company had $8.1 million in loans classified as TDRs that were performing as of June 30, 2012. Additionally, there were $4.0 million in TDRs included in nonaccrual loans at June 30, 2012 for a total of $12.1 million. At December 31, 2011 and June 30, 2011 there were $2.3 million and $1.9 million, respectively, in loans classified as TDRs that were performing and $2.2 million and $1.8 million, respectively, in TDRs included in nonaccrual loans. See Note 6 of the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion of TDRs.

RESULTS OF OPERATIONS

Income Statement

Net Income

Net income attributable to Northrim BanCorp for the second quarter of 2012 decreased $40,000, or 1%, to $3.1 million as compared to $3.2 million for the same period in 2011. This decrease was due to increases in other operating expense and the

provision for income taxes and a slight decrease in net interest income. These changes were partially offset by an increase in other operating income and a decrease in the provision for loan losses.

Net income attributable to Northrim BanCorp for the six-month period ending June 30, 2012 increased $81,000, or 1%, to $5.7 million compared to $5.6 million for the same period in 2011. This increase was due to an increase in other operating income and a decrease in the provision for loan losses. These changes were partially offset by increases in other operating expense and the provision for income taxes and a slight decrease in net interest income.

Net Interest Income / Net Interest Margin

Net interest income for the second quarter of 2012 decreased $85,000, or 1%, as compared to the second quarter in 2011. Net interest income for the six month period ending June 30, 2012 decreased $407,000, or 2%, as compared to the same period in 2011. The decreases in both periods arose from reductions in interest income due to decreased yields on interest-earning assets, accompanied by a smaller decrease in the costs of the Company’s interest-bearing liabilities. The Company's net interest income as a percentage of average interest-earning assets on a tax equivalent basis decreased by 14 and 16 basis points to 4.51% and 4.52%, respectively, for the three and six-month periods ending June 30, 2012 as compared to the same periods in 2011.

Average loans, the largest category of interest-earning assets, increased by $25.0 million and $16.2 million, or 4% and 2%, to $677.2 million and $673.2 million in the three and six-month periods ending June 30, 2012, respectively, as compared to the same periods in 2011. Average commercial loans, real estate term loans, and loans held for sale increased while real estate construction and home equity lines and other consumer loans decreased in the both periods as compared to the same periods in 2011. Total interest income from loans decreased $404,000 and $866,000 for the three and six-month periods ending June 30, 2012, respectively, as compared to the same periods in 2011, due to decreased yields.

Average investments changed less than 1% for both the three and six month periods ending June 30, 2012 as compared to the same periods in 2011.

The average yield on interest-earning assets, which includes loans and investments, decreased 27 basis points to 4.77% for the second quarter of 2012 from 5.04% in the same period in 2011. The average yield on interest-earning assets decreased 29 basis points to 4.80% for the six months ended June 30, 2012 from 5.09% in the same period in 2011. The decrease in average yields in both periods arose from decreasing interest rates in both the loan and investment portfolios as new volume replaces old volume at lower current rates.

Average interest-bearing liabilities increased $13.7 million, or 2%, to $634.9 million during the second quarter of 2012 as compared to $621.2 million for the same period in 2011. Average interest-bearing liabilities increased $4.2 million, or 1%, to $630.1 million during the six months ended June 30, 2012 as compared to $625.9 million for the same period in 2011. These increases were the result of increased average interest-bearing deposit balances and increased balances in securities sold under repurchase agreements, which are classified as borrowings.

The average cost of interest-bearing liabilities decreased $277,000, or 19 basis points, and $556,000, or 18 basis points, for the three and six month periods ending June 30, 2012, respectively, as compared to the same periods in 2011 due to declining market rates across all deposit types and borrowings.

Components of Net Interest Margin

The following tables compares average balances and rates as well as net tax equivalent margin on earning assets for the three and six months ending June 30, 2012 and 2011:



		Three Months Ended June 30,
										Interest income/							Average Yields/Costs
		Average Balances				Change				expense				Change			Tax Equivalent³
		2012		2011		$	%			2012		2011		$	%		2012		2011		Change
		(In Thousands)
Commercial	$	248,884	$	244,273	$	4,611	2	%	$	4,114	$	4,161	$	(47)	(1)	%	6.65	%	6.83	%	(0.18)	%
Real estate construction		37,235		58,953		(21,718)	(37)	%		766		1,077		(311)	(29)	%	8.27	%	7.33	%	0.94	%
Real estate term		341,786		309,216		32,570	11	%		4,721		4,785		(64)	(1)	%	5.56	%	6.21	%	(0.65)	%
Home equity lines and																					0.00
other consumer		38,312		42,350		(4,038)	(10)	%		590		686		(96)	(14)	%	6.20	%	6.50	%	(0.30)	%
Loans held for sale		12,768		-		12,768	NM			114		-		114	NM		3.59	%	0.00	%	3.59	%
Unearned origination fees, net of
origination costs		(1,782)		(2,641)		859	(33)	%
Total loans^1,2		677,203		652,151		25,052	4	%		10,305		10,709		(404)	(4)	%	6.15	%	6.62	%	(0.47)	%

Short-term investments		75,075		84,310		(9,235)	(11)	%		63		55		8	15	%	0.33	%	0.26	%	0.07	%
Long-term investments		197,700		188,168		9,532	5	%		755		722		33	5	%	1.72	%	1.69	%	0.03	%
Total investments		272,775		272,478		297	0	%		818		777		41	5	%	1.35	%	1.25	%	0.10	%
Interest-earning assets		949,978		924,629		25,349	3	%		11,123		11,486		(363)	(3)	%	4.77	%	5.04	%	(0.27)	%
Nonearning assets		114,569		109,562		5,007	5	%
Total	$	1,064,547	$	1,034,191	$	30,356	3	%

Interest-bearing deposits	$	597,878	$	586,003	$	11,875	2	%	$	422	$	704	$	(282)	(40)	%	0.28	%	0.48	%	(0.20)	%
Borrowings		37,066		35,219		1,847	5	%		205		200		5	3	%	2.18	%	2.24	%	(0.06)	%
Total interest-bearing liabilities		634,944		621,222		13,722	2	%		627		904		(277)	(31)	%	0.39	%	0.58	%	(0.19)	%
Demand deposits and other
noninterest-bearing liabilities		299,819		291,912		7,907	3	%
Equity		129,784		121,057		8,727	7	%
Total	$	1,064,547	$	1,034,191	$	30,356	3	%
Net interest income									$	10,496	$	10,582	$	(86)	(1)	%
Net tax equivalent margin on earning assets³																	4.51	%	4.65	%	(0.14)	%
¹ Loan fees recognized during the period and included in the yield calculation totaled $663,000 and $680,000 in the second quarter of 2012 and 2011, respectively.
² Average nonaccrual loans included in the computation of the average loans were $6.3 million and $10.1 million in the second quarter of 2012 and 2011, respectively.
³ Tax-equivalent net interest margin is a non-GAAP performance measurement in which interest income on non-taxable investments and loans is presented on a tax-equivalent basis using
a combined federal and state statutory rate of 41.11% in both 2011 and 2010.


		Six Months Ended June 30,
										Interest income/							Average Yields/Costs
		Average Balances				Change				expense				Change			Tax Equivalent³
		2012		2011		$	%			2012		2011		$	%		2012		2011		Change
		(In Thousands)
Commercial	$	250,355	$	243,707	$	6,648	3	%	$	8,191	$	8,229	$	(38)	0	%	6.58	%	6.81	%	(0.23)	%
Real estate construction		38,431		61,338		(22,907)	(37)	%		1,544		2,243		(699)	(31)	%	8.08	%	7.38	%	0.70	%
Real estate term		333,477		311,286		22,191	7	%		9,332		9,530		(198)	(2)	%	5.63	%	6.17	%	(0.54)	%
Home equity lines and																					0.00
other consumer		38,769		42,718		(3,949)	(9)	%		1,205		1,381		(176)	(13)	%	6.25	%	6.52	%	(0.27)	%
Loans held for sale		14,015		616		13,399	NM			258		13		245	NM	%	3.69	%	4.32	%	(0.63)	%
Unearned origination fees, net of
origination costs		(1,848)		(2,650)		802	30	%
Total loans^{1, 2}		673,199		657,015		16,184	2	%		20,530		21,396		(866)	(4)	%	6.17	%	6.60	%	(0.43)	%

Short-term investments		59,059		68,474		(9,415)	(14)	%		103		88		15	17	%	0.34	%	0.25	%	0.09	%
Long-term investments		209,796		201,445		8,351	4	%		1,542		1,654		(112)	(7)	%	1.65	%	1.78	%	(0.13)	%
Total investments		268,855		269,919		(1,064)	0	%		1,645		1,742		(97)	(6)	%	1.37	%	1.41	%	(0.04)	%
Interest-earning assets		942,054		926,934		15,120	2	%		22,175		23,138		(963)	(4)	%	4.80	%	5.09	%	(0.29)	%
Nonearning assets		113,655		110,180		3,475	3	%
Total	$	1,055,709	$	1,037,114	$	18,595	2	%

Interest-bearing deposits	$	592,271	$	590,103	$	2,168	0	%	$	907	$	1,487	$	(580)	(39)	%	0.31	%	0.51	%	(0.20)	%
Borrowings		37,798		35,776		2,022	6	%		418		394		24	6	%	2.18	%	2.22	%	(0.04)	%
Total interest-bearing liabilities		630,069		625,879		4,190	1	%		1,325		1,881		(556)	(30)	%	0.42	%	0.60	%	(0.18)	%
Demand deposits and other
noninterest-bearing liabilities		297,078		291,396		5,682	2	%
Equity		128,562		119,839		8,723	7	%
Total	$	1,055,709	$	1,037,114	$	18,595	2	%
Net interest income									$	20,850	$	21,257	$	(407)	(2)	%
Net tax equivalent margin on earning assets³																	4.52	%	4.68	%	(0.16)	%
¹ Loan fees recognized during the period and included in the yield calculation totaled $1.3 million in the six months ending June 30, 2012 and 2011, respectively.
²Average nonaccrual loans included in the computation of the average loans were $6.5 million and $10.5 million in the six months ending June 30, 2012 and 2011, respectively.
³Tax-equivalent net interest margin is a non-GAAP performance measurement in which interest income on non-taxable investments and loans is presented on a tax-equivalent basis using
a combined federal and state statutory rate of 41.11% in both 2011 and 2010.

Analysis of Changes in Interest Income and Expense

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the three month and six month periods ending June 30, 2012 as compared to the same period in 2011. Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates.



		Quarter ended June 30, 2012 vs. 2011
		Increase (decrease) due to
	Volume		Rate		Total
Interest Income:
Loans	$	126	$	(530)	$	(404)
Long-term investments		25		8		33
Short-term investments		(6)		15		9
Total interest income	$	145	$	(507)	$	(362)

Interest Expense:
Interest-bearing deposits	$	14	$	(296)	$	(282)
Borrowings		10		(5)		5
Total interest expense	$	24	$	(301)	$	(277)



		Six months ended June 30, 2012 vs. 2011
		Increase (decrease) due to
	Volume		Rate		Total
Interest Income:
Loans	$	265	$	(1,131)	$	(866)
Long-term investments		145		(257)		(112)
Short-term investments		(10)		25		15
Total interest income	$	400	$	(1,363)	$	(963)

Interest Expense:
Interest-bearing deposits	$	6	$	(581)	$	(581)
Borrowings		28		(9)		25
Total interest expense	$	34	$	(590)	$	(556)

Provision for Loan Losses

The provision for loan losses was $89,000 and $178,000 for the three and six-month periods ending June 30, 2012 and $550,000 and $1.1 million for the same periods in 2011, respectively. The decrease in the provision for loan losses in both periods is primarily the result of an increase in the credit quality of the loan portfolio. At June 30, the Allowance was $16.5 million, or 2.51% of total loans as compared to $15.6 million, or 2.46% of total loans a year ago. See additional analysis of the Allowance in the Balance Sheet Overview section.

Other Operating Income

Other operating income for the second quarter of 2012 increased $655,000, or 21%, to $3.7 million as compared to $3.1 million for the second quarter of 2011. This increase is primarily due to increases of $246,000, $147,000, $135,000 and $91,000, respectively, in gains on the sale of securities, purchased receivable income, equity in earnings from RML, and other income. The increase in other income is primarily the result of increases in miscellaneous loan fees, merchant fees, and in the Company’s share of income from its affiliate Elliot Cove Insurance Agency, LLC, (“ECIA”) which is accounted for using the equity method. The Company purchased a 41% interest in ECIA in the fourth quarter of 2011. The increase in purchased receivable income resulted from higher average balances.

Changes in other operating income for the year-to-date as of June, 30 2012 are similar to those that occurred in the second quarter of 2012 as compared to 2011 discussed above. Other operating income increased $1.1 million as compared to the same period in 2011. This increase is primarily due to increases in equity in earnings from RML of $488,000, purchased receivable income of $233,000, and other income of $196,000. Employee benefit plan income and electronic banking income also increased by $63,000 and $60,000, respectively, year-to-date as of June, 30 2012 as compared to the same period in 2011.

Other Operating Expense

Other operating expense for the second quarter of 2012 increased $706,000, or 8%, to $9.3 million as compared to $8.6 million for the second quarter of 2011. This increase was primarily due to an increase of $860,000 in OREO expense, net of rental income and gains on the sale of OREO properties, which primarily resulted from decreased gains on the sale and rental income attributable to OREO properties. This increase was partially offset by decreases of $77,000 and $75,000 in occupancy expense and other operating expense, respectively, as compared to the same period in 2011. Occupancy expense decreased due to decreased costs for repairs and maintenance related to the Company’s main office building. Other operating expense decreased primarily due to decreases in operational charge offs, expenses associated with loan collection costs, and shareholder costs. These decreases were only partially offset by an increase in employee education expense.

Other operating expense for the six-months ended June 30, 2012 increased $1.1 million, or 6%, to $19.1 million as compared to $17.9 million for the same period in 2011. This increase was primarily due to an increase of $1.1 million in OREO expense, net of rental income and gains on the sale of OREO properties, which primarily resulted from decreased gains on the sale and rental income attributable to OREO properties. Additionally, salaries and other personnel expense increased by $344,000 year-to-date as of June 30, 2012 as compared to the same period in 2011 due to higher salaries and related incentives and group medical expenses. These increases were partially offset by a decrease in insurance expense of $312,000, primarily due to lower FDIC insurance premiums.

Income Taxes

The provision for income taxes for the three and six-month periods ending June 30, 2012 increased $353,000, or 29%, and $345,000, or 15%, respectively, as compared to the same periods in 2011 primarily due to an increase in net income before the provision for income taxes. The tax rate for the second quarter of 2012 increased to 32% from 27% in the second quarter of 2011 due to a decrease in tax exempt income on investments as well as a decrease in tax exempt gains on the cash surrender value of assets held under the Company’s keyman policies relative to the level of taxable income. The tax rate for the six-month period ending June 30, 2012 increased to 30% from 28% for the same period in 2011.

Financial Condition

Balance Sheet Overview

Investment Securities

Investment securities at June 30, 2012 decreased $33.1 million, or 15%, to $192.8 million from $225.9 million at December 31, 2011, and increased $4.8 million, or 3%, from $188.0 million at June 30, 2011. The decrease at June 30, 2012 as compared to December 31, 2011 is partially due to a decrease in total deposits of $16.5 million and also due to the fact that proceeds from the sale and maturity of investment securities were used to fund loan growth and placed in interest bearing deposits in other banks. The increase from June 30, 2011 is due to the purchase of available for sale securities with funds from interest bearing deposits at other banks.

Loans and Lending Activities

Our loan products include short and medium-term commercial loans, commercial credit lines, construction and real estate loans, and consumer loans. From our inception, we have emphasized commercial, land development and home construction, and commercial real estate lending. This type of lending has provided us with market opportunities and higher net interest margins than other types of lending. However, it also involves greater risks, including greater exposure to changes in local economic conditions, than certain other types of lending.

Loans are the highest yielding component of our earning assets. Loans comprised 71% of total average earning assets for the three and six-month periods ending June 30, 2012 and June 30, 2011, respectively. The yield on loans averaged 6.15% and 6.17% for the three and six-month periods ending June 30, 2012 as compared to 6.62% and 6.60%, respectively, for the same periods in 2011. See the “Net Interest Income/Net Interest Margin” and “Components of Net Interest Margin” sections for further discussion of average balances and yields for the three and six-month periods ending June 30, 2012 and 2011.

The loan portfolio increased by $11.2 million, or 2%, to $656.9 million at June 30, 2012 from $645.6 million at December 31, 2011. The loan portfolio increased by $22.7 million, or 4%, at June 30, 2012 from $634.1 million at June 30, 2011. The increases for both periods are primarily due to a higher level of real estate term loans. The following table details the changes in loan balances by loan type:



		June 30, 2012				December 31, 2011				June 30, 2011
	Dollar		Percent		Dollar		Percent		Dollar		Percent
	Amount		of Total		Amount		of Total		Amount		of Total
		(In Thousands)
Commercial	$	240,395	36.6	%	$	252,689	39.1	%	$	232,765	36.7	%
Real estate construction		40,922	6.2	%		40,182	6.2	%		47,639	7.5	%
Real estate term		340,530	51.8	%		315,860	48.9	%		314,093	49.5	%
Home equity lines and other consumer		38,260	5.8	%		39,834	6.2	%		42,458	6.7	%
Subtotal	$	660,107			$	648,565			$	636,955
Less: Unearned origination fee,
net of origination costs		(3,257)	(0.5)	%		(3,003)	(0.5)	%		(2,825)	(0.4)	%
Total loans	$	656,850			$	645,562			$	634,130

Due to its efforts to capitalize on market opportunities, the Company expects its loan portfolio to increase during the remainder of 2012 mainly in the commercial and real estate term areas.

Analysis of Allowance for Loan Losses

The Company maintains an Allowance to reflect losses inherent in the loan portfolio. The Allowance is increased by provisions for loan losses and loan recoveries and decreased by loan charge-offs. The size of the Allowance is determined through quarterly assessments of probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the Allowance includes the following key elements:

A specific allocation for impaired loans. Management determined the fair value of the majority of these loans based on the underlying collateral values. This analysis is based upon a specific analysis for each impaired loan, including external appraisals on loans secured by real property, management’s assessment of the current market, recent payment history, and an evaluation of other sources of repayment. In-house evaluations of fair value are used in the impairment analysis in some situations. Inputs to the in-house evaluation process include information about sales of comparable properties in the appropriate markets and changes in tax assessed values. The Company obtains appraisals on real and personal property that secure its loans during the loan origination process in accordance with regulatory guidance and its loan policy. The Company obtains updated appraisals on loans secured by real or personal property based upon its assessment of changes in the current market or particular projects or properties, information from other current appraisals, and other sources of information. Appraisals may be adjusted downward by the Company based on its evaluation of the facts and circumstances on a case by case basis. External appraisals may be discounted when management believes that the absorption period used in the appraisal is unrealistic, when expected liquidation costs exceed those included in the appraisal, or when management’s evaluation of deteriorating market conditions warrants an adjustment. Additionally, the Company may also adjust appraisals in the above circumstances between appraisal dates. The Company uses the information provided in these updated appraisals along with its evaluation of all other information available on a particular property as it assesses the collateral coverage on its performing and nonperforming loans and the impact that may have on the adequacy of its Allowance. The specific allowance for impaired loans, as well as the overall Allowance, may increase based on the Company’s assessment of updated appraisals.

When the Company determines that a loss has occurred on an impaired loan, a charge-off equal to the difference between carrying value and fair value is recorded. If a specific allowance is deemed necessary for a loan, and then that loan is partially charged off, the loan remains classified as a nonperforming loan after the charge-off is recognized. Loans measured for impairment based on collateral value and all other loans measured for impairment are accounted for in the same way. The total charge-off rate for nonperforming loans as of June 30, 2012 and 2011 was 39% and 19%, respectively.

A general allocation. The Company has identified segments and classes of loans not considered impaired for purposes of establishing the general allocation allowance. The Company determined the disaggregation of the loan portfolio into segments and classes based on its assessment of how different pools of loans with like characteristics in the portfolio behave over time. This determination is based on historical experience and management’s assessment of how current facts and circumstances are expected to affect the loan portfolio.

The Company first disaggregates the loan portfolio into the following segments: commercial, real estate construction, real estate term, and home equity lines and other consumer loans. Then the Company further disaggregates each of these segments into the following classes, which are also known as risk classifications: excellent, good, satisfactory, watch, special mention, substandard, doubtful, and loss.

After the portfolio has been disaggregated into segments and classes, the Company calculates a general reserve for each segment and class based on the average year loss history for each segment and class. In 2012, the Company increased the look-back period used in the calculation of average historical loss rates from four years to five years. Management made this change because we believe that continuing to include the elevated loss experience from 2007 that occurred as a result of the economic downturn from that time is appropriate.

After the Company calculates a general allocation using its loss history, the general reserve is then adjusted for qualitative factors by segment and class. Qualitative factors are based on management’s assessment of current trends that may cause losses inherent in the current loan portfolio to differ significantly from historical losses. Some factors that management considers in determining the qualitative adjustment to the general reserve include national and local economic trends, business conditions, underwriting policies and standards, trends in local real estate markets, effects of various political activities, peer group data, and internal factors such as underwriting policies and expertise of the Company’s employees.

An unallocated reserve. The unallocated portion of the Allowance provides for other credit losses inherent in the Company’s loan portfolio that may not have been contemplated in the specific and general components of the Allowance, and it acknowledges the inherent imprecision of all loss prediction models. The unallocated component is reviewed periodically based on trends in credit losses and overall economic conditions.

At June 30, 2012, the unallocated portion of the Allowance as a percentage of the total Allowance was 11%. The unallocated portion of the Allowance as a percentage of the total Allowance was 14% at December 31, 2011 and 9% at June 30, 2011.

Further discussion of the enhancement to the Company’s Allowance methodology can be found in Item 7 in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

The following table sets forth information regarding changes in the Allowance for the periods indicated:



		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2012		2011		2012		2011
		(In Thousands)
Balance at beginning of period	$	16,288	$	15,139	$	16,503	$	14,406
Charge-offs:
Commercial		-		91		231		564
Real estate construction		-		-		-		-
Real estate term		127		90		553		90
Home equity lines and
other consumer		-		65		-		65
Total charge-offs		127		246		784		719
Recoveries:
Commercial		223		109		572		699
Real estate construction		12		12		12		13
Real estate term		-		-		-		53
Home equity lines and
other consumer		5		10		9		23
Total recoveries		240		131		593		788
Net, (recoveries) charge-offs		(113)		115		191		(69)
Provision for loan losses		89		550		178		1,099
Balance at end of period	$	16,490	$	15,574	$	16,490	$	15,574

Additional disclosure regarding activity in the Allowance can be found in Note 7 of the Notes to Consolidated Financial Statements in this Form 10-Q.

While management believes that it uses the best information available to determine the Allowance, unforeseen market conditions and other events could result in adjustment to the Allowance, and net income could be significantly affected if circumstances differed substantially from the assumptions used in making the final determination of the Allowance. Moreover, bank regulators frequently monitor banks' loan loss allowances, and if regulators were to determine that the Company’s Allowance is inadequate, they may require the Company to increase the Allowance, which may adversely impact the Company’s net income and financial condition.

Deposits

Deposits are the Company’s primary source of funds. Total deposits decreased $16.5 million to $894.8 million at June 30, 2012, from $911.2 million at December 31, 2011, and increased $10.6 million from $844.2 million at June 30, 2011. The Company’s deposits generally are expected to fluctuate according to the level of the Company’s market share, economic conditions, and normal seasonal trends. Total average deposits increased $19.8 million to $897.7 million for the second quarter of 2012 from the second quarter of 2011 and increased $7.9 million for the six-month period ending June 30, 2012 as compared to the same period in 2011. In April 2012 Northrim launched a new marketing campaign titled “100% 907” (based on the Alaska area code 907) to broaden and deepen the Company’s relationship with our local communities and expects that this campaign will increase total deposits. There were no depositors with deposits representing 10% or more of total deposits at June 30, 2012, December 31, 2011, or June 30, 2011.

Borrowings

At June 30, 2012, the Company’s maximum borrowing line from the FHLB was $130.3 million, approximately 12% of the Company’s assets. FHLB advances are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Company’s assets. At June 30, 2012, December 31, 2011, and June 30, 2011, the Company had no outstanding balances on the borrowing line.

The Company purchased its main office facility for $12.9 million on July 1, 2008. In this transaction, the Company, through Northrim Building LLC, assumed an existing loan secured by the building in an amount of $5.1 million. At June 30, 2012, December 31, 2011, and June 30, 2011, the outstanding balance on this loan was $4.6 million, $4.6 million, and $4.7 million, respectively. This loan has a maturity date of April 1, 2014 and a fixed interest rate of 5.95%.

At June 30, 2012, December 31, 2011, and June 30, 2011, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

Liquidity and Capital Resources

The Company manages its liquidity through its Asset and Liability Committee. In addition to the $110.7 million of cash and due from banks and interest bearing deposits in other banks and $156.0 million in unpledged available for sale securities held at June 30, 2012, the Company had additional funding sources which include fed fund borrowing lines and advances available at the FHLB of Seattle and the Federal Reserve Bank of approximately $134.2 million as of Jun e 30, 2012.

At June 30, 2012, $33.2 million in securities, or 17%, of the investment portfolio was pledged, as compared to $32.1 million, or 14%, at December 31, 2011, and $24.2 million, or 13%, at June 30, 2011. As shown in the Consolidated Statements of Cash Flows, net cash provided by operating activities was $11.3 million for the first six months of 2012. Net cash provided by investing activities was $25.8 million for the same period, mostly due to proceeds from the sale and maturity of available-for-sale securities, net of securities purchases and loan paydowns in excess of fundings. The $19.5 million of cash used by financing activities for the period primarily consisted of a $16.5 million decrease in deposits.

The Company issued 1,828 shares of its common stock through the exercise of stock options in the second quarter of 2012 and did not repurchase any shares of its common stock under the Company’s publicly announced repurchase program. At June 30, 2012, the Company had 6,470,518 million shares of its common stock outstanding.

Capital Requirements and Ratios

The Company and Northrim Bank (the “Bank”) are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum regulatory capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material adverse effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by regulators about the components of regulatory capital, risk weightings, and other factors. The regulatory agencies may establish higher minimum requirements if, for example, a bank or bank holding company has previously received special attention or has a high susceptibility to interest rate risk.

The requirements address both risk-based capital and leverage capital. At June 30, 2012, all capital ratios of the Company and the Bank exceeded the ratios required for a “well-capitalized” institution.

The following table illustrates the actual capital ratios for the Company and the Bank as calculated under regulatory guidelines, compared to the regulatory minimum capital ratios and the regulatory minimum capital ratios needed to be eligible to qualify as a “well-capitalized” institution as of June 30, 2012.



	Adequately-		Well-		Actual Ratio		Actual Ratio
	Capitalized		Capitalized		BHC		Bank

Tier 1 risk-based capital	4.00	%	6.00	%	15.44	%	14.04	%
Total risk-based capital	8.00	%	10.00	%	16.70	%	15.30	%
Leverage ratio	4.00	%	5.00	%	13.33	%	12.12	%

The regulatory capital ratios for the Company exceed those for the Bank primarily because the $18.6 million junior subordinated debenture offerings that the Company completed in the third quarter of 2003 and the fourth quarter of 2005 are included in the Company’s capital for regulatory purposes although such securities are accounted for as a long-term debt in its financial statements. The junior subordinated debentures are not accounted for on the Bank’s financial statements nor are they included in its capital. As a result, the Company has $18.6 million more in regulatory capital than the Bank, which explains the significant difference in the capital ratios for the two entities.

Off-Balance Sheet Items

The Company is a party to financial instruments with off-balance sheet risk. Among the off-balance sheet items entered into in the ordinary course of business are commitments to extend credit and the issuance of letters of credit. These instruments

involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheet. Certain commitments are collateralized. As of June 30, 2012, December 31, 2011 and June 30, 2011, the Company’s commitments to extend credit and to provide letters of credit which are not reflected on its balance sheet amounted to $245.3 million, $190 million, and $223 million, respectively. Since many of the commitments are expected to expire without being drawn upon, these total commitment amounts do not necessarily represent future cash requirements.

Capital Expenditures and Commitments

The company has no capital commitments as of June 30, 2012.June 30, 2012

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our assessment of market risk as of June 30, 2012 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we evaluated the effectiveness (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934) of our disclosure controls and procedures. Our principal executive and financial officers supervised and participated in this evaluation. Based on this evaluation, our principal executive and financial officers each concluded that as of June 30, 2012, the disclosure controls and procedures are effective in timely alerting them to material information required to be included in the periodic reports to the Securities and Exchange Commission. The design of any system of controls is based in part upon various assumptions about the likelihood of future events, and there can be no assurance that any of our plans, products, services or procedures will succeed in achieving their intended goals under future conditions.

Changes in Internal Control over Disclosure and Reporting

There was no change in our internal control over financial reporting that occurred during the quarterly period ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

During the normal course of its business, the Company is a party to various debtor-creditor legal actions, disputes, claims, and litigation related to the conduct of its banking business. These include cases filed as a plaintiff in collection and foreclosure cases, and the enforcement of creditors’ rights in bankruptcy proceedings. Management does not expect that the resolution of these matters will have a material effect on the Company’s business, financial position, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

For information regarding risk factors, please refer to Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. These risk factors have not materially changed as of June 30, 2012.

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

(a)-(b) Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

(a) Not applicable.

(b) There have been no material changes to the procedures by which shareholders may nominate directors to the Company’s board.

ITEM 6. EXHIBITS

31.1 Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)

31.2 Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)

32.1 Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

32.2 Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

101.INSXBRL Instance Document

101.SCHXBRL Schema Document

101.CALXBRL Calculation Linkbase Document

101.LABXBRL Labels Linkbase Document

101.PREXBRL Presentation Linkbase Document

101.DEFXBRL Definition Linkbase Document

Notes to Exhibits List:

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheet at June 30, 2012, December 31, 2011 and June 30, 2011, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011, (iii) Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income for the three and six months ended June 30, 2012 and 2011, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011, and (v) Notes to the Consolidated Financial Statements. In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NORTHRIM BANCORP, INC.

August 6, 2012 By /s/ R. Marc Langland

R. Marc Langland

Chairman, President, and CEO

(Principal Executive Officer)

August 6 , 2012 By /s/ Joseph M. Schierhorn

Joseph M. Schierhorn

Executive Vice President, Chief Financial Officer

(Principal Financial and Accounting Officer)