UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

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

For the transition period from                      to                     

NORTHRIM BANCORP, INC.

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

The number of shares of the issuer’s Common Stock outstanding at August 8, 2008 was 6,311,807.

 

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets
- June 30, 2008 (unaudited)			4
- December 31, 2007			4
- June 30, 2007 (unaudited)			4
Consolidated Statements of Income (unaudited)
- Three and six months ended June 30, 2008 and 2007			5
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (unaudited)
- Six months ended June 30, 2008 and 2007			6
Consolidated Statements of Cash Flows (unaudited)
- Six months ended June 30, 2008 and 2007			7
Notes to the Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			37
PART II OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3. Defaults Upon Senior Securities			38
Item 4. Submission of Matters to a Vote of Security Holders			38
Item 5. Other Information			39
Item 6. Exhibits			39
SIGNATURES			40
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

These consolidated financial statements should be read in conjunction with the financial statements, accompanying notes and other relevant information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

ITEM 1. FINANCIAL STATEMENTS

NORTHRIM BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2008, DECEMBER 31, 2007, AND JUNE 30, 2007

		June 30,				December 31,				June 30,
		2008				2007				2007
		(unaudited)								(unaudited)
		(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks		$	30,567			$	30,767			$	27,020
Money market investments			94,746				33,039				74,231
Investment securities held to maturity			11,906				11,701				11,774
Investment securities available for sale			116,498				148,009				66,115
Investment in Federal Home Loan Bank stock			2,003				2,003				1,556
Total investment securities			130,407				161,713				79,445
Loans			710,074				714,801				700,124
Allowance for loan losses			(13,519	)			(11,735	)			(11,841	)
Net loans			696,555				703,066				688,283
Purchased receivables, net			15,973				19,437				22,295
Accrued interest receivable			4,742				5,232				4,962
Premises and equipment, net			17,034				15,621				12,962
Goodwill and intangible assets			9,483				9,946				6,683
Other real estate owned			11,147				4,445				717
Other assets			32,703				31,448				30,683
Total Assets		$	1,043,357			$	1,014,714			$	947,281
LIABILITIES
Deposits:
Demand		$	222,117			$	224,986			$	186,903
Interest-bearing demand			99,249				96,455				82,883
Savings			52,576				55,285				55,272
Alaska CDs			137,546				171,341				181,159
Money market			253,726				215,819				206,929
Certificates of deposit less than $100,000			63,431				61,586				59,580
Certificates of deposit greater than $100,000			73,350				41,904				35,045
Total deposits			901,995				867,376				807,771
Borrowings			10,310				16,770				11,294
Junior subordinated debentures			18,558				18,558				18,558
Other liabilities			10,534				10,595				11,470
Total liabilities			941,397				913,299				849,093
Minority interest in subsidiaries			31				24				26
SHAREHOLDERS’ EQUITY
Common stock, $1 par value, 10,000,000 shares authorized, 6,311,807; 6,300,256; and 6,085,572 shares issued and outstanding at June 30, 2008, December 31, 2007, and June 30, 2007, respectively			6,312				6,300				6,086
Additional paid-in capital			51,125				50,798				45,852
Retained earnings			44,543				44,068				46,477
Accumulated other comprehensive income — unrealized gain (loss) on securities, net			(51	)			225				(253	)
Total shareholders’ equity			101,929				101,391				98,162
Total Liabilities and Shareholders’ Equity		$	1,043,357			$	1,014,714			$	947,281

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(unaudited)								(unaudited)
		(Dollar in thousands, except per share data)
Interest Income
Interest and fees on loans		$	13,265			$	16,936			$	27,711			$	33,757
Interest on investment securities:
Assets available for sale			1,170				866				2,776				1,761
Assets held to maturity			107				112				218				224
Interest on money market investments			345				459				540				613
Total Interest Income			14,887				18,373				31,245				36,355
Interest Expense
Interest expense on deposits and borrowings			3,421				5,986				7,584				11,865
Net Interest Income			11,466				12,387				23,661				24,490
Provision for loan losses			1,999				1,333				3,699				1,788
Net Interest Income After Provision for Loan Losses			9,467				11,054				19,962				22,702
Other Operating Income
Service charges on deposit accounts			888				892				1,750				1,396
Purchased receivable income			518				649				1,047				1,076
Employee benefit plan income			352				314				659				571
Equity in earnings from mortgage affiliate			273				174				306				188
Equity in loss from Elliott Cove			(16	)			(18	)			(53	)			(51	)
Other income			809				659				1,537				1,152
Total Other Operating Income			2,824				2,670				5,246				4,332
Other Operating Expense
Salaries and other personnel expense			5,440				5,161				10,843				10,416
Impairment on other real estate owned			977				—				977				—
Occupancy, net			812				620				1,636				1,318
Equipment expense			291				365				587				707
Marketing expense			391				469				781				928
Intangible asset amortization expense			88				100				176				221
Other operating expense			2,392				1,909				4,856				3,966
Total Other Operating Expense			10,391				8,624				19,856				17,556
Income Before Income Taxes and Minority Interest			1,900				5,100				5,352				9,478
Minority interest in subsidiaries			94				80				169				130
Income Before Income Taxes			1,806				5,020				5,183				9,348
Provision for income taxes			367				1,878				1,596				3,477
Net Income		$	1,439			$	3,142			$	3,587			$	5,871
Earnings Per Share, Basic		$	0.23			$	0.49			$	0.56			$	0.91
Earnings Per Share, Diluted		$	0.23			$	0.48			$	0.56			$	0.90
Weighted Average Shares Outstanding, Basic			6,350,587				6,428,983				6,350,043				6,436,913
Weighted Average Shares Outstanding, Diluted			6,359,192				6,522,532				6,367,713				6,533,812

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY AND COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007

																		Accumulated
		Common Stock								Additional				Retained				Other
		Number				Par				Paid-in				Earnings				Comprehensive
		of Shares				Value				Capital				(unaudited)				Income				Total
		(Dollar in thousands)
Six months ending June 30, 2007:
Balance as of January 1, 2007			6,114			$	6,114			$	46,379			$	43,212			$	(287	)		$	95,418
Cash dividend declared			—				—				—				(2,606	)			—				(2,606	)
Stock option expense			—				—				277				—				—				277
Exercise of stock options			9				9				126				—				—				135
Excess tax benefits from share-based payment arrangements			—				—				32				—				—				32
Treasury stock buy-back			(37	)			(37	)			(962	)			—				—				(999	)
Comprehensive income:
Change in unrealized holding (gain/loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				34				34
Net Income			—				—				—				5,871				—				5,871
Total Comprehensive Income																							5,905
Balance as of June 30, 2007			6,086			$	6,086			$	45,852			$	46,477			$	(253	)		$	98,162
Six months ending June 30, 2008:
Balance as of January 1, 2008			6,300			$	6,300			$	50,798			$	44,068			$	225			$	101,391
Cash dividend declared			—				—				—				(3,112	)			—				(3,112	)
Stock option expense			—				—				304				—				—				304
Exercise of stock options			12				12				(67	)			—				—				(55	)
Excess tax benefits from share-based payment arrangements			—				—				90				—				—				90
Comprehensive income:
Change in unrealized holding (gain/loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				(276	)			(276	)
Net Income			—				—				—				3,587				—				3,587
Total Comprehensive Income																							3,311
Balance as of June 30, 2008			6,312			$	6,312			$	51,125			$	44,543			$	(51	)		$	101,929

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007

		Six Months Ended
		June 30,
		2008				2007
		(unaudited)
		(Dollars in thousands)
Operating Activities:
Net income		$	3,587			$	5,871
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Security (gains), net			(100	)			—
Depreciation and amortization of premises and equipment			567				583
Amortization of software			94				127
Intangible asset amortization			176				221
Amortization of investment security premium, net of discount accretion			(93	)			(299	)
Deferred tax (benefit)			(2,050	)			(855	)
Stock-based compensation			304				277
Excess tax benefits from share-based payment arrangements			(90	)			(32	)
Deferral of loan fees and costs, net			(310	)			(269	)
Provision for loan losses			3,699				1,788
Purchased receivable loss (recovery)			(13	)			245
(Gain)/loss on sale of other real estate owned			18				(28	)
Impairment on other real estate owned			977				—
Distributions (proceeds) in excess of earnings from RML			(63	)			95
Equity in loss from Elliott Cove			53				51
Minority interest in subsidiaries			169				130
(Increase) decrease in accrued interest receivable			490				(46	)
(Increase) decrease in other assets			1,230				(640	)
Increase (decrease) of other liabilities			(1,136	)			358
Net Cash Provided by Operating Activities			7,509				7,577
Investing Activities:
Investment in securities:
Purchases of investment securities-available-for-sale			(43,045	)			(20,781	)
Purchases of investment securities-held-to-maturity			(508	)			—
Proceeds from sales/maturities of securities-available-for-sale			74,283				42,018
Proceeds from calls/maturities of securities-held-to-maturity			300				—
Investment in purchased receivables, net of repayments			3,477				(1,357	)
Investments in loans:
Sales of loans and loan participations			5,254				6,156
Loans made, net of repayments			(8,472	)			8,861
Proceeds from sale of other real estate owned			50				140
Investment in OREO			(1,339	)			—
Loan to Elliott Cove, net of repayments			(32	)			(35	)
Purchases of premises and equipment			(1,980	)			(671	)
Purchases of software			(75	)			38
Net Cash Provided by Investing Activities			27,913				34,369
Financing Activities:
(Increase) in deposits			34,619				12,867
Increase (decrease) in borrowings			(6,460	)			4,792
Distributions to minority interests			(162	)			(133	)
Proceeds from issuance of common stock			—				135
Excess tax benefits from share-based payment arrangements			90				32
Repurchase of common stock			—				(999	)
Cash dividends paid			(2,002	)			(1,671	)
Net Cash Provided by Financing Activities			26,085				15,023
Net Increase in Cash and Cash Equivalents			61,507				56,969
Cash and cash equivalents at beginning of period			63,806				44,282
Cash and cash equivalents at end of period		$	125,313			$	101,251
Supplemental Information:
Income taxes paid		$	2,385			$	3,687
Interest paid		$	7,518			$	11,767
Transfer of loans to other real estate owned		$	6,340			$	0
Cash dividends declared but not paid		$	1,109			$	924

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

(unaudited)

June 30, 2008 and 2007

1. BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared by Northrim BanCorp, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to prior year amounts to maintain consistency with the current year with no impact on net income or total shareholders’ equity. The Company has evaluated the requirements of Financial Accounting Standards Board (“FASB”) Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (as amended) and determined that the Company operates as a single operating segment. Operating results for the interim period ended June 30, 2008, are not necessarily indicative of the results anticipated for the year ending December 31, 2008. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

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, 2007.

On January 1, 2008, the Company adopted the following new accounting pronouncements:
		- FASB Statement No. 157 (“SFAS 157”), Fair Value Measurements
		- FASB Statement No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and
		Financial Liabilities — Including an Amendment of FASB Statement No. 115

The adoption of SFAS 157 and SFAS 159 did not have any affect on the Company’s financial statements at the date of adoption. For additional information, see Note 10.

Recently Issued Accounting Pronouncements

In March 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB No. 133 (“SFAS 161”). SFAS 161 requires expanded qualitative, quantitative and credit-risk disclosures about derivatives and hedging activities and their effects on the Company’s financial position, financial performance and cash flows. SFAS 161 also clarifies that derivatives are subject to credit risk disclosures as required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS 161 is effective for the Company’s financial statements for the year beginning on January 1, 2009 and must be adopted prospectively. The Company does not expect that adoption of SFAS 161 will impact its financial condition and results of operations.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets (“SFAS 142”). The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007), Business Combinations, and other GAAP. FSP 142-3 is effective for the Company’s financial statements for the year beginning on January 1, 2009 and will be adopted prospectively. The Company does not expect that adoption of FSP 142-3 will impact its financial condition and results of operations.

In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts (“SFAS 163”). SFAS 163 requires that insurance enterprises recognize a claim liability prior to an event of default (insured event) in accounting for financial guarantee insurance contracts when there is evidence that credit deterioration has occurred in an insured financial obligation. SFAS 163 also clarifies how SFAS 60, “Accounting and Reporting by Insurance Enterprises”, applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. SFAS 163 is effective for the Company’s financial statements for the year beginning on January 1, 2009 and must be adopted prospectively. The Company does not expect that adoption of SFAS 163 will impact its financial condition and results of operations.

In June 2008, the FASB issued Financial Accounting Staff Position Emerging Issues Task Force No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP 03-6-1”). FSP 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described in paragraphs 60 and 61 of SFAS No. 128, “Earnings Per Share”. FSP 03-6-1 is effective for the Company’s financial statements for the year beginning on January 1, 2009 and must be adopted retrospectively for all earnings per share calculations. The Company does not expect adoption of FSP 03-6-1 will have a material impact its financial condition and results of operations.

3. GOODWILL AND OTHER INTANGIBLES

As part of an acquisition of branches from Bank of America, N.A. in 1999, the Company recorded $6.9 million of goodwill and $2.9 million of core deposit intangible (“CDI”). This CDI is fully amortized as of June 30, 2008. In addition, the Company recorded $1.1 million in intangible assets related to customer relationships purchased in the acquisition of an additional 40.1% of Northrim Benefits Group, LLC (“NBG”) in December 2005. The Company amortizes this intangible over its estimated life of ten years. Finally, in 2007 the Company recorded $2.1 million of goodwill and $1.3 million of CDI as part of the acquisition of Alaska First Bank & Trust, N.A. (“Alaska First”) stock. During the first quarter of 2008, the Company adjusted the purchase price allocation which resulted in a $285,000 decrease in goodwill. The Company amortizes the CDI associated with the Alaska First purchase over its estimated useful life of ten years using an accelerated method.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, management reviews goodwill for impairment by reviewing a number of key market indicators at least annually or if an event occurs or circumstances change that reduce the fair value of the reporting unit below its carrying value. We conducted an impairment analysis to evaluate the carrying value of goodwill as of June 30, 2008. The process of evaluating goodwill for impairment requires us to make several assumptions and estimates. If our impairment analysis indicates that the fair value of the Company is less than its carrying amount, then we will have to write down the amount of goodwill we carry on our balance sheet through a charge to our earnings.

Our impairment analysis estimated the fair value using two methods: an income approach and a market comparison approach. The most significant element in the goodwill evaluation is the level of our earnings. If our earnings were to decline and cause our market capitalization to also decline, the market value of our Company may not support the carrying value of goodwill.

Based on our analysis, the Company determined that there was no goodwill impairment at June 30, 2008. We will continue to monitor the valuation of the Company to determine whether goodwill is impaired each quarter. No assurance can be given that we will not charge earnings during 2008 for goodwill impairment.

4. LENDING ACTIVITIES

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

		June 30, 2008								December 31, 2007								June 30, 2007
		Dollar				Percent				Dollar				Percent				Dollar				Percent
		Amount				of Total				Amount				of Total				Amount				of Total
		(Dollars in thousands)
Commercial		$	295,531				42	%		$	284,632				40	%		$	286,574				41	%
Construction/development			115,637				16	%			138,070				19	%			138,352				20	%
Commercial real estate			249,123				35	%			243,245				34	%			232,463				33	%
Consumer			51,961				7	%			51,274				7	%			44,605				6	%
Loans in process			256				0	%			324				0	%			884				0	%
Unearned loan fees, net			(2,434	)			0	%			(2,744	)			0	%			(2,754	)			0	%
Total loans		$	710,074				100	%		$	714,801				100	%		$	700,124				100	%

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

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

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

The Company then estimates an allowance for all loans that are not impaired. This allowance is based on loss factors applied to loans that are quality graded according to an internal risk classification system (“classified loans”). The Company’s internal risk classifications are based in large part upon regulatory definitions for classified loans. The loss factors that the Company applies to each group of loans within the various risk classifications are based on industry standards, historical experience and management’s judgment.

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

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

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

In October of 2007, the Company acquired $13.2 million in loans as a part of its acquisition of Alaska First. The acquisition of these loans did not cause any material changes in the risk characteristics of the Company’s loan portfolio.

The Company took a provision for loan losses in the amount of $2.0 million for the three-month period ending June 30, 2008 to account for increases in nonperforming loans and the specific allowance for impaired loans. The following table details activity in the Allowance for the periods indicated:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(Dollars in thousands)
Balance at beginning of period		$	12,571			$	11,853			$	11,735			$	12,125
Charge-offs:
Commercial			534				1,639				1,463				2,860
Construction/development			737				—				816				—
Commercial real estate			—				—				—				—
Consumer			32				40				32				41
Total charge-offs			1,303				1,679				2,311				2,901
Recoveries:
Commercial			166				281				305				772
Construction/development			51				50				51				50
Commercial real estate			—				—				—				—
Consumer			35				3				40				7
Total recoveries			252				334				396				829
Net, (recoveries) charge-offs			1,051				1,345				1,915				2,072
Provision for loan losses			1,999				1,333				3,699				1,788
Balance at end of period		$	13,519			$	11,841			$	13,519			$	11,841

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

		June 30, 2008				December 31, 2007				June 30, 2007
		(Dollars in thousands)
Nonaccrual loans		$	11,855			$	9,673			$	5,268
Accruing loans past due 90 days or more			6,199				1,665				4,579
Restructured loans			—				—				36
Total nonperforming loans			18,054				11,338				9,883
Other real estate owned			11,147				4,445				717
Total nonperforming assets		$	29,201			$	15,783			$	10,600
Allowance for loan losses		$	13,519			$	11,735			$	11,841
Nonperforming loans to loans			2.54	%			1.59	%			1.41	%
Nonperforming assets to total assets			2.80	%			1.56	%			1.12	%
Allowance to loans			1.90	%			1.64	%			1.69	%
Allowance to nonperforming loans			75	%			104	%			120	%

At June 30, 2008, December 31, 2007, and June 30, 2007, the Company had impaired loans of $84.9 million, $51.4 million, and $25.0 million, respectively. A specific allowance of $3.7 million, $3.3 million, and $3.0 million, respectively, was established for these loans for the periods noted. The increase in impaired loans at June 30, 2008, as compared to December 31, 2007, resulted mainly from the addition of a residential construction project, a condominium conversion project, a commercial real estate loan relationship consisting of three loans to one borrower, and a land development loan that were not included in impaired loans at December 31, 2007 and the deletion of one residential construction project that was included in impaired loans at December 31, 2007 but not at June 30, 2008. The increase in impaired loans at December 31, 2007, as compared to June 30, 2007, resulted mainly from the addition of two residential land development loans that were not included in impaired loans at June 30, 2007.

At June 30, 2008, December 31, 2007, and June 30, 2007 the Company held $11.1 million, $4.5 million and $717,000, respectively, as OREO. The Company expects to expend approximately $3.5 million during 2008 to complete construction of these projects with an estimated completion date of September 30, 2008 for the majority of them.

6. INVESTMENT SECURITIES

Investment securities, which include Federal Home Loan Bank (“FHLB”) stock, totaled $130.4 million at June 30, 2008, a decrease of $31.3 million, or 19%, from $161.7 million at December 31, 2007, and an increase of $51.0 million, or 64%, from $79.4 million at June 30, 2007. Investment securities designated as available for sale comprised 89% of the investment portfolio at June 30, 2008, 92% at December 31, 2007, and 83% at June 30, 2007, and are available to meet liquidity requirements. Both available for sale and held to maturity securities may be pledged as collateral to secure public deposits. At June 30, 2008, $47.8 million in securities, or 37%, of the investment portfolio was pledged, as compared to $32.4 million, or 20%, at December 31, 2007, and $21.4 million, or 27%, at June 30, 2007.

7. OTHER OPERATING INCOME

The Company, through Northrim Capital Investments Co. (“NCIC”), a wholly-owned subsidiary of Northrim Bank, owns a 50.1% in NBG. The Company consolidates the balance sheet and income statement of NBG into its financial statements and notes the minority interest in this subsidiary as a separate line item on its financial statements. In the three-month periods ending June 30, 2008 and 2007, the Company included employee benefit plan income from NBG of $352,000 and $314,000, respectively, in its Other Operating Income. In the six-month periods ending June 30, 2008 and 2007, the Company included employee benefit plan income from NBG of $659,000 and $571,000, respectively, in Other Operating Income.

The Company also owns a 23.5% interest in Residential Mortgage Holding Company, LLC (“RML Holding Company”) through NCIC. In the three-month period ending June 30, 2008, the Company’s earnings from RML Holding Company increased by $99,000 to $273,000 as compared to $174,000 for the three-month period ending June 30, 2007. In the six-month period ending June 30, 2008, the Company’s earnings from RML Holding Company increased by $118,000 to $306,000 as compared to $188,000 for the six-month period ending June 30, 2007.

The Company owns a 48% equity interest in Elliott Cove Capital Management LLC (“Elliott Cove”), an investment advisory services company, through its wholly–owned subsidiary, Northrim Investment Services Company (“NISC”). In addition to its ownership interest, the Company provides Elliott Cove with a line of credit that has a commitment amount of $750,000 and an outstanding balance of $697,000 as of June 30, 2008. The Company’s share of the loss from Elliott Cove for the second quarter of 2008 was $16,000, as compared to a loss of $18,000 in the second quarter of 2007. In the six-month period ending June 30, 2008, the Company’s share of the loss from Elliott Cove was $53,000 as compared to a loss of $51,000 for the six-month period ending June 30, 2007. The losses from Elliott Cove, which were consistent with the same periods in 2007 for both the three and six-month periods ending June 30, 2008, were more than offset by commissions that the Company receives for its sales of Elliott Cove investment products. These commissions are accounted for as other operating income and totaled $63,000 in the second quarter of 2008 and $136,000 for the six months ending June 30, 2008 as compared to $66,000 in the second quarter of 2007 and $140,000 for the six months ending June 30, 2007. A portion of these commissions are paid to the Company’s employees and accounted for as salary expense. These commission payments totaled $14,000 for both three-month periods ending June 30, 2007 and 2008, and $23,000 and $24,000, respectively, in the six-month periods ending June 30, 2007 and 2008.

The Company also owns a 24% interest in Pacific Wealth Advisors, LLC (“PWA”) through NISC. PWA is a holding company that owns Pacific Portfolio Consulting, LLC (“PPC”) and Pacific Portfolio Trust Company (“PPTC”). PPC is an investment advisory company with an existing client base while PPTC is a start-up operation. During the three-month period ending June 30, 2008, the Company’s earnings from PWA increased by $23,000 to $5,000 as compared to a loss of $18,000 for the three-month period ending June 30, 2007. During the six-month period ending June 30, 2008, the Company’s earnings from PWA increased by $87,000 to $16,000 as compared to a loss of $71,000 for the six-month period ending June 30, 2007.

8. DEPOSIT ACTIVITIES

Total deposits at June 30, 2008 and 2007 are $902.0 million and $807.8 million, respectively. A portion of this increase is due to the fact that the Company acquired $47.7 million in deposits through the acquisition of Alaska First in the fourth quarter of 2007. Additionally, at June 30, 2008, the Company held $25 million in certificates of deposit for the Alaska Permanent Fund Corporation. At June 30, 2007 the Company held no certificates of deposit for the Alaska Permanent Fund. The Alaska Permanent Fund Corporation may invest in certificates of deposit at Alaska banks in an aggregate amount with respect to each bank, not to exceed its capital and at specified rates and terms. The depository bank must collateralize the deposits either with pledged securities or a letter of credit.

At June 30, 2008, the Company had one longtime depositor with total deposits representing $110.4 million, or 12.2% of total deposits. There were no depositors with deposits representing 10% or more of total deposits at June 30, 2007 or December 31, 2007. Subsequent to the end of the second quarter of 2008, this depositor withdrew $96.0 million from one of its deposit accounts in an effort to diversify its investments. The deposits with this customer have fluctuated significantly in the past. As a result, the Company used its existing overnight investments and drew on its borrowing lines with correspondent banks and the FHLB in the amount of $65 million to fund this withdrawal.

9. STOCK INCENTIVE PLAN

The Company has set aside 330,750 shares of authorized stock for the 2004 Stock Incentive Plan (“2004 Plan”) under which it may grant stock options and restricted stock units. The Company’s policy is to issue new shares to cover awards. The total number of shares under the 2004 Plan and previous stock incentive plans at June 30, 2008 was 488,445, which includes 220,246 shares granted under the 2004 Plan leaving 121,969 shares available for future awards. Under the 2004 Plan, certain key employees have been granted the option to purchase set amounts of common stock at the market price on the day the option was granted. Optionees, at their own discretion, may cover the cost of exercise through the exchange, at then fair market value, of already owned shares of the Company’s stock. Options are granted for a 10-year period and vest on a pro rata basis over the initial three years from grant. In addition to stock options, the Company has granted restricted stock units to certain key employees under the 2004 Plan. These restricted stock grants cliff vest at the end of a three-year time period.

The Company recognized expenses of $75,000 and $55,000 on the fair value of restricted stock units and $77,000 and $83,000 on the fair value of stock options for a total of $152,000 and $138,000 in stock-based compensation expense for the three-month periods ending June 30, 2008 and 2007, respectively. For the six-month periods ending June 30, 2008 and 2007, the Company recognized expense of $151,000 and $110,000, respectively, on the fair value of restricted stock units and $153,000 and $167,000, respectively, on the fair value of stock options for a total of $304,000 and $277,000, respectively, in stock-based compensation expense.

There were no stock options exercised during the second quarter of 2008. Proceeds from the exercise of stock options for second quarter of 2007 were $140,000. The Company recognized a tax deduction of $25,000 related to the exercise of these stock options during the quarter ended June 30, 2007.

Proceeds from the exercise of stock options for the six months ended June 30, 2008 and 2007 were $232,000 and $139,000, respectively. The Company withheld shares valued at $287,000 and $4,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options for the six-month periods ending June 30, 2008 and 2007, respectively. The Company recognized tax deductions of $90,000 and $32,000 related to the exercise of these stock options during the six months ended June 30, 2008 and 2007, respectively.

10. FAIR VALUE OF ASSETS AND LIABILTIES

On January 1, 2008, the Company adopted the provisions SFAS 159. In accordance with this statement, the Company, at its option, can value assets and liabilities at fair value on an instrument-by-instrument basis with changes in the fair value recorded in earnings. The Company elected not to value any additional assets or liabilities at fair value in accordance with SFAS 159.

On January 1, 2008, the Company also adopted the provisions of SFAS 157. This statement defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements for fair value measurement. This Statement applies whenever assets or liabilities are required or permitted to be measured at fair value under current existing standards.

Fair Value Hierarchy

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

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

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

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

The following valuation methods were used for assets and liabilities recorded at fair value. All financial instruments are held for other than trading purposes.

Available-for-sale Securities: Securities available for sale are recorded at fair value on a recurring basis. Fair values 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 or model-based valuation techniques.

Loans: Loans are carried at their principal amount outstanding, net of charge-offs, unamortized fees and direct loan origination costs. Loans are placed on non-accrual when management believes doubt exists as to the collectability of the interest or principal. Cash payments received on non-accrual loans are directly applied to the principal balance. The Company does not record loans at fair value on a recurring basis. We record nonrecurring fair value adjustments to loans to reflect partial write-downs that are based on the observable market price or current appraised value of collateral or the full charge-off of the loan carrying value.

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

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

						Quoted Prices in				Signifcant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable Inputs
		Total				Assets (Level 1)				Inputs (Level 2)				(Level 3)
Available-for-sale securities		$	116,498				—			$	116,498				—
Total		$	116,498				—			$	116,498				—

As of June 30, 2008, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis, except for certain assets as shown in the following table (in thousands):

						Quoted Prices in				Signifcant
						Active Markets				Other				Significant				Total
						for Identical				Observable				Unobservable Inputs				(gains)
		Total				Assets (Level 1)				Inputs (Level 2)				(Level 3)				losses
Loans measured for impairment1		$	20,250				—			$	16,025			$	4,225			$	413
Other real estate owned2			8,264				—				8,264				—				977
Total		$	28,514			$	0			$	24,289			$	4,225			$	1,390

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

Note Regarding Forward-Looking Statements

This report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements describe Northrim Bancorp, Inc.’s (the “Company”) management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of the Company’s style of banking, and the strength of the local economy. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this report are forward-looking. We use words such as “anticipates,” “believes,” “expects,” “intends” and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management’s current plans and expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations, and those variations may be both material and adverse. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the general condition of, and changes in, the Alaska economy; factors that impact our net interest margins; and our ability to maintain asset quality. Further, actual results may be affected competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in our filings with the SEC. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition, you should note that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements.

OVERVIEW

GENERAL

Northrim BanCorp, Inc. (the “Company”) is a publicly traded bank holding company (Nasdaq: NRIM) with four wholly-owned subsidiaries: Northrim Bank (the “Bank”), a state chartered, full-service commercial bank, Northrim Investment Services Company (“NISC”), which we formed in November 2002 to hold the Company’s equity interest in Elliott Cove Capital Management LLC (“Elliott Cove”), an investment advisory services company; Northrim Capital Trust 1 (“NCT1”), an entity that we formed in May 2003 to facilitate a trust preferred securities offering by the Company, and Northrim Statutory Trust 2 (“NST2”), an entity that we formed in December 2005 to facilitate a trust preferred securities offering by the Company. The Company also holds a 23.5% interest in the profits and losses of a residential mortgage holding company, Residential Mortgage Holding Company, LLC (“RML Holding Company”), through the Bank’s wholly-owned subsidiary, Northrim Capital Investments Co. (“NCIC”). Residential Mortgage LLC (“RML”), the predecessor of RML Holding Company, was formed in 1998 and has offices throughout Alaska. We also now operate in the Washington and Oregon market areas through Northrim Funding Services (“NFS”), a division of the Bank that we started in the third quarter of 2004. This division also began operating in Alaska in the second quarter of 2008. NFS purchases accounts receivable from its customers and provides them with working capital. In addition, through NCIC, we hold a 50.1% interest in Northrim Benefits Group, LLC (“NBG”), an insurance brokerage company that focuses on the sale and servicing of employee benefit plans. Finally, in the first quarter of 2006, through NISC, we purchased a 24% interest in Pacific Wealth Advisors, LLC (“PWA”), an investment advisory and wealth management business located in Seattle, Washington.

CRITICAL ACCOUNTING POLICIES

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, and the notes thereto, which have been prepared in accordance with GAAP. 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.

Our significant accounting policies and practices are described in Note 1 to the Consolidated Financial Statements in the Company’s Form 10-K as of December 31, 2007. 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. We have identified our policy for the Allowance for Loan Losses (the “Allowance) as a critical accounting policy.

A description of this policy can be found in Note 5 of the Notes to the Financial Statements to this 10-Q. We maintain an allowance for loan losses at an amount which we believe is sufficient to provide adequate protection against losses inherent in the loan portfolio at the balance sheet date. The Allowance is reported as a reduction of outstanding loan balances and is decreased by loan charge-offs, increased by loan recoveries and decreased for provisions for loan losses. Our periodic evaluation of the adequacy of the Allowance is based on such factors as our past loan loss experience, known and inherent risks in the portfolio, adverse situations that have occurred but are not yet known that may affect the borrowers’ ability to repay, the estimated value of underlying collateral, and economic conditions. As we utilize information currently available to evaluate the Allowance, the Allowance is subjective and may be adjusted in the future depending on changes in economic conditions or other factors.

We recognize the determination of the allowance for loan losses is sensitive to the assigned credit risk ratings and inherent loss rates at any given point in time. Therefore, we perform a sensitivity analysis to provide insight regarding the impact of adverse changes in risk ratings may have on our allowance for loan losses. The sensitivity analysis does not imply any expectation of future deterioration in our loans’ risk ratings and it does not necessarily reflect the nature and extent of future changes in the allowance for loan losses due to the numerous quantitative and qualitative factors considered in determining our allowance for loan losses. At June 30, 2008, in the event that 1 percent of our loans were downgraded from the “pass” category to the “special mention” category within our current allowance methodology, the allowance for loan losses would have increased by approximately $330,000.

Based on our methodology and its components, management believes the resulting Allowance is adequate and appropriate for the risk identified in the Company’s loan portfolio. Given current processes employed by the Company, management believes the risk ratings and inherent loss rates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be material to the Company’s financial statements. In addition, current risk ratings and fair value estimates of collateral are subject to change as we continue to review loans within our portfolio and as our borrowers are impacted by economic trends within their market areas. Although we have established an Allowance that we consider adequate, there can be no assurance that the established Allowance will be sufficient to offset losses on loans in the future.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

SUMMARY OF SECOND QUARTER RESULTS

At June 30, 2008, the Company had assets of $1 billion and gross loans of $710.1 million, increases of 10% and 1%, respectively, as compared to the balances for these accounts at June 30, 2007. As compared to balances at December 31, 2007, total assets at June 30, 2008 increased by 3% and total loans at June 30, 2008 decreased by 1%. The Company’s net income and diluted earnings per share for the three months ended June 30, 2008, were $1.4 million and $0.23, respectively, a decrease of 59% and 58%, respectively, as compared to the same period in 2007. For the quarter ended June 30, 2008 the Company’s net interest income decreased by $1.7 million, or 54%, its provision for loan losses increased by $666,000, or 50%, its other operating income increased $154,000, or 6%, and its other operating expenses increased by $1.8 million, or 20%, as compared to the second quarter a year ago.

RESULTS OF OPERATIONS

NET INCOME

Net income for the quarter ended June 30, 2008, was $1.4 million, or $0.23 per diluted share, decreases of 54% and 52%, respectively, as compared to net income of $3.1 million and diluted earnings per share of $0.48, respectively, for the second quarter of 2007.

The decrease in net income for the three-month period ending June 30, 2008 as compared to the same period a year ago is the result of a decrease in net interest income of $921,000, an increase in the provision for loan losses of $666,000, and an increase in other operating expense of $1.8 million as compared to the same period a year ago. The decrease in the Company’s net interest income was caused by larger declines in the yield of its earning assets as compared to decreases in its cost of funds combined with a shift in earning assets to lower yielding investment securities from higher yielding loans. The net interest income was further negatively impacted by an increase in noninterest earning assets mainly in the form of other real estate owned (“OREO”). The provision for loan losses increased to account for the increase in nonperforming loans and the specific allowance for impaired loans. The increase in other operating expense is primarily the result of a $977,000 impairment on OREO, a $166,000 increase in expenses related to OREO, and a $152,000 increase in FDIC insurance expense that was due to changes in the assessment of FDIC insurance premiums. Salaries and benefits also increased by $279,000, or 5%, for the three-month period ending June 30, 2008 as compared to the same period a year ago, due to an increase in employees and salary increases driven by competitive pressures. Occupancy expenses increased by $192,000, or 31%, for the three-month period ending June 30, 2008 as compared to the same period a year ago, due to increased rental costs at the Company’s headquarters facility, and lease expense for new office space that the Company began occupying in the fourth quarter of 2007. These increases were partially offset by a decrease in tax expense of $1.5 million. The decrease in earnings per diluted share for the second quarter of 2008 as compared to the second quarter of 2007 was primarily due to the decrease in net income in the second quarter of 2008.

Net income for the six months ended June 30, 2008, was $3.6 million, or $0.56 per diluted share, decreases of 39% and 38%, respectively, as compared to net income of $5.9 million and diluted earnings per share of $0.90, respectively, for the same period in 2007.

The decrease in net income for the six-month period ending June 30, 2008 as compared to the same period a year ago is the result of a decrease in net interest income of $829,000, an increase in the provision for loan losses of $1.9 million, and an increase in other operating expenses of $2.3 million as compared to the same period a year ago. These decreases were partially offset by a $914,000 increase in other operating income which resulted mainly from increased service charges on deposit accounts, increased electronic banking fees, gain on a security sale and increased earnings from the Company’s investment in RML. The decrease in the Company’s net interest income and the increase in its provision for loan losses were caused by similar factors to those noted above in the discussion of the three-month period ending June 30, 2008. The increase in other operating expense is the result of the $977,000 impairment on OREO, a $268,000 increase in FDIC insurance expense that was due to changes in the assessment of FDIC insurance premiums, a $217,000 increase in expenses related to OREO, and a $207,000 increase in professional fees and outside services. Salaries and benefits increased by $427,000, or 4%, for the six-month period ending June 30, 2008 as compared to the same period a year ago, due to an increase in employees and salary increases driven by competitive pressures. Occupancy expenses increased by $318,000, or 24%, for the six-month period ending June 30, 2008 as compared to the same period a year ago, due to increased costs at the Company’s headquarters facility and lease expense for new office space that the Company began occupying in the fourth quarter of 2007. These increased expenses were partially offset by a decrease in tax expense of $1.9 million. The decrease in earnings per diluted share for the second quarter of 2008 as compared to the second quarter of 2007 was primarily due to the decrease in net income in the second quarter of 2008.

NET INTEREST INCOME

The primary component of income for most financial institutions is net interest income, which represents the institution’s interest income from loans and investment securities minus interest expense, ordinarily on deposits and other interest bearing liabilities. Both the Company’s loans and deposits consist largely of variable interest rate arrangements, with the result that as loans and deposits reprice, the Company can expect fluctuations in net interest income. Net interest income for the second quarter of 2008 decreased $921,000, or 7%, to $11.5 million from $12.4 million in the second quarter of 2007 because of a larger reduction in the yields on the Company’s loans, accompanied by a relatively modest decrease in interest expense. Net interest income for the six-month period ending June 30, 2008 decreased $829,000, or 3%, to $23.7 million from $24.5 million in the same period in 2007 due to the same factors that affected net interest income in the three-month period ending June 30, 2008. The following table compares average balances and rates for the quarters ending June 30, 2008 and 2007:

		Three Months Ended June 30,
																		Average Yields/Costs
		Average Balances								Change								Tax Equivalent
		2008				2007				$				%				2008				2007				Change
		(Dollars in thousands)
Commercial		$	283,679			$	300,208			$	(16,529	)			-6	%			7.34	%			9.51	%			-2.17	%
Construction/development			121,416				142,172				(20,756	)			-15	%			8.49	%			11.16	%			-2.67	%
Commercial real estate			247,960				234,866				13,094				6	%			7.52	%			8.58	%			-1.06	%
Consumer			51,777				44,034				7,743				18	%			6.89	%			7.64	%			-0.75	%
Other loans			(1,044	)			(1,637	)			593				-36	%
Total loans			703,788				719,643				(15,855	)			-2	%			7.59	%			9.44	%			-1.85	%
Short-term investments			59,480				35,989				23,491				65	%			2.29	%			5.12	%			-2.83	%
Long-term investments			130,066				83,582				46,484				56	%			4.10	%			4.85	%			-0.75	%
Total investments			189,546				119,571				69,975				59	%			3.56	%			4.96	%			-1.40	%
Interest-earning assets			893,334				839,214				54,120				6	%			6.73	%			8.80	%			-2.07	%
Nonearning assets			99,706				87,850				11,856				13	%
Total		$	993,040			$	927,064			$	65,976				7	%
Interest-bearing liabilities		$	676,271			$	625,185			$	51,086				8	%			2.03	%			3.84	%			-1.81	%
Demand deposits			203,881				191,603				12,278				6	%
Other liabilities			9,345				11,744				(2,399	)			-20	%
Equity			103,543				98,532				5,011				5	%
Total		$	993,040			$	927,064			$	65,976				7	%
Net tax equivalent margin on earning assets																			5.20	%			5.94	%			-0.74	%

		Six Months Ended June 30,
																		Average Yields/Costs
		Average Balances								Change								Tax Equivalent
		2008				2007				$				%				2008				2007				Change
		(Dollars in thousands)
Commercial		$	282,108			$	296,675			$	(14,567	)			-5	%			7.71	%			9.49	%			-1.78	%
Construction/development			128,491				145,824				(17,333	)			-12	%			9.00	%			11.25	%			-2.25	%
Commercial real estate			244,768				233,433				11,335				5	%			7.67	%			8.66	%			-0.99	%
Consumer			51,552				43,098				8,454				20	%			7.02	%			7.65	%			-0.63	%
Other loans			(1,385	)			(1,488	)			103				-7	%
Total loans			705,534				717,542				(12,008	)			-2	%			7.91	%			9.49	%			-1.58	%
Short-term investments			42,533				23,780				18,753				79	%			2.51	%			5.13	%			-2.62	%
Long-term investments			137,341				85,894				51,447				60	%			4.50	%			4.79	%			-0.29	%
Total investments			179,874				109,674				70,200				64	%			4.06	%			4.91	%			-0.85	%
Interest-earning assets			885,408				827,216				58,192				7	%			7.12	%			8.88	%			-1.76	%
Nonearning assets			99,214				86,668				12,546				14	%
Total		$	984,622			$	913,884			$	70,738				8	%
Interest-bearing liabilities		$	672,403			$	618,366			$	54,037				9	%			2.26	%			3.87	%			-1.61	%
Demand deposits			199,089				185,861				13,228				7	%
Other liabilities			9,962				12,130				(2,168	)			-18	%
Equity			103,168				97,527				5,641				6	%
Total		$	984,622			$	913,884			$	70,738				8	%
Net tax equivalent margin on earning assets																			5.41	%			5.99	%			-0.58	%

Interest-earning assets averaged $893.3 million and $885.4 million for the three and six-month periods ending June 30, 2008, an increase of $54.1 million and $58.2 million, or 6% and 7%, respectively, over the $839.2 and $827.2 million average for the comparable periods in 2007. The tax equivalent yield on interest-earning assets averaged 5.20% and 5.41 %, respectively, for the three and six-month periods ending June 30, 2008, decreases of 74 and 58 basis points, respectively, from 5.94% and 5.99% for the same periods in 2007.

Loans, the largest category of interest-earning assets, decreased by $15.9 million, or 2%, to an average of $703.8 million in the second quarter of 2008 from $719.6 million in the second quarter of 2007. During the six-month period ending June 30, 2008, loans decreased by $12.0 million, or 2%, to an average of $705.5 million from an average of $717.5 million for the six-month period ending June 30, 2007. Commercial and construction loans decreased by $16.5 million and $20.8 million on average, respectively, between the second quarters of 2008 and 2007. Commercial real estate loans and consumer loans increased by $13.1 million and $7.7 million on average between the second quarters of 2008 and 2007. During the six-month period ending June 30, 2008, commercial and construction loans decreased by $14.6 million, and $17.3 million, respectively, on average as compared to the six-month period ending June 30, 2007. Commercial real estate loans and consumer loans increased $11.3 million and $8.5 million, respectively, on average between the six-month periods ending June 30, 2008 and June 30, 2007. The decline in the loan portfolio resulted from a combination of transfers to OREO of $2.9 million and $6.3 million for the three and six-month periods ending June 30, 2008, respectively, refinance and loan payoff activity, and a decrease in construction loan originations. We expect the loan portfolio to grow slightly in the future with moderate growth in commercial loans and commercial real estate, decreases in construction loans, and further increases in consumer loans as we sell more consumer loans to the larger consumer account base that we have developed with the High Performance Checking (“HPC”) product. Residential construction activity in Anchorage, the Company’s largest market, is expected to continue to decline through 2008 due to a decline in available building lots and sales activity. While the Company believes it has offset a portion of this effect by acquiring additional residential construction customers, it expects that the real estate markets in Anchorage, the Matanuska-Susitna Valley, and the Fairbanks areas will continue to decrease from the prior year and lead to an overall decline in its construction loans. The yield on the loan portfolio averaged 7.59% for the second quarter of 2008, a decrease of 185 basis points from 9.44% over the same quarter a year ago. During the six-month period ending June 30, 2008, the yield on the loan portfolio averaged 7.91%, a decrease of 158 basis points from 9.49% over the same six-month period in 2007.

Average investments increased $70.0 million or 59% to $189.5 million for the second quarter of 2008 from $119.6 million in the second quarter of 2007. For the six-month period ending June 30, 2008, average investments increased $70.2 million or 64% to $179.9 million from $109.7 million in the same period in 2007. This increase resulted mainly from additional deposit accounts that generated increased funds for investments. Additionally, the Company acquired $23.8 million in investments when it purchased Alaska First Bank & Trust, N.A. (“Alaska First”) in the fourth quarter of 2007.

Interest-bearing liabilities averaged $676.3 million for the second quarter of 2008, an increase of $51.1 million, or 8%, compared to $625.2 million for the same period in 2007. For the six-month period ending June 30, 2008, interest-bearing liabilities averaged $672.4 million, an increase of $54.0 million, or 9%, compared to $618.4 million for the same period in 2007. This increase resulted in part from the $47.4 million in deposits acquired by the Company in the Alaska First acquisition, additional deposits by the Company’s largest depositor, and the addition of $25 million in certificates of deposit from the Alaska Permanent Fund. The average cost of interest-bearing liabilities decreased 181 basis points to 2.03% for the second quarter of 2008 compared to 3.84% for the second quarter of 2007. The decrease in the average cost of funds in 2008 as compared to 2007 is largely due to the interest rate cuts by the Federal Reserve that began in the third quarter of 2007 and continued through May 2008.

The Company’s net interest income as a percentage of average interest-earning assets (net tax-equivalent margin) was 5.20% and 5.41%, respectively, for the three and six-month periods ending June 30, 2008 as compared to 5.94% and 5.99% for the same periods in 2007. During both the three and six-month periods ending June 30, 2008, the yield on the Company’s loans decreased due to lower yields in commercial, construction and consumer loans while its funding costs also experienced a decrease due to a decline in interest rates as noted above.

In both the three and six-month periods ending June 30, 2008, the yield on the Company’s earning assets declined by more than the cost of its interest-bearing liabilities. As loan volume declined in the both periods, investment volume increased as compared to the same periods a year ago. However, the yields on the Company’s investments averaged 3.56% and 4.06% for the three and six-month periods ending June 30, 2008, respectively, as compared to average yields on its loans of 7.59% and 7.91%, respectively, for the same periods. This shift from higher yielding to lower yielding assets and increased OREO balances had a negative effect on the Company’s net tax equivalent margin.

OTHER OPERATING INCOME

Other operating income consists of earnings on service charges, fees and other items as well as gains from the sale of securities. Set forth below is the change in Other Operating Income between the three and six-month periods ending June 30, 2008 and 2007:

		Three Months Ended June 30,																Six Months Ended June 30,
		2008				2007				$ Chg				% Chg				2008				2007				$ Chg				% Chg
						(Dollars in thousands)																(Dollars in thousands)
Service charges on deposit accounts		$	888			$	892			$	(4	)			0	%		$	1,750			$	1,396			$	354				25	%
Purchased receivable income			518				649				(131	)			-20	%			1,047				1,076				(29	)			-3	%
Employee benefit plan income			352				314				38				12	%			659				571				88				15	%
Electronic banking fees			292				227				65				29	%			538				410				128				31	%
Equity in earnings from mortgage affiliate			273				174				99				57	%			306				188				118				63	%
Loan servicing fees			126				152				(26	)			-17	%			250				260				(10	)			-4	%
Merchant credit card transaction fees			111				117				(6	)			-5	%			217				219				(2	)			-1	%
Equity in earnings from PWA			5				(18	)			23				128	%			16				(71	)			87				-123	%
Equity in loss from Elliott Cove			(16	)			(18	)			2				11	%			(53	)			(51	)			(2	)			4	%
Security gains, net			100				—				100			NA					100				—				100			NA
Other			175				181				(6	)			-3	%			416				334				82				25	%
Total		$	2,824			$	2,670			$	154				6	%		$	5,246			$	4,332			$	914				21	%

Total other operating income for the second quarter of 2008 was $2.8 million, an increase of $154,000 from $2.7 million in the second quarter of 2007. Total other operating income for the six months ending June 30, 2008 was $5.2 million, an increase of $914,000 from $4.3 million in same period in 2007. This increase is due primarily to increases in income from service charges on deposit accounts.

Service charges on the Company’s deposit accounts decreased by $4,000, or 0%, and increased by $354,000, or 25%, to $888,000 and $1.8 million for the three and six-month periods ending June 30, 2008 and June 30, 2007, respectively. The increase in the six-month period service charges was primarily due to the April 2007 implementation of NSF fees on point-of-sale transactions.

Income from the Company’s purchased receivable products decreased by $131,000, or 20%, and $29,000, or 3%, respectively, for the three and six-month periods ending June 30, 2008 and June 30. 2007. The Company uses these products to purchase accounts receivable from its customers and provide them with working capital for their businesses. While the customers are responsible for collecting these receivables, the Company mitigates this risk with extensive monitoring of the customers’ transactions and control of the proceeds from the collection process. The Company expects the income level from this product to decline on a year-over-year comparative basis as the Company expects that some of its customers will move into different products to meet their working capital needs.

Employee benefit plan income from NBG was $352,000 and $659,000 for the three and six-month periods ending June 30, 2008, as compared to $314,000 and $571,000 in the same periods in 2007 for increases of $38,000 and $88,000, or 12% and 15%, respectively. These increases occurred as NBG sold more of its products to a larger client base.

The Company’s electronic banking revenue increased by $65,000, or 29%, and $128,000, or 31%, respectively, to $292,000 and $538,000 for the three and six-month periods ending June 30, 2008 as compared to revenues of $227,000 and $410,000 in the same periods in 2007.

The increase in these revenues came from additional fees collected from increased point of sale transactions and internet banking fees. The point of sale fees have increased as a result of the increased number of deposit accounts that the Company has acquired through the marketing of the HPC product and overall continued increased usage of point of sale by the entire customer base. The internet banking fees increased due to a change in the Company’s internet banking product.

The Company’s share of the earnings from its 23.5% interest in its mortgage affiliate, RML, increased by $99,000 and $118,000, respectively, to $273,000 and $306,000 during the three and six-month periods ending June 30, 2008 as compared to $174,000 and $188,000 in the same periods in 2007. The increase in earnings resulted from RML’s income increasing due to the increase in mortgage loan originations.

The Company’s share of the earnings from PWA for the three and six-month periods ending June 30, 2008 increased by $23,000 and $87,000 to $5,000 and $16,000 as compared to losses of $18,000 and $71,000, respectively, in the same periods in 2007. These increases are the result of increased client fees earned on PWA’s growing client base coupled with decreased personnel costs.

The Company recognized a $100,000 gain on the sale of one available-for-sale security in May 2008. There were no gains on sales of securities in 2007.

Other income decreased by $6,000 or 3%, during the second quarter of 2008 to $175,000 from $181,000 in the second quarter of 2007. For the six-month period ending June 30, 2008, other income increased $82,000, or 25%, to $416,000 from $334,000 in the same period in 2007. This increase is mainly the result of $56,000 in proceeds received for the mandatory partial redemption of the Company’s Class B common stock in VISA Inc. in the first quarter of 2008.

EXPENSES

Other Operating Expense

The following table breaks out the components of and changes in Other Operating Expense between the three and six-month periods ending June 30, 2008 and 2007:

		Three Months Ended June 30,																Six Months Ended June 30,
		2008				2007				$ Chg				% Chg				2008				2007				$ Chg				% Chg
		(Dollars in thousands)																(Dollars in thousands)
Salaries and other personnel expense		$	5,440			$	5,161			$	279				5	%		$	10,843			$	10,416			$	427				4	%
Impairment on other real estate owned			977				—				977				100	%			977				—				977				100	%
Occupancy, net			812				620				192				31	%			1,636				1,318				318				24	%
Professional and outside services			403				268				135				50	%			712				505				207				41	%
Marketing			391				469				(78	)			-17	%			781				928				(147	)			-16	%
Equipment, net			291				365				(74	)			-20	%			587				707				(120	)			-17	%
Intangible asset amortization			88				100				(12	)			-12	%			176				221				(45	)			-20	%
Purchased receivable losses			—				—				—				N/A				(13	)			245				(258	)			-105	%
OREO expenses			71				(15	)			86				-573	%			164				(53	)			217				-409	%
Other expense			1,918				1,656				262				16	%			3,993				3,269				724				22	%
Total		$	10,391			$	8,624			$	1,767				20	%		$	19,856			$	17,556			$	2,300				13	%