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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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                         Smaller reporting company o

                                        (Do not check if a smaller reporting company)

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

The number of shares of the issuer’s Common Stock outstanding at November 7, 2008 was 6,325,109.

 

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets
- September 30, 2008 (unaudited)			4
- December 31, 2007			4
- September 30, 2007 (unaudited)			4
Consolidated Statements of Income (unaudited)
- Three and nine months ended September 30, 2008 and 2007			5
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (unaudited)
- Nine months ended September 30, 2008 and 2007			6
Consolidated Statements of Cash Flows (unaudited)
- Nine months ended September 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			16
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			39
Item 3. Defaults Upon Senior Securities			39
Item 4. Submission of Matters to a Vote of Security Holders			39
Item 5. Other Information			39
Item 6. Exhibits			39
SIGNATURES			40
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

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

ITEM 1. FINANCIAL STATEMENTS

NORTHRIM BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2008, DECEMBER 31, 2007, AND SEPTEMBER 30, 2007

		September 30,				December 31,				September 30,
		2008				2007				2007
		(unaudited)								(unaudited)
		(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks		$	31,809			$	30,767			$	26,159
Money market investments			53,766				33,039				78,443
Domestic certificates of deposit			9,500				—				—
Investment securities held to maturity			11,526				11,701				11,702
Investment securities available for sale			102,264				148,009				77,278
Investment in Federal Home Loan Bank stock			2,529				2,003				1,556
Total investment securities			116,319				161,713				90,536
Loans			705,239				714,801				694,949
Allowance for loan losses			(13,656	)			(11,735	)			(12,074	)
Net loans			691,583				703,066				682,875
Purchased receivables, net			15,905				19,437				23,168
Accrued interest receivable			4,561				5,232				5,629
Premises and equipment, net			30,108				15,621				13,910
Goodwill and intangible assets			9,402				9,946				6,656
Other real estate owned			12,261				4,445				717
Other assets			34,077				31,448				30,779
Total Assets		$	1,009,291			$	1,014,714			$	958,872
LIABILITIES
Deposits:
Demand		$	244,559			$	224,986			$	208,441
Interest-bearing demand			104,521				96,455				86,250
Savings			59,723				55,285				51,645
Alaska CDs			115,010				171,341				187,765
Money market			162,820				215,819				187,448
Certificates of deposit less than $100,000			78,828				61,586				58,448
Certificates of deposit greater than $100,000			88,999				41,904				37,612
Total deposits			854,460				867,376				817,609
Borrowings			23,634				16,770				12,698
Junior subordinated debentures			18,558				18,558				18,558
Other liabilities			9,004				10,595				9,703
Total liabilities			905,656				913,299				858,568
Minority interest in subsidiaries			44				24				29
SHAREHOLDERS’ EQUITY
Common stock, $1 par value, 10,000,000 shares authorized, 6,315,109, 6,300,256; and 6,317,268 shares issued and outstanding at September 30, 2008, December 31, 2007, and September 30, 2007, respectively			6,315				6,300				6,317
Additional paid-in capital			51,304				50,798				51,094
Retained earnings			46,093				44,068				42,861
Accumulated other comprehensive income - unrealized gain (loss) on securities, net			(121	)			225				3
Total shareholders’ equity			103,591				101,391				100,275
Total Liabilities and Shareholders’ Equity		$	1,009,291			$	1,014,714			$	958,872

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(unaudited)								(unaudited)
		(Dollar in thousands, except per share data)
Interest Income
Interest and fees on loans		$	13,189			$	16,613			$	40,900			$	50,370
Interest on investment securities:
Securities available for sale			966				853				3,795				2,614
Securities held to maturity			188				111				353				335
Interest on money market investments			264				893				804				1,506
Total Interest Income			14,607				18,470				45,852				54,825
Interest Expense
Interest expense on deposits and borrowings			3,511				6,058				11,095				17,923
Net Interest Income			11,096				12,412				34,757				36,902
Provision for loan losses			2,000				725				5,699				2,513
Net Interest Income After Provision for Loan Losses			9,096				11,687				29,058				34,389
Other Operating Income
Service charges on deposit accounts			841				873				2,591				2,269
Purchased receivable income			712				744				1,763				1,821
Employee benefit plan income			398				319				1,057				890
Equity in earnings from mortgage affiliate			210				202				516				390
Equity in loss from Elliott Cove			(17	)			(20	)			(70	)			(71	)
Other income			845				665				2,378				1,816
Total Other Operating Income			2,989				2,783				8,235				7,115
Other Operating Expense
Salaries and other personnel expense			5,135				5,110				15,978				15,526
Occupancy, net			662				695				2,298				2,013
Loan and other real estate owned expenses			544				74				887				47
Professional and outside services			411				268				1,143				784
Marketing expense			391				468				1,172				1,396
Equipment expense			316				333				903				1,040
Intangible asset amortization expense			89				28				265				249
Impairment on other real estate owned			85				—				1,062				—
Other operating expense			2,049				1,583				5,830				5,060
Total Other Operating Expense			9,682				8,559				29,538				26,115
Income Before Income Taxes and Minority Interest			2,403				5,911				7,755				15,389
Minority interest in subsidiaries			102				85				271				215
Income Before Income Taxes			2,301				5,826				7,484				15,174
Provision for income taxes			751				2,200				2,347				5,677
Net Income		$	1,550			$	3,626			$	5,137			$	9,497
Earnings Per Share, Basic		$	0.24			$	0.57			$	0.81			$	1.48
Earnings Per Share, Diluted		$	0.24			$	0.56			$	0.78			$	1.46
Weighted Average Shares Outstanding, Basic			6,351,210				6,386,334				6,350,166				6,420,054
Weighted Average Shares Outstanding, Diluted			6,539,295				6,480,057				6,545,427				6,515,894

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY AND

COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

																		Accumulated
		Common Stock								Additional								Other
		Number				Par				Paid-in				Retained				Comprehensive
		of Shares				Value				Capital				Earnings				Income				Total
		(unaudited)
		(Dollar in thousands)
Nine months ending September 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 dividend			301				301				6,941				(7,242	)			—				—
Stock option expense			—				—				415				—				—				415
Exercise of stock options			15				15				105				—				—				120
Excess tax benefits from share-based payment arrangements			—				—				57				—				—				57
Treasury stock buy-back			(113	)			(113	)			(2,803	)			—				—				(2,916	)
Comprehensive income:
Change in unrealized holding (gain/loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				290				290
Net Income			—				—				—				9,497				—				9,497
Total Comprehensive Income																							9,787
Balance as of September 30, 2007			6,317			$	6,317			$	51,094			$	42,861			$	3			$	100,275
Nine months ending September 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			—				—				456				—				—				456
Exercise of stock options			15				15				(44	)			—				—				(29	)
Excess tax benefits from share-based payment arrangements			—				—				94				—				—				94
Comprehensive income:
Change in unrealized holding (gain/loss) on available for sale investment securities, net of related income tax effect			—				—				—				—				(346	)			(346	)
Net Income			—				—				—				5,137				—				5,137
Total Comprehensive Income																							4,791
Balance as of September 30, 2008			6,315			$	6,315			$	51,304			$	46,093			$	(121	)		$	103,591

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

		Nine Months Ended
		September 30,
		2008				2007
		(unaudited)
		(Dollars in thousands)
Operating Activities:
Net income		$	5,137			$	9,497
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Security (gains), net			(146	)			—
Depreciation and amortization of premises and equipment			965				845
Amortization of software			135				185
Intangible asset amortization			265				249
Amortization of investment security premium, net of discount accretion			(26	)			(435	)
Deferred tax (benefit)			(3,108	)			(668	)
Stock-based compensation			456				415
Excess tax benefits from share-based payment arrangements			(94	)			(57	)
Deferral of loan fees and costs, net			(88	)			(23	)
Provision for loan losses			5,699				2,513
Purchased receivable loss (recovery)			(13	)			245
(Gain)/loss on sale of other real estate owned			(5	)			(28	)
Impairment on other real estate owned			1,062				—
Distributions (proceeds) in excess of earnings from RML			(9	)			108
Equity in loss from Elliott Cove			70				71
Minority interest in subsidiaries			271				215
(Increase) decrease in accrued interest receivable			671				(713	)
(Increase) decrease in other assets			968				(933	)
(Decrease) of other liabilities			(1,563	)			(461	)
Net Cash Provided by Operating Activities			10,647				11,025
Investing Activities:
Investment in securities:
Purchases of investment securities-available-for-sale			(66,400	)			(51,281	)
Purchases of investment securities-held-to-maturity			(510	)			—
Proceeds from sales/maturities of securities-available-for-sale			111,735				61,929
Proceeds from calls/maturities of securities-held-to-maturity			680				70
Investment in domestic certificates of deposit			(9,500	)			—
Investment in Federal Home Loan Bank stock, net			(526	)			—
Investment in purchased receivables, net of repayments			3,545				(2,230	)
Investments in loans:
Sales of loans and loan participations			6,874				7,438
Loans made, net of repayments			(8,451	)			12,016
Proceeds from sale of other real estate owned			697				140
Investment in other real estate owned			(2,121	)			—
Loan to Elliott Cove, net of repayments			(71	)			(80	)
Purchases of premises and equipment			(15,452	)			(1,881	)
Purchases of software			(94	)			(178	)
Net Cash Provided by Investing Activities			20,406				25,943
Financing Activities:
(Increase) decrease in deposits			(12,916	)			22,705
Increase in borrowings			6,864				6,196
Distributions to minority interests			(251	)			(215	)
Proceeds from issuance of common stock			—				119
Excess tax benefits from share-based payment arrangements			94				57
Repurchase of common stock			—				(2,915	)
Cash dividends paid			(3,075	)			(2,595	)
Net Cash Provided by Financing Activities			(9,284	)			23,352
Net Increase in Cash and Cash Equivalents			21,769				60,320
Cash and cash equivalents at beginning of period			63,806				44,282
Cash and cash equivalents at end of period		$	85,575			$	104,602
Supplemental Information:
Income taxes paid		$	4,555			$	6,572
Interest paid		$	10,937			$	17,786
Transfer of loans to other real estate owned		$	7,449			$	0
Cash dividends declared but not paid		$	36			$	11

See notes to the consolidated financial statements

NORTHRIM BANCORP, INC.

(unaudited)

September 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 September 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 the 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 that adoption of FSP 03-6-1 will have a material impact its financial condition and results of operations.

In October 2008, the FASB issued Financial Accounting Staff Position FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance and must be adopted prospectively. The Company does not expect that adoption of FSP 157-3 will impact its financial condition and results of operations.

3. GOODWILL AND OTHER INTANGIBLES

As part of an acquisition of branches from Bank of America 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 this CDI 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 September 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 September 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:

		September 30, 2008								December 31, 2007								September 30, 2007
		Dollar				Percent				Dollar				Percent				Dollar				Percent
		Amount				of Total				Amount				of Total				Amount				of Total
		(Dollars in thousands)
Commercial		$	277,782				39	%		$	284,632				40	%		$	297,882				43	%
Construction/development			113,842				16	%			138,070				19	%			141,268				20	%
Commercial real estate			263,812				37	%			243,245				34	%			213,214				31	%
Consumer			51,978				7	%			51,274				7	%			45,472				7	%
Loans in process			481				0	%			324				0	%			113				0	%
Unearned loan fees, net			(2,656	)			0	%			(2,744	)			0	%			(3,000	)			0	%
Total loans		$	705,239				100	%		$	714,801				100	%		$	694,949				100	%

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

The Company maintains an Allowance for Loan Losses (the “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.

Our banking regulators, as an integral part of their examination process, periodically review the Company’s Allowance. Our 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 recorded a provision for loan losses in the amount of $2.0 million for the three-month period ending September 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								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Dollars in thousands)
Balance at beginning of period		$	13,519			$	11,841			$	11,735			$	12,125
Charge-offs:
Commercial			746				146				2,209				3,006
Construction/development			—				—				816				—
Commercial real estate			1,268				599				1,268				599
Consumer			2				2				34				43
Total charge-offs			2,016				747				4,327				3,648
Recoveries:
Commercial			149				251				454				1,023
Construction/development			—				—				51				50
Commercial real estate			—				—				—				—
Consumer			4				4				44				11
Total recoveries			153				255				549				1,084
Net, (recoveries) charge-offs			1,863				492				3,778				2,564
Provision for loan losses			2,000				725				5,699				2,513
Balance at end of period		$	13,656			$	12,074			$	13,656			$	12,074

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

		September 30, 2008				December 31, 2007				September 30, 2007
		(Dollars in thousands)
Nonaccrual loans		$	15,747			$	9,673			$	5,666
Accruing loans past due 90 days or more			4,953				1,665				2,917
Restructured loans			—				—				17
Total nonperforming loans			20,700				11,338				8,600
Other real estate owned			12,261				4,445				717
Total nonperforming assets		$	32,961			$	15,783			$	9,317
Allowance for loan losses		$	13,656			$	11,735			$	12,074
Nonperforming loans to loans			2.94	%			1.59	%			1.24	%
Nonperforming assets to total assets			3.27	%			1.56	%			0.97	%
Allowance to loans			1.94	%			1.64	%			1.74	%
Allowance to nonperforming loans			66	%			104	%			140	%

At September 30, 2008, December 31, 2007, and September 30, 2007, the Company had impaired loans of $87.0 million, $51.4 million, and $40.6 million, respectively. A specific allowance of $4.4 million, $3.3 million, and $3.8 million, respectively, was established for these loans for the periods noted. The increase in impaired loans at September 30, 2008, as compared to December 31, 2007, resulted mainly from the addition of a two condominium conversion projects, two commercial loans, four commercial real estate loan relationships, four residential construction relationships and four land development relationships that were not included in impaired loans at December 31, 2007 and the deletion of one land development project that was included in impaired loans at December 31, 2007 but not at September 30, 2008. The increase in impaired loans at December 31, 2007, as compared to September 30, 2007, resulted mainly from the addition of two residential land development loans that were not included in impaired loans at September 30, 2007.

At September 30, 2008, December 31, 2007, and September 30, 2007 the Company held $12.3 million, $4.5 million and $717,000, respectively, as OREO. The Company expects to expend approximately $2.8

million over the next year to complete construction of these projects with an estimated completion date of December 31, 2008 for the majority of them. The Company expects that it will expend a majority of the money for the completion of these projects through the end of the third quarter ending September 30, 2009.

6. INVESTMENT SECURITIES

Investment securities, which include Federal Home Loan Bank (“FHLB”) stock, totaled $116.3 million at September 30, 2008, a decrease of $45.4 million, or 28%, from $161.7 million at December 31, 2007, and an increase of $25.8 million, or 28%, from $90.5 million at September 30, 2007. Investment securities designated as available for sale comprised 88% of the investment portfolio at September 30, 2008, 92% at December 31, 2007, and 85% at September 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 September 30, 2008, $66.3 million in securities, or 57%, of the investment portfolio was pledged, as compared to $32.4 million, or 20%, at December 31, 2007, and $23.9 million, or 26%, at September 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% interest 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 September 30, 2008 and 2007, the Company included employee benefit plan income from NBG of $398,000 and $319,000, respectively, in its Other Operating Income. In the nine-month periods ending September 30, 2008 and 2007, the Company included employee benefit plan income from NBG of $1.1 million and $890,000, 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 September 30, 2008, the Company’s earnings from RML Holding Company increased by $8,000 to $210,000 as compared to $202,000 for the three-month period ending September 30, 2007. In the nine-month period ending September 30, 2008, the Company’s earnings from RML Holding Company increased by $126,000 to $516,000 as compared to $390,000 for the nine-month period ending September 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 $737,000 as of September 30, 2008. The Company’s share of the loss from Elliott Cove for the third quarter of 2008 was $17,000, as compared to a loss of $20,000 in the third quarter of 2007. In the nine-month period ending September 30, 2008, the Company’s share of the loss from Elliott Cove was $70,000 as compared to a loss of $71,000 for the nine-month period ending September 30, 2007. The losses from Elliott Cove were consistent with the same periods in 2007 for both the three and nine-month periods ending September 30, 2008, and 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 $69,000 in the third quarter of 2008 and $205,000 for the nine months ending September 30, 2008 as compared to $77,000 in the third quarter of 2007 and $216,000 for the nine months ending September 30, 2007. A portion of these commissions are paid to the Company’s employees and accounted for as salary expense. There were no commission payments in the third quarter of 2008 and payments totaled $28,000 for the third quarter of 2007. Total commission payments were $23,000 and $51,000 for the nine-month periods ending September 30, 2008 and 2007, respectively.

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 September 30, 2008, the Company’s earnings from PWA increased by $39,000 to $16,000 as compared to a loss of $23,000 for the three-month period ending September 30, 2007. During the nine-month period ending September 30, 2008, the Company’s earnings from PWA increased by $127,000 to $32,000 as compared to a loss of $95,000 for the nine-month period ending September 30, 2007.

8. DEPOSIT ACTIVITIES

Total deposits at September 30, 2008 and 2007 were $854.5 million and $817.6 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 September 30, 2008, the Company held $45 million in certificates of deposit for the Alaska Permanent Fund Corporation. At September 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. There were no depositors with deposits representing 10% or more of total deposits at September 30, 2008, December 31, 2007 or September 30, 2007.

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 September 30, 2008 was 488,445, which includes 220,246 shares granted under the 2004 Plan leaving 124,331 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 $77,000 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 September 30, 2008 and 2007, respectively. For the nine-month periods ending September 30, 2008 and 2007, the Company recognized expense of $226,000 and $165,000, respectively, on the fair value of restricted stock units and $230,000 and $250,000, respectively, on the fair value of stock options for a total of $456,000 and $415,000, respectively, in stock-based compensation expense.

Proceeds from the exercise of stock options for the three months ended September 30, 2008 and 2007 were $53,000 and $93,000, respectively. The Company withheld shares valued at $27,000 and $109,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options for the three-month periods ending September 30, 2008 and 2007, respectively. The Company recognized tax deductions of $4,000 and $24,000 related to the exercise of these stock options during the quarters ended September 30, 2008 and 2007, respectively.

Proceeds from the exercise of stock options for the nine months ended September 30, 2008 and 2007 were $285,000 and $232,000, respectively. The Company withheld shares valued at $314,000 and $113,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options for the nine-month periods ending September 30, 2008 and 2007, respectively. The Company recognized tax deductions of $94,000 and $57,000 related to the exercise of these stock options during the nine months ended September 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 currently 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 or dealer quotes, 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		$	102,264				—			$	102,264				—
Total		$	102,264				—			$	102,264				—

As of and for the three months ending September 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		$	37,122				—			$	25,607			$	11,515			$	1,211
Other real estate owned2			4,055				—				—				4,055				86
Total		$	41,177				—			$	25,607			$	15,570			$	1,297

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 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 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 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. 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. Finally, in the third quarter of 2008, the Bank, formed another wholly-owned subsidiary, Northrim Building, LLC (“NBL”), which owns and operates the Company’s main office facility at 3111 C Street in Anchorage. NBL purchased the building in the third quarter of 2008.

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 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 (the “Allowance”) 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 increased by 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 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. 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 due to the numerous quantitative and qualitative factors considered in determining our Allowance. At September 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 would have increased by approximately $325,000.

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 THIRD QUARTER RESULTS

At September 30, 2008, the Company had assets of $1 billion and gross loans of $705.2 million, increases of 5% and 1%, respectively, as compared to the balances for these accounts at September 30, 2007. As compared to balances at December 31, 2007, both total assets and total loans at September 30, 2008 decreased by 1%. The Company’s net income and diluted earnings per share for the three months ended September 30, 2008, were $1.6 million and $0.24, respectively, decreases of 57%, as compared to the same period in 2007. For the quarter ended September 30, 2008 the Company’s net interest income decreased by $1.3 million, or

11%, its provision for loan losses increased by $1.3 million, or 176%, its other operating income increased $206,000, or 7%, and its other operating expenses increased by $1.1 million, or 13%, as compared to the second quarter a year ago.

RESULTS OF OPERATIONS

NET INCOME

Net income for the quarter ended September 30, 2008, was $1.6 million, or $0.24 per diluted share, decreases of 57%, as compared to net income of $3.6 million and diluted earnings per share of $0.56, respectively, for the third quarter of 2007.

The decrease in net income for the three-month period ending September 30, 2008 as compared to the same period a year ago is the result of a decrease in net interest income of $1.3 million, an increase in the provision for loan losses of $1.3 million, and an increase in other operating expense of $1.1 million as compared to the same period a year ago. The negative effect of these items was partially offset by a $206,000 increase in other operating income for the three-month period ending September 30, 2008 as compared to the same period a year ago and a $1.4 million decrease in tax expense from $2.2 million for the three-month period ending September 30, 2007 to $751,000 for the third quarter of 2008. The decrease in the Company’s net interest income for the third quarter of 2008 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 in the form of other real estate owned (“OREO”) and nonaccrual loans that increased by $11.5 million and $10 million, respectively, to balances of $12.3 million and $15.7 million at September 30, 2008 as compared to balances of $717,000 and $5.7 million at September 30, 2007. The provision for loan losses increased by $1.1 million in the third quarter of 2008 to account for the increase in nonperforming loans and the specific allowance for impaired loans. The increase in other operating expense for the third quarter of 2008 is primarily the result of a $470,000 increase in expenses related to loan collection and OREO costs, a $143,000 increase in professional and outside services, a $196,000 increase in insurance expense attributable to decreases in the cash surrender value of assets held under the Company’s Keyman insurance policies, and a $160,000 increase in FDIC insurance costs. The decrease in earnings per diluted share for the third quarter of 2008 as compared to the third quarter of 2007 was primarily due to the decrease in net income in the third quarter of 2008.

Net income for the nine months ended September 30, 2008, was $5.1 million, or $0.78 per diluted share, decreases of 46% and 47%, respectively, as compared to net income of $9.5 million and diluted earnings per share of $1.46, respectively, for the same period in 2007.

The decrease in net income for the nine-month period ending September 30, 2008 as compared to the same period a year ago is the result of a decrease in net interest income of $2.1 million, an increase in the provision for loan losses of $3.2 million, and an increase in other operating expenses of $3.4 million as compared to the same period a year ago. These decreases were partially offset by a $1.1 million increase in other operating income for the nine-month period ending September 30, 2008 which resulted mainly from increased service charges on deposit accounts and increased electronic banking fees. Additionally, tax expense for the nine-month period ending September 30, 2008 decreased by $3.3 million from $5.7 million for the same period in 2007 to $2.3 million. The decrease in the Company’s net interest income and the increase in its provision for loan losses for the nine-month period ending September 30, 2008 were caused by similar factors to those noted above in the discussion of the three-month period ending September 30, 2008. The increase in other operating expense for the nine-month period ending September 30, 2008 is the result of a $1.1 million impairment on OREO, an $840,000 increase in loan collection and OREO costs, a $452,000 increase in salaries and other personnel expense, a $427,000 increase in FDIC insurance expense, a $390,000 increase in insurance expense attributable to decreases in the cash surrender value of assets held under the Company’s Keyman insurance policies, a $341,000 increase in professional and outside services and a $285,000 increase in occupancy expense as compared to the same period in 2007. The decrease in earnings per diluted share for

the nine months ending September 30, 2008 as compared to the same period of 2007 was primarily due to the decrease in net income in the nine-month period ending September 30, 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 third quarter of 2008 decreased $1.3 million, or 11%, to $11.1 million from $12.4 million in the third quarter of 2007 because of larger reductions in the yields on the Company’s loans, accompanied by a smaller decrease in interest expense. Net interest income for the nine-month period ending September 30, 2008 decreased $2.1 million, or 6%, to $34.8 million from $36.9 million in the same period in 2007 due to the same factors that affected net interest income in the three-month period ending September 30, 2008. The following table compares average balances and rates for the quarters ending September 30, 2008 and 2007:

		Three Months Ended September 30,
																		Average Yields/Costs
		Average Balances								Change								Tax Equivalent
		2008				2007				$				%				2008				2007				Change
		(Dollars in thousands)
Commercial		$	284,317			$	292,565			$	(8,248	)			-3	%			7.32	%			9.49	%			-2.17	%
Construction/development			118,832				141,912				(23,080	)			-16	%			8.02	%			11.13	%			-3.11	%
Commercial real estate			251,864				220,788				31,076				14	%			7.38	%			8.60	%			-1.22	%
Consumer			51,874				44,952				6,922				15	%			6.85	%			7.50	%			-0.65	%
Other loans			(226	)			(1,648	)			1,422				-86	%
Total loans			706,661				698,569				8,092				1	%			7.52	%			9.44	%			-1.92	%
Short-term investments			40,823				69,671				(28,848	)			-41	%			2.56	%			5.01	%			-2.45	%
Long-term investments			124,986				82,044				42,942				52	%			3.88	%			4.87	%			-0.99	%
Total investments			165,809				151,715				14,094				9	%			3.55	%			4.94	%			-1.39	%
Interest-earning assets			872,470				850,284				22,186				3	%			6.77	%			8.63	%			-1.86	%
Nonearning assets			115,804				93,892				21,912				23	%
Total		$	988,274			$	944,176			$	44,098				5	%
Interest-bearing liabilities		$	649,004			$	631,682			$	17,322				3	%			2.12	%			3.80	%			-1.68	%
Demand deposits			224,290				199,845				24,445				12	%
Other liabilities			9,865				12,168				(2,303	)			-19	%
Equity			105,115				100,481				4,634				5	%
Total		$	988,274			$	944,176			$	44,098				5	%
Net tax equivalent margin on earning assets																			5.10	%			5.81	%			-0.71	%

		Nine Months Ended September 30,
																		Average Yields/Costs
		Average Balances								Change								Tax Equivalent
		2008				2007				$				%				2008				2007				Change
		(Dollars in thousands)
Commercial		$	282,850			$	295,290			$	(12,440	)			-4	%			7.58	%			9.49	%			-1.91	%
Construction/development			125,248				144,506				(19,258	)			-13	%			8.69	%			11.21	%			-2.52	%
Commercial real estate			247,150				229,171				17,979				8	%			7.57	%			8.64	%			-1.07	%
Consumer			51,660				43,723				7,937				18	%			6.96	%			7.60	%			-0.64	%
Other loans			(995	)			(1,542	)			547				-35	%
Total loans			705,913				711,148				(5,235	)			-1	%			7.77	%			9.47	%			-1.70	%
Short-term investments			41,959				39,245				2,714				7	%			2.53	%			5.06	%			-2.53	%
Long-term investments			133,193				84,596				48,597				57	%			4.31	%			4.81	%			-0.50	%
Total investments			175,152				123,841				51,311				41	%			3.90	%			4.92	%			-1.02	%
Interest-earning assets			881,065				834,989				46,076				6	%			7.00	%			8.80	%			-1.80	%
Nonearning assets			104,783				89,103				15,680				18	%
Total		$	985,848			$	924,092			$	61,756				7	%
Interest-bearing liabilities		$	664,546			$	622,854			$	41,692				7	%			2.22	%			3.84	%			-1.62	%
Demand deposits			207,551				190,573				16,978				9	%
Other liabilities			9,929				12,142				(2,213	)			-18	%
Equity			103,822				98,523				5,299				5	%
Total		$	985,848			$	924,092			$	61,756				7	%
Net tax equivalent margin on earning assets																			5.31	%			5.93	%			-0.62	%

Interest-earning assets averaged $872.5 million and $881.1 million for the three and nine-month periods ending September 30, 2008, an increase of $22.2 million and $46.1 million, or 3% and 6%, respectively, over the $850.3 and $835.0 million average for the comparable periods in 2007. The tax equivalent yield on interest-earning assets averaged 5.10% and 5.31%, respectively, for the three and nine-month periods ending September 30, 2008, decreases of 71 and 62 basis points, respectively, from 5.81% and 5.93% for the same periods in 2007.

Loans, the largest category of interest-earning assets, increased by $8.1 million, or 1%, to an average of $706.7 million in the third quarter of 2008 from $698.6 million in the third quarter of 2007. During the nine-month period ending September 30, 2008, loans decreased by $5.2 million, or 1%, to an average of $705.9 million from an average of $711.1 million for the nine-month period ending September 30, 2007. Commercial and construction loans decreased by $8.2 million and $23.1 million on average, respectively, between the third quarters of 2008 and 2007. Commercial real estate loans and consumer loans increased by $31.1 million and $6.9 million on average between the third quarters of 2008 and 2007. During the nine-month period ending September 30, 2008, commercial and construction loans decreased by $12.4 million, and $19.3 million, respectively, on average as compared to the nine-month period ending September 30, 2007. Commercial real estate loans and consumer loans increased $18.0 million and $7.9 million, respectively, on average between the nine-month periods ending September 30, 2008 and September 30, 2007. The decline in the loan portfolio resulted from a combination of transfers of loans to OREO for the three and nine-month periods ending September 30, 2008, refinance and loan payoff activity, and a decrease in construction loan originations. We expect the loan portfolio to decline slightly in the future with moderate growth in commercial real estate, decreases in commercial and construction loans, and further increases in consumer loans as we market 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 7.52% for the third quarter of 2008, a decrease of 192 basis points from 9.44% over the same quarter a year ago. During the nine-month period ending September 30, 2008, the yield on the loan portfolio averaged 7.77%, a decrease of 170 basis points from 9.47 % over the same nine-month period in 2007.

Average investments increased $14.1 million, or 9%, to $165.8 million for the third quarter of 2008 from $151.7 million in the third quarter of 2007. For the nine-month period ending September 30, 2008, average investments increased $51.3 million, or 41%, to $175.2 million from $123.8 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 $649.0 million for the third quarter of 2008, an increase of $17.3 million, or 3%, compared to $631.7 million for the same period in 2007. For the nine-month period ending September 30, 2008, interest-bearing liabilities averaged $664.5 million, an increase of $41.7 million, or 7%, compared to $622.9 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 and the addition of $45 million in certificates of deposit from the Alaska Permanent Fund. The average cost of interest-bearing liabilities decreased 168 basis points to 2.12% for the third quarter of 2008 compared to 3.80% for the third 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 5.10% and 5.31%, respectively, for the three and nine-month periods ending September 30, 2008 as compared to 5.81% and 5.93% for the same periods in 2007. During both the three and nine-month periods ending September 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 nine-month periods ending September 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 3.55% and 3.90% for the three and nine-month periods ending September 30, 2008, respectively, as compared to average yields on its loans of 7.52% and 7.77%, respectively, for the same periods. This shift from higher yielding to lower yielding assets and increased OREO and nonaccrual loan 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 nine-month periods ending September 30, 2008 and 2007:

		Three Months Ended September 30,																Nine Months Ended September 30,
		2008				2007				$ Chg				% Chg				2008				2007				$ Chg				% Chg
		(Dollars in thousands)																(Dollars in thousands)
Service charges on deposit accounts		$	841			$	873			$	(32	)			-4	%		$	2,591			$	2,269			$	322				14	%
Purchased receivable income			712				744				(32	)			-4	%			1,763				1,820				(57	)			-3	%
Employee benefit plan income			398				319				79				25	%			1,057				890				167				19	%
Electronic banking fees			343				233				110				47	%			881				642				239				37	%
Equity in earnings from mortgage affiliate			210				202				8				4	%			516				390				126				32	%
Merchant credit card transaction fees			134				152				(18	)			-12	%			351				371				(20	)			-5	%
Loan servicing fees			105				123				(18	)			-15	%			355				383				(28	)			-7	%
Equity in earnings from PWA			16				(23	)			39				170	%			32				(95	)			127				-134	%
Equity in loss from Elliott Cove			(17	)			(20	)			3				15	%			(70	)			(71	)			1				-1	%
Security gains, net			46				—				46			NA					146				—				146			NA
Other			201				180				21				12	%			613				516				97				19	%
Total		$	2,989			$	2,783			$	206				7	%		$	8,235			$	7,115			$	1,120				16	%

Total other operating income for the third quarter of 2008 was $3.0 million, an increase of $206,000 from $2.8 million in the third quarter of 2007. Total other operating income for the nine months ending September 30, 2008 was $8.2 million, an increase of $1.1 million from $7.1 million in same period in 2007. This increase is due primarily to increases in income from service charges on deposit accounts and increased electronic banking fees.

Service charges on the Company’s deposit accounts decreased by $32,000, or 4%, and increased by $322,000, or 14%, to $841,000 and $2.6 million for the three and nine-month periods ending September 30, 2008, as compared to $873,000 and $2.3 million for the three and nine-month periods ending September 30, 2007, respectively. The increase in the nine-month period in 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 $32,000, or 4%, and $57,000, or 3%, respectively, for the three and nine-month periods ending September 30, 2008 as compared to the same periods ending in September 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 $398,000 and $1.1 million for the three and nine-month periods ending September 30, 2008, as compared to $319,000 and $890,000 in the same periods in 2007 for increases of $79,000 and $167,000, or 25% and 19%, respectively. These increases are a reflection of NBG’s ability to provide additional products and services to an increasing client base

The Company’s electronic banking revenue increased by $110,000, or 47%, and $239,000, or 37%, respectively, to $343,000 and $881,000 for the three and nine-month periods ending September 30, 2008 as compared to revenues of $233,000 and $642,000 in the same periods in 2007. These increases resulted from additional fees collected from increased point of sale and ATM transactions. The point of sale and ATM 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 Company’s share of the earnings from its 23.5% interest in its mortgage affiliate, RML, increased by $8,000 and $126,000, respectively, to $210,000 and $516,000 during the three and nine-month periods ending September 30, 2008 as compared to $202,000 and $390,000 in the same periods in 2007. The increase in earnings resulted from RML’s income increasing due to the increase in mortgage loan originations and a reduction in its costs.

The Company’s share of the earnings from its 24% interest in PWA for the three and nine-month periods ending September 30, 2008 increased by $39,000 and $127,000 to $16,000 and $32,000 as compared to losses of $23,000 and $95,000, 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 gain on sales of available-for-sale securities of $46,000 and $146,000 for the three and nine-month periods ending September 30, 2008, respectively. There were no gains on sales of securities in 2007.

Other income increased by $21,000 or 12%, during the third quarter of 2008 to $201,000 from $180,000 in the third quarter of 2007. This increase is the result of increased fee income collected on customer certificates of deposit placed at other financial institutions through the Certificate of Deposit Account Registry Service (“CDARS”). For the nine-month period ending September 30, 2008, other income increased $97,000, or 19%, to $613,000 from $516,000 in the same period in 2007. This increase is the result of increased fee income collected on customer certificates of deposit placed at other financial institutions through CDARS and 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 nine-month periods ending September 30, 2008 and 2007:

		Three Months Ended September 30,																Nine Months Ended September 30,
		2008				2007				$ Chg				% Chg				2008				2007				$ Chg				% Chg
		(Dollars in thousands)																(Dollars in thousands)
Salaries and other personnel expense		$	5,135			$	5,110			$	25				0	%		$	15,978			$	15,526			$	452				3	%
Occupancy, net			662				695				(33	)			-5	%			2,298				2,013				285				14	%
Professional and outside services			411				268				143				53	%			1,143				784				359				46	%
Marketing			391				468				(77	)			-16	%			1,172				1,396				(224	)			-16	%
Equipment, net			316				333				(17	)			-5	%			903				1,040				(137	)			-13	%
Loan and other real estate owned expe			544				74				470				635	%			887				47				840				1787	%
Intangible asset amortization			89				28				61				218	%			265				249				16				6	%
Impairment on other real estate owned			85				—				85				100	%			1,062				—				1,062				100	%
Purchased receivable losses			—				—				—				N/A				(13	)			245				(258	)			-105	%
Other expense			2,049				1,583				466				29	%			5,843				4,815				1,028				21	%
Total		$	9,682			$	8,559			$	1,123				13	%		$	29,538			$	26,115			$	3,423				13	%