Summary of NORTHRIM BANCORP INC

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 24% 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 accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles ("GAAP"). The Company's accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company has identified three policies as being critical because they require management to make estimates, assumptions and judgments that affect the reported amount of assets and liabilities, contingent assets and liabilities, and revenues and expenses included in the consolidated financial statements. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Circumstances and events that differ significantly from those underlying the Company's estimates, assumptions and judgments could cause the actual amounts reported to differ significantly from these estimates.

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The Company's critical accounting policies include those that address the accounting for the allowance for loan losses, the valuation of goodwill and other intangible assets, and the valuation of other real estate owned. The Company has not made any significant changes in its critical accounting policies or its estimates and assumptions from those disclosed in its Form 10-K as of December 31, 2008. These critical accounting policies are further described in Management's Discussion and Analysis and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company's Form 10-K as of December 31, 2008. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements.
Several new accounting pronouncements became effective for the Company on January 1, 2009. See Note 2 of the Notes to the Consolidated Financial Statements in this Form 10-Q for a summary of the pronouncements and discussion of the impact of their adoption on the Company's consolidated financial statements.
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, 2009, the Company had assets of $985.7 million and gross loans of $674.2 million, decreases of 2% and 4%, respectively, as compared to the balances for these accounts at September 30, 2008. As compared to balances at December 31, 2008, total assets and total loans at September 30, 2009 decreased by 2% and 5%, respectively. The Company's net income and diluted earnings per share for the three months ended September 30, 2009, were $1.9 million and $0.30, respectively, increases of 26% and 25%, respectively, as compared to the same period in 2008. For the quarter ended September 30, 2009, the Company's net interest income increased by $646,000, or 6%, its provision for loan losses decreased by $626,000, or 31%, its other operating income increased $158,000, or 5%, and its other operating expenses increased by $972,000, or 10%, as compared to the third quarter a year ago.
RESULTS OF OPERATIONS
NET INCOME
Net income attributable to Northrim Bancorp for the quarter ended September 30, 2009, was $1.9 million or $0.30 per diluted share, increases of 26% and 25%, respectively, as compared to net income of $1.6 million and diluted earnings per share of $0.24, respectively, for the third quarter of 2008.
The increase in net income attributable to Northrim Bancorp for the three-month period ending September 30, 2009 as compared to the same period a year ago was the result of an increase in net interest income of $646,000, a decrease in the loan loss provision of $626,000 and an increase in other operating income of $158,000. These increases were partially offset by a $972,000 increase in other operating expenses and a $59,000 increase in the provision for income taxes for the three-month period ending September 30, 2009 as compared to the same period a year ago. The Other Operating Income, Other Operating Expense, Net Interest Income, Analysis of Allowance for Loan Losses and Loan Loss Provision and Income Taxes sections of Item 2 in this Form 10-Q discuss these changes further. Net income attributable to Northrim Bancorp for the nine months ended September 30, 2009, was $5.8 million, or $0.90 per diluted share, increases of 13% and 15%, respectively, as compared to net income of $5.1 million and diluted earnings per diluted share of $0.78, respectively, for the same period in 2008.

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The increase in net income attributable to Northrim Bancorp for the nine-month period ending September 30, 2009 as compared to the same period a year ago was the result of an increase in other operating income of $2.1 million, a decrease in the loan loss provision of $833,000, and a $29,000 decrease in the provision for income taxes. These changes were partially offset by a $2.1 million increase in other operating expenses and a $173,000 decrease in net interest income for the nine-month period ending September 30, 2009 as compared to the same period a year ago. The Other Operating Income, Other Operating Expense, Net Interest Income, Analysis of Allowance for Loan Losses and Loan Loss Provision and Income Taxes sections of Item 2 in this Form 10-Q discuss these changes further.
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 2009 increased $646,000 million, or 6%, to $11.7 million from $11.1 million in the third quarter of 2008 because of larger reductions in interest expense, accompanied by a smaller decrease in the yields on the Company's interest-earning assets. Net interest income for the nine-month period ending September 30, 2009 decreased $173,000, or less than 1%, to $34.6 million from $34.8 million in the same period in 2008 due to a decrease in interest income, accompanied by a smaller decrease in interest expense. The following table compares average balances and rates for the quarters and nine-month periods ending September 30, 2009 and 2008:

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                                                                    Three Months Ended September 30,
                                                                                                            Average Yields/Costs
                                    Average Balances                       Change                              Tax Equivalent
                                 2009              2008                $               %             2009            2008          Change
                                                 (Dollars in thousands)
Commercial                    $ 252,224         $ 284,317         $ (32,093 )         -11 %           7.22 %         7.32 %         -0.10 %
Construction/development         83,199           118,832           (35,633 )         -30 %           8.63 %         8.02 %          0.61 %
Commercial real estate          293,236           251,864            41,372            16 %           6.82 %         7.38 %         -0.56 %
Home equity lines and
other consumer                   46,655            51,874            (5,219 )         -10 %           6.73 %         6.85 %         -0.12 %
Real estate loans for
sale                                411                 -               411           NA            -13.32 %          NA             NA
Other loans                        (853 )            (226 )            (627 )         277 %

Total loans                     674,872           706,661           (31,789 )          -4 %           7.19 %         7.52 %         -0.33 %

Short-term investments           49,609            40,823             8,786            22 %           0.24 %         2.56 %         -2.32 %
Long-term investments           143,979           124,986            18,993            15 %           3.23 %         3.88 %         -0.65 %

Total investments               193,588           165,809            27,779            17 %           2.45 %         3.55 %         -1.10 %

Interest-earning assets         868,460           872,470            (4,010 )           0 %           6.13 %         6.77 %         -0.64 %
Nonearning assets               104,378           115,804           (11,426 )         -10 %

Total                         $ 972,838         $ 988,274         $ (15,436 )          -2 %


Interest-bearing
liabilities                   $ 606,150         $ 649,004         $ (42,854 )          -7 %           1.08 %         2.12 %         -1.04 %
Demand deposits                 247,647           224,290            23,357            10 %
Other liabilities                 9,346             9,865              (519 )          -5 %
Equity                          109,695           105,115             4,580             4 %

Total                         $ 972,838         $ 988,274         $ (15,436 )          -2 %



Net tax equivalent
margin on earning assets                                                                              5.38 %         5.10 %          0.28 %




                                                                    Nine Months Ended September 30,
                                                                                                           Average Yields/Costs
                                    Average Balances                       Change                             Tax Equivalent
                                 2009              2008                $               %            2009           2008          Change
                                                 (Dollars in thousands)
Commercial                    $ 269,926         $ 282,850         $ (12,924 )          -5 %         7.01 %         7.58 %         -0.57 %
Construction/development         87,644           125,248           (37,604 )         -30 %         7.91 %         8.69 %         -0.78 %
Commercial real estate          281,828           247,150            34,678            14 %         6.96 %         7.57 %         -0.61 %
Consumer                         48,439            51,660            (3,221 )          -6 %         6.79 %         6.96 %         -0.17 %
Real estate loans for
sale                              6,310                 -             6,310           NA            4.43 %          NA             NA
Other loans                      (1,359 )            (995 )            (364 )          37 %

Total loans                     692,788           705,913           (13,125 )          -2 %         7.08 %         7.77 %         -0.69 %

Short-term investments           37,192            41,959            (4,767 )         -11 %         0.43 %         2.53 %         -2.10 %
Long-term investments           138,527           133,193             5,334             4 %         3.40 %         4.31 %         -0.91 %

Total investments               175,719           175,152               567             0 %         2.78 %         3.90 %         -1.12 %

Interest-earning assets         868,507           881,065           (12,558 )          -1 %         6.21 %         7.00 %         -0.79 %
Nonearning assets               107,566           104,783             2,783             3 %

Total                         $ 976,073         $ 985,848         $  (9,775 )          -1 %


Interest-bearing
liabilities                   $ 625,661         $ 664,546         $ (38,885 )          -6 %         1.19 %         2.22 %         -1.03 %
Demand deposits                 233,261           207,551            25,710            12 %
Other liabilities                 8,994             9,929              (935 )          -9 %
Equity                          108,157           103,822             4,335             4 %

Total                         $ 976,073         $ 985,848         $  (9,775 )          -1 %


Net tax equivalent
margin on earning assets                                                                            5.36 %         5.31 %          0.05 %

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Interest-earning assets averaged $868.5 million and $872.5 million for the three-month periods ending September 30, 2009 and 2008, respectively, a decrease of $4 million, or less than 1%. The tax equivalent yield on interest-earning assets averaged 6.13% and 6.77%, respectively, for the three-month periods ending September 30, 2009 and 2008, respectively, a decrease of 64 basis points. Interest-earning assets averaged $868.5 million and $881.1 million for the nine-month periods ending September 30, 2009 and 2008, respectively, a decrease of $12.6 million, or 1%. The tax equivalent yield on interest-earning assets averaged 6.21% and 7%, respectively, for the nine-month periods ending September 30, 2009 and 2008, respectively, a decrease of 79 basis points. Average loans, the largest category of interest-earning assets, decreased by $31.8 million, or 4%, to an average of $674.9 million in the third quarter of 2009 from $706.7 million in the third quarter of 2008. During the nine-month period ending September 30, 2009, loans decreased by $13.1 million, or 2%, to an average of $692.8 million from an average of $705.9 million for the nine-month period ending September 30, 2008. Commercial, construction and home equity lines and other consumer loans decreased by $32.1 million, $35.6 million and $5.2 on average, respectively, between the third quarters of 2009 and 2008. Commercial real estate loans increased by $41.4 million on average between the third quarters of 2009 and 2008. During the nine-month period ending September 30, 2009, commercial, construction and home equity lines and other consumer loans decreased by $12.9 million, $37.6 million, and $3.2 million, respectively, on average as compared to the nine-month period ending September 30, 2008. Commercial real estate loans increased $34.7 million on average between the nine-month periods ending September 30, 2009 and September 30, 2008. Additionally, the Company had $6.3 million in real estate loans for sale on average in the nine month period ended September 30, 2009 and no real estate loans for sale during the same period in 2008. The decline in the loan portfolio resulted from a combination of refinance and loan payoff activity and a decrease in construction loan originations. The yield on the loan portfolio averaged 7.19% for the third quarter of 2009, a decrease of 33 basis points from 7.52% over the same quarter a year ago. During the nine-month period ending September 30, 2009, the yield on the loan portfolio averaged 7.08%, a decrease of 69 basis points from 7.77% over the same nine-month period in 2008. See the Loan and Lending Activities section for discussion about the Company's expectations for future activity in the loan portfolio.
Average investments increased $27.8 million, or 17%, to $193.6 million for the third quarter of 2009 from $165.8 million in the third quarter of 2008. For the nine-month period ending September 30, 2009, average investments increased $567,000, or less than 1%, to $175.7 million from $175.2 million in the same period in 2008.
Interest-bearing liabilities averaged $606.2 million for the third quarter of 2009, a decrease of $42.9 million, or 7%, compared to $649 million for the same period in 2008. For the nine-month period ending September 30, 2009, interest-bearing liabilities averaged $625.7 million, a decrease of $38.9 million, or 6%, compared to $664.5 million for the same period in 2008. The average cost of interest-bearing liabilities decreased 104 basis points to 1.08% for the third quarter of 2009 compared to 2.12% for the third quarter of 2008. The average cost of interest-bearing liabilities decreased 103 basis points to 1.19% for the nine-month period ending September 30, 2009 as compared to 2.22% for the same period in 2008. The decrease in the average cost of funds in 2009 as compared to 2008 is largely due to the interest rate cuts by the Federal Reserve that were made throughout 2008. As a result, many other interest rates declined during the year, which contributed to a decline in deposit rates. The Company's net interest income as a percentage of average interest-earning assets (net tax-equivalent margin) was 5.38% and 5.36%, respectively, for the three and nine-month periods ending September 30, 2009 as compared to 5.10% and 5.31% for the same periods in 2008. The decrease in funding costs coupled with smaller decreases in the yields on its earning assets for both the three and nine-month periods ending September 30, 2009 resulted in an increase in net tax-equivalent margin.

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OTHER OPERATING INCOME
The following table breaks out the components of and changes in Other Operating
Income between the three and nine-month periods ending September 30, 2009 and
2008:

                               Three Months Ended September 30,                              Nine Months Ended September 30,
                        2009           2008          $ Chg         % Chg          2009             2008             $ Chg          % Chg
                                    (Dollars in thousands)                                        (Dollars in thousands)
Service charges
on deposit
accounts             $    791        $   841        $  (50 )          -6 %      $ 2,269        $     2,591        $  (322 )          -12 %
Purchased
receivable
income                    474            712          (238 )         -33 %        1,706              1,763            (57 )           -3 %
Employee benefit
plan income               469            398            71            18 %        1,282              1,057            225             21 %
Electronic
banking fees              463            343           120            35 %        1,124                881            243             28 %
Equity in
earnings from
mortgage
affiliate                 385            210           175            83 %        1,997                516          1,481            287 %
Rental income             206            213            (7 )          -3 %          620                240            380            158 %
Merchant credit
card transaction
fees                      152            134            18            13 %          305                351            (46 )          -13 %
Loan servicing
fees                       89            105           (16 )         -15 %          387                355             32              9 %
Equity in loss
from Elliott
Cove                      (13 )          (17 )           4           -24 %         (106 )              (70 )          (36 )           51 %
Gain on sale of
securities
available for
sale, ne                 t 24             46           (22 )         -48 %          220                146             74             51 %
Gain on sale of
other real
estate owned,
net                       201             13           188          1446 %          424                 (5 )          429          -8580 %
Other income              119            204           (85 )         -42 %          364                650           (286 )          -44 %

Total                $  3,360        $ 3,202        $  158             5 %      $  10,5          92 $8,475        $ 2,117             25 %

Total other operating income for the third quarter of 2009 was $3.4 million, an increase of $158,000 from $3.2 million in the third quarter of 2008. Total other operating income for the nine months ending September 30, 2009 was $10.6 million, an increase of $2.1 million from $8.5 million in the same period in 2008. The increase in total other operating income was due primarily to increases in income from our equity in earnings from our mortgage affiliate and gain on the sales of other real estate owned.
Service charges on the Company's deposit accounts decreased by $50,000 and $322,000, respectively, or 6% and 12%, to $791,000 and $2.3 million for the three and nine-month periods ending September 30, 2009, as compared to $841,000 and $2.6 million for the same periods in 2008. The decrease in service charges was primarily the result of a decrease in fees collected on nonsufficient funds transactions due to a decrease in the number of overdraft transactions processed during the three and nine-month periods ending September 30, 2009. Income from the Company's purchased receivable products decreased by $238,000, or 33%, to $474,000 for the three-month period ending September 30, 2009 as compared to $712,000 for the same period ending in September 30, 2008. Income from the Company's purchased receivable products decreased by $57,000, or 3%, to $1.7 million for the nine-month period ending September 30, 2009 as compared to $1.8 million for the same period in 2008. 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 fluctuate as the Company adds new customers while some of its existing customers will move into different products to meet their working capital needs. For example, at the end of the three-month period ending March 31, 2009, one of the Company's purchased receivable customers sold a portion of its business and used those proceeds to repay its purchased receivable balance which accounted for a most of the decrease in purchased receivable revenues for the three and nine-month periods ending September 30, 2009 as compared to revenues for the same periods in 2008.
Employee benefit plan income from NBG was $469,000 and $1.3 million, respectively, for the three and nine-month periods ending September 30, 2009 as compared to $398,000 and $1.1 million for the same periods in 2008 for increases of $71,000 and $225,000, respectively, or 18% and 21%. This increase in employee benefit plan income is 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 $120,000 and $243,000, respectively, or 35% and 28%, for the three and nine-month periods ending September 30, 2009 to $463,000 and $1.1 million from $343,000 and $881,000 at September 30, 2008. 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

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