This discussion should be read in conjunction with the unaudited consolidated financial statements of Northrim BanCorp, Inc. (the "Company") and the notes thereto presented elsewhere in this report and with the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Note Regarding Forward Looking-Statements

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

Critical Accounting Policies

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

The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. The Company's critical accounting policies include those that address the accounting for the Allowance, the valuation of goodwill and other intangible assets, and the valuation of other real estate owned. These critical accounting policies are further described in Item 7, Management's Discussion and Analysis, and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company's Form 10-K for the year ended December 31, 2011. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements.

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

Update on Economic Conditions

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

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

Recent Developments

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

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

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

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

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

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

Highlights and Summary of Performance - Second Quarter of 2012

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

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

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

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

§ Northrim remains well-capitalized with Tier 1 Capital to Risk Adjusted Assets at June 30, 2012 of 15.44%, compared to 15.20% at December 31, 2011 and 15.59% at June 30, 2011. Tangible common equity to tangible assets was 11.47% at June 30, 2012, up from 10.86% at December 31, 2011 and 10.90% a year ago. Tangible common equity to tangible assets is a non-GAAP ratio that represents total equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. The GAAP measure of equity to assets is total equity divided by total assets. Total equity to total assets was 12.17% at June 30, 2012 as compared to 11.56% at December 31, 2011 and 11.63% at June 30, 2011.

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

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

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

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

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

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

Credit Quality

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

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

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

Potential problem loans: Potential problem loans are loans which are currently performing and are not included in nonaccrual loans, accruing loans 90 days or more past due, or impaired loans that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, or impaired loans. At June 30, 2012, management had identified potential problem loans of $2.4 million as compared to potential problem loans of $4.6 million at December 31, 2011 and $8.6 million at June 30, 2011. The decrease in potential problem loans at June 30, 2012 from December 31, 2011 is primarily due to the movement of two real estate term loans to the same borrower totaling $2.7 million from potential problem loans to nonaccrual status. The decrease at June 30, 2012 as compared to June 30, 2011 is due to the movement of $4.8 million in loans to nonaccrual or OREO status, as well as pay downs and upgrades on several loans.

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

RESULTS OF OPERATIONS

Income Statement

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

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

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

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

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

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

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

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

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

      Components of Net Interest Margin

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





                                                                                     Three Months Ended June 30,
                                                                                                       Interest income/                          Average Yields/Costs
                                       Average Balances                       Change                       expense                Change           Tax Equivalent3
                                 2012                 2011                    $        %              2012          2011          $    %        2012     2011    Change
                                                                                           (In Thousands)
Commercial               $      248,884      $          244,273      $        4,611     2  %     $     4,114     $  4,161     $  (47)  (1) %    6.65  %  6.83  % (0.18) %
Real estate construction         37,235                  58,953             (21,718)  (37) %             766        1,077       (311) (29) %    8.27  %  7.33  %  0.94  %
Real estate term                341,786                 309,216              32,570    11  %           4,721        4,785        (64)  (1) %    5.56  %  6.21  % (0.65) %
Home equity lines and                                                                                                                                             0.00
 other consumer                  38,312                  42,350              (4,038)  (10) %             590          686        (96) (14) %    6.20  %  6.50  % (0.30) %
Loans held for sale              12,768                        -             12,768     NM               114             -       114    NM      3.59  %  0.00  %  3.59  %
Unearned origination
fees, net of
     origination costs           (1,782)                 (2,641)                859   (33) %
 Total loans1,2                 677,203                 652,151              25,052     4  %          10,305       10,709       (404)  (4) %    6.15  %  6.62  % (0.47) %

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

Interest-bearing
deposits                 $      597,878      $          586,003      $       11,875     2  %     $       422     $    704     $ (282) (40) %    0.28  %  0.48  % (0.20) %
Borrowings                       37,066                  35,219               1,847     5  %             205          200          5    3  %    2.18  %  2.24  % (0.06) %
 Total interest-bearing
liabilities                     634,944                 621,222              13,722     2  %             627          904       (277) (31) %    0.39  %  0.58  % (0.19) %
Demand deposits and
other
     noninterest-bearing
liabilities                     299,819                 291,912               7,907     3  %
Equity                          129,784                 121,057               8,727     7  %
     Total               $    1,064,547      $        1,034,191      $       30,356     3  %
Net interest income                                                                              $    10,496     $ 10,582     $  (86)  (1) %
Net tax equivalent
margin on earning
assets3                                                                                                                                         4.51  %  4.65  % (0.14) %

                                                                                      Six Months Ended June 30,
. . .