Northrim BanCorp (NRIM) 10-Q 2004 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2004

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

For the transition period from                   to                   

Commission File Number 000-33501

NORTHRIM BANCORP, INC.

(Exact name of registrant as specified in its charter)

Alaska
(State or other jurisdiction of incorporation or organization) 92-0175752
(I.R.S. Employer Identification Number)

3111 C Street
Anchorage, Alaska	99503
(Address of principal executive offices)	(Zip Code)

(907) 562-0062

(Registrant’s telephone number, including area code)

                 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X]  No [  ]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]  No [  ]

                 The number of shares of the issuer’s Common Stock outstanding at July 31, 2004 was 6,086,293.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets
- June 30, 2004 (unaudited)	3
- December 31, 2003	3
- June 30, 2003 (unaudited)	3
Consolidated Statements of Income (unaudited)
- Three and six months ended June 30, 2004 and 2003	4
Consolidated Statements of Comprehensive Income (unaudited)
- Three and six months ended June 30, 2004 and 2003	5
Consolidated Statements of Cash Flows (unaudited)
- Six months ended June 30, 2004 and 2003	6
Notes to the Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	25
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds	26
Item 4. Submission of Matters to a Vote of Security Holders	26
Item 5. Other Information	27
Item 6. Exhibits and Reports on Form 8-K	27
SIGNATURES	28
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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NORTHRIM BANCORP, INC.

PART I - FINANCIAL INFORMATION

ITEM ONE

NORTHRIM BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

June 30, 2004, December 31, 2003, and June 30,2003

	June 30,			December 31,			June 30,
	2004			2003			2003
	(unaudited)						(unaudited)
	(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks	$	24,564		$	31,298		$	18,295
Money market investments		6,917			5,597			10,692
Investment securities held to maturity		945			945			1,080
Investment securities available for sale		58,624			70,717			68,474
Investment in Federal Home Loan Bank stock		1,401			1,546			1,706
Real estate loans for sale		0			1,395			39,703
Portfolio loans		617,151			599,724			551,098
Allowance for loan losses		(10,293	)		(10,186	)		(9,384	)
Net loans		606,858			590,933			581,417
Premises and equipment, net		11,002			11,107			11,394
Accrued interest receivable		3,330			3,300			3,362
Intangible assets		6,818			7,002			7,186
Other assets		18,810			16,124			11,341
Total Assets	$	739,269		$	738,569		$	714,947
LIABILITIES
Deposits:
Demand	$	184,775		$	179,461		$	163,971
Interest-bearing demand		57,991			56,312			54,719
Savings		131,286			109,740			102,939
Money market		117,697			137,657			138,174
Certificates of deposit less than $100,000		63,095			66,913			70,553
Certificates of deposit greater than $100,000		87,689			96,114			97,554
Total deposits		642,533			646,197			627,910
Borrowings		5,327			5,143			5,423
Trust perferred securities		8,000			8,000			8,000
Other liabilities		5,220			3,944			3,475
Total Liabilities		661,080			663,284			644,808
SHAREHOLDERS’ EQUITY
Common stock, $1 par value, 10,000,000 shares authorized, 6,085,657; 6,050,359 and 5,957,046 shares issued and outstanding at June 30, 2004, December 31, 2003, and June 30, 2003, respectively		6,085			6,050			5,957
Additional paid-in capital		45,763			45,615			44,814
Retained earnings		26,403			22,997			18,202
Accumulated other comprehensive income - unrealized gain (loss) on securities, net		(62	)		623			1,166
Total shareholders’ equity		78,189			75,285			70,139
Total Liabilities and Shareholders’ Equity	$	739,269		$	738,569		$	714,947

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003

	Three Months Ended:						Six Months Ended:
	June 30,						June 30,
	2004			2003			2004			2003
	(unaudited)						(unaudited)
	(Dollars in thousands, except per share data)
Interest Income
Interest and fees on loans	$	11,236		$	10,652		$	21,918		$	21,148
Interest on investment securities:
Assets available for sale		593			665			1,246			1,443
Assets held to maturity		21			35			50			79
Interest on money market investments		9			45			20			61
Total Interest Income		11,859			11,397			23,234			22,731
Interest Expense
Interest expense on deposits and borrowings		1,580			1,728			3,063			3,512
Net Interest Income		10,279			9,669			20,171			19,219
Provision for loan losses		429			936			858			1,365
Net Interest Income After Provision for Loan Losses		9,850			8,733			19,313			17,854
Other Operating Income
Service charges on deposit accounts		443			478			874			924
Equity in earnings from RML		123			886			166			1,350
Equity in loss from Elliott Cove		(58	)		(116	)		(247	)		(325	)
Other income		447			529			998			991
Total Other Operating Income		955			1,777			1,791			2,940
Other Operating Expense
Salaries and other personnel expense		4,031			3,426			7,871			6,743
Occupancy, net		495			488			1,023			977
Equipment expense		327			369			691			748
Marketing expense		338			312			627			629
Intangible asset amortization expense		92			92			184			184
Other operating expense		1,224			1,499			2,744			3,084
Total Other Operating Expense		6,507			6,186			13,140			12,365
Income Before Income Taxes		4,298			4,324			7,964			8,429
Provision for income taxes		1,536			1,689			2,829			3,250
Net Income	$	2,762		$	2,635		$	5,135		$	5,179

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003

	Three Months Ended:					Six Months Ended:
	June 30,					June 30,
	2004			2003		2004			2003
	(unaudited)					(unaudited)
	(Dollars in thousands)					(Dollars in thousands)
Net income	$	2,762		$	2,635	$	5,135		$	5,179
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period		(660	)		138		(596	)		44
Less: reclassification adjustment for gains		89			29		89			81
Comprehensive Income	$	2,013		$	2,744	$	4,450		$	5,142

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

	Six Months Ended:
	June 30,
	2004			2003
	(unaudited)
	(Dollars in thousands)
Operating Activities
Net income	$	5,135		$	5,179
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Security (gains) losses		(151	)		(137	)
Depreciation and amortization of premises and equipment		557			609
Amortization of software		253			227
Intangible asset amortization		184			184
Deferred tax expense (benefit)		(1,046	)		(418	)
Deferral of loan fees and costs, net		197			(36	)
Provision for loan losses		858			1,365
Equity in earnings from RML		(166	)		(1,350	)
Equity in loss from Elliott Cove		247			325
(Increase) decrease in accrued interest receivable		(30	)		(170	)
(Increase) decrease in other assets		(1,876	)		(825	)
Amortization of investment security premium, net of discount accretion		77			154
Increase (decrease) of other liabilities		698			343
Net Cash Provided by Operating Activities		4,937			5,450
Investing Activities
Investment in securities:
Purchases of investment securities:
Available-for-sale		(10,333	)		(28,435	)
Proceeds from sales / maturities of securities:
Available-for-sale		21,816			38,169
Held-to-maturity		0			200
Investment in Federal Home Loan Bank stock, net		145			68
Investments in loans:
Sales of loans and loan participations		15,572			94,117
Loans made, net of repayments		(32,552	)		(150,349	)
Investment in Elliott Cove		0			(250	)
Purchases of premises and equipment		(452	)		(1,522	)
Net Cash Provided (Used) by Investing Activities		(5,804	)		(48,002	)
Financing Activities
Increase (decrease) in deposits		(3,664	)		1,495
Increase (decrease) in borrowings		184			(942	)
(Increase) decrease loan to Elliott Cove		(375	)		(125	)
Net proceeds from issuance of common stock		183			39
Net proceeds from issuance of trust preferred securities		0			8,000
Repurchase of common stock		0			(1,977	)
Dividends received from RML		277			906
Cash dividends paid		(1,152	)		(1,437	)
Net Cash Provided (Used) by Financing Activities		(4,547	)		5,959
Net Increase (Decrease) in Cash and Cash Equivalents		(5,414	)		(36,593	)
Cash and cash equivalents at beginning of period		36,895			65,580
Cash and cash equivalents at end of period	$	31,481		$	28,987
Supplemental Information
Income taxes paid	$	2,750		$	3,550
Interest paid	$	3,044		$	3,516
Conversion of Elliott Cove loan to equity	$	625		$	0

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

June 30, 2004 and 2003

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. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period ended June 30, 2004, are not necessarily indicative of the results anticipated for the year ending December 31, 2004. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

2. STOCK REPURCHASE

In September 2002, the Board of Directors of the Company approved a plan whereby the Company would periodically repurchase for cash up to approximately 5%, or 306,372, of its shares of stock in the open market. The Company purchased 224,800 shares of its stock under this program through June 30, 2004, at a total cost of $3.1 million. The Company intends to continue to repurchase its stock from time to time depending upon market conditions, but it can make no assurances that it will continue this program or that it will repurchase all of the authorized shares.

3. ACCOUNTING PRONOUNCEMENTS

In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. Statement No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133. The Standard has multiple effective date provisions depending on the nature of the amendment to Statement No. 133. The Company believes the adoption of Statement No. 149 will have no impact on its financial statements.

In May 2003, the FASB issued Statement No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. Statement No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 30, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The statement required that our trust preferred securities be treated as a liability.

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4. LENDING ACTIVITIES

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

	June 30, 2004						December 31, 2003						June 30, 2003
	Dollar			Percent			Dollar			Percent			Dollar			Percent
	Amount			of Total			Amount			of Total			Amount			of Total
	(Dollars in thousands)
Commercial	$	239,335			39	%	$	220,774			37	%	$	201,743			34	%
Construction/development		105,200			17	%		102,311			17	%		84,756			14	%
Commercial real estate		237,150			38	%		239,545			40	%		223,966			38	%
Consumer		37,652			6	%		39,796			7	%		41,849			7	%
Other, net of unearned and discount		(2,186	)		0	%		(2,702	)		0	%		(1,216	)		0	%
Sub total		617,151						599,724						551,098
Real estate loans for sale		—			0	%		1,395			0	%		39,703			7	%
Total loans	$	617,151			100	%	$	601,119			100	%	$	590,801			100	%

The following table details activity in the Allowance for Loan Losses for the dates indicated:

	Second Quarter				Six Months
	2004		2003		2004		2003
	(Dollars in thousands)
Balance at beginning of period	$	10,229	$	8,828	$	10,186	$	8,476
Charge-offs:
Commercial		415		399		824		592
Construction/development		0		67		0		67
Consumer		26		41		48		43
Total charge-offs		441		507		872		702
Recoveries:
Commercial		31		89		67		189
Construction/development		10		0		10		0
Commercial real estate		0		13		0		26
Consumer		35		25		44		30
Total recoveries		76		127		121		245
Provision for loan losses		429		936		858		1,365
Balance at end of period	$	10,293	$	9,384	$	10,293	$	9,384

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

	June 30, 2004		December 31, 2003		June 30, 2003
	(Dollars in thousands)
Nonaccrual loans	$	5,988	$	7,426	$	4,314
Accruing loans past due 90 days or more		2,541		2,283		3,952
Restructured loans		453		597		552
Total nonperforming loans		8,982		10,306		8,818
Real estate owned		—		—		99
Total nonperforming assets	$	8,982	$	10,306	$	8,917
Allowance for loan losses	$	10,293	$	10,186	$	9,384

At June 30, 2004, December 31, 2003, and June 30, 2003, the Company had loans measured for impairment of $10.8 million, $13.2 million, and $13 million, respectively. A specific allowance of $521,000, $580,000, and $1.3 million, respectively, was established for these periods. The decrease in

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loans measured for impairment at June 30, 2004, as compared to June 30, 2003, and December 31, 2003, resulted in large part from the concentrated collection activities of the Company.

5. OTHER OPERATING INCOME

The Company owns a 30% interest in the profits and losses of Residential Mortgage LLC (“RML”), through Northrim Bank’s wholly-owned subsidiary, Northrim Capital Investments Co. RML was formed in 1998 and has offices throughout Alaska. The Company’s share of the earnings from RML decreased by $764,000 to $123,000 during the second quarter of 2004 as compared to $886,000 in the second quarter of 2003, primarily due to decreased refinance activity.

The Company owns a 49% 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”). Elliott Cove began active operations in the fourth quarter of 2002 and has had start-up losses since that time as it continues to build its assets under management. In July of 2003, the Company made a commitment to loan $625,000 to Elliott Cove. The balance outstanding on this commitment at December 31, 2003 was $475,000. During the first and second quarters of 2004, other investors made additional investments in Elliott Cove. In addition, the Company made a separate commitment to loan Elliott Cove $500,000. The outstanding balance on this commitment at June 30, 2004 was $225,000. In the second quarter of 2004, the Company converted its $625,000 loan commitment to an additional capital interest in Elliott Cove. The balance of this commitment at the time of this conversion was $625,000. As a result of the additional investments in Elliott Cove by other investors and the Company’s conversion of its $625,000 loan, its interest in Elliott Cove increased from 43% to 49% between December 31, 2003 and June 30, 2004.

6. DEPOSIT ACTIVITIES

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 deposit. At June 30, 2004, the Company held $40 million in certificates of deposit for the Alaska Permanent Fund, collateralized by letters of credit issued by the Federal Home Loan Bank (“FHLB”).

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7. EARNINGS PER SHARE

The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net income would have been reduced to the pro forma amounts indicated below for the second quarter ending June 30, 2004 and 2003:

		Three Months
		2004			2003
		(Dollars in thousands, except per share data)
Net income	As reported	$	2,762		$	2,635
Less stock-based employee compensation			(46	)		(50	)
Net income	Pro forma	$	2,716		$	2,585
Earnings per share, basic	As reported	$	0.45		$	0.44
	Pro forma	$	0.45		$	0.43
Earnings per share, diluted	As reported	$	0.44		$	0.43
	Pro forma	$	0.43		$	0.42

		Six Months
		2004			2003
		(Dollars in thousands, except per share data)
Net income	As reported	$	5,135		$	5,179
Less stock-based employee compensation			(92	)		(83	)
Net income	Pro forma	$	5,043		$	5,096
Earnings per share, basic	As reported	$	0.85		$	0.86
	Pro forma	$	0.83		$	0.85
Earnings per share, diluted	As reported	$	0.82		$	0.84
	Pro forma	$	0.80		$	0.82

The per share weighted-average fair value of stock options granted during April 2003, October 2001, and October 2000, was $4.71, $5.51, and $3.20, respectively, on the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions: 2003—expected dividends of $0.38 per share, risk-free rate of 3.83%, volatility of 31.05%, and an expected life of 10 years; 2001—expected dividends of $0.20 per share, risk-free interest rate of 5.83%, volatility of 31.7%, and an expected life of 10 years; 2000—expected dividends of $0.20 per share, risk-fee interest rate of 5.87%, volatility of 32.1%, and an expected life of 10 years. In addition, the effective tax rate used to compute the net tax effect of the stock–based compensation for the six-month periods ending June 30, 2003, and June 30, 2004, was 40%.

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NORTHRIM BANCORP, INC.
PART I — FINANCIAL INFORMATION

ITEM TWO

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’s management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of Northrim’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 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 our ability to compete 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 Northrim Bank’s filings with the FDIC and those identified from time to time 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 three 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 49% equity interest in Elliott Cove Capital Management LLC (“Elliott Cove”), an investment advisory services company; and Northrim Capital Trust I (“NCTI”), an entity that we formed in May 2003 to facilitate a trust preferred securities offering by the Company. We also hold a 30% interest in the profits and losses of a residential mortgage company, Residential Mortgage LLC (“RML”), through the Bank’s wholly-owned subsidiary, Northrim Capital Investments Co. (“NCIC”). RML was formed in 1998 and has offices throughout Alaska.

The Company is regulated by the Board of Governors of the Federal Reserve System, and the Bank is regulated by the Federal Deposit Insurance Corporation, and the State of Alaska Department of Community and Economic Development, Division of Banking, Securities and Corporations. We began banking operations in Anchorage in December 1990, and formed the Company in connection with our reorganization into a holding company structure; that reorganization was completed effective December 31, 2001. We make our Securities Exchange Act reports available free of charge on our Internet web site, www.northrim.com. Our reports can also be obtained through the SEC’s EDGAR database at www.sec.gov.

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BUSINESS OVERVIEW

We opened for business in 1990 shortly after the dramatic consolidation of the Alaska banking industry in the late 1980s that left three large commercial banks with over 93% of commercial bank deposits in greater Anchorage. Through the successful implementation of our “Customer First Service” philosophy of providing our customers with the highest level of service, we capitalized on the opportunity presented by this consolidation and carved out a market niche among small business and professional customers seeking more responsive and personalized service.

We are headquartered in Anchorage and have 10 branch locations: seven in Anchorage, and one each in Fairbanks, Eagle River and Wasilla. We offer a wide array of commercial bank loan and deposit products, investment products, and electronic banking services over the Internet.

BUSINESS STRATEGY

The Company’s goal is to improve earnings and increase shareholder value by implementing a number of strategies that are designed to increase its market share within its major markets that include the areas surrounding Anchorage, Fairbanks, and the Matanuska-Susitna Borough. To achieve these objectives, the Company is pursing the following strategies:

• Providing Customer First Service:The Company provides a high level of customer service. The Company’s guiding principle is to serve its market areas by operating with a “Customer First Service” philosophy, affording its customers the highest priority in all aspects of its operations. This “Customer First Service” philosophy is combined with the Company’s emphasis on personalized, local decision making.

• Emphasizing Business and Professional Lending:The Company focuses on providing commercial lending products and services, and emphasizing relationship banking with businesses and professional individuals. The Company believes that its focus on providing financial services to businesses and professional individuals has and may continue to increase lending and core deposit volumes.

• Providing Competitive and Responsive Real Estate Lending:The Company is a major land development and residential construction lender and an active lender in the commercial real estate market. The Company believes that its willingness to provide these services in a professional and responsive manner has contributed significantly to its growth.

• Pursuing Strategic Opportunities for Additional Growth:The Company plans to affect its growth strategy through a combination of growth at existing branch locations, new branch openings, primarily in Anchorage, Wasilla and Fairbanks, and strategic banking and non-banking acquisitions.

• Developing a Sales Culture:In 2003, the Company conducted extensive sales training and developed a comprehensive approach to sales. The Company’s goal throughout this process is to increase and broaden the relationships that it has with new and existing customers and to continue to increase its market share.

MARKET AREA

Since it opened for business in late 1990, the economies within the Company’s major markets have grown at a slow but steady pace. Employment growth in the Anchorage area, the Company’s largest market, has averaged between 1.5% and 2.5% for the past several years. The economy has benefited

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from steady population growth, increases in private and public construction projects, and a strong real estate market. Many of the private construction projects have been funded by large retailers headquartered outside of Alaska that have expanded their operations within the state to meet the demands of the growing population. In contrast, much of the publicly funded construction is for military defense projects at the four major military installations located in the Anchorage and Fairbanks areas as well as for the National Missile Defense project, a portion of which is being constructed at a former military base approximately 100 miles south of Fairbanks. In addition to these large capital projects, the economy has benefited from a strong real estate market that has been fueled in part by the historic drop in interest rates. As interest rates began to rise from their lows in the latter part of 2003, refinance activity within the real estate market began to slow which began to have a negative effect on the income the Company receives from its investment in RML. This trend has continued in 2004 as mortgage interest rates have remained above the levels experienced in 2003. As a result, mortgage refinance activity has declined which has caused RML’s earnings to decline in 2004.

The State of Alaska is very dependent upon the oil industry. Revenues from the oil industry fund 75% of the cost of state government in Alaska. Oil industry employment and spending levels have been declining for a number of years in the state. Moreover, oil production as measured by daily throughput through the Trans-Alaska oil pipeline has declined from a peak of two million barrels per day in 1989 to a current level of approximately one million barrels per day. As production has declined over time so to have revenues to the State of Alaska. As a result, in 11 out of the past 13 years, Alaska has had to draw from its savings accounts to balance its state budget. Although, the State had a small budget surplus for the fiscal year ending June 30, 2004 due to record high oil prices. The main account for the State’s savings draws has been the State’s Constitutional Budget Reserve, which has a current balance of approximately $2 billion. However, the State is projecting deficits of $400 million to $500 million plus over the next several years. The State has other sources available to it to support future expenditures such as earnings from its Permanent Fund, a $28 billion dollar fund created from oil royalties. However, in the past the State has lacked the political will to form a long-term plan to provide for a consistent, stable method of funding state government.

SECOND QUARTER RESULTS SUMMARY

At June 30, 2004, the Company had assets of $739.3 million and gross portfolio loans of $617.2 million, respectively, an increase of 3% and 12%, respectively, over the previous year. The Company’s net income and diluted earnings per share at June 30, 2004, were $2.8 million and $0.44, respectively, an increase of 5% and 2%, respectively, as compared to the same period in 2003. During the same time, the Company’s net interest income increased $610,000, or 6%, its provision for loan losses decreased $507,000, or 54%, its other operating income decreased $822,000, or 46%, and its operating expenses increased $321,000, or 5%. The growth in the Company’s net interest income was more than offset by the decline in other operating income. However, the Company’s provision for loan losses declined by 54% and its other operating expense increased by 5% as compared to a 6% increase in its net interest income, which helped to reverse the effects of the decline in the other operating income and contributed to the increase in its net income and diluted earnings per share.

RESULTS OF OPERATIONS

NET INCOME

Net income for the second quarter ended June 30, 2004, was $2.8 million, or $0.44 per diluted share, an increase in net income of 5%, and a 2% increase in diluted earnings per share as compared to $2.6 million and $0.43, respectively, in the same period of 2003.

Net income for the six months ended June 30, 2004, was $5.1 million, a decrease of $44,000, or 1% from the six months ended June 30, 2003. Diluted earnings per share were $0.82, compared to $0.84 in the same

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period in 2003. The relatively flat earnings for the six-month period ended June 30, 2004, reflects moderate growth in assets, loans, and deposits as well as a large decline in earnings from RML as compared to the six months ended June 30, 2003. The decline in earnings per share was affected by all of these factors.

NET INTEREST INCOME

Net interest income for the second quarter of 2004 increased $610,000, or 6%, to $10.3 million from $9.7 million in 2003. The following table compares average balances and rates for the second quarter and six-month period ending June 30, 2004 and 2003:

								Second Quarter
	Second Quarter							Average Yields/Costs
	Average Balances							Tax Equivalent
	2004		2003		Change			2004			2003			Change
	(Dollars in thousands)
Loans	$	621,466	$	552,291	$	69,175			7.29	%		7.76	%		-0.47	%
Short-term investments		4,392		16,011		(11,619	)		0.79	%		1.11	%		-0.32	%
Long-term investments		62,907		68,513		(5,606	)		3.98	%		4.15	%		-0.17	%
Interest-earning assets		688,765		636,815		51,950			6.95	%		7.21	%		-0.26	%
Nonearning assets		53,844		49,429		4,415
Total	$	742,609	$	686,244	$	56,365
Interest-bearing liabilities	$	484,781	$	462,735	$	22,046			1.31	%		1.51	%		-0.20	%
Demand deposits		175,559		150,789		24,770
Other liabilities		4,220		3,992		228
Equity		78,049		68,728		9,321
Total	$	742,609	$	686,244	$	56,365
Net tax equivalent margin on earning assets									6.03	%		6.11	%		-0.08	%

	Six Months							Six Months
	Average Balances							Average Yields/Costs
	2004		2003		Change			2004			2003			Change
	(Dollars in thousands)
Loans	$	611,539	$	543,736	$	67,803			7.23	%		7.87	%		-0.64	%
Short-term investments		4,861		10,804		(5,943	)		0.82	%		1.11	%		-0.29	%
Long-term investments		65,127		73,765		(8,638	)		4.03	%		4.19	%		-0.16	%
Interest-earning assets		681,527		628,305		53,222			6.88	%		7.33	%		-0.45	%
Nonearning assets		53,402		48,260		5,142
Total	$	734,929	$	676,565	$	58,364
Interest-bearing liabilities	$	482,134	$	456,404	$	25,730			1.28	%		1.56	%		-0.28	%
Demand deposits		171,231		147,740		23,491
Other liabilities		4,300		3,876		424
Equity		77,264		68,545		8,719
Total	$	734,929	$	676,565	$	58,364
Net tax equivalent margin on earning assets									5.97	%		6.19	%		-0.22	%

Interest-earning assets averaged $688.8 million for the second quarter of 2004, an increase of $52 million, or 8%, over the $636.8 million average for the comparable period in 2003. The tax equivalent yield on

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interest-earning assets averaged 6.95% in 2004, a decrease of 26 basis points from 7.21% for the same period in 2003.

Loans, the largest category of interest-earning assets, increased by $69.2 million, or 13%, to an average of $621.5 million in the second quarter of 2004 from $552.3 million in the same period of 2003. Commercial loans, real estate term loans and construction loans increased by $46.3 million, $20.3 million, and $19.3 million, respectively, on average between the second quarters. Consumer loans and real estate loans held for resale declined by $5.1 million and $11.4 million, respectively, on average during the same period. The tax equivalent yield on the loan portfolio averaged 7.29% for the second quarter of 2004, a decrease of 47 basis points from 7.76% a year ago. The drop in the yield on loans was due in part to borrowers taking advantage of historically low rates and refinancing their loans and also in part due to increasing competitive pricing pressures in the market.

Interest-bearing liabilities averaged $484.8 million for the second quarter of 2004, an increase of $22 million, or 5%, compared to $462.7 million for the same period in 2003. The average cost of interest-bearing liabilities decreased 20 basis points to 1.31% for the second quarter of 2004 compared to 1.51% for the second quarter of 2003. The decrease in the average cost of funds was largely due to the repricing of deposit accounts in response to the Federal Reserve’s rate reductions over the last two years. The weighted average life of the Company’s certificates of deposit is less than one year. As these deposits matured, they were repriced at lower interest rates. However, at the end of June of this year, the Federal Reserve began to increase short-term interest rates. As a result, the interest rates on certificates of deposit as well as other interest bearing deposit products have begun to increase. If these recent interest rate increases continue, this could cause an increase in the cost of the Company’s deposit accounts which could also have a negative impact on its net interest margin.

The Company’s net interest income as a percentage of average interest-earning assets (net tax-equivalent margin) was 6.03% for the second quarter of 2004 and 6.11% for same period in 2003. The decline in the Company’s net interest margin was due to several factors. First, the Company received non-recurring prepayment fees of $122,000 in the second quarter of 2003 due to several commercial real estate loans that refinanced during the quarter. Second, the yield on the Company’s loans declined by 47 basis points as noted above. Finally, the lower yield on the Company’s assets was applied to a larger amount of average earning assets, which increased by $52 million, or 8%, and had the effect of decreasing the overall yield on earning assets.

OTHER OPERATING INCOME

Set forth below is a schedule of the components of and change in Other Operating Income between the second quarters and six-month periods ending June 30, 2004 and 2003:

	Second Quarter												Six Months
	2004			2003			$ Chg			% Chg			2004			2003			$ Chg			% Chg
	(Dollars in thousands)												(Dollars in thousands)
Deposit service charges	$	443		$	478			($35	)		-7	%	$	874		$	924			($50	)		-5	%
Loan servicing fees		81			124			(43	)		-35	%		156			206			(50	)		-24	%
Merchant & credit card fees		103			91			12			13	%		172			187			(15	)		-8	%
Electronic banking revenue		145			163			(18	)		-11	%		285			304			(19	)		-6	%
Equity in earnings from RML		123			886			(763	)		-86	%		166			1,350			(1,184	)		-88	%
Equity in loss from Elliott Cove		(58	)		(116	)		58			-50	%		(247	)		(325	)		78			-24	%
Security gains (losses)		0			49			(49	)		-100	%		151			157			(6	)		-4	%
Other		118			102			16			16	%		234			137			97			71	%
Total	$	955		$	1,777			($822	)		-46	%	$	1,791		$	2,940			($1,149	)		-39	%

Total other operating income for the second quarter of 2004 was $955,000, a decrease of $822,000 from the second quarter of 2003.

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The Company’s share of the earnings from RML decreased by $764,000 to $122,000 during the second quarter of 2004 as compared to $886,000 in the second quarter of 2003, primarily due to decreased refinance activity. The large decrease in interest rates and a strong residential housing market fueled increases in mortgage originations from refinances and home purchase loans in the second quarter of 2003. As mortgage rates began to increase in the third quarter of 2003 from the historically low levels experienced earlier in the year, the refinance activity began to decline, which resulted in lower earnings for RML. This trend continued in 2004 with mortgage interest rates rising above those experienced in 2003. As a result, refinance activity declined dramatically in 2004, which caused a large part of the decrease in earnings from RML.

The Company’s share of the loss from Elliott Cove was $58,000 for the second quarter of 2004. These losses reflect the start-up costs for Elliott Cove, which began active operations in the fourth quarter of 2002. The Company expects these losses to continue for several years while Elliott Cove builds its assets under management. In July 2003, the Company made a commitment to loan $625,000 to Elliott Cove. The loan was converted to equity in Elliott Cove in the quarter ending June 2004. During the first and second quarters of 2004, additional investments were made in Elliott Cove by other investors. As a result of these additional investments and the Company’s conversion of its $625,000 loan to equity, the Company’s ownership interest in Elliott Cove increased from 43% to 49% between the second quarter of 2003 and the second quarter of 2004. In addition to the increased investment in Elliott Cove, in February of this year, the Company made a commitment to loan Elliott Cove $500,000 in the form of a one-year revolving line of credit. The balance outstanding on this commitment at June 30, 2004, was $225,000.

EXPENSES

Provision for Loan Losses

The provision for loan losses for the second quarter of 2004 was $429,000, as compared to a provision for loan losses of $936,000 for the second quarter of 2003. Between December 31, 2003, and June 30, 2004, the Company decreased its nonperforming loans from $10.3 million to $9 million. As a result of this reduction in its nonperforming loans, the Company decreased its provision for loan losses and increased the ratio of its allowance for loan losses to nonperforming loans from 106% at June 30, 2003, to 115% at June 30, 2004. The allowance for loan losses was $10.3 million, or 1.67% of total portfolio loans outstanding, which excludes real estate loans for sale, at June 30, 2004, compared to $9.4 million, or 1.70%, of total portfolio loans, at June 30, 2003.

Charge-offs

There were $365,000 in net loan charge-offs during the second quarter of 2004, compared to $380,000 of net charge-offs for the same period in 2003. For the first six months of 2004, net loan charge-offs were $751,000, or 0.25% of average loans annualized, compared to net loan charge-offs of $457,000 for the same period in 2003.

Other Operating Expense

The following table breaks out the components of and changes in Other Operating Expense between the second quarters and six-month periods ending June 30, 2004 and 2003:

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	Second Quarter										Six Months Ended
	2004		2003		$ Chg			% Chg			2004		2003		$ Chg			% Chg
	(Dollars in thousands)										(Dollars in thousands)
Salaries & benefits	$	4,031	$	3,426	$	605			18	%	$	7,871	$	6,743	$	1,128			17	%
Occupancy		495		488		7			1	%		1,023		977		46			5	%
Equipment		327		369		(42	)		-11	%		691		748		(57	)		-8	%
Marketing		338		312		26			8	%		627		629		(2	)		0	%
Professional and outside services		226		302		(76	)		-25	%		459		570		(111	)		-19	%
Software amortization and maintenance		281		238		43			18	%		536		473		63			13	%
Intangible asset amortization-core deposit		92		92		—			0	%		184		184		—			0	%
Other expense		717		959		(242	)		-25	%		1,749		2,041		(292	)		-14	%
Total	$	6,507	$	6,186	$	321			5	%	$	13,140	$	12,365	$	775			6	%

Total other operating expense for the second quarter of 2004 was $6.5 million, an increase of $321,000 from the same period in 2003.

There were a number of major reasons for the changes within this category of expenses. First, salaries and benefits increased by $605,000, or 18%, due in large part to an increase in competition for key staff. Second, software amortization and maintenance expense increased by $43,000, or 18%, due to higher costs associated with larger investments in software. Third, professional and outside services decreased by $76,000, or 25%, as the company incurred lower legal costs. Finally, other expenses decreased by $242,000, or 25%, due to a variety of expense items declining during this period.

Income Taxes

The provision for income taxes decreased by $153,000, or 9%, to $1.5 million in the second quarter of 2004 compared to $1.7 million in the same period in 2003. The effective tax rates for the second quarter of 2004 and 2003 were 36% and 39%, respectively. The provision for income taxes decreased by $421,000, or 13%, to $2.8 million in the first six months of 2004 compared to $3.3 million in the same period in 2003. The effective tax rates for the first six months of 2004 and 2003 were 36% and 39%, respectively.

FINANCIAL CONDITION

ASSETS

Loans and Lending Activities

General:Our loan products include short- and medium-term commercial loans, commercial credit lines, construction and real estate loans, and consumer loans. We emphasize providing financial services to small-and medium-sized businesses and to individuals. From our inception, we have emphasized commercial, land development and home construction, and commercial real estate lending. These types of lending have provided us with needed market opportunities and higher net interest margins than other types of lending. However, they also involve greater risks, including greater exposure to changes in local economic conditions, than certain other types of lending.

Loans are the highest yielding component of earning assets. Average loans were $69.2 million, or 13%, greater in the second quarter of 2004 than in the same period of 2003. Loans comprised 90% of total average earning assets for the second quarter ending June 30, 2004, compared to 87% of total average earning assets for the second quarter ending June 30, 2003. The yield on loans averaged 7.29% for the quarter ended June 30, 2004, compared to 7.76% during the same period in 2003.

The loan portfolio, excluding real estate loans for sale, grew $66.1 million, or 12% from June 30, 2003, as compared to June 30, 2004. Commercial loans increased $37.6 million, or 19%, commercial real estate loans increased $13.2 million, or 6%, construction loans increased $20.4 million, or 24%, and consumer loans decreased $4.2 million, or 10%, during the second quarter of 2004 as compared to the same period

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in 2003. Funding for the growth in loans during the second quarter of 2004 came from a decrease in investments and an increase in noninterest-bearing and interest-bearing sources of funds and capital.

We began a program in 1998 of purchasing single-family mortgage loans originated from our affiliated mortgage company, RML. These loans, which are committed for sale to mortgage investors, have generally been held by the Company for less than 45 days. At June 30, 2004, these loans totaled zero compared to $39.7 million on June 30, 2003.

Loan Portfolio Composition:Loans, excluding real estate loans for sale, increased to $617.2 million at June 30, 2004, from $599.7 million at December 31, 2003. At June 30, 2004, 43% of the portfolio was scheduled to mature over the next 12 months, and 23% was scheduled to mature between July 1, 2005, and June 30, 2009. Future growth in loans is generally dependent on new loan demand and deposit growth, and is constrained by the Company’s policy of being “well-capitalized.”

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

	June 30, 2004						December 31, 2003						June 30, 2003
	Dollar			Percent			Dollar			Percent			Dollar			Percent
	Amount			of Total			Amount			of Total			Amount			of Total
	(Dollars in thousands)
Commercial	$	239,335			39	%	$	220,774			37	%	$	201,743			34	%
Construction/development		105,200			17	%		102,311			17	%		84,756			14	%
Commercial real estate		237,150			38	%		239,545			40	%		223,966			38	%
Consumer		37,652			6	%		39,796			7	%		41,849			7	%
Other, net of unearned and discount		(2,186	)		0	%		(2,702	)		0	%		(1,216	)		0	%
Sub total		617,151						599,724						551,098
Real estate loans for sale		—			0	%		1,395			0	%		39,703			7	%
Total loans	$	617,151			100	%	$	601,119			100	%	$	590,801			100	%

Nonperforming Loans; Real Estate Owned:Nonperforming assets consist of nonaccrual loans, accruing loans that are 90 days or more past due, restructured loans, and real estate owned. The following table sets forth information with respect to nonperforming assets:

	June 30, 2004			December 31, 2003			June 30, 2003
	(Dollars in thousands)
Nonaccrual loans	$	5,988		$	7,426		$	4,314
Accruing loans past due 90 days or more		2,541			2,283			3,952
Restructured loans		453			597			552
Total nonperforming loans		8,982			10,306			8,818
Real estate owned		—			—			99
Total nonperforming assets	$	8,982		$	10,306		$	8,917
Allowance for loan losses	$	10,293		$	10,186		$	9,384
Nonperforming loans to portfolio loans		1.46	%		1.72	%		1.60	%
Nonperforming assets to total assets		1.21	%		1.40	%		1.25	%
Allowance to portfolio loans		1.67	%		1.70	%		1.70	%
Allowance to nonperforming loans		115	%		99	%		106	%

Nonaccrual, Accruing Loans 90 Days or More Past Due and Restructured Loans:The Company’s financial statements are prepared based on the accrual basis of accounting, including recognition of interest income on the Company’s loan portfolio, unless a loan is placed on a nonaccrual basis. For financial reporting purposes, amounts received on nonaccrual loans generally will be applied first to principal and then to interest only after all principal has been collected.

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Restructured loans are those 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 restructured loans 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.

Total nonperforming loans at June 30, 2004, were $9 million, or 1.5% of total portfolio loans, a decrease of $1.3 million from $10.3 million at December 31, 2003, and an increase of $65,000 from $8.9 million at June 30, 2003. The decrease in the non-performing loans in the second quarter of 2004 as compared to December 31, 2003, was due in part to concentrated collection activities by the Company. In addition, the Company continues to write-down assets to their estimated fair market value when they are in a non-performing status.

At June 30, 2004, December 31, 2003, and June 30, 2003, the Company had loans measured for impairment of $10.8 million, $13.2 million, and $13 million, respectively. A specific allowance of $521,000, $580,000, and $1.3 million, was established for these periods. The decrease in loans measured for impairment at June 30, 2004, as compared to June 30, 2003, and December 31, 2003, resulted in large part from the concentrated collection activities of the Company.

Potential Problem Loans:At June 30, 2004 and December 31, 2003, the Company had no potential problem loans, as compared to $2.8 million at June 30, 2003. Potential problem loans are loans which are currently performing and are not included in nonaccrual, accruing loans 90 days or more past due, or restructured loans at the end of the applicable period, about which the Company has developed serious doubts as to the borrower’s ability to comply with present repayment terms and which may later be included in nonaccrual, past due, or restructured loans.

Analysis of Allowance for Loan Losses:The Allowance for Loan Losses was $10.3 million, or 1.67% of total portfolio loans outstanding, at June 30, 2004, compared to $9.4 million, or 1.70%, of total portfolio loans at June 30, 2003. The Allowance for Loan Losses represented 115% of non-performing loans at June 30, 2004, as compared to 106% of non-performing loans at June 30, 2003. Management believes that at June 30, 2004, the Allowance for Loan Losses was adequate to cover losses that are reasonably likely in light of our current loan portfolio and existing and expected economic conditions. Management anticipates additional provisions to the Allowance for Loan Losses in future periods due to expected growth in the loan portfolio and a perceived continued softening of the overall state and local economies.

The following table details activity in the Allowance for Loan Losses for the dates indicated:

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	Second Quarter				Six Months
	2004		2003		2004		2003
			(Dollars in thousands)
Balance at beginning of period	$	10,229	$	8,828	$	10,186	$	8,476
Charge-offs:
Commercial		415		399		824		592
Construction/development		0		67		0		67
Consumer		26		41		48		43
Total charge-offs		441		507		872		702
Recoveries:
Commercial		31		89		67		189
Construction/development		10		0		10		0
Commercial real estate		0		13		0		26
Consumer		35		25		44		30
Total recoveries		76		127		121		245
Provision for loan losses		429		936		858		1,365
Balance at end of period	$	10,293	$	9,384	$	10,293	$	9,384

Investment Securities

Investment securities, which include Federal Home Loan Bank stock, totaled $61 million at June 30, 2004, a decrease of $12.2 million, or 17%, from $73.2 million at December 31, 2003, and a decrease of $10.3 million, or 14%, from $71.3 million at June 30, 2003. Investment securities designated as available for sale comprised 96% of the investment portfolio at June 30, 2004, 97% at December 31, 2003, and 96% at June 30, 2003, and are available to meet liquidity requirements. Both available for sale and held to maturity securities may be pledged as collateral to secure public deposits. At June 30, 2004, $16 million in securities, or 26%, of the investment portfolio was pledged, as compared to $16.8 million, or 23%, at December 31, 2003, and $51.6 million, or 72%, at June 30, 2003.

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LIABILITIES

Deposits

General:Deposits are the Company’s primary source of new funds. Total deposits decreased $3.7 million to $642.5 million at June 30, 2004, down from $646.2 million at December 31, 2003, but increased $14.6 million from $627.9 million at June 30, 2003. The Company’s deposits generally are expected to fluctuate according to the level of the Company’s market share, economic conditions, and normal seasonal trends.

Certificates of Deposit:The only deposit category with stated maturity dates is certificates of deposit. At June 30, 2004, the Company had $150.8 million in certificates of deposit, of which $120.1 million, or 80%, are scheduled to mature over the next 12 months compared to $126.1 million, or 77%, at December 31, 2003, and to $127.5 million, or 76%, one year ago.

The following table sets forth the scheduled maturities of the Company’s certificates of deposit for the dates indicated:

	June 30, 2004					December 31, 2003					June 30, 2003
	Dollar		Percent			Dollar		Percent			Dollar		Percent
	Amount		of Total			Amount		of Total			Amount		of Total
						(Dollars in thousands)
Remaining maturity:
Three months or less	$	45,211		30	%	$	61,505		38	%	$	21,081		13	%
Over three through six months		36,416		24	%		23,097		14	%		68,087		41	%
Over six through twelve months		38,477		26	%		41,505		25	%		38,365		23	%
Over twelve months		30,680		20	%		36,920		23	%		40,574		24	%
Total	$	150,784		100	%	$	163,027		100	%	$	168,107		100	%

Alaska Permanent Fund Deposits: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 deposit. At June 30, 2004, the Company held $40 million in certificates of deposit for the Alaska Permanent Fund, collateralized by a letter of credit issued by the Federal Home Loan Bank (“FHLB”).

Borrowings

Federal Home Loan Bank:At June 30, 2004, the Company’s maximum borrowing line from the FHLB was $75.1 million, approximately 10% of the Company’s assets. At June 30, 2004, there was $3.2 million outstanding on the line and an additional $40 million committed to secure public deposits, compared to an outstanding balance of $3.4 million and additional commitments of $40.7 million at December 31, 2003. Additional advances are dependent on availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Company’s assets.

In addition to the borrowings from the FHLB, the Company had $2.1 million in other borrowings outstanding at June 30, 2004, as compared to $1.7 million in other borrowings outstanding at December 31, 2003, in each time period the other borrowings were split between security repurchase arrangements and short-term borrowings from the Federal Reserve Bank for payroll tax deposits.

Other Short-term Borrowing:At June 30, 2004, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

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CAPITAL

Shareholders’ Equity

Shareholders’ equity was $78.2 million at June 30, 2004, compared to $75.3 million at December 31, 2003, an increase of 4%. The Company earned net income of $5.1 million during the six-month period ending June 30, 2004. However, the Company’s equity was decreased by dividends paid and declared that totaled $1.7 million.

Capital Requirements and Ratios

The Company is subject to minimum capital requirements. Federal banking agencies have adopted regulations establishing minimum requirements for the capital adequacy of banks and bank holding companies. The requirements address both risk-based capital and leverage capital. As of June 30, 2004, the Company and the Bank met all applicable capital adequacy requirements.

The FDIC has in place qualifications for banks to be classified as “well-capitalized.” As of December 15, 2003, the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There were no conditions or events since the FDIC notification that have changed the Bank’s classification.

The following table illustrates the capital requirements for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements. The capital ratios for the Company exceed those for the Bank primarily because the $8 million trust preferred securities offering that the Company completed in the second quarter of 2003 is included in the Company’s capital for regulatory purposes although such securities are accounted for as a long-term debt in its financial statements. The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital. As a result, the Company has $8 million more in regulatory capital than the Bank, which explains most of the difference in the capital ratios for the two entities.

	Adequately-			Well-			Actual Ratio			Actual Ratio
	Capitalized			Capitalized			BHC			Bank
Tier 1 risk-based capital		4.00	%		6.00	%		11.85	%		10.31	%
Total risk-based capital		8.00	%		10.00	%		13.10	%		11.56	%
Leverage ratio		4.00	%		5.00	%		10.79	%		9.39	%

Stock Repurchase Plan

In September of 2002, the Board of Directors of the Company approved a plan whereby the Company would periodically repurchase, for cash, up to approximately 5%, or 306,372, of its shares of stock in the open market. The Company purchased 224,800 shares of its stock under this program through June 30, 2004, at a total cost of $3.1 million. The Company intends to continue to repurchase its stock from time to time depending upon market conditions, but it can make no assurances that it will continue this program or that it will repurchase all of the authorized shares.

Trust Preferred Issuance

On May 8, 2003, the Company’s newly formed subsidiary, Northrim Capital Trust I, issued trust preferred securities in the principal amount of $8 million. These securities carry an interest rate of LIBOR plus 3.15% that was initially set at 4.45% and adjusted quarterly. The securities currently have an interest rate of 4.27%, a maturity date of May 15, 2033, and are callable by the Company within the first five years. These securities are treated as Tier 1 capital by the Company’s regulators for capital adequacy calculations.

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CAPITAL EXPENDITURES AND COMMITMENTS

None.

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ITEM THREE

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate, credit, and operations risks are the most significant market risks, which affect the Company’s performance. The Company relies on loan review, prudent loan underwriting standards, and an adequate allowance for credit losses to mitigate credit risk.

The Company utilizes a simulation model to monitor and manage interest rate risk within parameters established by its internal policy. The model projects the impact of a 100 basis point increase and a 100 basis point decrease, from prevailing interest rates, on the balance sheet for a period of 12 months.

The Company is currently liability sensitive, meaning that interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period. Therefore, a significant increase in market rates of interest could adversely impact net interest income. Conversely, a declining interest rate environment may improve net interest income. However, due to the historically low level of interest rates, the Company may be unable to pass additional declines through to its deposit customers, which could have an adverse effect on its net interest income.

Generalized assumptions are made on how investment securities, classes of loans and various deposit products might respond to the interest rate changes. These assumptions are inherently uncertain, and as a result, the model cannot precisely estimate net interest income nor precisely predict the impact of higher or lower interest rates on net interest income. Actual results may differ materially from simulated results due to factors such as timing, magnitude, and frequency of rate changes, customer reaction to rate changes, competitive response, changes in market conditions, the absolute level of interest rates, and management strategies, among other factors.

The results of the simulation model at June 30, 2004, indicate that, if interest rates immediately increased by 100 basis points, the Company would experience a decrease in net interest income of approximately $1.1 million over the next 12 months. Similarly, the simulation model indicates that, if interest rates immediately decreased by 100 basis points, the Company would experience an increase in net interest income of approximately $62,000 over the next 12 months. Due to the fact that interest rates are at historically low levels, the simulation model did not take the 100-point decrease in interest rates into full effect. As a result, this decrease in interest rates in the simulation model had only a modest positive effect on net interest income because interest-bearing liabilities did not bear the full effect of the interest rate decline, which resulted in a larger interest expense in this situation.

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ITEM FOUR

CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Our principal executive and financial officers supervised and participated in this evaluation. Based on this evaluation, our principal executive and financial officers each concluded that the disclosure controls and procedures are effective in timely alerting them to material information required to be included in the periodic reports to the Securities and Exchange Commission. The design of any system of controls is based in part upon various assumptions about the likelihood of future events, and there can be no assurance that any of our plans, products, services or procedures will succeed in achieving their intended goals under future conditions. In addition, there have been no significant changes in our internal controls or in other factors known to management that could significantly affect our internal controls subsequent to our most recent evaluation. We have found no facts that would require us to take any corrective actions with regard to significant deficiencies or material weaknesses.

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PART II – OTHER INFORMATION

ITEM TWO

CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)-(d) Not applicable

(e) There were no stock repurchases by the Company during the second quarter of 2004.

ITEM FOUR

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Northrim BanCorp, Inc. held its Annual Shareholders’ Meeting on May 6, 2004. The matters voted on by shareholders were (1) the election of directors and (2) the proposal to approve the Company’s 2004 Stock Incentive Plan.

1. ELECTION OF DIRECTORS

The following individuals were nominated and elected by the shareholders to serve as directors until the 2005 election of directors or until their successors are elected and have qualified:

Larry S. Cash	R. Marc Langland
Mark G. Copeland	Richard L. Lowell
Frank A. Danner	Irene Sparks Rowan
Ronald A. Davis	John C. Swalling
Anthony Drabek	Joseph E. Usibelli
Christopher N. Knudson

DIRECTOR	FOR		WITHHOLD		VOTES CAST		NONVOTES		TOTAL SHARES
CASH, LARRY S.		5,820,323		16,225		5,836,548		216,121		6,052,669
COPELAND, MARK G.		5,786,065		50,483		5,836,548		216,121		6,052,669
DANNER, FRANK A.		4,610,650		1,225,898		5,836,548		216,121		6,052,669
DAVIS, RONALD A.		5,818,279		18,269		5,836,548		216,121		6,052,669
DRABEK, ANTHONY		5,785,488		51,060		5,836,548		216,121		6,052,669
KNUDSON, CHRISTOPHER N.		4,607,551		1,228,997		5,836,548		216,121		6,052,669
LANGLAND, R. MARC		4,607,848		1,228,700		5,836,548		216,121		6,052,669
LOWELL, RICHARD L.		5,785,183		51,365		5,836,548		216,121		6,052,669
ROWAN, IRENE SPARKS		5,813,985		22,563		5,836,548		216,121		6,052,669
SWALLING, JOHN C.		5,820,455		16,093		5,836,548		216,121		6,052,669
USIBELLI, JOSEPH E.		5,809,190		27,358		5,836,548		216,121		6,052,669

2. THE NORTHRIM BANCORP, INC. 2004 STOCK INCENTIVE PLAN

The Board of Directors believes that a stock incentive plan for key employees is desirable to attract and retain the best-qualified people available to assist in the ongoing management of the Company.

Accordingly, the Northrim BanCorp, Inc. 2004 Stock Incentive Plan (the “Plan”) was adopted by the Compensation Committee on February 12, 2004, and as further recommended by the Committee, approved by the unanimous written consent of the Board of Directors of Northrim BanCorp, Inc., subject to shareholder approval.

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The Plan was approved by the shareholders on May 6, 2004. A copy of the Plan was attached to the Company’s Annual Report on Form 10-K as “Exhibit 10.10” filed with the Securities and Exchange Commission on March 15, 2004.

FOR	AGAINST		ABSTAIN		VOTES CAST		NON VOTES		TOTAL SHARES
3,963,022		394,285		64,987		4,422,294		1,630,375		6,052,669

ITEM FIVE

OTHER INFORMATION

(a)	Not applicable
(b)	There have been no material changes in the procedures for shareholders to nominate directors to the Company’s board.

ITEM SIX

EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1	Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On April 15, 2004, the Company filed an 8-K dated April 14, 2004, enclosing a press release announcing its earnings for the first quarter ended March 31, 2004.

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SIGNATURES

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

NORTHRIM BANCORP, INC.
August 5, 2004	By /s/ R. Marc Langland
	R. Marc Langland
	Chairman, President, and CEO   (Principal Executive Officer)

August 5, 2004	By /s/ Joseph M. Schierhorn
	Joseph M. Schierhorn
	Senior Vice President, Chief Financial Officer   (Principal Financial and Accounting Officer)

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