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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission File Number 0-33501

Northrim BanCorp, Inc.

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

Registrant’s Telephone Number, Including Area Code: (907) 562-0062

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities and 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 [   ]

Indicate by check mark if the registrant is an accelerated filer within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934, as amended. Yes [X] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. Yes [X] No [   ]

The aggregate market value of common stock held by non-affiliates of registrant at June 30, 2002, was $84,063,248.

The number of shares of registrant’s common stock outstanding at February 20, 2003, was 6,077,946.

Documents incorporated by reference and parts of Form 10-K into which incorporated: The portions of the Proxy Statement for Northrim BanCorp’s Annual Shareholders’ Meeting to be held on May 1, 2003, referenced in Part III of this Form 10-K are incorporated by reference therein.

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Northrim BanCorp, Inc.
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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.

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Northrim BanCorp, Inc.

About the Company

Overview

     Northrim BanCorp, Inc. (the “Company”) is a publicly traded bank holding company with two wholly-owned subsidiaries, Northrim Bank (the “Bank”), a state chartered, full-service commercial bank, and Northrim Investment Services Company (“NISC”). NISC was formed in November 2002 and holds the Company’s 42% equity interest in Elliott Cove Capital LLC, dba Elliott Cove Capital Management (“Elliot Cove”), a new entity that provides investment advisory services. We also hold a 50% equity interest and a 30% interest in the profits and losses of a residential mortgage company, Residential Mortgage LLC (“RML”), through Northrim Bank’s wholly-owned subsidiary, Northrim Capital Investment Corporation (“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 website, www.northrim.com. Our reports can also be obtained through the SEC’s EDGAR database at www.sec.gov.

     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 grew substantially in 1999, when we completed a public stock offering, in which we raised $18.5 million and acquired eight branches from Bank of America. The Bank of America branch acquisition was completed in June 1999 and increased our outstanding loans by $114 million, our deposits by $124 million, and provided us fixed assets valued at $2 million, for a purchase price of $5.9 million, largely derived from the proceeds of the stock offering.

     In January 2002, we moved from a supermarket branch into a full-service branch to provide a higher level of service to the growing Eagle River market. In December 2002, we completed construction of our Wasilla Financial Center and moved from our existing supermarket branch and loan production office. We moved from our supermarket branch in west Anchorage into a freestanding facility in February 2003. In addition, we plan to explore other branching opportunities in our major markets in the future.

     We have grown to be the third largest commercial bank in Anchorage and Alaska in terms of deposits, with $626.4 million in total deposits and $704.2 million in total assets at December 31, 2002. Through our 10 branches, we are accessible by approximately 75% of the Alaska population.

	•		Anchorage: We have two major financial centers in Anchorage, three smaller branches and two supermarket branches.
	•		Fairbanks: We opened our financial center in Fairbanks, Alaska’s second largest city, in mid-1996. This branch has given us a strong foothold in Interior Alaska, and management believes that there is significant potential to increase our share of that market. We are currently analyzing additional market opportunities in this area.
	•		Eagle River: We also serve Eagle River, an upscale community outside of Anchorage. In January of 2002, we moved from a supermarket branch into a full-service branch to provide a higher level of service to this growing market.

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•

Wasilla: Wasilla is a rapidly growing market in the Matanuska Valley outside of Anchorage where we completed construction of a new financial center in December of 2002 and moved from our supermarket branch and loan production office into this new facility.

New Core Software System

     In 2000, we selected a new software system to process our loan, deposit and general ledger accounts. We converted to the new system in the second quarter of 2001. This system, which utilizes an Oracle database and real-time customer transaction posting, initiates the process of modernizing our backroom processing. In 2002, we took additional steps by adding an item imaging system and upgrading our Internet banking capabilities. As a result, we moved item processing back in-house as it had been out-sourced due to the rapid expansion that followed the Bank of America branch purchase. We also revamped our customers’ statements and began providing statements with imaged items in January 2003. In 2003, we plan to add document imaging to this system to allow us to electronically store our records and documents. These initiatives are being pursued to improve service levels to customers and achieve operational efficiencies.

Business Strategies

     In addition to our acquisition strategy, we are pursuing a strategy of aggressive internal growth. Our success will depend on our ability to manage our credit risks and control our costs while providing competitive products and services. To achieve our objectives, we are pursuing the following business strategies:

	•		Providing Customer First Service: We provide a high level of customer service. Our guiding principle is to serve our market areas by operating with a “Customer First Service” philosophy, affording our customers the highest priority in all aspects of our operations. To achieve this objective, our management emphasizes the hiring and retention of competent and highly motivated employees at all levels of the organization. Management believes that a well-trained and highly motivated core of employees allows maximum personal contact with customers in order to understand and fulfill customer needs and preferences. This “Customer First Service” philosophy is combined with our emphasis on personalized, local decision making.
	•		Emphasizing Business and Professional Lending: We endeavor to provide commercial lending products and services and to emphasize relationship banking with businesses and professional individuals. Management believes that our 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: We are a major land development and residential construction lender and an active lender in the commercial real estate market. Management believes that our willingness to provide these services in a professional and responsive manner has contributed significantly to our growth. Because of our relatively small size, our experienced senior management can be more involved with serving customers and making credit decisions, allowing us to compete more favorably for lending relationships.
	•		Pursuing Strategic Opportunities for Additional Growth: Management believes that the Bank of America branch acquisition significantly strengthened our local market position and enabled us to further capitalize on expansion opportunities resulting from the demand for a locally based banking institution providing a high level of service. Not only did the acquisition increase our size, number of branch offices and lending capacity, but it also expanded our consumer lending, further diversifying our loan portfolio. We expect to continue seeking similar opportunities to further our growth while maintaining a high level of credit quality. We plan to affect our 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.

     In the fourth quarter of 2002, we made an initial investment of $375,000 in Elliott Cove through our wholly-owned subsidiary, NISC. We plan to offer Elliott Cove investment products to our customers beginning in the first quarter of 2003, and we hope to use the Elliott Cove products to diversify our product offerings in an effort to strengthen our existing customer relationships and bring new customers into the Bank. We expect to incur losses on the Elliott Cove investment for several years as the company works to build assets under management.

Services

     We provide a wide range of banking services in South Central and Interior Alaska to businesses, professionals, and individuals with high service expectations.

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Deposit Services: Our deposit services include non-interest-bearing checking accounts and interest-bearing time deposits, checking accounts, and savings accounts. Our interest-bearing accounts generally earn interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits. Our money market deposit account pays interest based on the 90-day U.S. Treasury rate.

Several of our innovative deposit services and products are:

	•		An indexed money market deposit account;
	•		A “Jump-Up” certificate of deposit (“CD”) that allows additional deposits with the opportunity to increase the rate to the current market rate for a similar term CD;
	•		An indexed CD that allows additional deposits, quarterly withdrawals without penalty, and tailored maturity dates; and
	•		Arrangements to courier cash and non-cash deposits from our customers to their branch.

Lending Services: We are an active lender with an emphasis on commercial and real estate lending. We also have a significant niche in construction and land development lending in Anchorage, Fairbanks and the Matanuska Valley (near Anchorage). To a lesser extent, we provide consumer loans. See “ – Lending Activities.”

Other Customer Services: In addition to our deposit and lending services, we offer our customers several 24-hour services: Telebanking, faxed account statements, Internet banking for individuals and businesses, and automated teller services. Other special services include personalized checks at account opening, overdraft protection from a savings account, extended banking hours (Monday through Friday, 9:00 a.m. to 6:00 p.m. for the lobby and 8:00 a.m. to 7:00 p.m. for the drive-up, and Saturday 10:00 a.m. to 3:00 p.m.), commercial drive-up banking with coin service, automatic transfers and payments, wire transfers, direct payroll deposit, electronic tax payments, Automated Clearing House origination and receipt, “Express Service” for opening accounts by mail, three cash management programs to meet the specialized needs of business customers and courier agents who pick up both cash and non-cash deposits from business customers.

Directors and Executive Officers: The following table presents the names and occupations of our directors and executive officers.

*Indicates individual serving as both director and executive officer.

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Selected Financial Data

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Management’s Discussion and Analysis of Financial Condition and Results of Operation

Overview

     We are a publicly traded bank holding company with two wholly-owned subsidiaries, the Bank, a state chartered, full-service commercial bank and NISC, a company formed to invest in Elliott Cove, an investment advisory services company. We are headquartered in Anchorage and have 10 branch locations, seven in Anchorage, and one in each Fairbanks, Eagle River and Wasilla. We offer a wide array of commercial bank loan and deposit products, including electronic banking services over the Internet.

     We opened the Bank for business in Anchorage in 1990. The Bank became the wholly-owned subsidiary of the Company effective December 31, 2001, when we completed our bank holding company reorganization. We opened our first branch in Fairbanks in 1996, and our second location in Anchorage in 1997. During the second quarter of 1999, we purchased eight branches located in Anchorage, Eagle River and Wasilla from Bank of America. This acquisition resulted in us acquiring $114 million in loans, $124 million in deposits and $2 million in fixed assets for a purchase price of $5.9 million.

     One of our major objectives is to increase our market share in Anchorage and Fairbanks, Alaska’s two largest urban areas. We estimate that we hold a 21% share of the commercial bank deposit market in Anchorage and an 8% share of the Fairbanks market as of June 30, 2002.

     Our growth and operations depend upon the economic conditions of Alaska and the specific markets it serves. The economy of Alaska is dependent upon the natural resources industries, in particular oil production, as well as tourism, government, and U.S. military spending. Approximately 40% of the Alaska economy is generated from the oil industry and about 75% of the Alaska state government is funded through various taxes and royalties on the oil industry. Any significant changes in the Alaska economy and the markets we serve eventually could have a positive or negative impact on the Company.

     During the second quarter of 1999, we sold 1,842,900 shares of our common stock in an underwritten common stock offering that generated $18.5 million in net proceeds. We used the proceeds to purchase the Bank of America branches and to provide capital for additional growth.

     At December 31, 2002, we had assets of $704.2 million and gross loans of $535 million, an increase of 13% and 11%, respectively, over the previous year. Our net income and diluted earnings per share for 2002 were $8.5 million and $1.35, respectively; an increase of 20% and 19%, respectively, from 2001.

Results of Operations

Net Income

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     We earned net income of $8.5 million in 2002, compared to net income of $7.1 million in 2001 and $5.8 million in 2000. Net income per diluted share was $1.35, $1.13, and $0.95, respectively.

Net Interest Income

     Our results of operations are dependent to a large degree on our net interest income. We also generate other income, primarily through service charges and fees, earnings from our mortgage affiliate, and other sources. Our operating expenses consist primarily of compensation, employee benefits expense and occupancy expense. Interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and the actions of regulatory authorities.

     Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Net interest income in 2002 was $34.7 million compared to $31.3 million in 2001 and $28.3 million in 2000, reflecting an increase in our interest-earning assets. Average interest-earning assets increased $61.4 million, or 11%, in 2002 compared to an increase in average interest-bearing liabilities in 2002 of $32.9 million, or 8%. Average interest-earning assets increased $46.4 million, or 9%, in 2001 compared to an increase in average interest-bearing liabilities in 2001 of $31.3 million, or 8%.

     Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Changes in net interest income are influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. During the fiscal years ended December 31, 2002, 2001 and 2000, average interest-earning assets were $599.7 million, $538.3 million and $491.9 million, respectively. During these same periods, net interest margins were 5.78%, 5.82% and 5.75%, respectively, which reflect our balance sheet mix and premium pricing on loans compared to other community banks and an emphasis on construction lending, which has a higher fee base. Our average yield on earning assets was 7.48% in 2002, 8.93% in 2001, and 9.74% in 2000, while the average cost of interest-bearing liabilities was 2.30% in 2002, 4.10% in 2001, and 5.20% in 2000.

     Our net interest margin decreased in 2002 from 2001 as interest rates declined to historically low levels. Approximately one-third of our earnings assets were funded by non-interest-bearing liabilities and equity that were not affected by the change in interest rates. As a result, the lower interest rates had more of an effect on the yield of our assets than the total cost of our liabilities. Consequently, the net interest margin decreased four basis points from 2001 to 2002.

     The following table sets forth for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities. Resultant yields or costs, net interest income and net interest margin are also presented.

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(1)		Interest income included loan fees.
(2)		Nonaccrual loans are included with a zero effective yield.
(3)		The net interest margin on a tax equivalent basis was 5.82%, 5.88%, 5.82%, 6.10%, 6.20%, and 6.24%, respectively, for 2002, 2001, 2000, 1999, and 1998.

     The following table sets forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates. Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rate.

Other Operating Income

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     Total other income increased $433,000, or 9%, in 2002, after increasing $1.3 million, or 39%, in 2001, and $939,000, or 38%, in 2000. The following table separates the more routine (recurring) sources of other income from those that can fluctuate significantly from period to period:

     The recurring sources of operating income in 2002 increased $405,000, or 9%, in 2001, increased $1.3 million, or 39%, and in 2000, increased $909,000, or 37%. Several components of non-interest income increased slightly in 2002 including deposit service charges, merchant credit card fees, and electronic banking fees. Loan service fees declined because the Bank purchased fewer loans for resale from it’s affiliated company RML, which in turn occurred because RML secured lower cost sources of funding. In addition, other transaction fees declined by $41,000 from $324,000 to $283,000 between 2001 and 2002 because we recorded less income from other fees associated with loan transactions. Finally, we recorded a $239,000 loss from NISC as it incurred its share of the start-up losses from its investment in Elliott Cove.

     Included in recurring sources of other operating income in 2002, 2001 and 2000 are $1.9 million, $1.2 million and $98,000, respectively, of income from NCIC, reflecting earnings from RML. Earnings from RML have fluctuated with activity in the housing market which has been affected by local economic conditions and changes in mortgage interest rates. In 2002 and 2001, declining mortgage interest rates generated a major increase in the demand for mortgage loans by consumers both for the refinance of existing loans and the purchase of new homes.

     The other sources of other operating income in 2002 increased $28,000, or 33%, in 2001 increased $18,000, or 27%, and in 2000 increased $30,000, or 81%. We recorded a gain of $56,000 on the sale of SBA loans in 2000. Security gains of $113,000 were recorded in 2002, $47,000 were recorded in 2001, compared to security losses of $3,000 recorded in 2000. We also recorded a gain on the sale of other real estate owned of $38,000 in 2001, and $14,000 in 2000.

Expenses

Provision for Loan Losses: The provision for loan losses in 2002 was $3.1 million, compared to $2.3 million in 2001 and $1.3 million in 2000. We increased the provision in 2002, 2001 and 2000 because of loan growth, loss inherent in the portfolio, and increase in charge-offs. The allowance for loan losses was $8.5 million, or 1.58% of total loans, at December 31, 2002, $7.2 million, or 1.49% of total loans, at December 31, 2001, and $6.2 million, or 1.50% of total loans, at December 31, 2000.

Charge-Offs: Net loan charge-offs were $1.8 million, or 0.36% of average loans, in 2002, $1.3 million, or 0.29% of average loans, in 2001, and $1.2 million, or 0.28% of average loans, in 2000.

Other Operating Expense: Other operating expense increased $492,000, or 2%, in 2002, $1.3 million, or 6%, in 2001 and $2.9 million, or 16%, in 2000. The following table breaks out the other operating expense categories.

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     Salaries and other personnel expense, occupancy expense and equipment costs, in the aggregate, increased $862,000, or 6%, in 2002, $1.1 million, or 8%, in 2001, and $1.7 million, or 13%, in 2000, reflecting increases to service our overall growth and growth due to the loans and deposits acquired from the eight Bank of America branches. In addition, the costs of amortizing the intangible asset, created as a result of the branch purchase, did not commence until mid-1999. Intangible amortization expense was $368,000 in 2002, $832,000 in 2001 and 2000, and $460,000 in 1999. In 2002, amortization expense decreased by $464,000 because of the effect of a change in the accounting treatment of goodwill and intangible assets. As a result of the requirements of SFAS No. 142, we will no longer amortize goodwill. However, the Company will continue to amortize the core deposit intangible.

     Legal costs decreased $105,000, or 35%, in 2002, increased $118,000 or 64%, in 2001, and increased $71,000, or 63%, in 2000. The increases in 2001 and 2000 were associated in part with litigation issues that were settled favorably for the Company and in part because of legal fees and expenses incurred in connection with our holding company reorganization, which we completed on December 31, 2001.

     Loan collection and ORE costs increased $19,000, or 39%, in 2002, decreased $75,000, or 60%, in 2001, and decreased $3,000, or 2%, in 2000. These costs represent the out-of-pocket expense we incurred to liquidate problem assets and manage repossessed property resulting from the collection process. In 2002 and 2001, these costs declined compared to 2000 because we were able to resolve problem loans without the assistance of outside legal counsel in many instances. In addition, we did not hold any ORE during these years, which also helped reduce expenses in this area. In 1999, we were successful in recovering various collection expenses that were recorded in 1998.

Income Taxes: The provision for income taxes increased $1 million, or 25%, to $5.2 million in 2002, increased $854,000, or 26%, to $4.1 million in 2001 compared to $3.3 million in 2000. The effective tax rate for 2002 was 38%, compared to 37% in 2001 and 36% in 2000. The increase in the effective tax rate is due to the Company’s taxable income in excess of $10 million being taxed at a higher rate and the proportion of tax exempt income to total income declined as the Company grew.

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, consumer loans, and credit cards. 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

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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 $52.4 million, or 12%, greater in 2002 than in 2001. Average loans were $39 million, or 9%, greater in 2001 than in 2000. Loans comprised 84% of total earning assets at the end of 2002, 2001 and 2000. The yield on loans averaged 8.07% in 2002, 9.57% in 2001, and 10.39% in 2000.

     Growth in the loan portfolio during 2002 was $52.4 million, or 11%. Commercial loans increased $20.5 million, or 12%, commercial real estate loans increased $35.2 million, or 20%, and construction loans increased $13.8 million, or 20%, in 2002. Real estate loans for sale decreased $12.1 million, or 62%, and consumer loans decreased $4.8 million, or 9%. Funding for the growth in loans in 2002 came from an increase in interest-bearing liabilities and from non-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 December 31, 2002, these loans totaled $7.4 million compared to $19.5 million on December 31, 2001.

Nonperforming Loans; Real Estate Owned: Nonperforming loans (nonaccrual loans, accruing loans delinquent 90 days or more, and restructured loans) were $5.7 million, or 1.07% of total loans, at December 31, 2002, $3.6 million, or 0.74% of total loans, at December 31, 2001, and $3.6 million, or 0.86% of total loans, at December 31, 2000. Loans are placed on a nonaccrual basis when management believes serious doubt exists about the collectability of principal or interest. Our policy generally is to discontinue the accrual of interest on all loans 90 days or more past due and place them on nonaccrual status. Cash payments on nonaccrual loans are directly applied to the principal balance. The amount of unrecognized interest on nonaccrual loans was $480,000, $270,000, and $219,000, in 2002, 2001 and 2000, respectively.

     We did not have any real estate owned at December 31, 2002.

     The following table sets forth information regarding our nonperforming loans and total nonperforming assets:

Potential Problem Loans: At December 31, 2002, management had identified potential problem loans of $2.9 million that were not previously classified. 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 that have developed serious doubts as to the borrower’s ability to comply with present payment 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 is maintained at a level considered adequate by management to provide for inherent loan losses based on management’s assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions, estimated collateral values, loss experience, credit concentrations and an overall evaluation of the quality of the underlying collateral, and holding and disposal costs. The allowance is increased by provisions charged to operations

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and reduced by loans charged off, net of recoveries. Management believes that at December 31, 2002, the allowance is adequate to cover losses that are reasonably likely in light of our current loan portfolio and existing and expected economic conditions.

     While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions and other events could result in adjustment to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination.

     The following table shows the allocation of the allowance for loan losses at December 31, 2002, 2001, 2000, 1999, and 1998: