UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2004

Commission File Number 000-33501

NORTHRIM BANCORP, INC.

(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 o

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 o

The number of shares of the issuer’s Common Stock outstanding at April 30, 2004 was
6,073,527.

NORTHRIM BANCORP, INC.
TABLE OF CONTENTS

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NORTHRIM BANCORP, INC.

NORTHRIM BANCORP, INC.

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.

See notes to the consolidated financial statements

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NORTHRIM BANCORP, INC.

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 March 31, 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 March 31, 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 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:

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

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:

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At March 31, 2004, December 31, 2003, and March 31, 2003, the Company had loans measured for impairment of $11.7 million, $13.2 million, and $6.9 million, respectively. A specific allowance of $454,000, $580,000, and $860,000, respectively, was established for these periods. The increase in loans measured for impairment at March 31, 2004, as compared to March 31, 2003, resulted in large part from three loans being added to loans measured for impairment. These loans comprised 63% of the loans measured for impairment at March 31, 2004.

5. 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 March 31, 2004, the Company held $40 million in certificates of deposit for the Alaska Permanent Fund, collateralized by available-for-sale securities and letters of credit issued by the Federal Home Loan Bank (“FHLB”).

6. 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 first quarter ending March 31, 2004 and 2003:

The per share weighted-average fair value of stock options granted during April 2003, October 2001, and October 2000, was $5.51, $3.20, and $3.76, 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 three-month periods ending March 31, 2003, and March 31, 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 25% 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 Investment Company (“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, the 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.

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 2 million barrels per day in 1989 to a current level of approximately 1 million barrels per day. As production has declined over time so to have revenues to the state of Alaska. As a result, Alaska has had to draw from its savings accounts to balance its state budget. The main account for these 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 $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.

FIRST QUARTER RESULTS SUMMARY

At March 31, 2004, the Company had assets of $740.8 million and gross loans of $610.5 million, respectively, an increase of 10% and 15%, respectively, over the previous year. The Company’s net income and diluted earnings per share at March 31, 2004 were $2.4 million and $0.38, respectively; a decrease of 7% as compared to the same period in 2003. During the same time, the Company’s net interest income increased $339,000, or 4%, its other operating income decreased $327,000, or 28%, and its operating expenses increased $452,000, or 7%. The growth in the Company’s net interest income was more than offset by the growth in its operating expenses. In addition, the decline in the Company’s other operating income contributed to the decline in its net income and diluted earnings per share.

RESULTS OF OPERATIONS

NET INCOME

Net income at March 31, 2004, was $2.4 million, compared to net income of $2.5 million during the same period in 2003. Net income per diluted share was $0.38 for the quarter ending March 31, 2004, versus $0.41 for the same period in 2003.

NET INTEREST INCOME

Net interest income for the first quarter of 2004 increased $339,000, or 4%, to $9.9 million from $9.6 million in 2003. The following table compares average balances and rates for the first quarter ending March 31, 2004 and 2003:

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Interest-earning assets averaged $674.7 million for the first quarter of 2004, an increase of $55 million, or 9%, over the $619.7 million average for the comparable period in 2003. The tax equivalent yield on interest-earning assets averaged 6.80% in 2004, a decrease of 65 basis points from 7.45% for the same period in 2003.

Loans, the largest category of interest-earning assets, increased by $66.9 million, or 13%, to an average of $602 million in the first quarter of 2004 from $535.1 million in the same period of 2003. Commercial loans, real estate term loans and construction loans increased by $37.5 million, $26.3 million, and $15.9 million, respectively, on average between the first quarters. Consumer loans and real estate loans held for resale declined by $7.4 million and $5.1 million, respectively, on average during the same period. The tax equivalent yield on the loan portfolio averaged 7.16% for the first quarter of 2004, a decrease of 83 basis points from 7.99% 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 $479.5 million for the first quarter of 2004, an increase of $29.5 million, or 7%, compared to $450 million for the same period in 2003. The average cost of interest-bearing liabilities decreased 36 basis points to 1.25% for the first quarter of 2004 compared to 1.61% for the first 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 certificate of deposits is less than one year. The cost of these deposits should further decline if market interest rates remain at reduced levels, as deposits originated at higher interest rates during earlier periods mature, and are repriced to the current rates. However, as interest rates approach historically low levels, the Company may not be able to fully reprice these liabilities to maintain its net interest margin. Moreover, interest rates could increase in the future in response to an improvement in the general economy of the United States. An increase in general interest rates 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 5.92% for the first quarter of 2004 and 6.28% 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 pre-

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payment fees of $355,000 in the first 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 83 basis points as noted above. Finally, the lower yield on the Company’s assets was applied to a larger amount of earning assets which increased by $55 million, or 9%, which 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 first quarters ending March 31, 2004 and 2003:

Total other operating income for the first quarter of 2004 was $836,000, a decrease of $327,000 from the first quarter of 2003.

The Company’s share of the earnings from RML decreased by $420,000 to $44,000 during the first quarter of 2004 as compared to $464,000 in the first 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 first 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. If this trend continues, the Company’s share of earnings from RML could continue to decline in 2004.

The Company’s share of the loss from Elliott Cove was $189,000 for the first 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. At March 31, 2004, the balance outstanding on this commitment was $625,000. The loan is convertible to equity in Elliott Cove, and the Company intends to make this conversion in 2004. 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 March 31, 2004, was zero. During the first quarter of this year, additional investments were made in Elliott Cove by other investors, which had the effect of decreasing the Company’s ownership interest from 43% to 25% during this period.

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EXPENSES

Provision for Loan Losses

The provision for loan losses for the first quarter of 2004 and 2003 was $429,000. The allowance for loan losses was $10.2 million, or 1.68% of total portfolio loans outstanding, which excludes real estate loans for sale, at March 31, 2004, compared to $8.8 million, or 1.66%, of total portfolio loans, at March 31, 2003.

Charge-offs

There were $386,000 in net loan charge-offs during the first quarter of 2004, compared to $77,000 of net charge-offs 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 first quarters ending March 31, 2004 and 2003:

Total other operating expense for the first quarter of 2004 was $6.6 million, an increase of $452,000 from the same period in 2003.

There were three major reasons for the changes within this category of expenses. First, salaries and benefits increased by $523,000, or 16%, due to increases in full time equivalent employees as the Company increased staff for the provision of services in its larger branch structure and incurred wage increases over the prior period partially in response to competitive pressures in its lending area. Second, occupancy increased by $38,000 due again to the larger branch structure. Finally, other expenses decreased by $91,000 as a result of lower operational charge-offs and education expenses, which decreased by $63,000 and $117,000, respectively, and were offset by higher loan collection costs, which increased by $77,000.

Income Taxes

The provision for income taxes decreased by $268,000, or 17%, to $1.3 million in the first quarter of 2004 compared to $1.6 million in the same period in 2003. The effective tax rates for the first quarter of 2004 and 2003 were 35% and 38%, respectively. The tax rate in the first quarter of 2004 declined due to the accounting for amended tax returns in previous years, which decreased the Company’s taxes by $104,000.

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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 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 $66.9 million, or 13%, greater in the first quarter of 2004 than in the same period of 2003. Loans comprised 89% of total average earning assets for the first quarter ending March 31, 2004, compared to 86% of total average earning assets for the first quarter ending March 31, 2003. The yield on loans averaged 7.16% for the quarter ended March 31, 2004, compared to 7.99% during the same period in 2003.

The loan portfolio grew $74.7 million, or 14% from March 31, 2003, as compared to March 31, 2004. Commercial loans increased $49.8 million, or 27%, commercial real estate loans increased $20 million, or 9%, construction loans increased $16.3 million, or 20%, real estate loans for sale decreased $4.9 million, or 74%, and consumer loans decreased $7.4 million, or 16%, during the first quarter of 2004 as compared to the same period in 2003. Funding for the growth in loans during the first 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 March 31, 2004, these loans totaled $1.7 million compared to $6.6 million on March 31, 2003.

Loan Portfolio Composition: Loans, excluding real estate loans for sale, increased to $610.5 million at March 31, 2004, from $599.7 million at December 31, 2003. At March 31, 2004, 42% of the portfolio was scheduled to mature over the next 12 months, and 26% was scheduled to mature between April 1, 2005, and March 31, 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:

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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:

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.

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 March 31, 2004, were $10.4 million, or 1.7% of total portfolio loans, an increase of $98,000 from $10.3 million at December 31, 2003, and an increase of $4 million from $6.4 million at March 31, 2003. The increase in nonperforming loans in the first quarter of 2004, as compared to the same period in 2003, resulted in large part from the inclusion of several loans to two existing nonperforming relationships as well as the addition of one new commercial loan to the nonperforming category. These three relationships comprised 63% of the Company’s nonperforming loans at March 31, 2004.

At March 31, 2004, December 31, 2003, and March 31, 2003, the Company had loans measured for impairment of $11.7 million, $13.2 million, and $6.9 million, respectively. A specific allowance of $454,000, $580,000, and $860,000, was established for these periods.

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Potential Problem Loans: At March 31, 2004 and December 31, 2003, the Company had no potential problem loans, as compared to $3.5 million at March 31, 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 $10.2 million, or 1.68% of total portfolio loans outstanding (which excludes $1.7 million of real estate loans for sale), at March 31, 2004, compared to $8.8 million, or 1.66%, of total portfolio loans at March 31, 2003. The Allowance for Loan Losses represented 98% of non-performing loans at March 31, 2004, as compared to 137% of non-performing loans at March 31, 2003. Management believes that at March 31, 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:

Investment Securities

Investment securities, which include Federal Home Loan Bank stock, totaled $66.5 million at March 31, 2004, a decrease of $6.7 million, or 9%, from $73.2 million at December 31, 2003, and a decrease of $3.5 million, or 4%, from $69.7 million at March 31, 2003. Investment securities designated as available for sale comprised 96% of the investment portfolio at March 31, 2004, 97% at December 31, 2003, and 96% at March 31, 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 March 31, 2004, $31.5 million in securities, or 47%, of the investment portfolio was pledged, as compared to $16.8 million, or 23%, at December 31, 2003, and $55.1 million, or 79%, at March 31, 2003.

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LIABILITIES

Deposits

General: Deposits are the Company’s primary source of new funds. Total deposits decreased $1.1 million to $645.1 million at March 31, 2004, down from $646.2 million at December 31, 2003, but increased $47 million from $598 million at March 31, 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 March 31, 2004, the Company had $164.9 million in certificates of deposit, of which $128.5 million, or 78%, are scheduled to mature over the next 12 months compared to $124.5 million, or 76%, at December 31, 2003, and to $135.7 million, or 78%, one year ago.

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

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 March 31, 2004, the Company held $40 million in certificates of deposit for the Alaska Permanent Fund, collateralized by available-for-sale securities and a letter of credit issued by the Federal Home Loan Bank (“FHLB”).

Borrowings

Federal Home Loan Bank: At March 31, 2004, the Company’s maximum borrowing line from the FHLB was $75.1 million, approximately 10% of the Company’s assets. At March 31, 2004, there was $3.3 million outstanding on the line and an additional $35 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.

Other Short-term Borrowing: At March 31, 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 $76.9 million at March 31, 2004, compared to $75.3 million at December 31, 2003, an increase of 2%. The Company earned net income of $2.4 million during the three-month period ending March 31, 2004. However, the Company’s equity was decreased by dividends paid and declared that totaled $574,000.

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 March 31, 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.

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 March 31, 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

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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.

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 March 31, 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 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 a decrease in net interest income of approximately $138,000 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 the effect of decreasing 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 first quarter of 2004.

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 January 21, 2004, the Company filed an 8-K dated January 21, 2004, enclosing a press release announcing its earnings for the fourth quarter ended December 31, 2003.

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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.

May 5, 2004	By		/s/ R. Marc Langland
			R. Marc Langland
			Chairman, President, and CEO (Principal Executive Officer)

May 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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