NRIM

Northrim BanCorp Inc. 2008 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2008. Northrim BanCorp, Inc. is a publicly traded bank holding company headquartered in Anchorage, Alaska, operating primarily through its subsidiary, Northrim Bank. The Company serves Southcentral and Interior Alaska with 11 branches and operates Northrim Funding Services in Washington and Oregon. The Company is regulated by the Federal Reserve Board and the FDIC. As of year-end 2008, the Company held approximately 24% of the commercial bank deposit market in Anchorage.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net income decreased 48% to $6.1 million, and diluted EPS fell 47% to $0.95. This was driven by a decrease in net interest income and a significant increase in the provision for loan losses.
• Net Interest Margin Compression: Net interest margin declined to 5.26% from 5.89% in 2007. The yield on interest-earning assets dropped 179 basis points to 6.81%, while the cost of interest-bearing liabilities decreased 156 basis points to 2.11%.
• Credit Quality Deterioration: Nonperforming loans increased 129% to $26.0 million (3.66% of portfolio loans) from $11.3 million in 2007. Consequently, the provision for loan losses rose 31% to $7.2 million. Other Real Estate Owned (OREO) increased to $12.6 million from $4.4 million.
• Expense Growth: Total other operating expenses increased 15% to $40.4 million. Notable increases included OREO expenses ($2.6 million, including $2.0 million in impairment) and insurance expenses ($1.8 million, up 283% due to FDIC assessment changes and keyman insurance adjustments).
• Balance Sheet: Total assets decreased slightly (less than 1%). Construction loans decreased 27% to $100.4 million due to a slowdown in the residential real estate market.

Guidance, Outlook, and Risks

• Outlook: Management expects construction loan balances to decline in 2009 due to the slow residential real estate market. The Company intends to reduce loans measured for impairment and OREO by 20% by December 31, 2009.
• Dividend Reduction: On February 5, 2009, the Board declared a quarterly dividend of $0.10 per share, a reduction from the previous $0.17 per share, to align with 2008 earnings and the uncertain economic environment.
• Capital Position: The Company and Bank remain "well-capitalized" under regulatory guidelines. Management intends to maintain a Tier 1 risk-based capital ratio for the Bank in excess of 10% in 2009.
• Goodwill Impairment: While no goodwill impairment was recorded in 2008, management noted that further declines in stock price could trigger impairment charges in 2009.
• Risks: Key risks include the concentration of the loan portfolio in Alaska (dependent on oil, tourism, and government spending), the adequacy of the loan loss allowance, and the potential for further deterioration in the FHLB of Seattle's financial position.

Investor Verification Checklist

• Nonperforming Asset Coverage: Verify the adequacy of the allowance for loan losses ($12.9 million) relative to nonperforming loans ($26.0 million), noting the coverage ratio dropped to 50%.
• OREO Resolution: Monitor the Company's ability to execute its plan to reduce OREO and impaired loans by 20% in 2009 and the associated costs to complete projects ($2.2 million estimated).
• Interest Rate Sensitivity: Review the liability-sensitive position (liabilities reprice faster than assets) and the impact of potential interest rate changes on net interest income.
• FHLB Exposure: Assess the risk associated with the Company's investment in Federal Home Loan Bank of Seattle stock and its borrowing capacity given the FHLB's capital deficiency.
• Dividend Sustainability: Evaluate the sustainability of the reduced dividend payout ratio (68.93% in 2008) given the compressed earnings environment.