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		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 in 1999 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.
	•	Developing a Sales Culture:  In 2003, we conducted extensive sales training throughout the company and developed a comprehensive approach to sales. In 2004 and 2005, we continued with this sales training in all of our major customer contact areas. Our goal throughout this process is to increase and broaden the relationships that we have with new and existing customers and to continue to increase our market share within our existing markets.

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Selected Financial Data

			2005		2004		2003		2002		2001
Unaudited
			(In Thousands Except Per Share Data)
Net interest income			$43,908		$41,271		$39,267		$34,670		$31,349
Provision for loan losses			1,170		1,601		3,567		3,095		2,300
Other operating income			4,833		3,792		6,089		5,199		4,766
Other operating expense			29,477		26,535		24,728		23,061		22,569
	Income before income taxes		18,094		16,927		17,061		13,713		11,246
Income taxes			6,924		6,227		6,516		5,171		4,138
Net income			$11,170		$10,700		$10,545		$8,542		$7,108
Earnings per share:
	Basic		$1.87		$1.76		$1.76		$1.40		$1.17
	Diluted		1.81		1.71		1.69		1.35		1.13
Cash dividends per share			0.43		0.38		0.33		0.20		0.20
Assets			$895,022		$800,726		$738,569		$704,249		$620,518
Loans			705,059		678,269		601,119		534,990		482,562
Deposits			779,866		699,061		646,197		626,415		550,607
Long-term debt			2,574		2,974		3,374		3,774		1,500
Junior subordinated debentures			18,000		8,000		8,000		—		—
Shareholders’ equity			84,474		83,358		75,285		68,373		60,791
Book value			$14.56		$13.69		$12.44		$11.22		$9.95
Tangible book value			$13.48		$12.60		$11.29		$10.01		$8.69
Net interest margin (tax equivalent)			5.66%		5.88%		6.04%		5.82%		5.88%
Efficiency ratio (cash) (1)			59.72%		58.07%		53.71%		56.92%		60.19%
Return on assets			1.33%		1.41%		1.50%		1.33%		1.23%
Return on equity			13.17%		13.50%		14.89%		13.32%		12.34%
Equity/assets			9.44%		10.41%		10.19%		9.71%		9.80%
Dividend payout ratio			22.92%		21.57%		19.04%		14.29%		17.09%
Nonperforming loans/portfolio loans			0.86%		0.97%		1.72%		1.09%		0.77%
Net charge-offs/average loans			0.18%		0.16%		0.33%		0.36%		0.29%
Allowance for loan losses/portfolio loans			1.52%		1.59%		1.70%		1.61%		1.55%
Nonperforming assets/assets			0.69%		0.82%		1.40%		0.81%		0.58%
Number of banking offices			10		10		10		10		10
Number of employees (FTE)			272		272		268		246		234

(1)

The efficiency ratio measures the proportion of the Company’s net interest income and non-interest income that is absorbed by its other operating expenses. For the purposes of this calculation, other operating expenses do not include intangible asset amortization expense. In 2005, the efficiency ratio was 59.72%, which was calculated by dividing other operating expense of $29.1 million (exclusive of intangible asset amortization) by $48.7 million, which is the total of net interest income of $43.9 million and other operating income of $4.8 million.

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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 four wholly-owned subsidiaries: the Bank, a state chartered, full-service commercial bank; NISC, a company formed to invest in Elliott Cove, an investment advisory services company; and NCT1 and NST2, entities formed to facilitate two trust preferred securities offerings. The Bank in turn has a wholly-owned subsidiary, NCIC, which has an interest in RML Holding Company, a residential mortgage holding company and NBG, an insurance brokerage company that provides employee benefits plans to businesses throughout Alaska. We are headquartered in Anchorage and have 10 branch locations, seven in Anchorage, and one each in Fairbanks, Eagle River, and Wasilla. The Bank also operates Northrim Funding Services, a division headquartered in Bellevue, Washington with operations in the Washington and Oregon markets. We offer a wide array of commercial and consumer loan and deposit products, investment products, and 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, Fairbanks, and the Matanuska Valley, Alaska’s three largest urban areas. We estimate that we hold a 21% share of the commercial bank deposit market in Anchorage, a 7% share of the Fairbanks market, and an 8% share of the Matanuska Valley market as of June 30, 2005.

         Our growth and operations depend upon the economic conditions of Alaska and the specific markets we serve. 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 85% 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, 2005, we had assets of $895 million and gross loans of $705.1 million, an increase of 12% and 4%, respectively, over the previous year. Our net income and diluted earnings per share for 2005 were $11.2 million and $1.81, respectively; an increase of 4% and 6%, respectively, over 2004. During the same time, our net interest income increased by $2.6 million, or 6%. Our provision for loan losses during that period declined by $431,000, or 27%, as our nonperforming loans declined by $519,000, or 8%. In contrast, our other operating income increased by $1 million, or 27%. The growth in our net interest income combined with the positive effects of the declines in our provision for loan losses and the increases in our other operating income was offset in part by an increase in other operating expenses of $2.9 million, or 11%, which resulted in an increase in our net income and earnings per share.

Results of Operations

Net Income

         We earned net income of $11.2 million in 2005, compared to net income of $10.7 million in 2004, and $10.5 million in 2003. During these periods, net income per diluted share was $1.81, $1.71, and $1.69, 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 purchased receivables products, and other sources. Our operating expenses consist in large part 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 2005 was $43.9 million compared to $41.3 million in 2004, and $39.3 million in 2003, reflecting an increase in our interest-earning assets and the general level of interest rates. Average interest-earning assets increased $74.1 million, or 11%, in 2005 compared to an increase in average

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interest-bearing liabilities in 2005 of $76.1 million, or 15%. Average interest-earning assets increased $51 million, or 8%, in 2004 compared to an increase in average interest-bearing liabilities in 2004 of $23.7 million, or 5%.

         Changes in net interest income result from changes in volume and spread, which in turn affect our 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, 2005, 2004, and 2003, average interest-earning assets were $778.6 million, $704.5 million, and $653.5 million, respectively. During these same periods, net interest margins were 5.64%, 5.86%, and 6.01%, 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 7.55% in 2005, 6.89% in 2004, and 7.03% in 2003, while the average cost of interest-bearing liabilities was 2.61% in 2005, 1.48% in 2004, and 1.42% in 2003.

         Our net interest margin decreased in 2005 from 2004 as the cost of interest-bearing liabilities grew faster than the yield on interest-earning assets. During 2005, the cost of interest-bearing liabilities increased by 113 basis points while the yield on interest-earning assets increased by 66 basis points. In order to counteract the effects of increasing interest rates on our net interest margin, we emphasize the pricing of new loans on a floating rate basis tied primarily to the prime rate of interest, which allows these loans to reprice more frequently and in turn helps to increase our net interest margin.

         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:

Years Ended December 31,					2005						2004						2003
					Average		Interest				Average		Interest				Average		Interest
					outstanding		earned/		Yield/		outstanding		earned/		Yield/		outstanding		earned/		Yield/
					balance		paid (1)		Rate		balance		paid (1)		Rate		balance		paid (1)		Rate
					(In Thousands)
Assets:
	Loans (2)				$698,240		$55,870		8.00%		$628,830		$45,898		7.30%		$569,532		$42,945		7.54%
	Securities				61,125		2,202		3.60%		64,008		2,492		3.89%		69,972		2,867		4.10%
	Overnight investments				19,232		709		3.69%		11,633		164		1.41%		13,987		136		0.97%
			Total interest-earning assets		778,597		58,781		7.55%		704,471		48,554		6.89%		653,491		45,948		7.03%
	Noninterest-earning assets				63,810						54,788						51,194
			Total assets		$842,407						$759,259						$704,685
Liabilities and Shareholders’ Equity:
	Deposits:
		Interest-bearing demand accounts			$65,890		$369		0.56%		$57,373		$221		0.39%		$52,955		$205		0.39%
		Money market accounts			139,331		3,876		2.78%		126,567		1,527		1.21%		134,582		1,293		0.96%
		Savings accounts			207,277		6,263		3.02%		139,876		2,290		1.64%		104,158		1,182		1.13%
		Certificates of deposit			138,284		3,482		2.52%		155,134		2,671		1.72%		164,847		3,523		2.14%
			Total interest-bearing deposits		550,782		13,990		2.54%		478,950		6,709		1.40%		456,542		6,203		1.36%
	Borrowings				18,792		883		4.70%		14,525		574		3.95%		13,235		478		3.61%
			Total interest-bearing liabilities		569,574		14,873		2.61%		493,475		7,283		1.48%		469,777		6,681		1.42%
	Demand deposits and other noninterest-bearing liabilities				188,000						186,506						164,091
			Total liabilities		757,574						679,981						633,868
	Shareholders’ equity				84,833						79,278						70,817
			Total liabilities and shareholders’ equity		$842,407						$759,259						$704,685
Net interest income							$43,908						$41,271						$39,267
Net interest margin (3)									5.64%						5.86%						6.01%

(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 5.66%, 5.88%, 6.04%, 5.82%, and 5.88%, respectively, for 2005, 2004, 2003, 2002, and 2001.

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         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.

					2005 compared to 2004						2004 compared to 2003
					Increase (decrease) due to						Increase (decrease) due to
					Volume		Rate		Total		Volume		Rate		Total
Interest Income:
	Loans				$5,327		$4,645		$9,972		$4,265		($1,312)		$2,953
	Securities				(109)		(181)		(290)		(237)		(138)		(375)
	Overnight investments				157		388		545		(17)		45		28
			Total interest income		$5,375		$4,852		$10,227		$4,011		($1,405)		$2,606
Interest Expense:
	Deposits:
		Interest-bearing demand accounts			$37		$112		$148		$17		($1)		$16
		Money market accounts			168		2,181		2,349		(71)		305		234
		Savings accounts			1,441		2,532		3,973		483		625		1,108
		Certificates of deposit			(250)		1,061		811		(199)		(653)		(852)
			Total interest on deposits		1,396		5,885		7,281		230		276		506
	Borrowings				188		121		309		49		47		96
			Total interest expense		$1,584		$6,006		$7,590		$279		$323		$602

Other Operating Income

         Total other income increased $1 million, or 27%, in 2005, after decreasing $2.3 million, or 38%, in 2004, and increasing $890,000, or 17%, in 2003. The following table separates the more routine (operating) sources of other income from those that can fluctuate significantly from period to period:

Years Ended December 31,				2005		2004		2003		2002		2001
				(In Thousands)
Other Operating Income
		Deposit service charges		$1,800		$1,718		$1,805		$1,687		$1,606
		Purchased receivable income		993		201		35		—		—
		Electronic banking fees		632		608		563		654		652
		Equity in earnings from RML		493		438		2,785		1,917		1,208
		Merchant credit card transaction fees		444		414		363		423		400
		Other transaction fees		214		204		247		283		324
		Loan service fees		374		379		416		350		467
		Equity in loss from Elliott Cove		(424)		(457)		(554)		(239)		—
		Other income		298		136		74		11		24
		Operating sources		4,824		3,641		5,734		5,086		4,681
	Gain on sale of securities available for sale, net			9		151		310		113		47
	Gain on sale of ORE			—		—		45		—		38
		Other sources		9		151		355		113		85
		Total other operating income		$4,833		$3,792		$6,089		$5,199		$4,766

         The sources of operating income in 2005 increased $1.2 million, or 32%. In 2004, this income decreased $2.1 million, or 37%, and in 2003, it increased $648,000, or 13%. Deposit service charges increased $82,000, or 5%, in 2005. Purchased

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receivable income increased $792,000, or 394%, in 2005, due largely to increases in fees earned on our Business Manager ^® product that is used to purchase accounts receivable from customers and our activity at NFS. In 2005, our share of earnings from RML was $493,000 as compared to $438,000 in 2004. Merchant credit card and electronic banking fees increased $30,000 and $24,000, respectively, or 7%, and 4%, respectively, as a result of volume increases in these products. Loan service fees decreased $5,000, or 1%, in 2005. Finally, we recorded a $424,000 loss from our share of the loss of Elliott Cove compared to a loss of $457,000 in 2004.

         Included in operating sources of other operating income in 2005, 2004, and 2003 are $493,000, $438,000, and $2.8 million, respectively, of income from our share of the earnings from RML. RML was formed in 1998 and has offices throughout Alaska. During the third quarter of 2004, RML reorganized and became a wholly-owned subsidiary of a newly formed holding company, RML Holding Company. In this process, RML Holding Company acquired another mortgage company, Pacific Alaska Mortgage Company (“PAM”). In the first quarter of 2005, PAM was merged into RML. Prior to the reorganization, the Company, through Northrim Bank’s wholly-owned subsidiary, NCIC, owned a 30% interest in the profits and losses of RML. Following the reorganization, the Company’s interest in RML Holding Company decreased to 24%.

         Earnings from RML and RML Holding Company have fluctuated with activity in the housing market, which has been affected by local economic conditions and changes in mortgage interest rates. In 2003, and 2002, declining mortgage interest rates generated a significant increase in the demand for mortgage loans by consumers both for the refinance of existing loans and the purchase of new homes. Mortgage rates began to increase in the third quarter of 2003 from the historic lows reached in the second quarter. As a result, the refinance activity in the mortgage industry began to decrease in the latter part of 2003. Due to this trend of increasing long-term mortgage interest rates and the costs associated with the merger of RML and PAM, our share of the earnings from RML declined in 2004. In 2005, RML Holding Company began to realize some efficiencies from its merger and increased its income from its combined operations.

         Our share of the loss from Elliott Cove decreased to $424,000 in 2005, as compared to a loss of $457,000 in 2004. 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. In the second quarter of 2004, the Company converted the loan into an additional equity interest in Elliott Cove. At the time of the conversion, the amount outstanding on this loan was $625,000. During the first, second, and third quarters of 2004, and third and fourth quarters of 2005, other investors made additional investments in Elliott Cove. In addition, the Company made a separate commitment to loan Elliott Cove $500,000 during the first quarter of 2004. In the first quarter of 2005, the Company increased this loan commitment to $750,000. The balance outstanding on this commitment at December 31, 2005 was $675,000. Finally, in the third quarters of 2004 and 2005, the Company made additional investments of $250,000 and $150,000, respectively, in Elliott Cove. As a result of the additional investments in Elliott Cove by other investors and the Company’s conversion of its $625,000 loan and its additional investments, its interest in Elliott Cove increased from 43% to 49% between December 31, 2003 and December 31, 2005.

         The other sources of other operating income decreased $142,000 in 2005, or 94%. In 2004, this income decreased $204,000, or 57%; and in 2003, it increased $242,000, or 214%. Net security gains of $9,000 were recorded in 2005, $151,000 of net gains were recorded in 2004, and $310,000 were recorded in 2003.

Expenses

Provision for Loan Losses:  The provision for loan losses in 2005 was $1.2 million, compared to $1.6 million in 2004 and $3.6 million in 2003. We decreased the provision for loan losses in 2005 due to a decrease in our non-performing loans and an overall improvement in our credit quality indicators. In 2005, non-performing loans decreased to $6.1 million from a balance of $6.6 million at December 31, 2004. In addition, net loan charge-offs were $1.2 million, or 0.18% of average loans, in 2005 as compared to $1 million, or 0.16% of average loans, in 2004 and $1.9 million, or 0.33% of average loans, in 2003. The allowance for loan losses also decreased in 2005 as a result of the decreases in non-performing loans and was $10.7 million, or 1.52% of portfolio loans as compared to $10.8 million, or 1.59% of portfolio loans at December 31, 2004 and $10.2 million, or 1.70% of portfolio loans, at December 31, 2003. While the allowance for loan losses decreased, the coverage ratio of the allowance for loan losses versus non-performing loans increased to 176% in 2005 as compared to a coverage ratio of 163% in 2004 and 99% in 2003.

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Other Operating Expense:  Other operating expense increased $2.9 million, or 11%, in 2005, $1.8 million, or 7%, in 2004, and $1.7 million, or 7%, in 2003. The following table breaks out the other operating expense categories:

Years Ended December 31,				2005		2004		2003		2002		2001
				(In Thousands)
Other Operating Expense
	Salaries and other personnel expense			$17,656		$15,708		$14,180		$13,023		$12,135
	Occupancy, net			2,417		2,130		2,000		2,040		1,963
	Equipment, net			1,371		1,372		1,504		1,405		1,508
	Marketing			1,657		1,201		1,205		1,136		1,153
	Software amortization			544		558		451		400		440
	Intangible asset amortization			368		368		368		368		832
	Supply expense			275		244		314		492		443
	Legal expense			111		230		193		197		302
	Cash handling costs			109		171		230		269		327
	Loan collection and ORE costs			155		156		161		68		49
	Consulting expense			151		89		144		78		104
	Other expenses			4,663		4,308		3,978		3,585		3,313
		Total other operating expense		$29,477		$26,535		$24,728		$23,061		$22,569

         Salaries and other personnel expense increased $1.9 million, or 12%, in 2005, $1.5 million, or 11%, in 2004, and $1.2 million, or 9%, in 2003, reflecting increases in employees for the provision of services in our new branch locations in Wasilla, Eagle River, and West Anchorage in 2003 and increases in salary and medical benefit costs for them in 2004 and 2005 due in part to ongoing competition for our employees, which placed upward pressure on our salary structure and the absolute level of increases in our medical costs. Between 2002 and 2005, our occupancy expenses increased by $377,000, or 18%, as we incurred higher costs in our new branch locations and occupied additional space at our Main Financial Center. 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 2005, 2004, and 2003. 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 no longer amortize goodwill. However, the Company will continue to amortize the core deposit intangible and annually evaluate goodwill for impairment.

         Marketing costs increased by $456,000, or 38%, in 2005, decreased by $4,000, or less than 1%, in 2004, and increased $69,000, or 6%, in 2003. The main reason for the increase in marketing expenses in 2005 was the costs associated with marketing our HPC product. We intend to continue marketing this product in 2006.

         Software amortization decreased $14,000, or 3%, in 2005, and increased $107,000, or 24%, in 2004. These costs increased in 2004 in part as we purchased software for our document imaging system that we implemented throughout the organization in 2003 and 2004.

         Supply expense increased by $31,000, or 13%, in 2005, decreased $70,000, or 22%, in 2004, and decreased $178,000, or 36%, in 2003. The main reason for the decreased supply costs in these years was a change in vendors coupled with a program that brought the inventory system for a number of our forms in-house.

         Legal costs decreased $119,000, or 52%, in 2005, increased $37,000, or 19%, in 2004, and decreased $4,000, or 2%, in 2003.

         Cash handling costs decreased $62,000, or 36%, in 2005, decreased $59,000, or 26%, in 2004, and decreased $39,000, or 14%, in 2003. These costs decreased over the years as we have renegotiated our contract with our vendor and brought more of these services back in-house as opposed to having them performed by an independent contractor.

         Loan collection and ORE costs decreased $1,000, or 1%, in 2005, decreased $5,000, or 3%, in 2004, and increased $93,000, or 137%, in 2003. These costs represent the out-of -pocket expense we incurred to liquidate problem assets and manage repossessed property resulting from the collection process. Between 2003 and 2005, these costs were higher than those experienced in 2002 due to costs associated with the repossession and sale of a property in 2003 and the efforts that we expended to decrease our non-performing loans in 2004 and 2005.

         Consulting expenses increased $62,000, or 70%, in 2005, decreased $55,000, or 38%, in 2004, and increased $66,000, or 85%, in 2003. These costs increased in 2003 and 2005 due to consulting expenses associated with the review and enhancement of our information processing and employee benefit systems. In 2005, these costs increased due to increased expenses to comply

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with the requirements of the Sarbanes-Oxley Act, as well as costs incurred to implement our High Performance Checking program.

         Other expenses increased $355,000, or 8%, in 2005 from 2004, and increased $330,000, or 8%, in 2004 from 2003. A major reason for the change in 2005 was a $95,000 increase in outside service costs that resulted from outsourced internal audit costs due to temporary staff shortages. In addition, operational charge-offs increased by $58,000. The balance of the increase in other expenses was caused by increases in a wide variety of accounts.

Income Taxes:  The provision for income taxes increased $697,000, or 11%, to $6.9 million in 2005, decreased $289,000, or 4%, to $6.2 million in 2004, and increased $1.3 million, or 26%, to $6.5 million in 2003. The effective tax rate for 2005 was 38%, compared to 37% in 2004, and 38% in 2003. The effective tax rate in 2004 was lower than that for 2005 and 2003 due in part to the favorable resolution of a dispute on a prior year’s tax return recorded in 2004.

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 $69.4 million, or 11% greater in 2005 than in 2004. Average loans were $59.3 million, or 10% greater in 2004 than in 2003. Loans comprised 90% of total earning assets on average in 2005, 89% in 2004 and 87% in 2003. The yield on loans averaged 8.00% in 2005, 7.30% in 2004, and 7.54% in 2003.

         Growth in the loan portfolio during 2005 was $26.8 million, or 4%. Commercial loans increased $19.9 million, or 7%, commercial real estate loans increased $37,000, and construction loans increased $8.7 million, or 7%, in 2005. Installment and consumer loans decreased $1.6 million, or 4%. Funding for the growth in loans in 2005 came from an increase in interest-bearing liabilities and from noninterest-bearing sources of funds and capital.

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. We had real estate owned property of $105,000 at December 31, 2005. The following table sets forth information regarding our nonperforming loans and total nonperforming assets:

December 31,				2005		2004		2003		2002		2001
				(In Thousands)
Nonperforming loans
	Nonaccrual loans			$5,090		$5,876		$7,426		$4,717		$2,615
	Accruing loans past due 90 days or more			981		290		2,283		1,019		965
	Restructured loans			—		424		597		—		—
		Total nonperforming loans		6,071		6,590		10,306		5,736		3,580
Real estate owned				105		—		—		—		—
		Total nonperforming assets		$6,176		$6,590		$10,306		$5,736		$3,580
Allowance for loan losses to portfolio loans				1.52%		1.59%		1.70%		1.61%		1.55%
Allowance for loan losses to nonperforming loans				176%		163%		99%		148%		201%
Nonperforming loans to portfolio loans				0.86%		0.97%		1.72%		1.09%		0.77%
Nonperforming assets to total assets				0.69%		0.82%		1.40%		0.81%		0.58%

Nonaccrual, Accruing Loans 90 Days or More Past Due, and Restructured Loans:  The Company’s financial statements are prepared on the accrual basis of accounting, including recognition of interest income on its loan portfolio, unless a loan is placed on a nonaccrual basis. Loans are placed on a nonaccrual basis when management believes serious doubt exists about the

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collectability of principal or interest. Our policy generally is to discontinue the accrual of interest on all loans 90 days or more past due unless they are well secured and in the process of collection. Cash payments on nonaccrual loans are directly applied to the principal balance. The amount of unrecognized interest on nonaccrual loans was $353,000, $658,000, and $690,000, in 2005, 2004, and 2003, respectively.

         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 December 31, 2005, were $6.1 million, or 0.86% of portfolio loans, a decrease of $519,000 from $6.6 million at December 31, 2004, and a decrease of $4.2 million from $10.3 million at December 31, 2003. The decrease in nonperforming loans in 2005 as compared to 2004 was due to pay-downs and loan charge-offs on a number of loan relationships.

Potential Problem Loans:  At December 31, 2005, management had identified problem loans of $9.1 million that were not reported as such at December 31, 2004. 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 negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, or 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 and reduced by loans charged off, net of recoveries. Management believes that at December 31, 2005, the allowance is adequate to cover losses that are probable in light of our current loan portfolio and existing 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 differed substantially from the assumptions used in making the final determination.

         The following table shows the allocation of the allowance for loan losses for the periods indicated:

December 31,			2005 2004 2003 2002 2001
Balance					% of Total				% of Total				% of Total				% of Total				% of Total
applicable			Amount		Loans (1)		Amount		Loans (1)		Amount		Loans (1)		Amount		Loans (1)		Amount		Loans (1)
			(Dollars in Thousands)
Commercial			$6,913		41%		$5,130		39%		$5,610		37%		$4,285		35%		$4,086		34%
Construction			246		19%		276		18%		282		17%		1,327		15%		336		14%
Real estate term			1,214		35%		1,634		37%		413		40%		275		40%		410		37%
Loans for sale			—		0%		—		0%		—		0%		—		1%		—		4%
Consumer			37		5%		—		6%		3		6%		22		9%		5		11%
Unallocated			2,296		0%		3,724				3,878				2,567				2,363
	Total		$10,706		100%		$10,764		100%		$10,186		100%		$8,476		100%		$7,200		100%

(1)	Represents percentage of this category of loans to total loans.

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         The following table sets forth for the periods indicated information regarding changes in our allowance for loan losses:

December 31,					2005		2004		2003		2002		2001
					(In Thousands)
Balance at beginning of period					$10,764		$10,186		$8,476		$7,200		$6,208
Charge-offs:
	Commercial loans				(1,552)		(1,387)		(2,067)		(1,791)		(687)
	Construction loans				(100)		—		—		—		—
	Real estate loans				—		—		(127)		(67)		(748)
	Consumer loans				(63)		(84)		(91)		(257)		(118)
			Total charge-offs		(1,715)		(1,471)		(2,285)		(2,115)		(1,553)
Recoveries:
	Commercial loans				418		200		279		168		234
	Construction loans				15		185		—		—		—
	Real estate loans				15		—		111		48		—
	Consumer loans				39		63		38		80		11
			Total recoveries		487		448		428		296		245
		Charge-offs net of recoveries			(1,228)		(1,023)		(1,857)		(1,819)		(1,308)
Provision for loan losses					1,170		1,601		3,567		3,095		2,300
Balance at end of period					$10,706		$10,764		$10,186		$8,476		$7,200
Ratio of net charge-offs to average loans outstanding during the period					0.18%		0.16%		0.33%		0.36%		0.29%

Credit Authority and Loan Limits:  All of our loans and credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness and commitments to us, including the indebtedness of any guarantor.

         Generally, we are permitted to make loans to one borrower of up to 15% of the unimpaired capital and surplus of the Bank. The loan-to -one-borrower limitation for the Bank was $14.8 million at December 31, 2005. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Provision for Loan Losses.”

Loan Policy:  Our lending operations are guided by loan policies, which outline the basic policies and procedures by which lending operations are conducted. Generally, the policies address our desired loan types, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations, and compliance with laws and regulations. The policies are reviewed and approved annually by the Board of Directors. We supplement our own supervision of the loan underwriting and approval process with periodic loan reviews by experienced officers who examine quality, loan documentation, and compliance with laws and regulations.

Loans Receivable:  Loans receivable increased to $705.1 million at December 31, 2005, compared to $678.3 million and $601.1 million at December 31, 2004 and 2003, respectively. At December 31, 2005, 48% of the portfolio was scheduled to mature or reprice in 2006 with 21% scheduled to mature or reprice between 2007 and 2010. Future growth in loans is generally dependent on new loan demand and deposit growth, constrained by our policy of being “well-capitalized.”

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Loan Portfolio Composition:  The following table sets forth at the dates indicated our loan portfolio composition by type of loan:

December 31,				2005 2004 2003 2002 2001
								Percent				Percent				Percent				Percent				Percent
				Amount				of Total		Amount		of Total		Amount		of Total		Amount		of Total		Amount		of Total
				(Dollars in Thousands)
Commercial					$287,617			40.79%		$267,737		39.47%		$220,774		36.73%		$187,312		35.01%		$166,845		34.57%
	Real estate loans:
	Construction				131,532			18.66%		122,873		18.12%		102,311		17.02%		82,739		15.47%		68,952		14.29%
	Real estate term				252,395			35.80%		252,358		37.21%		239,545		39.85%		212,740		39.77%		177,493		36.78%
	Real estate loans for sale				—			0.00%		—		0.00%		1,395		0.23%		7,437		1.39%		19,496		4.04%
Consumer loans					36,519			5.18%		38,166		5.63%		39,796		6.62%		47,415		8.86%		52,236		10.82%
		Total			708,063			100.43%		681,134		100.42%		603,821		100.45%		537,643		100.50%		485,022		100.51%
Less:
	Unearned purchase discount				—			0.00%		(44)		-0.01%		(44)		-0.01%		(44)		-0.01%		(271)		-0.06%
	Unearned loan fees net of origination costs				(3,004)			-0.43%		(2,821)		-0.42%		(2,658)		-0.44%		(2,609)		-0.49%		(2,189)		-0.45%
Net loans					$705,059			100.00%		$678,269		100.00%		$601,119		100.00%		$534,990		100.00%		$482,562		100.00%

         The following table presents at December 31, 2005, the aggregate maturity and repricing data of our loan portfolio:

			Maturity
			Within		1-5		Over 5
			1 Year		Years		Years		Total
			(In Thousands)
Commercial			$152,253		$79,929		$55,435		$287,617
Construction			121,748		6,094		3,690		131,532
Real estate term			62,547		56,850		132,998		252,395
Installment and other consumer			1,423		6,271		28,825		36,519
	Total		$337,971		$149,144		$220,948		$708,063
Fixed interest rate			$131,649		$55,680		$49,921		$237,250
Floating interest rate			206,322		93,464		171,027		470,813
	Total		$337,971		$149,144		$220,948		$708,063

Commercial Loans:  Our commercial loan portfolio includes both secured and unsecured loans for working capital and expansion. Short-term working capital loans generally are secured by accounts receivable, inventory, or equipment. We also make longer-term commercial loans secured by equipment and real estate. We also make commercial loans that are guaranteed in large part by the Small Business Administration or the Bureau of Indian Affairs and commercial real estate loans that are participated with the Alaska Industrial Development and Export Authority (“AIDEA”). Commercial loans represented 41% of our total loans outstanding as of December 31, 2005 and reprice more frequently than other types of loans, such as real estate loans. More frequent repricing means that commercial loans are more sensitive to changes in interest rates. In a rising interest rate environment, our philosophy is to emphasize the pricing of loans on a floating rate basis, which allows these loans to reprice more frequently and to contribute positively to our net interest margin.

Construction Loans:

Land Development:  We are a major land development and residential construction lender. At December 31, 2005, we had $46.1 million of residential subdivision land development loans outstanding, or 7% of total loans.

One-to -Four-Family Residences:  We financed approximately one-third of the single-family houses constructed in Anchorage in 2005. We originated one-to -four-family residential construction loans to builders for construction of homes. At December 31, 2005, we had $67.2 million of one-to -four-family residential and condominium construction loans, or 10% of total loans. Of the homes under construction at December 31, 2005, for which these loans had been made, 59% were subject to sale contracts between the builder and homebuyers who were pre-qualified for loans, usually with other financial institutions.

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Commercial Construction:  We also provide construction lending for commercial real estate projects. Such loans generally are made only when there is a firm take-out commitment upon completion of the project by a third party lender.

Real Estate Loans for Sale:  In 1998, our wholly-owned subsidiary, NCIC, purchased a 30% profits and losses interest of RML, a mortgage company with offices throughout Alaska, in order for us to obtain a presence in the residential mortgage market. As noted above, in the third quarter of 2004, RML merged with PAM, another mortgage company. As a result, we now own 24% of RML Holding Company, the holding company for RML and PAM.

         When originating residential mortgage loans, RML obtains a firm commitment from long-term investors to buy the loans at a specified interest rate and under other specified terms. We buy loans originated by RML and generally hold these loans for less than 45 days before they are purchased by the long-term investor. In 2005, we did not purchase any loans from RML. RML has warehouse lines of credit in place that are independent of the Company with which it finances the majority of its loan production.

Commercial Real Estate:  We are an active lender in the commercial real estate market. At December 31, 2005, our commercial real estate loans were $252.4 million, or 36% of our loan portfolio. These loans are typically secured by office buildings, apartment complexes or warehouses. Loan maturities range from 10 to 25 years, ordinarily subject to our right to call the loan within 10 to 15 years of its origination. The interest rate for approximately 44% of these loans originated by Northrim resets every three years based on the spread over an index rate, normally prime or the three-year Treasury rate.

         We often sell all or a portion of our commercial real estate loans to two State of Alaska entities that were established to provide long-term financing in the State, AIDEA, and the Alaska Housing Finance Corporation (“AHFC”). We often sell up to a 90% loan participation to AIDEA. AIDEA’s portion of the participated loan typically features a maturity twice that of the portion retained by us and bears a lower interest rate. The blend of our and AIDEA’s loan terms allows us to provide competitive long-term financing to our customers, while reducing the risk inherent in this type of lending. We also originate and sell to AHFC loans secured by multifamily residential units. Typically, 100% of these loans are sold to AHFC and we provide ongoing servicing of the loans for a fee. AIDEA and AHFC make it possible for us to originate these commercial real estate loans and enhance fee income while reducing our exposure to risk.

Consumer Loans:  We provide personal loans for automobiles, recreational vehicles, boats, and other larger consumer purchases. We provide both secured and unsecured consumer credit lines to accommodate the needs of our individual customers, with home equity lines of credit serving as the major product in this area.

Off-Balance Sheet Arrangements — Commitments and Contingent Liabilities:  In the ordinary course of business, we enter into various types of transactions that include commitments to extend credit that are not reflected on our balance sheet. We apply the same credit standards to these commitments as in all of our lending activities and include these commitments in our lending risk evaluations. Our exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. See Note 18 to “Notes to Consolidated Financial Statements” in our Annual Report for the year ended December 31, 2005. See also “Liquidity and Capital Resources.”

Investments and Investment Activities

General:  Our investment portfolio consists primarily of U.S. Treasury and government agency securities, and municipal securities. Investment securities totaled $55 million at December 31, 2005, a decrease of $6.5 million, or 11%, from year-end 2004. The average maturity of the investment portfolio was two years at December 31, 2005.

         Investment securities designated as available for sale comprised 95% of the portfolio 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 December 31, 2005, $20.9 million in securities were pledged for deposits.

Investment Portfolio Composition:  Our investment portfolio is divided into two classes:

Securities Available For Sale:  These are securities we may hold for indefinite periods of time and which we do not intend to hold to maturity. These securities include those that management intends to use as part of our asset/liability management strategy and that may be sold in response to changes in interest rates and/or significant prepayment risks. We carry these securities at market value with any unrealized gains or losses reflected as an adjustment to shareholders’ equity.

Securities Held To Maturity:  These are securities that we have the ability and the intent to hold to maturity. Events that may be reasonably anticipated are considered when determining our intent to hold investment securities to maturity. These securities are carried at amortized cost.

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The following tables set forth the composition of our investment portfolio at the dates indicated:

				Amortized		Market
December 31,				Cost		Value
				(In Thousands)
Securities Available for Sale:
2005:
	U.S. Treasury			$15,930		$15,761
	U.S. Agency			37,140		36,482
	Mortgage-backed Securities			242		240
		Total		$53,312		$52,483
2004:
	U.S. Treasury			$5,503		$5,481
	U.S. Agency			53,628		53,656
	Mortgage-backed Securities			311		312
		Total		$59,442		$59,449
2003:
	U.S. Treasury			$498		$500
	U.S. Agency			68,742		69,797
	Mortgage-backed Securities			418		420
		Total		$69,658		$70,717
Securities Held to Maturity:
2005:
	Municipal securities			$936		$957
		Total		$936		$957
2004:
	Municipal securities			$724		$771
		Total		$724		$771
2003:
	Municipal securities			$945		$1,011
		Total		$945		$1,011

         For the periods ending December 31, 2005, 2004, and 2003, we held Federal Home Loan Bank (“FHLB”) stock with a book value approximately equal to its market value in the amounts of $1.6 million, $1.3 million, and $1.5 million, respectively.

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Market Value, Maturities and Weighted Average Yields:  The following table sets forth the market value, maturities and weighted average yields of our investment portfolio for the periods indicated as of December 31, 2005:

				Maturity
				Within		1-5		5-10		Over 10
				1 year		years		years		years		Total
				(Dollars In Thousands)
Securities Available for Sale:
	U.S. Treasury
		Balance		$10,878		$4,883		$—		$—		$15,761
		Weighted Average Yield		2.92%		3.42%		0.00%		0.00%		3.08%
	U.S. Agency
		Balance		$1,524		$34,958		$—		$—		$36,482
		Weighted Average Yield		3.00%		3.87%		0.00%		0.00%		3.83%
	Mortgage-Backed Securities
		Balance		$—		$—		$—		$240		$240
		Weighted Average Yield		0.00%		0.00%		0.00%		4.52%		4.52%
	Total
		Balance		$12,402		$39,841		$—		$240		$52,483
		Weighted Average Yield		2.93%		3.81%		0.00%		4.52%		3.61%
Securities Held to Maturity:
Municipal Securities
		Balance		$65		$310		$444		$138		$957
		Weighted Average Yield		3.84%		4.35%		3.88%		5.11%		4.20%

         At December 31, 2005, we held no securities of any single issuer (other than governmental agencies) that exceeded 10% of our shareholders’ equity.

Purchased Receivables

General:  We purchase accounts receivable from our business customers and provide them with short-term working capital. We provide this service to our customers in Alaska with our Business Manager ^® product and in Washington and Oregon through NFS.

         Our purchased receivable balances increased in 2005 to $12.2 million, as compared to $2.2 million in 2004. The funding for this growth in purchased receivables came from an increase in interest-bearing liabilities and from noninterest-bearing sources of funds and capital.

Policy and Authority Limits:  Our purchased receivable activity is guided by policies that outline risk management, documentation, and approval limits. The policies are reviewed and approved annually by the Board of Directors.

Liabilities

Deposits

 

General:  Deposits are our primary source of funds. Total deposits increased 12% to $779.9 million at December 31, 2005, compared with $699.1 million at December 31, 2004, and $646.2 million at December 31, 2003. Our deposits generally are expected to fluctuate according to the level of our market share, economic conditions, and normal seasonal trends.

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Average Balances and Rates:  The following table sets forth the average balances outstanding and average interest rates for each major category of our deposits, for the periods indicated:

December 31,			2005				2004				2003				2002				2001
			Average		Average		Average		Average		Average		Average		Average		Average		Average		Average
			balance		rate paid		balance		rate paid		balance		rate paid		balance		rate paid		balance		rate paid
			(Dollars in Thousands)
Interest-bearing demand accounts			$65,890		0.56%		$57,373		0.39%		$52,955		0.39%		$49,198		0.72%		$45,334		1.86%
Money market accounts			139,331		2.78%		126,567		1.21%		134,582		0.96%		131,227		1.57%		132,950		3.44%
Savings accounts			207,277		3.02%		139,876		1.64%		104,158		1.13%		82,061		1.84%		34,731		2.50%
Certificates of deposit			138,284		2.52%		155,134		1.72%		164,847		2.14%		172,531		3.50%		190,693		5.37%
	Total interest-bearing accounts		550,782		2.54%		478,950		1.40%		456,542		1.36%		435,017		2.29%		403,708		4.09%
Noninterest-bearing demand accounts			182,535				181,731				159,858				135,181				109,748
	Total average deposits		$733,317				$660,681				$616,400				$570,198				$513,456

Certificates of Deposit:  The only deposit category with stated maturity dates is certificates of deposit. At December 31, 2005, we had $110.6 million in certificates of deposit, of which $92.1 million, or 83%, are scheduled to mature in 2006. The following table sets forth the amounts and maturities of our certificates of deposit with balances of $100,000 or more, at the dates indicated:

December 31,				2005		2004		2003		2002		2001
				(In Thousands)
Remaining maturity:
	Three months or less			$32,296		$20,427		$47,480		$29,828		$20,739
	Over three through six months			4,830		24,673		9,017		21,505		27,531
	Over six through 12 months			9,226		25,976		19,966		15,535		30,549
	Over 12 months			4,897		11,411		19,651		20,549		19,167
		Total		$51,249		$82,487		$96,114		$87,417		$97,986

Alaska Certificates of Deposit:  The Alaska Certificate of Deposit (“Alaska CD”) is a savings deposit product with an open-ended maturity, interest rate that adjusts to an index that is tied to the two-year United States Treasury Note, and limited withdrawals. The total balance in the Alaska CD at December 31, 2005, was $198 million, an increase of $74.8 million as compared to the balance of $123.2 million at December 31, 2005.

Alaska Permanent Fund:  The Alaska Permanent Fund 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 December 31, 2005, we held $15 million in certificates of deposit for the Alaska Permanent Fund, collateralized by letters of credit issued by the FHLB.

Borrowings

 

FHLB:  At December 31, 2005, our maximum borrowing line from the FHLB was equal to $94.2 million, approximately 11% of the Company’s assets. At December 31, 2005, there was $2.6 million outstanding on the line and an additional $15.5 million of the borrowing line was committed to secure public deposits. FHLB advances are secured by a blanket pledge of the Company’s assets.

Other Short-term Borrowing:  At December 31, 2005, there were no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

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Contractual Obligations

 

         The following table references contractual obligations of the Company for the periods indicated:

			Payments Due by Period
			Within				1-3				3-5				Over
December 31, 2005			1 Year				Years				Years				5 Years				Total
			(In Thousands)
Long-term debt obligations				$400				$800				$800				$18,574				$20,574
Operating lease obligations				1,338				2,420				225				1,544				5,527
Other long-term liabilities				—				—				—				—				—
	Total			$1,738				$3,220				$1,025				$20,118				$26,101

			Payments Due by Period
			Within				1-3				3-5				Over
December 31, 2004			1 Year				Years				Years				5 Years				Total
			(In Thousands)
Long-term debt obligations				$400				$800				$800				$8,974				$10,974
Operating lease obligations				1,407				2,432				1,295				1,612				6,746
Other long-term liabilities				507				—				—				—				507
	Total			$2,314				$3,232				$2,095				$10,586				$18,227

         Long-term debt obligations consist of (a) $2.6 million advance from the FHLB that was originated on May 7, 2002, matures on May 7, 2012, and bears interest at 5.46%, (b) $8 million junior subordinated debentures that were originated on May 8, 2003, mature on May 15, 2033, and bear interest at a rate of LIBOR plus 3.15%, adjusted quarterly, and (c) $10 million junior subordinated debentures that were originated on December 16, 2005, mature on December 15, 2035, and bear interest at a rate of LIBOR plus 1.37%, adjusted quarterly. The operating lease obligations are more fully described at Note 18 of the Company’s annual report. Other long-term liabilities consist of amounts that the Company owes for its investment in Related Corporate Partners XXII, L.P., (“RCP”), a Delaware limited partnership that develops low-income housing projects throughout the United States. The Company purchased a $3 million interest in RCP in January of 2003. The Company paid the final installment on this investment due in October of 2005.

Liquidity and Capital Resources

         Our primary sources of funds are customer deposits and advances from the Federal Home Loan Bank of Seattle. These funds, together with loan repayments, loan sales, other borrowed funds, retained earnings, and equity are used to make loans, to acquire securities and other assets, and to fund continuing operations. The primary sources of demands on our liquidity are customer demands for withdrawal of deposits and borrowers’ demands that we advance funds against unfunded lending commitments. Our total unfunded lending commitments at December 31, 2005, were $172.1 million, and we do not expect that all of these loans are likely to be fully drawn upon at any one time. Additionally, as noted above, our total deposits at December 31, 2005, were $779.9 million.

         The sources by which we meet the liquidity needs of our customers are current assets and borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB. At December 31, 2005, our current assets were $457.3 million and our funds available for borrowing under our existing lines of credit were $143.5 million. Given these sources of liquidity and our expectations for customer demands for cash and for our operating cash needs, we believe our sources of liquidity to be sufficient in the foreseeable future.

         In September 2002, our Board of Directors approved a plan whereby we would periodically repurchase for cash up to approximately 5%, or 306,372, of our shares of common stock in the open market. We purchased 224,800 shares of our stock under this program through December 31, 2004, at a total cost of $3.1 million, at an average price of $13.68 per share. In August of 2004, the Board of Directors amended the stock repurchase plan and increased the number of shares available under the program by 5% of total shares outstanding, or 304,283 shares. We purchased 308,642 shares in 2005, which left a balance of 77,213 shares available under the stock repurchase program. We intend to continue to repurchase our stock from time to time

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depending upon market conditions, but we can make no assurances that we will continue this program or that we will repurchase all of the authorized shares.

         The stock repurchase program had an effect on earnings per share because it decreased the total number of shares outstanding in 2002, 2003, and 2005, by 69,000, 155,800, and 308,642 shares respectively. The Company did not repurchase any of its shares in 2004. The table below shows this effect on diluted earnings per share.

				Diluted
		Diluted EPS		EPS without
Years Ending:		as Reported		Stock Repurchase
2005		$1.81		$1.71
2004		$1.71		$1.65
2003		$1.69		$1.64
2002		$1.35		$1.35

         On May 8, 2003, the Company’s newly formed subsidiary, Northrim Capital Trust 1, issued trust preferred securities in the principal amount of $8 million. These securities carry an interest rate of LIBOR plus 3.15% per annum that was initially set at 4.45% adjusted quarterly. The securities have a maturity date of May 15, 2033, and are callable by the Company on or after May 15, 2008. These securities are treated as Tier 1 capital by the Company’s regulators for capital adequacy calculations. The interest cost to the Company of the trust preferred securities was $523,000 in 2005. At December 31, 2005, the securities had an interest rate of 7.49%.

         On December 16, 2005, the Company’s newly formed subsidiary, Northrim Statutory Trust 2, issued trust preferred securities in the principal amount of $10 million. These securities carry an interest rate of LIBOR plus 1.37% per annum that was initially set at 5.86% adjusted quarterly. The securities have a maturity date of March 15, 2036, and are callable by the Company on or after March 15, 2011. These securities are treated as Tier 1 capital by the Company’s regulators for capital adequacy calculations. The interest cost to the Company of these securities was $26,000 in 2005. At December 31, 2005, the securities had an interest rate of 5.86%.

         Our shareholders’ equity at December 31, 2005, was $84.5 million, a $1.1 million, or 1%, increase from 2004. We are 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. We believe as of December 31, 2005, that the Company and Northrim 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, 2005, the most recent notification from the FDIC categorized Northrim Bank as “well-capitalized.” There were no conditions or events since the FDIC notification that we believe have changed Northrim Bank’s classification.

         The table below 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 and another offering of $10 million completed in the fourth quarter of 2005 are included in the Company’s capital for regulatory purposes although they are accounted for as a long-term debt in our 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 $18 million more in regulatory capital than the Bank, which explains most of the difference in the capital ratios for the two entities.

December 31, 2005		Adequately -		Well -		Actual Ratio		Actual Ratio
		Capitalized		Capitalized		BHC		Bank
Tier 1 risk-based capital		4.00%		6.00%		12.10%		10.32%
Total risk-based capital		8.00%		10.00%		13.35%		11.57%
Leverage ratio		4.00%		5.00%		10.81%		9.24%

(See Note 19 of the Consolidated Financial Statements for a detailed discussion of the capital ratios.)

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Effects of Inflation and Changing Prices

         The primary impact of inflation on our operations is increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates, which could affect the degree and timing of the repricing of our assets and liabilities. In addition, inflation has an impact on our customers’ ability to repay their loans.

Market for Common Stock

         Our common stock trades on the Nasdaq Stock Market under the symbol, “NRIM.” We are aware that large blocks of our stock are held in street name by brokerage firms. At December 31, 2005, the number of shareholders of record of our common stock was 197.

         We began paying regular cash dividends of $0.05 per share in the second quarter of 1996. In the second quarter of 2003 and the second quarter of 2005, we increased the cash dividend to $0.095 and $0.11 per share, respectively. Cash dividends totaled $2.6 million, $2.3 million, and $2 million in 2005, 2004, and 2003, respectively. On January 6, 2006, the Board of Directors approved payment of a $0.11 per share dividend on February 3, 2006, to shareholders of record on January 23, 2006. The Company and the Bank are subject to restrictions on the payment of dividends pursuant to applicable federal and state banking regulations.

         The following are high and low sales prices as reported by Nasdaq. Prices do not include retail markups, markdowns or commissions. Prices have been adjusted for applicable stock dividends.

			First				Second				Third				Fourth
			Quarter				Quarter				Quarter				Quarter
2005
	High			$25.18				$25.00				$25.10				$25.50
	Low			$23.20				$22.07				$23.38				$23.25
2004
	High			$25.64				$25.56				$21.85				$23.84
	Low			$22.64				$18.65				$20.01				$21.83

Repurchase of Securities

 

         The Company repurchased 40,000 shares of its common stock, in the aggregate, during the fourth quarter of 2005 as indicated below:

Maximum number (1)

Total number of

(or approximate dollar value)

shares (or units)

of shares (or units)

Total number of

Average price

purchased as part of

that may yet be

shares (or units)

paid per share

publicly announced

purchased under the

purchased

(or unit)

plans or programs

plans or programs

Period

(a)

(b)

(c)

(d)

Month #1

October 1, 2005 —

October 31, 2005

—

$—

—

117,213

Month #2

November 1, 2005 —

November 30, 2005

35,000

$23.44

35,000

82,213

Month #3

December 1, 2005 —

December 31, 2005

5,000

$24.39

5,000

77,213

Total

40,000

$23.56

40,000

77,213

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(1)

In September 2002, the Company publicly announced Board of Director authorization to, from time to time, repurchase up to 5%, or 306,372, shares of common stock in the open market. In August 2004, the Company publicly announced the Board’s authorization to increase the stock in its repurchase program by an additional 304,283, or 5%, of total shares outstanding. As a result, the total shares available under the Plan at that time increased to 385,855 shares. In the three-month period ending December 31, 2005, the Company repurchased 40,000 shares, which brought the total shares available under the Plan to 77,213 shares.

Equity Compensation Plan Information

 

							Number of securities
			Number of securities				remaining available for
			to be issued		Weighted-average		future issuance under
			upon exercise of		exercise price of		equity compensation plans
			outstanding options,		outstanding options,		(excluding securities
			warrants and rights		warrants and rights		reflected in column
Plan Category			(a)		(b)		(a))
Equity compensation plans approved by security holders			424,003		$13.07		205,606
	Total		424,003		$13.07		205,606

Recent Accounting Pronouncements

         Between November of 2004 and December of 2005, the Financial Accounting Standards Board (“FASB”) issued Statement No. 151, Inventory Costs , Statement No. 152, Accounting for Real Estate Time-Sharing Transactions , Statement No. 153, Exchanges of Nonmonetary Assets , and Statement No. 154, Accounting Changes and Error Corrections. The Company believes the adoption of these Statements will have no impact on its financial statements.

         In December 2004, the FASB issued Statement No. 123R, Share-Based Payment , which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services primarily in share-based payment transactions with its employees. This Statement supersedes the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees , and its related implementation guidance. The Company intends to apply the provisions of this Statement in accordance with the modified prospective application method and begin to expense the costs associated with its stock options in the first quarter of 2006. Furthermore, as outlined below at Note 9, the Company provides disclosures of the proforma amounts. The Company does not expect the effect of the adoption of Statement No. 123R to be significantly different from the proforma disclosures.

Quantitative and Qualitative Disclosure About Market Risk

         Our results of operations depend substantially on our net interest income. Like most financial institutions, our interest income and cost of funds are affected by general economic conditions, levels of market interest rates, and by competition, and in addition, our community banking focus makes our results of operations particularly dependent on the Alaska economy.

         The purpose of asset/liability management is to provide stable net interest income growth by protecting our earnings from undue interest rate risk, which arises from changes in interest rates and changes in the balance sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk, market risk, and capital adequacy. We maintain an asset/liability management policy that provides guidelines for controlling exposure to interest rate risk by setting a target range and minimum for the net interest margin and running simulation models under different interest rate scenarios to measure the risk to earnings over the next 12-month period.

         In order to control interest rate risk in a rising interest rate environment, our philosophy is to shorten the average maturity of the investment portfolio and emphasize the pricing of new loans on a floating rate basis in order to achieve a more asset sensitive position, therefore, allowing quicker repricings and maximizing net interest margin. Conversely, in a declining interest rate environment, our philosophy is to lengthen the average maturity of the investment portfolio and emphasize fixed rate loans, thereby becoming more liability sensitive. In each case, the goal is to exceed our targeted net interest margin range without exceeding earnings risk parameters.

         Our excess liquidity not needed for current operations has generally been invested in short-term assets or securities, primarily securities issued by governmental agencies. The securities portfolio contributes to our profits and plays an important part in the overall interest rate management. The primary tool used to manage interest rate risk is determination of mix, maturity, and repricing characteristics of the loan portfolios. The loan and securities portfolios must be used in combination with

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management of deposits and borrowing liabilities and other asset/liability techniques to actively manage the applicable components of the balance sheet. In doing so, we estimate our future needs, taking into consideration historical periods of high loan demand and low deposit balances, estimated loan and deposit increases, and estimated interest rate changes.

         Although analysis of interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is one standard tool for the measurement of exposure to interest rate risk, we believe that because interest rate gap analysis does not address all factors that can affect earnings performance, such as early withdrawal of time deposits and prepayment of loans, it should not be used as the primary indictor of exposure to interest rate risk and the related volatility of net interest income in a changing interest rate environment. Interest rate gap analysis is primarily a measure of liquidity based upon the amount of change in principal amounts of assets and liabilities outstanding, as opposed to a measure of changes in the overall net interest margin.

         The following table sets forth the estimated maturity or repricing, and the resulting interest rate gap, of our interest-earning assets and interest-bearing liabilities at December 31, 2005. The amounts in the table are derived from internal data based upon regulatory reporting formats and, therefore, may not be wholly consistent with financial information appearing elsewhere in the audited financial statements that have been prepared in accordance with generally accepted accounting principles. The amounts shown below could also be significantly affected by external factors such as changes in prepayment assumptions, early withdrawals of deposits, and competition.

					Estimated maturity or repricing at December 31, 2005
					Within 1 year				1-5 years		³ 5 years		Total
					(In Thousands)
Interest-Earning Assets:
	Money market investments					$60,836			$—		$—		$60,836
	Investment securities					12,467			40,141		2,367		54,975
	Loans:
		Commercial				213,379			65,145		4,949		283,473
		Real estate construction				126,504			4,894		—		131,398
		Real estate term				138,720			110,862		2,003		251,585
		Installment and other consumer				14,038			10,386		12,093		36,517
			Total interest-earning assets			$565,944			$231,428		$21,412		$818,784
			Percent of total interest-earning assets			69%			28%		3%		100%
Interest-Bearing Liabilities:
	Interest-bearing demand accounts					$75,988			$—		$—		$75,988
	Money market accounts					151,903			—		—		151,903
	Savings accounts					244,779			—		—		244,779
	Certificates of deposit					92,111			18,449		20		110,580
	FHLB advances					—			—		2,574		2,574
	Other borrowings					5,841			—		—		5,841
	Junior subordinated debentures					18,000			—		—		18,000
			Total interest-bearing liabilities			$588,622			$18,449		$2,594		$609,665
			Percent of total interest-bearing liabilities			97%			3%		0%		100%
	Interest sensitivity gap					($22,678)			$212,979		$18,818		$209,119
	Cumulative interest sensitivity gap					($22,678)			$190,301		$209,119
	Cumulative interest sensitivity gap as a percentage of total assets					-3%			21%		23%

         As stated previously, certain shortcomings, including those described below, are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets have features that restrict changes in their interest rates, both on a short-term basis and over the lives of the assets. Further, in the event of a change in market interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables as can the relationship of rates between different loan and deposit categories. Moreover, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an increase in market interest rates.

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         We utilize a simulation model to monitor and manage interest rate risk within parameters established by our 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 over a period of 12 months. 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 would differ from simulated results due to factors such as timing, magnitude and frequency of rate changes, customer reaction to rate changes, changes in market conditions and management strategies, among other factors.

         Based on the results of the simulation models at December 31, 2005, we expect an increase in net interest income of $1.3 million and a decrease of $1.6 million in net interest income over a 12-month period, if interest rates decreased or increased an immediate 100 basis points, respectively. Due to the low level of interest rates, a drop of 100 basis points was unrealistic for some of the interest-bearing deposits since the Company is currently paying less than 100 basis points on some of those products. In these instances, interest rates were reduced less than 100 basis points.

Critical Accounting Estimates

         The preparation of financial statements in conformity with generally accepted accounting principles involves the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses during the reporting period. Actual results could differ from those estimates.

         Our estimate for the loan loss reserve is based on our 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. While we believe that we have used 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 differed substantially from the assumptions used in making the final determination.

Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure 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 our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our 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. There were no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

         Management of the Company is responsible for establishing and maintaining internal control over financial reporting as defined in Rules  13a-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

         Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

         Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework.

         Based on our assessment and the criteria discussed above, management believes that, as of December 31, 2005, the Company maintained effective internal control over financial reporting.

         The Company’s registered public accounting firm has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. This report follows below.

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Report of Independent Registered Public Accounting Firm

The Board of Directors of

Northrim BanCorp, Inc.:

We have audited management’s assessment, included in the accompanying Management Report on Effectiveness of Internal Control Over Financial Reporting, that Northrim BanCorp, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Northrim BanCorp, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Northrim BanCorp, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Northrim BanCorp, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated February 10, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Anchorage, Alaska

February 10, 2006

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Report of Independent Registered Public Accounting Firm

The Board of Directors of

Northrim BanCorp, Inc.:

We have audited the accompanying consolidated balance sheets of Northrim BanCorp, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Northrim BanCorp, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Northrim BanCorp, Inc’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 10, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Anchorage, Alaska

February 10, 2006

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Consolidated Financial Statements

NORTHRIM BANCORP, INC.

Consolidated Balance Sheets

December 31, 2005 and 2004

					2005		2004
					(In Thousands Except Share Amounts)
Assets
	Cash and due from banks (Note 2)				$28,854		$18,936
	Money market investments (Note 3)				60,836		12,157
	Investment securities held to maturity (Note 4)				936		724
	Investment securities available for sale (Note 4)				52,483		59,449
	Investment in Federal Home Loan Bank stock (Note 4)				1,556		1,302
			Total Portfolio Investments		54,975		61,475
	Loans (Note 5)				705,059		678,269
	Allowance for loan losses (Note 6)				(10,706)		(10,764)
			Net Loans		694,353		667,505
	Purchased receivables				12,198		2,191
	Accrued interest receivable				4,397		3,678
	Premises and equipment, net (Note 7)				10,603		10,583
	Intangible assets (Notes 1 and 8)				7,385		6,634
	Other assets (Notes 1 and 8)				21,421		17,567
			Total Assets		$895,022		$800,726
Liabilities
	Deposits:
		Demand			$196,616		$183,959
		Interest-bearing demand			75,988		59,933
		Savings			46,790		47,406
		Alaska CDs			197,989		123,223
		Money market			151,903		142,181
		Certificates of deposit less than $100,000 (Note 9)			59,331		59,872
		Certificates of deposit greater than $100,000 (Note 9)			51,249		82,487
			Total Deposits		779,866		699,061
	Borrowings (Note 10)				8,415		6,478
	Junior subordinated debentures (Note 11)				18,000		8,000
	Other liabilities				4,267		3,829
			Total Liabilities		810,548		717,368
Shareholders’ Equity (Note 16 and 17)
	Common stock, $1 par value, 10,000,000 shares authorized, 5,803,487 and 6,089,120 shares issued and outstanding at December 31, 2005 and 2004, respectively				5,803		6,089
	Additional paid-in capital				39,161		45,876
	Retained earnings				39,999		31,389
	Accumulated other comprehensive income- net unrealized gains/losses on available for sale on investment securities				(489)		4
			Total Shareholders’ Equity		84,474		83,358
	Commitments and contingencies (Notes 2, 4, 10, 15, 18, 19, and 22)
			Total Liabilities and Shareholders’ Equity		$895,022		$800,726

See accompanying notes to the consolidated financial statements.

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NORTHRIM BANCORP, INC.

Consolidated Statements of Income

Years Ended December 31, 2005, 2004 and 2003

				2005		2004		2003
				(In Thousands Except Per Share Amounts)
Interest Income
	Interest and fees on loans			$55,870		$45,898		$42,945
	Interest on investment securities-available for sale (Note 4)			2,171		2,400		2,724
	Interest on investment securities-held to maturity (Note 4)			31		92		143
	Interest on money market investments			709		164		136
		Total Interest Income		58,781		48,554		45,948
Interest Expense
	Interest expense on deposits and borrowings (Note 12)			14,873		7,283		6,681
		Net Interest Income		43,908		41,271		39,267
Provision for loan losses (Note 6)				1,170		1,601		3,567
		Net Interest Income After Provision for Loan Losses		42,738		39,670		35,700
Other Operating Income
	Service charges on deposit accounts			1,800		1,718		1,805
	Purchased receivable income			993		201		35
	Equity in earnings from RML Holding Company			493		438		2,785
	Equity in loss from Elliott Cove			(424)		(457)		(554)
	Other income			1,971		1,892		2,018
		Total Other Operating Income		4,833		3,792		6,089
Other Operating Expense
	Salaries and other personnel expense			17,656		15,708		14,180
	Occupancy, net			2,417		2,130		2,000
	Equipment expense			1,371		1,372		1,504
	Marketing expense			1,657		1,201		1,205
	Intangible asset amortization expense			368		368		368
	Other expense			6,008		5,756		5,471
		Total Other Operating Expense		29,477		26,535		24,728
		Income Before Income Taxes		18,094		16,927		17,061
Provision for income taxes (Note 13)				6,924		6,227		6,516
		Net Income		$11,170		$10,700		$10,545
		Earnings Per Share, Basic		$1.87		$1.76		$1.76
		Earnings Per Share, Diluted		$1.81		$1.71		$1.69
		Weighted Average Shares Outstanding, Basic		5,987,404		6,079,315		6,000,273
		Weighted Average Shares Outstanding, Diluted		6,173,137		6,270,615		6,225,889

See accompanying notes to the consolidated financial statements.

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NORTHRIM BANCORP, INC.

Consolidated Statements of Changes in

Shareholders’ Equity and Comprehensive Income

Years Ended December 31, 2005, 2004 and 2003

				Common Stock																Accumulated
												Additional								other
				Number				Par				paid-in				Retained				comprehensive
				of shares				value				capital				earnings				income				Total
				(In Thousands)
Balance as of January 1, 2003					6,095				$6,095			$	46,614				$14,460				$1,204				$68,373
Cash dividend					—				—				—				(2,008)				—				(2,008)
Exercise of Stock Options					111				111				1,064				—				—				1,175
Treasury stock buy-back					(156)				(156)				(2,063)				—				—				(2,219)
Comprehensive income:
	Change in unrealized holding (gain/loss) on available for sale investment securities, net of related income tax effect (Note 14)				—				—				—				—				(581)				(581)
Net Income					—				—				—				10,545				—				10,545
		Total Comprehensive Income																							9,964
Balance as of December 31, 2003					6,050				$6,050			$	45,615				$22,997				$623				$75,285
Cash dividend					—				—				—				(2,308)				—				(2,308)
Exercise of Stock Options					39				39				261				—				—				300
Comprehensive income:
	Change in unrealized holding (gain/loss) on available for sale investment securities, net of related income tax effect (Note 14)				—				—				—				—				(619)				(619)
Net Income					—				—				—				10,700				—				10,700
		Total Comprehensive Income																							10,081
Balance as of December 31, 2004					6,089				$6,089			$	45,876				$31,389				$4				$83,358
Cash dividend					—				—				—				(2,560)				—				(2,560)
Exercise of Stock Options					23				23				314				—				—				337
Treasury stock buy-back					(309)				(309)				(7,029)				—				—				(7,338)
Comprehensive income:
	Change in unrealized holding (gain/loss) on available for sale investment securities, net of related income tax effect (Note 14)				—				—				—				—				(493)				(493)
Net Income					—				—				—				11,170				—				11,170
		Total Comprehensive Income																							10,677
Balance as of December 31, 2005					5,803				$5,803			$	39,161				$39,999				($489)				$84,474

See accompanying notes to the consolidated financial statements.

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NORTHRIM BANCORP, INC.

Consolidated Statements of Cash Flows

Years Ended December 31, 2005, 2004 and 2003

					2005		2004		2003
					(In Thousands)
Operating Activities:
		Net income			$11,170		$10,700		$10,545
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
	Security (gains), net				(9)		(151)		(310)
	Depreciation and amortization of premises and equipment				1,244		1,142		1,220
	Amortization of software				544		558		451
	Intangible asset amortization				368		368		368
	Amortization of investment security premium, net of discount accretion				—		151		266
	Deferred tax (benefit)				(821)		(1,260)		(1,738)
	Deferral of loan fees and costs, net				183		163		49
	Gain on sale of building				—		—		(12)
	Provision for loan losses				1,170		1,601		3,567
	Equity in earnings from RML				(493)		(438)		(2,785)
	Equity in loss from Elliott Cove				424		457		554
	(Increase) in accrued interest receivable				(719)		(378)		(108)
	(Increase) in other assets				(494)		(656)		(63)
	Increase (decrease) of other liabilities				438		(115)		848
			Net Cash Provided by Operating Activities		13,005		12,142		12,852
Investing Activities:
	Investment in securities:
		Purchases of investment securities — Available-for-sale			(10,874)		(28,341)		(52,966)
		Purchases of investment securities — Held-to-maturity			(277)		—		—
		Proceeds from sales/maturities of securities — Available-for-sale			17,012		38,559		59,532
		Proceeds from maturities of securities — Held-to-maturity			65		220		335
	Investment in Federal Home Loan Bank stock, net				(254)		244		228
	Investment in purchased receivables, net				(10,007)		(1,729)		(462)
	Investments in loans:
		Sales of loans and loan participations			25,116		20,036		148,376
		Loans made, net of repayments			(53,317)		(98,373)		(216,411)
	Investment in Elliott Cove				(150)		(250)		(375)
	Dividends received from RML				482		367		1,850
	Investment in NBG				(1,146)		—		—
	Subscription in PWA				(2,015)		—		—
	Investment in Related Corporate Partners				—		—		(2,956)
	Purchases of premises and equipment				(1,264)		(618)		(1,846)
			Net Cash Used by Investing Activities		(36,629)		(69,885)		(64,695)
Financing Activities:
	Increase in deposits				80,805		52,864		19,782
	Increase (decrease) in borrowings				1,937		1,335		(1,222)
	Loan to Elliott Cove				(575)		(250)		(350)
	Loan to PWA				(385)		—		—
	Proceeds from issuance of common stock				337		300		1,175
	Proceeds from issuance of junior subordinated debentures				10,000		—		8,000
	Repurchase of common stock				(7,338)		—		(2,219)
	Cash dividends paid				(2,560)		(2,308)		(2,008)
			Net Cash Provided by Financing Activities		82,221		51,941		23,158
			Net Increase (Decrease) by Cash and Cash Equivalents		58,597		(5,802)		(28,685)
	Cash and cash equivalents at beginning of period				31,093		36,895		65,580
	Cash and Cash Equivalents at End of Year				$89,690		$31,093		$36,895
Supplemental Information:
	Income taxes paid				$7,550		$6,825		$7,900
	Interest paid				$14,741		$7,766		$6,851
	Conversion of Elliott Cove loan to equity				$—		$625		$—

See accompanying notes to the consolidated financial statements.

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Notes to Consolidated Financial Statements

NOTE 1 — Organization and Summary of Significant Accounting Policies

         Northrim BanCorp, Inc. (the “Company”) is a bank holding company whose subsidiaries are Northrim Bank (the “Bank”), which serves Anchorage, Eagle River, the Matanuska Valley, Fairbanks, Alaska, and the Pacific Northwest through its Northrim Funding Services division (“NFS”); Northrim Investment Services Company (“NISC”) which holds the Company’s interest in Elliott Cove Capital Management LLC (“Elliott Cove”), an investment advisory services company, and Northrim Capital Trust 1 (“NCT1”) and Northrim Statutory Trust 2 (“NST2”), entities that were formed to facilitate trust preferred securities offerings by the Company. The Company is regulated by the State of Alaska and the Federal Reserve Board. The Company was incorporated in Alaska, and its primary market areas include Anchorage, the Matanuska Valley, and Fairbanks, Alaska, where the majority of its lending and deposit activities have been with Alaska businesses and individuals.

         Effective December 31, 2001, Northrim Bank became a wholly-owned subsidiary of a new bank holding company, Northrim BanCorp, Inc. The Bank’s shareholders agreed to exchange their ownership in the Bank for ownership in the Company. The ownership interests in the Company are the same as the ownership interests in the Bank prior to the exchange. The exchange has been accounted for similar to a pooling of interests.

         The Bank formed a wholly-owned subsidiary, Northrim Capital Investments Co. (“NCIC”), in 1998. This subsidiary owns a 24% profit interest in Residential Mortgage Holding Company LLC (“RML Holding Company”), a residential mortgage holding company that owns one mortgage company, Residential Mortgage LLC (“RML”). RML has branches throughout Alaska. The Company accounts for RML Holding Company using the equity method. In addition, NCIC owns a 50.1% interest in Northrim Benefits Group, LLC (“NBG”), an insurance brokerage company that provides employee benefit plans to businesses throughout Alaska.

Estimates and Assumptions:  In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period and the disclosure of contingent assets and liabilities in accordance with generally accepted accounting principles. Actual results could differ from those estimates.

Cash and Cash Equivalents:  For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing balances with other banks, money market investments including interest-bearing balances with the FHLB, banker’s acceptances, commercial paper, securities purchased under agreement to resell, and federal funds sold.

Investment Securities:  Securities available-for-sale are stated at fair value with unrealized holding gains and losses, net of tax, excluded from earnings and reported as a net amount in a separate component of other comprehensive income, unless an unrealized loss is deemed other than temporary. The gain or loss on available-for-sale securities sold is determined on a specific identification basis.

         A decline in the market value of any available for sale or held to maturity security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. Unrealized investment securities losses are evaluated at least quarterly on pools of securities with similar attributes to determine whether such declines in value should be considered “other than temporary” and therefore be subject to immediate loss recognition in income. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value of the security is below the carrying value primarily due to changes in interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company has the intent and ability to hold the security for a sufficient time to recover the carrying value. Other factors that may be considered in determining whether a decline in the value is “other than temporary” include ratings by recognized rating agencies; actions of commercial banks or other lenders relative to the continued extension of credit facilities to the issuer of the security; the financial condition, capital strength and near-term prospects of the issuer and recommendations of investment advisors or market analysts.

         Held-to -maturity securities are stated at cost, adjusted for amortization of premium and accretion of discount on a level-yield basis. The Company has the ability and intent to hold these securities to maturity.

Loans and Loan Fees:  Loans are carried at their principal amount outstanding, adjusted for the net of unamortized fees and related direct loan origination costs. Interest income on loans is accrued and recognized on the principal amount outstanding except for loans in a non-accrual status. Loans are placed on non-accrual when management believes doubt exists as to the collectibility of the interest or principal. Cash payments received on non-accrual loans are directly applied to the principal balance. Cash payments received on performing loans that are considered impaired but not categorized as non-accrual are recognized on the cash basis method of income recognition. Loan origination fees received in excess of direct origination costs are deferred and accreted to interest income using a method approximating the level-yield method over the life of the loan.

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Allowance for Loan Losses:  The allowance for loan losses is a management estimate of the reserve necessary to absorb probable losses in the Company’s loan portfolio. The Company charges off the balance of a loan or writes down a portion of a loan when it identifies a loss in the respective loan. In determining the adequacy of the allowance, management evaluates prevailing economic conditions, results of regular examinations and evaluations of the quality of the loan portfolio by external parties, actual loan loss experience, the extent of existing risks in the loan portfolio and other pertinent factors. Future additions to the allowance may be necessary based on changes in economic conditions and other factors used in evaluating the loan portfolio. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require additions to the allowance based on their judgments of information available to them at the time of their examination.

         The allowance for impaired loans is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.

Purchased Receivables:  The Bank purchases accounts receivable at a discount from its customers. The purchased receivables are carried at cost. The discount and fees charged to the customer are recorded during the period of the purchase.

Premises and Equipment:  Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization expense for financial reporting purposes is computed using the straight-line method based upon the shorter of the lease term or the estimated useful lives of the assets that vary according to the asset type and include; vehicles at 3 years, furniture and equipment ranging between 3 and 7 years, leasehold improvements ranging between 2 and 11 years, and buildings over 39 years. Maintenance and repairs are charged to current operations, while renewals and betterments are capitalized.

Intangible Assets:  As part of an acquisition of branches from Bank of America in 1999, the Company recorded $6.9 million of goodwill and $2.9 million of core deposit intangible. In accordance with Statements of Financial Accounting Standards (SFAS) No. 142 “Goodwill and Other Intangible Assets,” management reviews goodwill annually for impairment by reviewing a number of key market indicators. In addition, the Company amortizes its core deposit intangible over 8 years using a straight-line method. The core deposit intangible is amortized over its estimated life of eight years.

Other Assets:  Other assets include purchased software and prepaid expenses. These assets are carried at amortized cost and are amortized using the straight-line method over their estimated useful life or the term of the agreement. Also included in other assets is the deferred tax asset and the Company’s investment in RML Holding Company, Elliott Cove, NBG, and Related Corporate Partners XXII, L.P., (“RCP”), a Delaware limited partnership that develops low-income housing projects throughout the United States. The Company purchased a $3 million interest in RCP in January of 2003.

Other Real Estate:  Other real estate represents properties acquired through foreclosure or its equivalent. Prior to foreclosure, the carrying value is adjusted to the lower of cost or fair market value of the real estate to be acquired by a charge to the allowance for loan loss. Any subsequent reduction in the carrying value is charged against earnings.

Advertising:  Advertising, promotion and marketing costs are expensed as incurred. For the periods ending December 31, 2005, 2004, and 2003, the Company reported total expenses of $1.7 million, $1.2 million, and $1.2 million, respectively.

Income Taxes:  The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

Earnings Per Share:  Earnings per share is calculated using the weighted average number of shares and dilutive common stock equivalents outstanding during the period. Stock options, as described in Note 17, are considered to be common stock equivalents. Incremental shares were 178,681, 191,300, and 225,616 for 2005, 2004, and 2003, respectively.

Stock Option Plans:  The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. FASB Statement No. 123R, “Share Based-Payment”, a revision of FASB 123 “Accounting for Stock — Based Compensation” establishes accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of Statement 123, as amended. In addition, the Company will begin to expense costs associated with its stock options in the first quarter of 2006 as required by the revision of FASB Statement No. 123.

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         The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.

					2005		2004		2003
Net income (in thousands)			As reported		$11,170		$10,700		$10,545
Less stock-based employee compensation					(173)		(163)		(198)
	Net income		Pro forma		$10,997		$10,537		$10,347
Earnings per share, basic			As reported		$1.87		$1.76		$1.76
			Pro forma		$1.84		$1.73		$1.72
Earnings per share, diluted			As reported		$1.81		$1.71		$1.69
			Pro forma		$1.78		$1.68		$1.66

Comprehensive Income:  Comprehensive income consists of net income and net unrealized gains (losses) on securities after tax effect and is presented in the consolidated statements of shareholders’ equity and comprehensive income.

Reclassifications:  Certain reclassifications have been made to prior year amounts, due to aggregation, to maintain consistency with the current year with no impact on net income or total shareholders’ equity.

Segments:  The Company has identified only one reportable segment.

Geographic Concentration and Alaska Economy:  The Company’s growth and operations depend upon the economic conditions of Alaska and the specific markets it serves. The economy in Alaska is dependent upon the natural resources industries, in particular oil production, as well as tourism, government, and U.S. military spending. Approximately 85% 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 the Company serves eventually could have a positive or negative impact on the Company.

Consolidation Policy:  The consolidated financial statements include the financial information for Northrim BanCorp, Inc. and its wholly-owned subsidiaries that include Northrim Bank, and NISC. All intercompany balances have been eliminated in consolidation. The Company accounts for its investments in RML Holding Company, Elliott Cove, and Pacific Wealth Advisors, LLC using the equity method.

NOTE 2 — Cash and Due from Banks

         The Company is required to maintain a $500,000 minimum average daily balance with the Federal Reserve Bank for purposes of settling financial transactions and charges for Federal Reserve Bank services. The Company is also required to maintain cash balances or deposits with the Federal Reserve Bank sufficient to meet its statutory reserve requirements. The average reserve requirement for the maintenance period, which included December 31, 2005, was $0.

NOTE 3 — Money Market Investments

         Money market investment balances are as follows:

December 31,			2005		2004
			(In Thousands)
Interest bearing deposits at Federal Home Loan Bank (FHLB)			$54,036		$12,157
Fed funds sold			6,800		—
	Total		$60,836		$12,157

         All money market investments had a one-day maturity.

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NOTE 4 — Investment Securities

         The carrying values and approximate market values of investment securities are presented below:

						Gross		Gross
				Amortized		Unrealized		Unrealized		Market
December 31,				Cost		Gains		Losses		Value
				(In Thousands)
2005:
Securities Available for Sale
	U.S. Treasury			$15,930		$—		$169		$15,761
	U.S. Agency			37,140		—		659		36,482
	Mortgage-backed Securities			242		—		2		240
		Total		$53,312		$—		$830		$52,483
Securities Held to Maturity
	Municipal Securities			$936		$28		$7		$957
Federal Home Loan Bank Stock				$1,556		$—		$—		$1,556
2004:
Securities Available for Sale
	U.S. Treasury			$5,503		$—		$22		$5,481
	U.S. Agency			53,628		180		152		53,656
	Mortgage-backed Securities			311		1		—		312
		Total		$59,442		$181		$174		$59,449
Securities Held to Maturity
	Municipal Securities			$724		$47		$—		$771
Federal Home Loan Bank Stock				$1,302		$—		$—		$1,302

         Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2005 were as follows:

			Less Than 12 Months				More Than 12 Months				Total
					Unrealized				Unrealized				Unrealized
			Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
			(In Thousands)
U.S. Treasury			$4,883		$53		$10,878		$116		$15,761		$169
U.S. Agency			10,519		176		25,963		483		36,482		659
Mortgage-backed Securities			240		2		—		—		240		2
	Total		$15,642		$231		$36,841		$599		$52,483		$830

         The unrealized losses on investments in U.S. Treasury and U.S. Agency securities were caused by interest rate increases. At December 31, 2005, there were fifteen of these securities in an unrealized loss position of $830,000. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

         The amortized cost and market values of debt securities at December 31, 2005, are distributed by contractual maturity as shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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				Within		1-5		5-10		Over		Amortized		Market
				1 Year		Years		Years		10 Years		Cost		Value
				(In Thousands)
Securities Available for Sale
	U.S. Treasury			$10,994		$4,936		$—		$—		$15,930		$15,761
	U.S. Agency			1,550		35,590		—		—		37,140		36,482
	Mortgage-backed Securities			—		—		—		242		242		240
		Total		$12,544		$40,526		$—		$242		$53,312		$52,483
		Weighted Average Yield		2.93%		3.81%		0.00%		4.52%		3.61%		—
Securities Held to Maturity
	Municipal Securities			$65		$300		$442		$129		$936		$957
		Weighted Average Yield		3.84%		4.35%		3.88%		5.11%		4.20%		—

         The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities are as follows:

					Gross		Gross
December 31,			Proceeds		Gains		Losses
			(In Thousands)
2005 Available-for-Sale Securities			$6,148		$44		$35
	Held-to-Maturity Securities		$—		$—		$—
2004 Available-for-Sale Securities			$3,789		$151		$—
	Held-to-Maturity Securities		$—		$—		$—
2003 Available-for-Sale Securities			$17,379		$310		$—
	Held-to-Maturity Securities		$—		$—		$—

         The Company pledged $20.9 million and $31.2 million of investment securities at December 31, 2005, and 2004, respectively, as collateral for public deposits and borrowings.

         A summary of taxable interest income on available for sale investment securities is as follows:

December 31,			2005		2004		2003
			(In Thousands)
U.S. Treasury			$472		$67		$37
U.S. Agency			1,688		2,319		2,666
Other			42		14		21
	Total		$2,202		$2,400		$2,724

         Included in investment securities is a required investment in stock of the FHLB. The amount of the required investment is based on the Company’s capital stock and lending activity, and amounted to $1.6 million and $1.3 million in 2005 and 2004, respectively.

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NOTE 5 — Loans

         The composition of the loan portfolio is presented below:

December 31,				2005		2004
				(In Thousands)
Commercial				$287,617		$267,737
Real estate construction				131,532		122,873
Real estate term				252,395		252,358
Installment and other consumer				36,519		38,166
	Sub-total			708,063		681,134
Less: Unearned purchase discount				—		(44)
		Unearned origination fees, net of origination costs		(3,004)		(2,821)
	Total loans			705,059		678,269
Allowance for loan losses				(10,706)		(10,764)
	Net Loans			$694,353		$667,505

         The Company’s primary market areas are Anchorage, the Matanuska Valley, and Fairbanks, Alaska, where the majority of its lending has been with Alaska businesses and individuals. At December 31, 2005, approximately 71% and 27% of the Company’s loans are secured by real estate, or for general commercial uses, including professional, retail, and small businesses, respectively. Substantially all of these loans are collateralized and repayment is expected from the borrowers’ cash flow or, secondarily, the collateral. The Company’s exposure to credit loss, if any, is the outstanding amount of the loan if the collateral is proved to be of no value.

         Nonaccrual loans totaled $5.1 million and $5.9 million at December 31, 2005, and 2004, respectively. Interest income which would have been earned on non-accrual loans for 2005, 2004, and 2003 amounted to $353,000, $658,000, and $690,000, respectively. There are no commitments to lend additional funds to borrowers whose loans are in a non-accrual status or are troubled debt restructurings.

         At December 31, 2005, and 2004, the recorded investment in loans that are considered to be impaired was $18.3 million and $6.7 million, respectively, (of which $5 million and $5.4 million, respectively, were on a non-accrual basis). A specific allowance of $2.6 million was established for the $18.3 million of impaired loans. The average recorded investment in impaired loans during the years ended December 31, 2005, and 2004, was approximately $18.1 million and $7.3 million, respectively. For the years ended December 31, 2005, 2004, and 2003, the Company recognized interest income on these impaired loans of $945,000, $117,000, and $734,000, respectively, which was recognized using the cash basis method of income recognition.

         At December 31, 2005, and 2004, there were no loans pledged as collateral to secure public deposits.

         At December 31, 2005, and 2004, the Company serviced $90 million and $79.6 million of loans, respectively, which had been sold to various investors without recourse. At December 31, 2005, and 2004, the Company held $734,000 and $374,000, respectively, in trust for these loans for the payment of such items as taxes, insurance, and maintenance costs.

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         Maturities and sensitivity of accrual loans to changes in interest rates as of December 31, 2005 are as follows:

			Maturity
			Within				Over
			1  Year		1-5 Years		5  Years		Total
			(In Thousands)
Commercial			$150,434		$79,633		$53,406		$283,473
Construction			121,615		6,094		3,689		131,398
Real estate term			62,547		56,850		132,188		251,585
Installment and other consumer			1,423		6,271		28,823		36,517
	Total		$336,019		$148,848		$218,106		$702,973
Fixed interest rate			$129,958		$55,391		$47,246		$232,595
Floating interest rate			206,061		93,457		170,860		470,378
	Total		$336,019		$148,848		$218,106		$702,973

         Certain directors, and companies of which directors are principal owners, have loans and other transactions such as insurance placement and architectural fees with the Company. Such transactions are made on substantially the same terms, including interest rates and collateral required, as those prevailing for similar transactions of unrelated parties. An analysis of the loan transactions follows:

December 31,		2005		2004
		(In Thousands)
Balance, beginning of the year		$3,132		$4,025
Loans made		16,848		10,349
Repayments or change to nondirector status		16,985		11,242
Balance, end of year		$2,995		$3,132

         The Company’s unfunded loan commitments to these directors or their related interests on December 31, 2005, and 2004, were $1.5 million and $2.5 million, respectively.

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NOTE 6 — Allowance for Loan Losses

         The following is a detail of the allowance for loan losses:

December 31,				2005		2004		2003
				(In Thousands)
Balance, beginning of the year				$10,764		$10,186		$8,476
Provision charged to operations				1,170		1,601		3,567
Charge-offs:
	Commercial			(1,552)		(1,387)		(2,067)
	Construction			(100)		—		—
	Real estate			—		—		(127)
	Consumer			(63)		(84)		(91)
		Total Charge-offs		(1,715)		(1,471)		(2,285)
Recoveries:
	Commercial			418		200		279
	Construction			15		185		—
	Real estate			15		—		111
	Consumer			39		63		38
		Total Recoveries		487		448		428
Charge-offs net of recoveries				(1,228)		(1,023)		(1,857)
Balance, End of Year				$10,706		$10,764		$10,186

NOTE 7 — Premises and Equipment

         The following summarizes the components of premises and equipment:

December 31,			Useful Life		2005		2004
					(In Thousands)
Land					$1,443		$1,443
Vehicle			3 years		61		61
Furniture and equipment			5-7 years		8,915		8,660
Tenant improvements			2-11 years		4,839		4,025
Buildings			30 years		6,848		6,848
	Total Premises and Equipment				22,106		21,037
Accumulated depreciation and amortization					(11,503)		(10,454)
	Total Premises and Equipment, Net				$10,603		$10,583

         During 1991, the Company purchased the building in which it operates and simultaneously sold the building to a partnership, in which three of the Company’s directors had an approximate 54% ownership interest. The net gain on the sale of the building, $176,000, was being amortized over the lease term; approximately $12,000 was recognized in 2004, and 2003, respectively. There was no gain amortized in 2005.

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NOTE 8 — Other Assets

         A summary of intangible assets and other assets is as follows:

December 31,			2005		2004
			(In Thousands)
Intangible assets
	Goodwill		$5,735		$5,735
	Core deposits intangible		531		899
	NBG customer relationships		1,119		—
	Total		$7,385		$6,634
Prepaid expenses			$572		$543
Software			466		816
Deferred taxes, net			8,838		7,673
Note receivables			1,060		100
Investment in Elliott Cove			101		375
Subscription in PWA			2,015		—
Investment in RML Holding Company			4,203		4,191
Investment in Related Corporate Partners			2,440		2,720
Other assets			1,726		1,149
	Total		$21,421		$17,567

         As part of the acquisition of branches from Bank of America in 1999, the Company recorded goodwill and a core deposit intangible (“CDI”). The CDI is net of accumulated amortization of $2,411,000 and $2,044,000 for the periods ending December 31, 2005, and 2004, respectively. The Company intends to continue amortizing the CDI for the remainder of its useful life.

         In the first quarter of 2005, NCIC purchased a 10% interest in NBG, an insurance brokerage company that provides employee benefit plans to businesses throughout Alaska. In the fourth quarter of 2005, NCIC purchased an additional 40.1% interest in NBG, bringing its ownership interest to 50.1%.

         The Company recorded amortization expense of its intangible assets of $368,000 in 2005, 2004, and 2003, respectively. The amortization expense that is required on these assets as of December 31, 2005, is as follows:

Year Ending December 31:
(In Thousands)
2006			$483
2007			276
2008			115
2009			115
2010			115
Thereafter			546
	Total		$1,650

         The Company owns a 49% equity interest in Elliott Cove through its wholly-owned subsidiary, 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. In the second quarter of 2004, the Company converted the loan into an additional equity interest in Elliott Cove. At the time of the conversion, the amount outstanding on this loan was $625,000. During the first, second, and third quarters of 2004, and third and fourth quarters of 2005, other investors made additional investments in Elliott Cove. In addition, the Company made a separate commitment to loan Elliott Cove $500,000 during the first quarter of 2004. In the first quarter of 2005, the Company increased this loan commitment to $750,000. The balance outstanding on this commitment at December 31, 2005 was $675,000. Finally, in the third quarters of 2004

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and 2005, the Company made additional investments of $250,000 and $150,000, respectively in Elliott Cove. As a result of the additional investments in Elliott Cove by other investors and the Company’s conversion of its $625,000 loan and its additional investments, its interest in Elliott Cove increased from 43% to 49% between December 31, 2004 and December 31, 2005.

         In the fourth quarter of 2005, the Company, through NISC, its wholly-owned subsidiary, purchased subscription rights to an ownership interest in Pacific Wealth Advisors, LLC (“PWA”), an investment advisory and wealth management business located in Seattle, Washington. The Company also made commitments to make two loans to PWA of $225,000 and $175,000, respectively. The balance outstanding on these two commitments at December 31, 2005 was $210,000 and $175,000, respectively. Subsequent to the investment in these subscription rights, PWA purchased Pacific Portfolio Consulting L.P., an investment advisory business, and formed Pacific Portfolio Trust Company. After the completion of these transactions, NISC owned a 24% interest in PWA and applies the equity method of accounting for its ownership interest in PWA.

         RML was formed in 1998 and has offices throughout Alaska. During the third quarter of 2004, RML reorganized and became a wholly-owned subsidiary of a newly formed holding company, RML Holding Company. In this process, RML Holding Company acquired another mortgage company, PAM, which was merged into RML in the first quarter of 2005. Prior to the reorganization, the Company, through Northrim Bank’s wholly-owned subsidiary, NCIC, owned a 30% interest in the profits of RML. As a result of the reorganization, the Company now owns a 24% interest in the profits of RML Holding Company and applies the equity method of accounting for its ownership interest in RML.

         Below is summary balance sheet and income statement information for RML Holding Company.

December 31,				2005		2004
				(In Thousands)
Assets
	Current assets			$70,315		$50,854
	Long-term assets			5,958		2,960
		Total Assets		$76,273		$53,814
Liabilities
	Current liabilities			$58,285		$37,872
	Long-term liabilities			1,906		0
		Total Liabilities		60,191		37,872
Shareholders’ Equity				16,082		15,942
		Total Liabilities and Shareholders’ Equity		$76,273		$53,814
Income/expense
	Gross income			$15,819		$13,177
	Total expense			13,107		11,466
	Joint venture allocations			(522)		(596)
		Net Income		$2,190		$1,115

         In January of 2003, the Company made a $3 million investment in RCP. The Company earns a return on its investment in the form of tax credits and deductions that flow through to it as a limited partner in this partnership over a fifteen-year period.

NOTE 9 —	Deposits

         The aggregate amount of certificates of deposit in amounts of $100,000 or more at December 31, 2005, and 2004, was $51.2 million and $82.5 million, respectively.

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         At December 31, 2005, the scheduled maturities of certificates of deposit (excluding Alaska CD’s, which do not have scheduled maturities) are as follows:

Year Ending December 31:
(In Thousands)
2006			$92,111
2007			14,819
2008			3,418
2009			91
2010			121
Thereafter			20
	Total		$110,580

         At December 31, 2005, and 2004, the Company held $15 million and $25 million, respectively, in certificates of deposit from a public entity collateralized by letters of credit issued by the Federal Home Loan Bank.

NOTE 10 —	Borrowings

         The Company has a line of credit with the FHLB of Seattle approximating 11% of assets, or $94.2 million at December 31, 2005. The line is secured by a blanket pledge of the Company’s assets. At December 31, 2005, and 2004, there was $18.1 million and $28.2 million committed on the line, respectively. At December 31, 2005, there was $2.6 million outstanding on the line and an additional $15.5 million of the borrowing line was committed to secure public deposits. At December 31, 2004, there was $3 million outstanding on the line and an additional $25.2 million of the borrowing line was committed to secure public deposits. The outstanding balances on the FHLB line of credit at December 31, 2005, and 2004, of $2.6 million and $3 million, respectively, have a maturity date of May 7, 2012.

         The Company entered into a note agreement with the Federal Reserve Bank on the payment of tax deposits. The Federal Reserve has the option to call the note at any time. The balance at December 31, 2005, and 2004, was $1 million.

         The Federal Reserve Bank is holding $63.2 million of loans as collateral to secure advances made through the discount window on December 31, 2005. There were no discount window advances outstanding at December 31, 2005.

         Securities sold under agreements to repurchase were $4.9 million with an interest rate of 2.25%, and $2.5 million with an interest rate of 0.26%, at December 31, 2005, and 2004, respectively. The average balance outstanding of securities sold under agreement to repurchase during 2005 and 2004 was $2.8 million and $1.1 million, respectively, and the maximum outstanding at any month-end was $5.4 million and $2.5 million, respectively. The securities sold under agreement to repurchase are held by the Federal Home Loan Bank under the Company’s control.

NOTE 11 —	Junior Subordinated Debentures

         In May of 2003, the Company formed a wholly-owned Delaware statutory business trust subsidiary, Northrim Capital Trust 1 (the “Trust”), which issued $8 million of guaranteed undivided beneficial interests in the Company’s Junior Subordinated Deferrable Interest Debentures (“Trust Preferred Securities”). These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. All of the common securities of the Trust are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by the Trust to purchase $8.2 million of junior subordinated debentures of the Company. The Trust Preferred Securities of the Trust are not consolidated in the Company’s financial statements in accordance with FASB Interpretation No. 46R (“FIN 46”); therefore, the Company has recorded its investment in the Trust as an other asset and the subordinated debentures as a liability. The debentures which represent the sole asset of the Trust, accrue and pay distributions quarterly at a variable rate of 90-day LIBOR plus 3.15% per annum, adjusted quarterly, of the stated liquidation value of $1,000 per capital security. The interest rate on these debentures was 7.49% at December 31, 2005. The interest cost to the Company on these debentures was $523,000 in 2005 and $375,000 in 2004. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities; (ii) the redemption price with respect to any Trust Preferred Securities called for redemption by the Trust and (iii) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of the Trust. The Trust Preferred Securities are mandatorily redeemable upon maturity of the debentures on May 15, 2033, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by

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the Trust in whole or in part, on or after May 15, 2008. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest.

         In December of 2005, the Company formed a wholly-owned Connecticut statutory business trust subsidiary, Northrim Statutory Trust 2 (the “Trust 2”), which issued $10 million of guaranteed undivided beneficial interests in the Company’s Junior Subordinated Deferrable Interest Debentures (“Trust Preferred Securities 2”). These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. All of the common securities of Trust 2 are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities 2 were used by Trust 2 to purchase $10.3 million of junior subordinated debentures of the Company. The Trust Preferred Securities of the Trust 2 are not consolidated in the Company’s financial statements in accordance with FIN 46; therefore, the Company has recorded its investment in the Trust 2 as an other asset and the subordinated debentures as a liability. The debentures which represent the sole asset of Trust 2, accrue and pay distributions quarterly at a variable rate of 90-day LIBOR plus 1.37% per annum, adjusted quarterly, of the stated liquidation value of $1,000 per capital security. The interest rate on these debentures was 5.86% at December 31, 2005. The interest cost to the Company on these debentures was $26,000 in 2005. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities 2; (ii) the redemption price with respect to any Trust Preferred Securities 2 called for redemption by Trust 2 and (iii) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of Trust 2. The Trust Preferred Securities 2 are mandatorily redeemable upon maturity of the debentures on March 15, 2036, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by Trust 2 in whole or in part, on or after March 15, 2011. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest.

NOTE 12 —	Interest Expense

         Interest expense on deposits and borrowings is presented below:

December 31,			2005		2004		2003
			(In Thousands)
Interest-bearing demand accounts			$369		$221		$205
Money market accounts			3,876		1,527		1,293
Savings accounts			6,263		2,290		1,182
Certificates of deposit greater than $100,000			2,170		1,620		1,903
Certificates of deposit less than $100,000			1,312		1,051		1,620
Borrowings			883		574		478
	Total		$14,873		$7,283		$6,681

NOTE 13 —	Income Taxes

         Components of the provision for income taxes are as follows:

				Current Tax		Deferred		Total
December 31,				Expense		(Benefit)		Expense
				(In Thousands)
2005:		Federal		$6,148		($639)		$5,509
		State		1,597		(182)		1,415
Total				$7,745		($821)		$6,924
2004:		Federal		$6,139		($998)		$5,141
		State		1,348		(262)		1,086
Total				$7,487		($1,260)		$6,227
2003:		Federal		$6,689		($1,398)		$5,291
		State		1,565		(340)		1,225
Total				$8,254		($1,738)		$6,516

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         The actual expense for 2005, 2004, and 2003, differs from the “expected” tax expense (computed by applying the U.S. Federal Statutory Tax Rate of 35% for the year ended December 31, 2005, 2004, and 2003) as follows:

December 31,			2005		2004		2003
			(In Thousands)
Computed “expected” income tax expense			$6,333		$5,924		$5,971
State income taxes, net			920		706		796
Other			(329)		(403)		(251)
	Total		$6,924		$6,227		$6,516

         The components of the deferred tax asset are as follows:

December 31,			2005		2004		2003
			(In Thousands)
Provision for loan losses			$5,796		$5,612		$4,962
Loan fees, net of costs			1,227		1,150		1,062
Unrealized gain on available-for-sale
	investment securities		341		(3)		(436)
Depreciation			678		386		263
Other, net			796		528		130
	Net Deferred Tax Asset		$8,838		$7,673		$5,981

         A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The primary source of recovery of the deferred tax assets will be future taxable income. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. The deferred tax asset is included in other assets.

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NOTE 14 — Comprehensive Income

         At December 31, 2005, 2004, and 2003, the related tax effects allocated to each component of other comprehensive income are as follows:

						Tax
		Before Tax				(Expense)
December 31,		Amount				Benefit				Net Amount
		(In Thousands)
2005:
Unrealized net holding losses on investment securities arising during 2005			($828)				$340				($488)
Plus: Reclassification adjustment for net realized gains included in net income			(9)				4				(5)
Net unrealized losses			($837)				$344				($493)
2004:
Unrealized net holding losses on investment securities arising during 2004			($900)				$370				($530)
Plus: Reclassification adjustment for net realized gains included in net income			(151)				62				(89)
Net unrealized losses			($1,051)				$432				($619)
2003:
Unrealized net holding losses on investment securities arising during 2003			($676)				$278				($398)
Plus: Reclassification adjustment for net realized gains included in net income			(310)				127				(183)
Net unrealized losses			($986)				$405				($581)

NOTE 15 —	Employee Benefit Plans

         On July 1, 1992, the Company implemented a profit sharing plan, including a provision designed to qualify the plan under Section 401(k) of the Internal Revenue Code of 1986, as amended. Employees may participate in the plan if they work more than 1,000 hours per year. Under the plan, each eligible participant may contribute a percentage of their eligible salary to a maximum established by the IRS, and the Company matches 25% up to 6% of the employee contribution. The Company may increase the matching contribution at the discretion of the Board of Directors. The plan also allows the Company to make a discretionary contribution on behalf of eligible employees based on their length of service to the Company.

         To be eligible for 401(k) contributions, participants must be employed at the end of the plan year, except in the case of death, disability or retirement. The Company expensed $773,000, $619,000, and $624,000, in 2005, 2004, and 2003, respectively for 401(k) contributions and included these expenses in salaries and other personal expense in the Consolidated Statements of Income.

         On July 1, 1994, the Company implemented a Supplemental Executive Retirement Plan to executive officers of the Company whose retirement benefits under the 401(k) plan have been limited under provisions of the Internal Revenue Code. Contributions to this plan totaled $165,000, $161,000, and $42,000, in 2005, 2004, and 2003, respectively and included these expenses in salaries and other personal expense in the Consolidated Statements of Income. At December 31, 2005 and 2004, the balance of the accrued liability for this plan was included in other liabilities and totaled $1.1 million and $970,000, respectively.

         In February of 2002, the Company implemented a non-qualified deferred compensation plan in which certain of the executive officers participate. Contributions to this plan totaled $268,000, $119,000, and $120,000 in 2005, 2004, and 2003 respectively and included these expenses in salaries and other personal expense in the Consolidated Statements of Income. At December 31, 2005 and 2004, the balance of the accrued liability for this plan was included in other liabilities and totaled $702,000 and $433,000, respectively.

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NOTE 16 —	Common Stock

         Quarterly cash dividends were paid aggregating to $2.6 million, $2.3 million, and $2 million, or $0.43 per share, $0.38 per share, and $0.33 per share, in 2005, 2004, and 2003, respectively. On January 6, 2006, the Board of Directors declared a $0.11 per share cash dividend payable on February 3, 2006, to shareholders of record on January 23, 2006. Federal and State regulations place certain limitations on the payment of dividends by the Company.

         In September 2002, our Board of Directors’ approved a plan whereby we would periodically repurchase for cash up to approximately 5%, or 306,372, of our shares of common stock in the open market. We purchased 224,800 shares of our stock under this program through December 31, 2004. In August of 2004, the Board of Directors amended the stock repurchase plan and increased the number of shares available under the program by 5% of total shares outstanding, or 304,283 shares. We purchased 308,642 shares in 2005, which left a balance of 77,213 shares available under the stock repurchase program. The Company has paid a total of $10.4 million to repurchase its shares at an average price of $19.52 per share. We intend to continue to repurchase our stock from time to time depending upon market conditions, but we can make no assurances that we will continue this program or that we will repurchase all of the authorized shares.

NOTE 17 —	Options

         The Company has set aside 300,000 shares of authorized stock for the 2004 Stock Incentive Plan (“2004 Plan”). The total number of shares under the 2004 Plan and previous stock incentive plans at December 31, 2005 was 424,003, which includes 46,418 shares granted under the 2004 Plan leaving 205,606 shares available for future awards. Under the 2004 Plan, certain key employees have been granted the option to purchase set amounts of common stock at the market price on the day the option was granted. Optionees, at their own discretion, may cover the cost of exercise through the exchange, at then fair market value, of already owned shares of the Company’s stock. Options are granted for a 10-year period and vest on a pro rata basis over the initial three years from grant. Activity on options granted under the 2004 Plan and prior plans is as follows:

				Weighted
		Shares		Average				Range of
		Under		Exercise				Exercise
		Option		Price				Price
December 31, 2002 outstanding		447,647			$8.26			$6.64-$23.11
Granted — 2003		104,500			14.00
Forfeited		(4,250)			11.83
Exercised		(125,937)			5.72
December 31, 2003 outstanding		421,960			$10.40			$6.64-$23.11
Granted — 2004		49,838			19.81
Forfeited		(6,750)			13.38
Exercised		(59,957)			6.73
December 31, 2004 outstanding		405,091			$12.05			$6.64-$23.11
Granted — 2005		46,418			20.40
Forfeited		(2,862)			17.78
Exercised		(24,644)			9.61
December 31, 2005 outstanding		424,003			$13.07			$6.64-$23.11

         At December 31, 2005, 2004, and 2003, the weighted-average remaining contractual life of outstanding options was 5.8 years, 6.4 years, and 6.4 years, respectively.

         At December 31, 2005, 2004, and 2003, the number of options exercisable was 312,102, 289,251, and 292,733, respectively, and the weighted-average exercise price of those options was $11.29, $10.27, and $8.95, respectively.

         At December 31, 2005, there were 205,606 additional shares available for grant under the plan. The per share weighted-average fair value of stock options granted during November 2005, December 2004, and April 2003, was $8.69, $8.91, and $4.71, respectively, on the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:

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2005-expected dividends of $0.50, risk free interest rate of 4.45%, volatility of 37.06%, and an expected life of 8 years; 2004 — expected dividends of $0.44 per share, risk-free interest rate of 4.09%, volatility of 39.28%, and an expected life of 8 years; 2003 — expected dividends of $0.38 per share, risk-free interest rate of 3.83%, volatility of 31.05%, and an expected life of 10 years.

         The Company applies APB Opinion No. 25 in accounting for its plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. FASB Statement No. 123, “Share-Based Payment” establishes accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of Statement 123, as amended.

NOTE 18 —	Commitments and Contingent Liabilities

         Rental expense under leases for equipment and premises was $1.7 million, $1.6 million, and $1.5 million in 2005, 2004, and 2003, respectively. Required minimum rentals on non-cancelable leases as of December 31, 2005, are as follows:

Year nding December 31:
(In Thousands)
2006			$1,338
2007			1,193
2008			1,227
2009			154
2010			71
Thereafter			1,545
	Total		$5,528

         The Company leases the main office facility from an entity in which a director has an interest. Rent expense under this lease agreement was $929,000, $810,000, and $782,000 for 2005, 2004, and 2003, respectively. The Company believes that the lease agreement is at market terms.

         At December 31, 2005, the Company pledged $15.5 million of letter of credit commitments, issued by the Federal Home Loan Bank of Seattle, as collateral to secure $15 million in public deposits and accrued interest. This letter of credit is collateralized by a blanket pledge of the Company’s assets.

         The Company is self-insured for medical, dental, and vision plan benefits provided to employees. The Company has obtained stop-loss insurance to limit total medical claims in any one year to $50,000 per covered individual and $1.6 million for all medical claims. The Company has established a liability for outstanding claims and incurred, but unreported, claims. While management uses what it believes are pertinent factors in estimating the liability, it is subject to change due to claim experience, type of claims, and rising medical costs.

Off-Balance Sheet Financial Instruments:  In the ordinary course of business, the Company enters into various types of transactions that involve financial instruments with off-balance sheet risk. These instruments include commitments to extend credit and standby letters of credit and are not reflected in the accompanying balance sheets. These transactions may involve to varying degrees credit and interest rate risk in excess of the amount, if any, recognized in the balance sheets. Management does not anticipate any loss as a result of these commitments.

         The Company’s off-balance sheet credit risk exposure is the contractual amount of commitments to extend credit and standby letters of credit. The Company applies the same credit standards to these contracts as it uses in its lending process.

December 31,			2005				2004
			(In Thousands)
Off-balance sheet commitments:
	Commitments to extend credit			$151,316			$	137,480
	Standby letters of credit			20,788				4,590

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         Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and generally have fixed expiration dates but may be terminated by the Company if certain conditions of the contract are violated. Although currently subject to draw down, many of the commitments do not necessarily represent future cash requirements. Collateral held relating to these commitments varies, but generally includes real estate, inventory, accounts receivable, and equipment.

         Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Credit risk arises in these transactions from the possibility that a customer may not be able to repay the Company upon default of performance. Collateral held for standby letters of credit is based on an individual evaluation of each customer’s creditworthiness.

NOTE 19 —	Regulatory Matters

         The Company and Northrim Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Northrim Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Northrim Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory practices. The Company’s and Northrim Bank’s capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings, and other factors.

         Federal banking agencies have established minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. The regulations set forth the definitions of capital, risk-weighted and average assets. As of December 15, 2005, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. Management believes, as of December 31, 2005, that the Company and Northrim Bank met all capital adequacy requirements.

         The tables below illustrate the capital requirements for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements. The dividends that the Bank pays to the Company are limited to the extent necessary for the Bank to meet the regulatory requirements of a well-capitalized bank. The capital ratios for the Company exceed those for the Bank primarily because the $18 million trust preferred securities offerings that the Company completed in the second quarter of 2003 and in the fourth quarter of 2005 are included in the Company’s capital for regulatory purposes although they are accounted for as a liability 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 $18 million and $8 million more in regulatory capital than the Bank at December 31, 2005 and 2004, respectively, which explains most of the difference in the capital ratios for the two entities.

						Adequately-
Consolidated		Actual				Capitalized				Well-Capitalized
		Amount		Ratio		Amount		Ratio		Amount		Ratio
		(In Thousands)
As of December 31, 2005:
Total Capital (to risk-weighted assets)		$106,587		13.35%		$63,872		M8.0%		$79,840		M10.0%
Tier I Capital (to risk-weighted assets)		$96,598		12.10%		$31,933		M4.0%		$47,900		M6.0%
Tier I Capital (to average assets)		$96,598		10.81%		$35,744		M4.0%		$44,680		M5.0%
As of December 31, 2004:
Total Capital (to risk-weighted assets)		$93,814		12.87%		$58,315		M8.0%		$72,894		M10.0%
Tier I Capital (to risk-weighted assets)		$84,682		11.62%		$29,150		M4.0%		$43,726		M6.0%
Tier I Capital (to average assets)		$84,682		10.72%		$31,598		M4.0%		$39,497		M5.0%

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						Adequately-
Northrim Bank		Actual				Capitalized				Well-Capitalized
		Amount		Ratio		Amount		Ratio		Amount		Ratio
		(In Thousands)
As of December 31, 2005:
Total Capital (to risk-weighted assets)		$92,004		11.57%		$63,616		M8.0%		$79,519		M10.0%
Tier I Capital (to risk-weighted assets)		$82,056		10.32%		$31,805		M4.0%		$47,707		M6.0%
Tier I Capital (to average assets)		$82,056		9.24%		$35,522		M4.0%		$44,403		M5.0%
As of December 31, 2004:
Total Capital (to risk-weighted assets)		$83,284		11.44%		$58,241		M8.0%		$72,801		M10.0%
Tier I Capital (to risk-weighted assets)		$74,160		10.18%		$29,139		M4.0%		$43,709		M6.0%
Tier I Capital (to average assets)		$74,160		9.40%		$31,557		M4.0%		$39,447		M5.0%

NOTE 20 —	Fair Value of Financial Instruments

         The following methods and assumptions were used to estimate fair value disclosures. All financial instruments are held for other than trading purposes.

Cash and Money Market Investments:  The carrying amounts reported in the balance sheet represent their fair values.

Investment Securities:  Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Investments in Federal Home Loan Bank stock are recorded at cost, which also represents fair market value.

Loans:  For variable-rate loans that reprice frequently, fair values are based on carrying amounts. An estimate of the fair value of the remaining portfolio is based on discounted cash flow analyses applied to pools of similar loans, using weighted average coupon rate, weighted average maturity, and interest rates currently being offered for similar loans. The carrying amount of accrued interest receivable approximates its fair value.

Purchased Receivables:  Fair values for purchased receivables are based on their carrying amounts due to their short duration and repricing frequency.

Deposit Liabilities:  The fair values of demand and savings deposits are equal to the carrying amount at the reporting date. The carrying amount for variable-rate time deposits approximate their fair value. Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies currently offered interest rates to a schedule of aggregate expected monthly maturities of time deposits. The carrying amount of accrued interest payable approximates its fair value.

FHLB Advance:  The carrying amount reported in the balance sheet approximates the fair value.

Junior Subordinated Debentures:  The junior subordinated debentures have variable rates that adjust on a quarterly basis, thus their carrying amounts approximate their fair values.

Commitments to Extend Credit and Standby Letters of Credit:  The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

Limitations:  Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in

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nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

December 31,			2005				2004
			Carrying		Fair		Carrying		Fair
			Amount		Value		Amount		Value
			(In Thousands)
Financial Assets:
	Cash and money market investments		$89,690		$89,690		$31,093		$31,093
	Investment securities		54,975		54,996		61,475		61,522
	Net loans		694,353		686,984		667,505		667,969
	Purchased receivables		12,198		12,198		2,191		2,191
	Accrued interest receivable		4,397		4,397		3,678		3,678
Financial Liabilities:
	Deposits		$779,866		$779,677		$699,061		$698,801
	Accrued interest payable		469		469		337		337
	Borrowings		8,415		8,415		6,478		6,478
	Junior subordinated debentures		18,000		18,000		8,000		8,000
Unrecognized Financial Instruments:
	Commitments to extend credit		$151,316		$1,513		$137,480		$1,375
	Standby letters of credit		20,788		208		4,590		46

NOTE 21 —	Quarterly Results of Operations

2005 Quarter Ended			Dec. 31		Sept. 30		June 30		March 31
			(In Thousands Except Per Share Amounts)
Total interest income			$16,344		$15,047		$14,078			$13,312
Total interest expense			4,730		3,910		3,403			2,830
	Net interest income		11,614		11,137		10,675			10,482
Provision for loan losses			642		428		100			—
Other operating income			1,426		1,494		1,065			848
Other operating expense			7,371		7,605		7,373			7,128
	Income before income taxes		5,027		4,598		4,267			4,202
Income taxes			1,935		1,756		1,611			1,622
	Net Income		$3,092		$2,842		$2,656			$2,580
Earnings per share, basic			$0.53		$0.48		$0.44			$0.42
Earnings per share, diluted			$0.51		$0.47		$0.42			$0.41

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2004 Quarter Ended			Dec. 31		Sept. 30		June 30				March 31
			(In Thousands Except Per Share Amounts)
Total interest income			$13,202		$12,119			$11,859				$11,374
Total interest expense			2,300		1,920			1,580				1,485
	Net interest income		10,902		10,199			10,279				9,889
Provision for loan losses			600		143			429				429
Other operating income			1,114		885			955				836
Other operating expense			6,850		6,545			6,507				6,631
	Income before income taxes		4,566		4,396			4,298				3,665
Income taxes			1,699		1,699			1,536				1,293
	Net Income		$2,867		$2,697			$2,762				$2,372
Earnings per share, basic			$0.47		$0.44			$0.45				$0.39
Earnings per share, diluted			$0.46		$0.43			$0.44				$0.38

The sum may not necessarily tie to Consolidated Statements of Income due to rounding.

NOTE 22 —	Disputes and Claims

         The Company from time to time may be involved with disputes, claims, and litigation related to the conduct of its banking business. In the opinion of management, the resolution of these matters will not have a material effect on the Company’s financial position, results of operations, and cash flows.

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NOTE 23 —	Parent Company Financial Information

                   Condensed financial information for Northrim BanCorp, Inc. (unconsolidated parent company only) is as follows:

Balance Sheets for December 31,					2005		2004		2003
					(In Thousands)
Assets
	Cash				$11,014		$8,735		$7,910
	Investment in Northrim Bank				87,922		80,797		73,133
	Investment in NISC				2,484		552		(54)
	Investment in NCT1				248		248		248
	Investment in NST2				310		—		—
	Other assets				891		252		504
		Total Assets			$102,869		$90,584		$81,741
Liabilities
	Junior subordinated debentures				$18,558		$8,248		$8,013
	Taxes payable and other payables				(359)		(1,084)		(1,581)
	Other liabilities				196		62		24
		Total Liabilities			18,395		7,226		6,456
Shareholders’ Equity
	Common stock				5,803		6,089		6,050
	Additional paid-in capital				39,161		45,876		45,615
	Retained earnings				39,999		31,389		22,997
	Accumulated other comprehensive income-
		net unrealized gains on available for sale investment securities			(489)		4		623
			Total Shareholders’ Equity		84,474		83,358		75,285
			Total Liabilities and Shareholders’ Equity		$102,869		$90,584		$81,741

Statements of Income for Years Ended:					2005		2004		2003
					(In Thousands)
Income
	Interest income				$229		$177		$83
	Net income from Northrim Bank				12,118		11,659		11,306
	Net loss from NISC				(233)		(269)		(565)
	Other income				—		1		7
		Total Income			12,114		11,568		10,831
Expense
	Interest expense				565		387		243
	Administrative and other expenses				846		954		588
			Total Expense		1,411		1,341		831
			Net Income Before Income Taxes		10,703		10,227		10,000
Income tax expense (benefit)					(467)		(473)		(545)
			Net Income		$11,170		$10,700		$10,545

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Statements of Cash Flows for Years Ended:				2005		2004		2003
				(In Thousands)
Operating Activities:
	Net income			$11,170		$10,700		$10,545
Adjustments to Reconcile Net Income to Net Cash:
	Equity in earnings from subsidiaries			(11,885)		(11,390)		(10,741)
	Changes in other assets and liabilities			220		398		(641)
		Net Cash Used from Operating Activities		(495)		(292)		(837)
Investing Activities:
	Investment in NISC & NCT1			(2,165)		(250)		(973)
	Purchases of software and equipment			—		—		(11)
		Net Cash Used by Investing Activities		(2,165)		(250)		(984)
Financing Activities:
	Dividends paid to shareholders			(2,560)		(2,308)		(2,008)
	Dividends received from Northrim Bank			4,500		3,375		4,969
	Proceeds from issuance of trust preferred securities			10,000		—		8,000
	Proceeds from issuance of common stock			337		300		425
	Repurchase of common stock			(7,338)		—		(2,219)
		Net Cash Provided by Financing Activities		4,939		1,367		9,167
Net Increase by Cash and Cash Equivalents				2,279		825		7,346
Cash and Cash Equivalents at beginning of period				8,735		7,910		564
Cash and Cash Equivalents at end of period				$11,014		$8,735		$7,910

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Annual Report on Form  10-K

Annual Report Under Section 13 of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2005.

Commission File Number 0-33501

Northrim BanCorp, Inc.
State of Incorporation: Alaska
Employer ID Number:  92-0175752
3111 C Street
Anchorage, Alaska 99503
Telephone Number: (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

Northrim BanCorp, Inc. has filed all reports required to be filed by Section 13 of the Securities and Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days.

Northrim BanCorp, Inc. is an accelerated filer within the meaning of Rule  12b-2 promulgated under the Securities Exchange Act.

Northrim BanCorp, Inc. is not a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Northrim BanCorp, Inc. is required to file reports pursuant to Section 13 of the Securities Exchange Act.

Northrim BanCorp, Inc. is not a shell company (as defined in Rule  12b-2 of the Securities Exchange Act).

Disclosure of delinquent filers pursuant to Item 405 of Regulation  S-K (17 C.F.R. 229.405) is in our definitive proxy statement, which is incorporated by reference in Part III of this Form  10-K.

The aggregate market value of common stock held by non-affiliates of Northrim BanCorp, Inc. at June 30, 2005, was $135,083,352.

The number of shares of Northrim BanCorp’s common stock outstanding at March 1, 2006, was 5,810,961.

This Annual Report on Form  10-K incorporates into a single document the requirements of the accounting profession and the SEC. Only those sections of the Annual Report required in the following cross reference index and the information under the caption “Forward Looking Statements” are incorporated into this Form  10-K.

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Index

				Page
		Part I
Item 1.		Business		1-4, 6-19, 54-60
		General		1-4, 54-60
		Investment Portfolio		15-17, 35-36, 48
		Loan Portfolio		11-15, 37-38
		Summary of Loan Loss Experience		11-15, 37-38
		Deposits		17-18, 44
		Return on Equity and Assets		5
		Short-term Borrowings		18, 41-42
Item 1A.		Risk Factors		59-60
Item 1B.		Unsolved Staff Comments		None
Item 2.		Properties		61
Item 3.		Legal Proceedings		None
Item 4.		Submission of Matters to a Vote of Security Holders		None
		Part II
Item 5.		Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities		19, 20, 34, 44-46, 52
Item 6.		Selected Financial Data		5
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		6-25
Item 7A.		Quantitative and Qualitative Disclosures about Market Risk		23-24
Item 8.		Financial Statements and Supplementary Data		28-52
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		None
Item 9A.		Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures		25
		Management’s Report on Internal Control Over Financial Reporting		25
		Report of Independent Registered Public Accounting Firm: Effectiveness of Internal Control Over Financial Reporting		26
Item 9B.		Other Information		None
		Part III
Item 10.		Directors and Executive Officers of the Registrant		*
Item 11.		Executive Compensation		*
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		*
Item 13.		Certain Relationships and Related Transactions		*
Item 14.		Principal Accountant Fees and Services		*
		Part IV
Item 15.		Exhibits, Financial Statement Schedules		62

*Northrim’s definitive proxy statement for the 2006 Annual Shareholders’ Meeting is incorporated herein by reference other than the section entitled “Report of the Compensation Committee on Executive Compensation,” “Report of the Audit Committee,” “Stock Performance Graph,” and “Fees Billed By KPMG During Fiscal Years 2005 and 2004.”

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General

         Northrim BanCorp, Inc. (the “Company”) is a publicly traded bank holding company with four 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 (“Elliot Cove”), an investment advisory services company; Northrim Capital Trust 1 (“NCT1,”) an entity that we formed in May of 2003 to facilitate a trust preferred security offering by the Company, and Northrim Statutory Trust 2 (“NST2”), an entity that we formed in December of 2005 to facilitate a trust preferred security offering by the Company. The Company is regulated by the Board of Governors of the Federal Reserve System, and Northrim 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.

Competition

         We operate in a highly competitive and concentrated banking environment. We compete not only with other commercial banks, but also with many other financial competitors, including credit unions (including Alaska USA Federal Credit Union, one of the nation’s largest credit unions), finance companies, mortgage banks and brokers, securities firms, insurance companies, private lenders, and other financial intermediaries, many of which have a state wide or regional presence, and in some cases, a national presence. Many of our competitors have substantially greater resources and capital than we do and offer products and services that are not offered by us. Our non-bank competitors also generally operate under fewer regulatory constraints, and in the case of credit unions, are not subject to income taxes. Credit unions in Alaska have a 35% share of total statewide deposits of banks and credit unions. Recent changes in their regulations have eliminated the “common bond” of membership requirement and liberalized their lending authority to include business and real estate loans on a par with commercial banks. The differences in resources and regulation may make it harder for us to compete profitably, to reduce the rates that we can earn on loans and investments, to increase the rates we must offer on deposits and other funds, and adversely affect our financial condition and earnings.

         Management believes that Wells Fargo’s acquisition of National Bank of Alaska (“NBA”), which occurred in 2000 and was completed in 2001, has opened up new opportunities for us to increase our market share in all of our markets. Long-time NBA customers have stated that our expanded branch network and product line are an excellent local alternative to an out-of -state bank. The Bank completed an extensive and comprehensive sales training program in 2003 that formed the basis for an aggressive, targeted calling effort to sell the benefits of banking with us to those potential customers. In 2005, the Bank continued with its sales calling and training efforts and plans to continue with this program in 2006. In addition, in the first part of 2005, the Bank launched its High Performance Checking product consisting of several consumer accounts tailored to the needs of specific segments of its market, including a Totally Free Checking account. The Bank supported this product with a targeted marketing program and extensive branch sales promotions and plans to continue with these efforts in 2006.

         In the late 1980s, eight of the 13 commercial banks and savings and loan associations in Alaska failed, resulting in the largest commercial banks gaining significant market share. Currently, there are eight commercial banks operating in Alaska. Our management believes that we have benefited from the consolidation of larger financial institutions in Alaska as customers have sought the responsive and personalized service that we offer, resulting in consistency in achieving market share growth. Our portfolio loans (excluding real estate loans for sale) and deposits increased 4% and 12%, respectively from year-end 2004 to year-end 2005. Moreover, on an average balance basis, loan growth during this same time period was 11% and 10%, respectively. At June 30, 2005, the date of the most recently available information, we had approximately a 21% share of the Anchorage commercial bank deposits, approximately 7% in Fairbanks, and 8% in the Matanuska Valley.

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         The following table sets forth market share data for the commercial banks having a presence in the greater Anchorage area as of June 30, 2005, the most recent date for which comparative deposit information is available.

Market Share in Greater Anchorage Area
			Number of				Total				Market share
Financial institution			branches				deposits				of deposits
			(Dollars in thousands)
Northrim Bank				8 (1)				$655,214				21%
Wells Fargo Bank Alaska				14				1,217,306				39%
First National Bank Alaska				10				820,627				26%
Key Bank				4				367,589				12%
Alaska First Bank & Trust				2				51,728				2%
	Total			47				$3,112,464				100%

(1) Does not reflect our Fairbanks or Wasilla branches

Employees and Key Personnel

         We had 272 full-time equivalent employees at December 31, 2005. None of our employees are covered by a collective bargaining agreement. We consider our relations with our employees to be satisfactory.

         We will be dependent for the foreseeable future on the services of R. Marc Langland, our Chairman of the Board, President and Chief Executive Officer; Christopher N. Knudson, our Executive Vice President and Chief Operating Officer; Joeseph M. Schierhorn, our Executive Vice President and Chief Financial Officer, Victor P. Mollozzi, our Senior Vice President and Senior Credit Officer; and Robert L. Shake, our Senior Vice President and Executive Loan Manager. While we maintain keyman life insurance on the lives of Messrs. Langland, Knudson, Schierhorn, Mollozzi, and Shake in the amounts of $2.5 million, $2.1 million, $1 million, $1 million, and $1 million, respectively, we may not be able to timely replace Mr. Langland, Mr. Knudson, Mr. Schierhorn, Mr. Mollozzi, or Mr. Shake with a person of comparable ability and experience should the need to do so arise, causing losses in excess of the insurance proceeds.

Alaska Economy

         All of our operations are in the greater Anchorage, Matanuska Valley, and Fairbanks, areas of Alaska. Because of our geographic concentration, our operations and growth depend on economic conditions in Alaska, generally, and the greater Anchorage, Matanuska Valley, and Fairbanks areas in particular. A material portion of our loans at December 31, 2005, were secured by real estate located in greater Anchorage, Matanuska Valley, and Fairbanks, Alaska. Moreover, 26% of our revenue was derived from the residential housing market in the form of loan fees and interest on residential construction and land development loans and income from RML Holding Company, our mortgage real estate affiliate. Real estate values generally are affected by economic and other conditions in the area where the real estate is located, fluctuations in interest rates, changes in tax and other laws, and other matters outside of our control. Any decline in real estate values in the greater Anchorage, Matanuska Valley, and Fairbanks areas could significantly reduce the value of the real estate collateral securing our real estate loans and could increase the likelihood of defaults under these loans. In addition, at December 31, 2005, $287.6 million, or 41%, of our loan portfolio was represented by commercial loans in Alaska. Commercial loans generally have greater risk than real estate loans.

         Alaska’s residents are not subject to any state income or state sales taxes, and for the past 24 years, have received annual distributions payable in October of each year from the Alaska Permanent Fund Corporation, which is supported by royalties from oil production. The distribution was $846 per eligible resident in 2005 for an aggregate distribution of approximately $510 million. The Anchorage Economic Development Corporation estimates that, for most Anchorage households, distributions from the Alaska Permanent Fund exceed other taxes to which those households are subject (primarily real estate taxes).

         Alaska is strategically located on the Pacific Rim, nine hours by air from 95% of the industrialized world, and has become a worldwide cargo and transportation link between the United States and international business in Asia and Europe. Anchorage’s airport is now rated first in the nation in terms of landed tonnage of international cargo. Key sectors of the Alaska economy are the oil industry, government and military spending, and the construction, fishing, forest products, tourism, mining, air cargo, and transportation industries, as well as medical services.

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         The petroleum industry plays a significant role in the economy of Alaska. Royalty payments and tax revenue related to North Slope oil fields provide over 85% of the revenue used to fund state government operations. Although oil prices increased to above $60 per barrel during 2005, the state’s largest producers, ConocoPhillips and British Petroleum, both kept capital spending and exploration drilling at approximately the same levels as they were in 2004. In addition, 2002 marked the entry of several independent and international oil companies onto the North Slope of Alaska that now include EnCana, Armstrong Resources, Pioneer, Tailsmanand, and Winstar Petroleum. Several of these independents drilled wells over the last several years and have plans to continue with their drilling efforts in 2006. As a result, total spending and employment by the industry appears to be consistent in 2005.

         Another major development in the petroleum industry in 2004 was passage of legislation by the United States Congress that provides incentives for the construction of a pipeline to transport natural gas from the North Slope of Alaska to the Continental United States. This project is estimated to cost in excess of $20 billion and would provide Alaska with additional revenue from severance taxes on the natural gas. The oil companies that own the natural gas, namely ConocoPhillips, Exxon, and British Petroleum, are currently negotiating with the state of Alaska on the terms for the development and taxation of this project. ConocoPhillips has agreed to the general fiscal terms for this project. However, British Petroleum and Exxon are still negotiating with the state of Alaska. Moreover, none of the oil companies has committed to build the project at this time.

         Tourism is another major employment sector of the Alaska economy. The events of September 11, 2001 had a negative effect on bookings for 2002. The industry reported further declines in 2003 as a result of a slower national economy in the first part of 2003. However, in 2004 and 2005, the industry reported increases due in part to an improving national economy.

         In addition to the challenges in several of Alaska’s major industries, the state has faced a “fiscal gap” in prior years because its operating expenditures have exceeded the revenues it collects in the form of taxes and royalty payments that have come mainly from the oil industry for several years. The fiscal gap has been filled by the Constitutional Budget Reserve fund (“CBR”) that was created for this situation. Although the state has recently experienced budget surpluses in 2004 and 2005 due to the recent rise in oil prices and projects a larger budget surplus for the fiscal year ending June 30, 2006, it still projects that the fiscal gap will continue to widen in future years and that the CBR could be depleted within several years. Over the past several years, the public and the legislature have debated a number of proposals to solve the fiscal gap that include the following: 1) implementing a personal income tax (currently Alaska has only a corporate income tax), 2) assessing a state-wide sales tax (sales tax rates vary by community, and Anchorage, Alaska’s largest city, does not have a sales tax), 3) utilizing a portion of the earnings from the Alaska Permanent Fund, which would decrease the size of the annual dividend paid to all Alaska residents, and/or 4) a reduction in state expenditures. While Alaska appears to have the resources to solve the fiscal gap, political decisions are required to solve the problem. We cannot predict the type nor the timing of the solution and the ultimate impact on the Alaska economy.

Supervision and Regulation

         The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “BHC Act”) registered with and subject to examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Company’s bank subsidiary is an Alaska-state chartered commercial bank and is subject to examination, supervision, and regulation by the Alaska Department of Community and Economic Development, Division of Banking, Securities and Corporations (the “Division”). The FDIC insures Northrim Bank’s deposits and in that capacity also regulates Northrim Bank. The Company’s affiliated investment company, Elliott Cove, is subject to and regulated under the Investment Advisors Act of 1940 and applicable state investment advisor rules and regulations.

         The Company’s earnings and activities are affected by legislation, by actions of the FRB, the Division, the FDIC and other regulators, and by local legislative and administrative bodies and decisions of courts in Alaska. For example, these include limitations on the ability of Northrim Bank to pay dividends to the Company, numerous federal and state consumer protection laws imposing requirements on the making, enforcement, and collection of consumer loans, and restrictions on and regulation of the sale of mutual funds and other uninsured investment products to customers.

         Congress enacted major federal financial institution legislation in 1999. Title I of the Gramm-Leach-Bliley Act (the “GLB Act”), which became effective March 11, 2000, allows bank holding companies to elect to become financial holding companies. In addition to the activities previously permitted bank holding companies, financial holding companies may engage in non-banking activities that are financial in nature, such as securities, insurance, and merchant banking activities, subject to certain limitations. It is likely that the Company will utilize the new structure to accommodate an expansion of its products and services.

         The activities of bank holding companies, such as the Company, that are not financial holding companies, are generally limited to managing or controlling banks. A bank holding company is required to obtain the prior approval of the FRB for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank

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or bank holding company. Nonbank activities of a bank holding company are also generally limited to the acquisition of up to 5% of the voting shares and activities previously determined by the FRB by regulation or order to be closely related to banking, unless prior approval is obtained from the FRB.

         The GLB Act also included the most extensive consumer privacy provisions ever enacted by Congress. These provisions, among other things, require full disclosure of the Company’s privacy policy to consumers and mandate offering the consumer the ability to “opt out” of having non-public personal information disclosed to third parties. Pursuant to these provisions, the federal banking regulators have adopted privacy regulations. In addition, the states are permitted to adopt more extensive privacy protections through legislation or regulation.

         Additional legislation may be enacted or regulations imposed to further regulate banking and financial services or to limit finance charges or other fees or charges earned in such activities. There can be no assurance whether any such legislation or regulation will place additional limitations on the Company’s operations or adversely affect its earnings.

         There are various legal restrictions on the extent to which a bank holding company and certain of its nonbank subsidiaries can borrow or otherwise obtain credit from banking subsidiaries or engage in certain other transactions with or involving those banking subsidiaries. With certain exceptions, federal law imposes limitations on, and requires collateral for, extensions of credit by insured depository institutions, such as Northrim Bank, to their non-bank affiliates, such as the Company.

         Subject to certain limitations and restrictions, a bank holding company, with prior approval of the FRB, may acquire an out-of -state bank. Banks in states that do not prohibit out-of -state mergers may merge with the approval of the appropriate federal banking agency. A state bank may establish a de novo branch out of state if such branching is expressly permitted by the other state.

         Among other things, applicable federal and state statutes and regulations which govern a bank’s activities relate to minimum capital requirements, required reserves against deposits, investments, loans, legal lending limits, mergers and consolidations, borrowings, issuance of securities, payment of dividends, establishment of branches and other aspects of its operations. The Division and the FDIC also have authority to prohibit banks under their supervision from engaging in what they consider to be unsafe and unsound practices.

         Specifically with regard to the payment of dividends, there are certain limitations on the ability of the Company to pay dividends to its shareholders. It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines a bank holding company’s ability to serve as a source of strength to its banking subsidiaries.

         Various federal and state statutory provisions also limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval. Additionally, depending upon the circumstances, the FDIC or the Division could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

         Under longstanding FRB policy, a bank holding company is expected to act as a source of financial strength for its subsidiary banks and to commit resources to support such banks. The Company could be required to commit resources to its subsidiary banks in circumstances where it might not do so, absent such policy.

         The Company and Northrim Bank are subject to risk-based capital and leverage guidelines issued by federal banking agencies for banks and bank holding companies. These agencies are required by law to take specific prompt corrective actions with respect to institutions that do not meet minimum capital standards and have defined five capital tiers, the highest of which is “well-capitalized.”

         Northrim Bank is required to file periodic reports with the FDIC and the Division and is subject to periodic examinations and evaluations by those regulatory authorities. These examinations must be conducted every 12 months, except that certain well-capitalized banks may be examined every 18 months. The FDIC and the Division may each accept the results of an examination by the other in lieu of conducting an independent examination.

         In the liquidation or other resolution of a failed insured depository institution, deposits in offices and certain claims for administrative expenses and employee compensation are afforded a priority over other general unsecured claims, including non-deposit claims, and claims of a parent company such as the Company. Such priority creditors would include the FDIC, which succeeds to the position of insured depositors.

         The Company is also subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Securities Exchange Act of 1934, including certain requirements under the Sarbanes-Oxley Act of 2002.

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         The Company is also subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”). Among other things, the USA Patriot Act requires financial institutions, such as the Company and Northrim Bank, to adopt and implement specific policies and procedures designed to prevent and defeat money laundering. Management believes the Company is in compliance with the USA Patriot Act as in effect on December 31, 2005.

         Our earnings are affected by general economic conditions and the conduct of monetary policy by the U.S. government.

Risk Factors

         An investment in the Company’s common stock is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors.

         If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and you could lose all or part of your investment.

Adequacy of Loan Loss Allowance:  We have established a reserve for probable losses we expect to incur in connection with loans in our credit portfolio. This allowance reflects our estimate of the collectibility of certain identified loans, as well as an overall risk assessment of total loans outstanding. Our determination of the amount of loan loss allowance is highly subjective; although management personnel apply criteria such as risk ratings and historical loss rates, these factors may not be adequate predictors of future loan performance. Accordingly, we cannot offer assurances that these estimates ultimately will prove correct or that the loan loss allowance will be sufficient to protect against losses that ultimately may occur. If our loan loss allowance proves to be inadequate, we may suffer unexpected charges to income, which would adversely impact our results of operations and financial condition. Moreover, bank regulators frequently monitor banks’ loan loss allowances, and if regulators were to determine that the allowance is inadequate, they may require us to increase the allowance, which also would adversely impact our revenues and financial condition.

Growth and Management:  Our financial performance and profitability will depend on our ability to manage recent and possible future growth. Although we believe that we have substantially integrated the business and operations of past acquisitions, there can be no assurance that unforeseen issues relating to the acquisitions will not adversely affect us. In addition, any future acquisitions and continued growth may present operating and other problems that could have an adverse effect on our business, financial condition and results of operations. Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain the level of profitability that we have experienced in the past.

Changes in Market Interest Rates:  Our earnings are impacted by changing interest rates. Changes in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loans and securities, and rates paid on deposits and borrowings. The relationship between the rates received on loans and securities and the rates paid on deposits and borrowings is known as the net interest margin. Given our current volume and mix of interest bearing liabilities and interest-earning assets, net interest margin could be expected to decrease during times when interest rates rise in a parallel shift along the yield curve and, conversely, to increase during times of similar falling interest rates. Exposure to interest rate risk is managed by monitoring the re-pricing frequency of our rate-sensitive assets and rate-sensitive liabilities over any given period. Although we believe the current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates could potentially have an adverse affect on our business, financial condition and results of operations.

Geographic Concentration:  Substantially all of our business is derived from the Anchorage, Matanuska Valley, and Fairbanks, areas of Alaska. These areas rely primarily upon the natural resources industries, particularly oil production, as well as tourism, government and U.S. military spending for their economic success. Our business is and will remain sensitive to economic factors that relate to these industries and local and regional business conditions. As a result, local or regional economic downturns, or downturns that disproportionately affect one or more of the key industries in regions served by the Company, may have a more pronounced effect upon its business than they might on an institution that is less geographically concentrated. The extent of the future impact of these events on economic and business conditions cannot be predicted; however, prolonged or acute fluctuations could have a material and adverse impact upon our results of operation and financial condition.

Regulation:  We are subject to government regulation that could limit or restrict our activities, which in turn could adversely impact our operations. The financial services industry is regulated extensively. Federal and state regulation is designed primarily

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to protect the deposit insurance funds and consumers, as well as our shareholders. These regulations can sometimes impose significant limitations on our operations. In addition, these regulations are constantly evolving and may change significantly over time. Significant new laws or changes in existing laws or repeal of existing laws may cause our results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, can significantly affect credit availability. Federal legislation such as Sarbanes-Oxley can dramatically shift resources and costs to insure adequate compliance.

Competition:  Competition may adversely affect our performance. The financial services business in our market areas is highly competitive. It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers. We face competition both in attracting deposits and in originating loans. We compete for loans principally through the pricing of interest rates and loan fees and the efficiency and quality of services. Increasing levels of competition in the banking and financial services industries may reduce our market share or cause the prices charged for our services to fall. Our results may differ in future periods depending upon the nature and/or level of competition.

Credit Risk:  A source of risk arises from the possibility that losses will be sustained if a significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for credit losses, which we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially affect our results of operations.

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