Commitments and Contingencies

Leases: Rental expense under leases for equipment and premises was $667,000, $957,000, and $953,000 in 2013, 2012, and 2011, respectively. Required minimum rentals on non-cancelable leases as of December 31, 2013, are as follows:



(In Thousands)
2014		$635
2015	594
2016	474
2017	388
2018	347
Thereafter	6,332
Total		$8,770

Rental income under leases was $108,000, $773,000 and $776,000 in 2013, 2012, and 2011, respectively. There are no future required minimum rentals on non-cancelable leases as of December 31, 2013.

Employee benefit plans: 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 $125,000 per covered individual and $1 million for all medical claims incurred by an individual. The Company has established a liability for outstanding 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.

Legal proceeding: 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.

Financial Instruments with Off-Balance-Sheet Risk: 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.



(In Thousands)	2013		2012
Off-balance sheet commitments:
Commitments to extend credit		$187,931		$208,328
Standby letters of credit		$6,463		$22,132

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.

The Company has a reserve for losses related to these commitments and letters of credit that is recorded in other liabilities on the consolidated balance sheets. The reserve was $96,000 and $87,000 as of December 31, 2013 and 2012, respectively.

Capital Expenditures and Commitments: At December 31, 2013, the Company has capital commitments of $2.2 million related to the planned improvements to the Company’s corporate office building. The Company expects these capital expenditures to be incurred in 2014.

Pending Acquisition: On October 21, 2013, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Alaska Pacific. The closing of the transaction is subject to the satisfaction of certain customary conditions, including the receipt of required regulatory approvals and the approval of Alaska Pacific's shareholders. Under the terms of the Merger Agreement, the total consideration to be paid by the Company for all of the shares of Alaska Pacific will be based on the volume weighted average closing price of the Company’s common stock for the 15 trading days ending on the fifth trading day before the completion of the Merger. The maximum aggregate consideration to be paid by the Company in connection with the merger is $13,869,274, and the minimum aggregate consideration payable is $12,513,666. Shareholders of Alaska Pacific will be able to elect to receive such consideration in the form of cash or shares of the Company’s common stock, subject to proration so as to ensure that the total consideration for Alaska Pacific will be roughly evenly split between cash and newly issued Northrim BanCorp, Inc. shares. If the Merger Agreement is terminated due to a willful intentional breach by the Company, we will be required to pay Alaska Pacific a termination fee of $600,000. Alaska Pacific will be required to pay the Company a termination fee of $600,000 under specified circumstances, including Alaska Pacific entering into an agreement with respect to a competing offer or entering into an alternative acquisition within 18 months of the termination of the Merger Agreement due to Alaska Pacific’s shareholders failing to approve the Merger, or Alaska Pacific committing a willful intentional breach of the Merger Agreement.