What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-05 · 201 added, 199 removed, 375 unchanged (52% of the section changed)

17 unchanged sentences

the timing of Paycheck Protection Program ("PPP") loan forgiveness;

the impact of interest rates, inflation, supply-chain constraints, trade policies and tensions, including tariffs, and potential geopolitical instability, including the ware in Ukraine;

the impact of rising interest rates, inflationary pressure, supply-chain constraints, trade policies and tensions, including tariffs, and potential geopolitical instability, including the war in Ukraine;

the general condition of, and changes in, the Alaska economy;

13 unchanged sentences

Update on Economic Conditions

The Alaska economy has seen continued job growth and personal income gains.

A strong rebound in tourism activity, coupled with high oil prices has benefited the state.

Management believes that the national focus on supply chain issues and the desire for more domestic production should improve the demand for Alaska’s vast natural resources.

Like the rest of the nation, Alaska’s housing market saw large price increases over the last year.

However, we expect the rapidly rising interest rate environment to temper the Alaska housing market in the second half of 2022.

The Alaska Department of Labor ("DOL") has released data through May of 2022.

The DOL reports total payroll jobs in Alaska increased 2.9% or 8,900 jobs compared to May of 2021.

The Alaska economy is experiencing many of the same issues seen throughout the rest of the United States.

Jobs are recovering from pandemic lows, inflation is impacting business activity, and incomes are rising, but not at the same pace as inflation.

The housing market was red hot last year, and home prices are still high, but the number of units sold is starting to decline as interest rates rise rapidly.

Alaska is enjoying an improvement in tourism activity and oil prices remain very healthy, near or above $100 a barrel for most of the year.

The Alaska Department of Labor (“DOL”) has released data through August of 2022.

The DOL reports total payroll jobs in Alaska increased 3.1% or 10,200 jobs compared to August of 2021.

The Leisure and Hospitality sector showed the fastest year over year increase of 10.3%.

Tourism related jobs were the hardest hit from the pandemic travel restrictions, but were also the quickest to rebound.

The Oil and Gas sector has benefited from high energy prices and added 600 jobs since May of 2021, a 9.1% increase.

The Oil and Gas sector has benefited from high energy prices and new exploration activity, resulting in an increase of 400 jobs since August of 2021, a 5.9% increase.

Other sectors showing improvement over the last 12 months include Trade, Warehousing, and Utilities (+6.2%), Other Services (+3.7%);

Financial Activities (+2.8%), and Professional and Business Services (+2.6%).

The only private sectors to decline year over year were Manufacturing (-2.9%) and Information (-2.1%).

The Government sector was up slightly by 0.6%, an increase of 500 jobs through May 2022 year-over-year.

Alaska’s Gross State Product (“GSP”), was estimated to be $58 billion at the end of 2021 by the Federal Bureau of Economic Analysis ("BEA").

This was a 0.3% increase in 2021 over 2020 figures.

The BEA also calculated Alaska’s seasonally adjusted personal income was $49 billion in 2021, an improvement of 5.9% over 2020.

This was largely a result of COVID related government transfer payments and an improvement in employment leading to higher wage income last year.

The price of Alaska North Slope crude oil began 2021 averaging $55.56 a barrel in January and climbed steadily throughout the year due to rising global demand to a monthly average high of $84.36 in October 2021.

2022 began with a monthly average of $86.50 a barrel in January and surpassed $100 in March after the war in Ukraine began.

Prices increased in the second quarter of 2022, reaching a monthly average of $120.17 a barrel in June.

Alaska’s home mortgage delinquency level continues to be better than most of the nation.

According to the Mortgage Bankers Association, Alaska’s delinquency rate in the first quarter of 2022 was 3.49% compared to the national average rate of 3.84%.

The Mortgage Bankers Association survey reported that the mortgage foreclosure rate in Alaska in the first quarter of 2022 was identical to the national average rate of 0.53%.

Construction (+3.2%);

Professional and Business Services (+2.9%);

Retail (+2.3%);

and Financial Activities (+1.8%).

The only private sector to decline year over year was Information (-2.1%), a loss of 100 jobs.

The Government sector was up by 1.2%, an increase of 900 jobs through August 2022 year over year.

Alaska’s Gross State Product (“GSP”) in the second quarter of 2022, was estimated to be $64.3 billion in nominal value and $49 billion in inflation adjusted “real” value, according to the Federal Bureau of Economic Analysis (“BEA”).

Real GSP decreased in 40 of the 50 U.S.

states, including Alaska, in the second quarter of 2022.

Alaska’s decrease was 0.9% compared to a U.S.

average decrease of 0.6%.

The BEA also calculated Alaska’s annualized and seasonally adjusted personal income at $49.3 billion in the second quarter of 2022, an improvement of 5.2% over the prior quarter.

The national average was an increase of 5.8% for the same period according to the BEA.

The price of Alaska North Slope (“ANS”) crude oil began 2022 with a monthly average of $86.50 a barrel in January and surpassed $100 in March after the war in Ukraine began.

Prices remained above $100 through August after reaching a monthly average high of $120.17 in June.

ANS averaged $92.42 in September and the most recent daily price available at the time of this writing was $97.97 on October 7, 2022.

According to the Mortgage Bankers Association, Alaska’s home mortgage delinquency rate in the second quarter of 2022 was 3.58% compared to the national average rate of 3.77%.

The Mortgage Bankers Association survey reported that the mortgage foreclosure inventory in Alaska in the second quarter of 2022 was 0.64% and the national average was 0.59%.

According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 6.9% in 2021 to $424,148.

In the first six months of 2022 prices climbed another 7.5% to $456,052.

Average sales prices in the Matanuska Susitna Borough rose 15.6% in 2021 and another 11% in the first six months of 2022 to $386,429.

In the first nine months of 2022, prices climbed another 7.5% to $456,125.

Average sales prices in the Matanuska Susitna Borough rose 15.6% in 2021 and another 10% in the first nine months of 2022 to $382,721.

These two markets represent where the vast majority of the Bank’s residential lending activity occurs.

Prices also increased 13.9% in the Fairbanks North Star Borough, 13.4% in the Kenai Peninsula Borough, and 13.8% in the Kodiak Island Borough in 2021.

The number of housing units sold in Anchorage was up significantly in 2021 by 11.2%, following an increase of 19.5% in 2020, as reported by the Alaska Multiple Listing Services.

The Matanuska Susitna Borough also had strong sales activity, up 11.7% in 2021 and 9.7% in 2020.

The Board of Governors of the Federal Reserve System increased its benchmark interest rate target from near zero as of December 31, 2021 to 2.25%-2.50% as of July 31, 2022.

Similarly, the Prime rate of interest has increased from 3.25% as of December 31, 2022 to 5.50% as of July 31, 2022.

The two and ten year Treasury rates were 2.89% and 2.67% as of July 31, 2022, up from 0.73% and 1.52% as of December 31, 2021, respectively.

The number of housing units sold in Anchorage was up significantly in 2021 by 11.2%, as reported by the Alaska Multiple Listing Services.

Starting in March of 2022, the number of homes sold has been lower each month compared to the same month of the prior year.

The number of units sold in Anchorage is 14.4% lower this year when comparing January to September of 2021 to 2022.

The Matanuska Susitna Borough also had strong sales activity in 2021, up 11.7%.

In the first nine months of 2022, the number of units sold in the Matanuska Susitna Borough was 3.4% lower than the same period in 2021.

The Board of Governors of the Federal Reserve System increased its benchmark interest rate target from near zero as of December 31, 2021 to 3.00%-3.25% as of October 31, 2022.

Similarly, the Prime rate of interest has increased from 3.25% as of December 31, 2022 to 6.25% as of October 31, 2022.

The two and ten year Treasury rates were 4.30% and 4.10% as of October 31, 2022, up from 0.73% and 1.52% as of December 31, 2021, respectively.

Management agrees with sentiment from industry experts that rates will continue to rise through the end of 2022 and into the first half of 2023.

Highlights and Summary of Performance - Second Quarter of 2022

The Company reported net income and diluted earnings per share of $4.8 million and $0.83, respectively, for the second quarter of 2022 compared to net income and diluted earnings per share of $8.3 million and $1.33, respectively, for the second quarter of 2021.

The Company reported net income and diluted earnings per share of $12.0 million and $2.03, respectively, for the first six months of 2022 compared to net income and diluted earnings per share of $20.5 million and $3.27, respectively, for the first six months of 2021.

The decrease in net income for the three and six-month periods ending June 30, 2022 compared to the same periods last year is primarily attributable to a decrease in net income in the Home Mortgage Lending segment as a result of decreased production and yields on sold loans, as well as a higher provision for credit losses and higher other operating expenses in the Community Banking segment that were only partially offset by higher net interest income.

Increases in interest rates drove the decrease in production in the Home Mortgage Lending segment and the increase in net interest income.

• Total revenue in the second quarter of 2022, which includes net interest income plus other operating income, decreased 10% to $30.0 million from $33.3 million in the second quarter a year ago, primarily due to a $5.5 million decrease in mortgage banking income and a $988.0 thousand increase in unrealized loss on marketable equity securities.

These decreases were only partially offset by a $3.0 million increase in net interest income.

Total revenue in the six-months ending June 30, 2022 decreased 12% to $60.1 million from $68.7 million in the same period a year ago, primarily due to a $12.1 million decrease in mortgage banking income and a $1.3 million increase in unrealized loss on marketable securities.

• Net interest income in the second quarter of 2022 increased 16% to $22.2 million compared to $19.2 million in the second quarter of 2021.

Net interest income excluding PPP interest and fees in the second quarter of 2022 increased 33% to $20.8 million, compared to $15.6 million in the second quarter of 2021.

Net interest income in the six-months ending June 30, 2022 increased 7% to $41.5 million compared to $38.7 million in the same period a year ago.

Net interest income excluding PPP interest and fees in the six-months ending June 30, 2022 increased 22% to $37.8 million compared to $30.9 million in the same period a year ago.

• Net interest margin was 3.67% for the second quarter of 2022, a 19 basis point increase from the second quarter of 2021 primarily due to the higher yields on portfolio loans and investments and on interest bearing deposits in other banks.

Net interest margin was 3.42% for the six-months ending June 30, 2022, a 26 basis point decrease from the same period a year ago primarily due to the a change in the mix of earning assets that was only partially offset by higher yields.

Average interest bearing deposits in other banks increased to 19% of average interest-earning assets in the six-months ending June 30, 2022, compared to 8% in the same period a year ago.

• Loans were $1.41 billion at June 30, 2022, down 1% from December 31, 2021 primarily as a result of PPP forgiveness which was only partially offset by core loan growth.

Loans excluding the impact from PPP, were $1.37 billion at June 30, 2022, up 6% from $1.30 billion at December 31, 2021.

As of June 30, 2022, 76% of core portfolio loans are adjustable rate and are subject to rate increases as the prime rate and other indices increase.

• The Company booked a provision for credit losses of $463,000 and $313,000 for the three- and six-month periods ending June 30, 2022, respectively, compared to a benefit of $427,000 and a benefit of $1.9 million in the same periods in 2021.

The increase in the provision for credit losses in both periods in 2022 compared to the same periods in the prior year are primarily the result of core loan growth.

• The Company paid cash dividends of $0.41 per common share in the second quarter of 2022, up 11% from $0.37 in the second quarter of 2021.

• At June 30, 2022, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements.

• During the second quarter of 2022, the Company repurchased 200,619 shares of its common stock under the previously announced share repurchase program at an average price of $41.04 per share.

There are no shares remaining of the 300,000 previously authorized for repurchase.

Highlights and Summary of Performance - Third Quarter of 2022

The Company reported net income and diluted earnings per share of $10.1 million and $1.76, respectively, for the third quarter of 2022 compared to net income and diluted earnings per share of $8.9 million and $1.42, respectively, for the third quarter of 2021.

The Company reported net income and diluted earnings per share of $22.1 million and $3.79, respectively, for the first nine months of 2022 compared to net income and diluted earnings per share of $29.4 million and $4.69, respectively, for the first nine months of 2021.

The increase in net income for the three-month period ending September 30, 2022 compared to the same period last year is primarily attributable to higher net interest income which was only partially offset by a decrease in net income in the Home Mortgage Lending segment as a result of decreased production and yields on sold loans, as well as a lower benefit to the provision for credit losses in the Community Banking segment.

The decrease in net income for the nine-month period ended September 30, 2022 as compared to the same period in 2021 was primarily due to lower production in the Home Mortgage Lending segment.

Increases in interest rates drove the decrease in production in the Home Mortgage Lending segment and the increase in net interest income in both the three and nine-month periods ended September 30, 2022 as compared to the same periods a year ago.

• Total revenue in the third quarter of 2022, which includes net interest income plus other operating income, increased 6% to $35.0 million from $33.1 million in the third quarter a year ago, primarily due to a $5.9 million increase in net interest income which was only partially offset by a $4.2 million decrease in mortgage banking income.

Total revenue in the nine-months ending September 30, 2022 decreased 7% to $95.1 million from $101.8 million in the same period a year ago, primarily due to a $16.3 million decrease in mortgage banking income and a $1.2 million increase in unrealized loss on marketable securities that was only partially offset by a $8.7 million increase in net interest income.

• Net interest income in the third quarter of 2022 increased 29% to $26.3 million compared to $20.4 million in the third quarter of 2021.

Net interest income excluding PPP interest and fees in the third quarter of 2022 increased 53% to $25.6 million, compared to $16.8 million in the third quarter of 2021.

Net interest income in the nine-months ending September 30, 2022 increased 15% to $67.8 million compared to $59.1 million in the same period a year ago.

Net interest income excluding PPP interest and fees in the nine-months ending September 30, 2022 increased 33% to $63.3 million compared to $47.7 million in the same period a year ago.

• Net interest margin was 4.22% for the third quarter of 2022, a 77 basis point increase from the third quarter of 2021.

Net interest margin was 3.69% for the nine-months ending September 30, 2022, a 9 basis point increase from the same period a year ago.

Increases in both these periods compared to the same periods in 2021 are primarily due to higher yields on portfolio loans and investments and on interest bearing deposits in other banks, as well as interest income recovered on nonaccrual loans.

• Loans were $1.41 billion at September 30, 2022, down 0.5% from December 31, 2021 primarily as a result of PPP forgiveness which was only partially offset by core loan growth.

Loans excluding the impact from PPP, were $1.40 billion at September 30, 2022, up 8% from $1.30 billion at December 31, 2021.

At September 30, 2022, a total of 75% of portfolio loans are adjustable rate and are subject to rate increases as the prime rate and other indices increase;

including 25% of portfolio loans that are subject to rate increases in the fourth quarter of 2022.

As of September 30, 2022, 33% of total earning assets are subject to rate increases in the fourth quarter of 2022 when prime or other indices increase.

• The Company booked a benefit to the provision for credit losses of $353,000 and $40,000 for the three and nine-month periods ending September 30, 2022, respectively, compared to a benefit of $1.1 million and a benefit of $3.0 million in the same periods in 2021.

The decrease in the benefit for credit losses in both periods in 2022 compared to the same periods in the prior year are primarily the result of higher forecasted national unemployment rates, which were only partially offset by higher net recoveries.

• The Company paid cash dividends of $0.50 per common share in the third quarter of 2022, up 32% from $0.38 in the third quarter of 2021.

• At September 30, 2022, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements.

Other financial measures are shown in the table below:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

5 unchanged sentences

Management estimates that we funded approximately 24% of the number and 32% of the value of all Alaska PPP second round loans.

• As of June 30, 2022, PPP has resulted in 2,344 new customers totaling $69.7 million in non-PPP loans, and $132.4 million in new deposit balances.

• As of June 30, 2022, Northrim customers had received forgiveness through the U.S, Small Business Administration ("SBA") on 5,407 PPP loans totaling $582.0 million, of which 417 PPP loans totaling $33.7 million were forgiven in the second quarter of 2022, 537 PPP loans totaling $56.9 million were forgiven in the first quarter of 2022, and 4,451 PPP loans totaling $491.4 million were forgiven in 2021.

Of the PPP loans forgiven in the second quarter of 2022, 414 loans totaling $33.4 million related to PPP round two.

As of June 30, 2022, approximately 99% of the number of PPP round one loans funded and 88% of the number of PPP round two loans funded have been forgiven.

• As of September 30, 2022, PPP has resulted in 2,344 new customers totaling $76.0 million in non-PPP loans, and $141.9 million in new deposit balances.

• As of September 30, 2022, Northrim customers had received forgiveness through the U.S.

Small Business Administration ("SBA") on 5,771 PPP loans totaling $603.1 million, of which 364 PPP loans totaling $21.1 million were forgiven in the third quarter of 2022, 417 PPP loans totaling $33.7 million were forgiven in the second quarter of 2022, 537 PPP loans totaling $56.9 million were forgiven in the first quarter of 2022, and 4,451 PPP loans totaling $491.4 million were forgiven in 2021.

Of the PPP loans forgiven in the third quarter of 2022, 286 loans totaling $20.9 million related to PPP round two.

As of September 30, 2022, nearly 100% of the number of PPP round one loans funded and 98% of the number of PPP round two loans funded have been forgiven.

Credit Quality

1 unchanged sentence

The Company implemented several forms of assistance to help our customers in the event that they experienced financial hardship as a result of COVID-19 in addition to our participation in PPP lending.

As of June 30, 2022, remaining accommodations include interest only and deferral options on loan payments.

The total outstanding principal balance of loan modifications due to the impacts of COVID-19 for the periods indicated were as follows:

Loan Modifications due to COVID-19 as of June 30, 2022

(Dollars in thousands) Interest Only Full Payment Deferral Total

Portfolio loans $23,573 $— $23,573

Number of modifications 5 — 5

Number of relationships 2 — 2

Loan Modifications due to COVID-19 as of December 31, 2021

(Dollars in thousands) Interest Only Full Payment Deferral Total

Portfolio loans $49,219 $— $49,219

Number of modifications 16 — 16

Number of relationships 6 — 6

The $23.6 million in COVID-19 loan accommodations as of June 30, 2022 are scheduled to return to normal principal and interest payments in 2022.

As of September 30, 2022, remaining accommodations include interest only and deferral options on loan payments.

The total outstanding principal balance of loan modifications due to the impacts of COVID-19 as of September 30, 2022 was $8.4 million, down from $49.2 million as of December 31, 2021.

The $8.4 million in COVID-19 loan accommodations as of September 30, 2022 are scheduled to return to normal principal and interest payments in the fourth quarter of 2022.

Nonperforming assets:

Nonperforming assets, net of government guarantees at June 30, 2022 decreased 22%, or $3.3 million to $11.7 million as compared to $15.0 million at December 31, 2021.

Other Real Estate Owned ("OREO"), net of government guarantees, remained at $4.4 million at June 30, 2022 as compared to December 31, 2021.

Nonperforming loans, net of government guarantees decreased $3.4 million, or 32% to $7.3 million as of June 30, 2022 from $10.7 million as of December 31, 2021, primarily due to the transfer of one relationship back to accrual status in the first six months of 2022 as well as payoffs and pay downs in the first half of 2022.

$5.9 million, or 74% of nonperforming assets at June 30, 2022, are nonaccrual loans related to five commercial relationships.

The following table summarizes nonperforming asset activity for the three-month periods ending June 30, 2022 and 2021.

Nonperforming assets, net of government guarantees at September 30, 2022 decreased 28%, or $4.2 million to $10.8 million as compared to $15.0 million at December 31, 2021.

Other Real Estate Owned ("OREO"), net of government guarantees, remained at $4.4 million at September 30, 2022, consistent with December 31, 2021.

Nonperforming loans, net of government guarantees decreased $4.2 million, or 39% to $6.5 million as of September 30, 2022 from $10.7 million as of December 31, 2021, primarily due to the transfer of one relationship back to accrual status and a large relationship that paid off in the first nine months of 2022 as well as other payoffs and pay downs in the first nine months of 2022.

$4.9 million, or 76% of nonperforming loans, net of government guarantees at September 30, 2022, are nonaccrual loans related to four commercial relationships.

The following table summarizes nonperforming asset activity for the three-month periods ending September 30, 2022 and 2021.

Writedowns Transfers to

(In Thousands) Balance at March 31, 2022 Additions this quarter Payments this quarter /Charge-offs

(In Thousands) Balance at June 30, 2022 Additions this quarter Payments this quarter /Charge-offs

this quarter Transfers to OREO Performing Status

this quarter Sales this quarter Balance at June 30, 2022

this quarter Sales this quarter Balance at September 30, 2022

Nonperforming loans $8,001 $298 ($1,159) ($48) $— $— $— $7,092

7 unchanged sentences

Writedowns Transfers to

(In Thousands) Balance at March 31, 2021 Additions this quarter Payments this quarter /Charge-offs

(In Thousands) Balance at June 30, 2021 Additions this quarter Payments this quarter /Charge-offs

this quarter Transfers to OREO/REPO Performing Status

this quarter Sales this quarter Balance at June 30, 2021

this quarter Sales this quarter Balance at September 30, 2021

Nonperforming loans $13,104 $— ($611) $— $— $— $— $12,493

2 unchanged sentences

Other real estate owned 7,073 — — — — — (1,161) 5,912

Repossessed assets 225 — — — — — (225) —

Other real estate owned guaranteed

by government (1,279) — — — — — — (1,279)

4 unchanged sentences

These loans are closely monitored and their performance is reviewed by management on a regular basis.

At June 30, 2022, management had identified potential problem loans of $1.4 million as compared to potential problem loans of $2.1 million at December 31, 2021.

The decrease in potential problem loans from December 31, 2021 to June 30, 2022 is primarily the result of one relationship payoff in the first half of 2022 which was only partially offset by the addition of one relationship in the first six months of 2022.

At September 30, 2022, management had identified potential problem loans of $2.0 million as compared to potential problem loans of $2.1 million at December 31, 2021.

The decrease in potential problem loans from December 31, 2021 to September 30, 2022 is primarily the result of one relationship which paid off and various other loan paydowns in the first nine months of 2022.

Troubled debt restructurings (“TDRs”):

1 unchanged sentence

Interest on TDRs 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, which is generally after a period of six months.

The Company had $3.0 million in loans classified as TDRs that were performing and $5.8 million in TDRs included in nonaccrual loans at June 30, 2022 for a total of approximately $8.9 million.

There are $3.1 million in government guarantees associated with TDRs, resulting in total TDRs, net of government guarantees, of $5.8 million at June 30, 2022.

The Company had $3.0 million in loans classified as TDRs that were performing and $5.1 million in TDRs included in nonaccrual loans at September 30, 2022 for a total of approximately $8.1 million.

There are $3.1 million in government guarantees associated with TDRs, resulting in total TDRs, net of government guarantees, of $5.0 million at September 30, 2022.

At December 31, 2021 there were $773,000 in loans classified as TDRs, net of government guarantees that were performing and $6.5 million in TDRs included in nonaccrual loans for a total of $7.3 million.

See Note 3 of the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion of TDRs.

See Note 3 of the Notes to Consolidated Financial Statements included in Part 1.

Item 1 of this report for further discussion of TDRs.

RESULTS OF OPERATIONS

Income Statement

Net income for the second quarter of 2022 decreased $3.6 million to $4.8 million as compared to $8.3 million for the same period in 2021.

The decrease in net income is mostly attributable to a $3.3 million decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production and a $239,000 decrease in net income in the Community Banking segment.

The decrease in net income in the Community Banking segment in the three months ended June 30, 2022, as compared to the same period a year ago is primarily due to an increase in the provision for credit losses and other operating expenses which were only partially offset by increased net interest income.

Net income for the first half of 2022 decreased $8.5 million to $12.0 million as compared to $20.5 million for the same period in 2021.

The decrease in net income is mostly attributable to a $7.3 million decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production and a $1.2 million decrease in net income in the Community Banking segment.

The decrease in net income in the Community Banking segment in the six-month period ended June 30, 2022, as compared to the same period a year ago is primarily due to an increase in the provision for credit losses and other operating expenses.

These decreases were only partially offset by a $2.8 million increase in net interest income and $2.0 million in life insurance proceeds received in connection with the death of the Company’s former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021.

Net income for the third quarter of 2022 increased $1.2 million to $10.1 million as compared to $8.9 million for the same period in 2021.

The increase in net income is mostly attributable to a $3.3 million increase in net income in the Community Banking segment which was only partially offset by a $2.0 million decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production.

The increase in net income in the Community Banking segment in the three months ended September 30, 2022, as compared to the same period a year ago is primarily due to an increase in net interest income which was only partially offset by a lower benefit in the provision for credit losses and an increase in other operating expenses.

Net income for the first nine months of 2022 decreased $7.3 million to $22.1 million as compared to $29.4 million for the same period in 2021.

The decrease in net income is mostly attributable to a $9.3 million decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production which was only partially offset by a $2.1 million increase in net income in the Community Banking segment.

The increase in net income in the Community Banking segment in the nine-month period ended September 30, 2022, as compared to the same period a year ago is primarily due to an increase in net interest income which was only partially offset by a lower benefit in the provision for credit losses and an increase in other operating expenses.

Additionally, the Company received $2.0 million in life insurance proceeds in the nine-month period ended September 30, 2022 in connection with the death of the Company’s former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021.

Net Interest Income/Net Interest Margin

Net interest income for the second quarter of 2022 increased $3.0 million, or 16%, to $22.2 million as compared to $19.2 million for the second quarter of 2021.

Net interest margin increased 19 basis points to 3.67% in the second quarter of 2022 as compared to 3.48% in the second quarter of 2021.

Net interest income for the first half of 2022 increased $2.8 million, or 7%, to $41.5 million as compared to $38.7 million for the first half of 2021.

Net interest margin decreased 26 basis points to 3.42% in the first half of 2022 as compared to 3.68% in the first half of 2021.

The increase in net interest income in the second quarter and first six-months of 2022 compared to the same periods in 2021 was primarily the result of increased interest on loans, investments, and interest bearing deposits in other banks and decreased interest expense which was only partially offset by a decrease in loan fee income due in large part to decreased recognition of the deferred PPP loan fees upon loan forgiveness through the SBA.

During the three and six-month periods ending June 30, 2022, Northrim received $33.7 million and $90.6 million, respectively, in PPP loan forgiveness through the SBA, compared to $133.0 million and $238.0 million, respectively, in the same periods in 2021.

Total net PPP fee income including accretion and full fee recognition upon loan forgiveness was $1.3 million and $2.6 million during the three-month periods ending June 30, 2022 and 2021, respectively, and $3.4 million and $5.9 million during the six-month periods ending June 30, 2022 and 2021, respectively.

As of June 30, 2022, there was $1.1 million of net deferred fees remaining on PPP loans mostly from the second round of PPP loan originations.

The increase in net interest margin in the second quarter of 2022 as compared to the same period a year ago was primarily the result of higher yields on earning-assets which was only partially offset by a less favorable mix of earning assets due to significant increases in short-term investments, which is the lowest yielding type of earning asset for the Company.

The decrease in the net interest margin in the first half of 2022 compared to the same period a year ago is primarily due to the less favorable mix of earning assets, which was only partially offset by higher yields.

Changes in net interest margin in the three and six-month periods ended June 30, 2022 as compared to the same periods in the prior year are detailed below:

Three Months Ended June 30, 2022 vs.

June 30, 2021

Net interest income for the third quarter of 2022 increased $5.9 million, or 29%, to $26.3 million as compared to $20.4 million for the third quarter of 2021.

Net interest margin increased 77 basis points to 4.22% in the third quarter of 2022 as compared to 3.45% in the third quarter of 2021.

Net interest income for the first nine months of 2022 increased $8.7 million, or 15%, to $67.8 million as compared to $59.1 million for the first nine months of 2021.

Net interest margin increased 9 basis points to 3.69% in the first nine months of 2022 as compared to 3.60% in the first nine months of 2021.

The increase in net interest income in the third quarter and first nine-months of 2022 compared to the same periods in 2021 was primarily the result of increased interest on loans, investments, and interest bearing deposits in other banks which was only partially offset by a decrease in loan fee income due in large part to decreased recognition of the deferred PPP loan fees upon loan forgiveness through the SBA.

During the three and nine-month periods ending September 30, 2022, Northrim received $21.1 million and $111.7 million, respectively, in PPP loan forgiveness through the SBA, compared to $100.0 million and $337.9 million, respectively, in the same periods in 2021.

Total net PPP fee income including accretion and full fee recognition upon loan forgiveness was $686,000 and $3.0 million during the three-month periods ending September 30, 2022 and 2021, respectively, and $4.1 million and $8.9 million during the nine-month periods ending September 30, 2022 and 2021, respectively.

As of September 30, 2022, there was $390,000 of net deferred fees remaining on PPP loans mostly from the second round of PPP loan originations.

The increase in net interest margin in the third quarter of 2022 as compared to the same period a year ago was primarily the result of higher yields on earning-assets.

The increase in net interest margin in the first nine months of 2022 as compared to the same period a year ago was primarily the result of higher yields on earning-assets which was only partially offset by a less favorable mix of earning assets due to an increase in short-term investments, which is the lowest yielding type of earning asset for the Company.

Changes in net interest margin in the three and nine-month periods ended September 30, 2022 as compared to the same periods in the prior year are detailed below:

Three Months Ended September 30, 2022 vs.

September 30, 2021

Nonaccrual interest adjustments 0.12 %

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Change in net interest margin 0.77 %

Six Months Ended June 30, 2022 vs.

June 30, 2021

Nine Months Ended September 30, 2022 vs.

September 30, 2021

Nonaccrual interest adjustments 0.07 %

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Components of Net Interest Margin

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended June 30, 2022 and 2021.

Average yields or costs are not calculated on a tax-equivalent basis.

(Dollars in Thousands) Three Months Ended June 30,

Interest income/

Average Balances Change expense Change Average Yields/Costs

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended September 30, 2022 and 2021.

Average yields or costs are calculated on a tax-equivalent basis.

(Dollars in Thousands) Three Months Ended September 30,

Interest income/ Average Tax Equivalent

Average Balances Change expense Change Yields/Costs 6

2022 2021 $ % 2022 2021 $ % 2022 2021 Change

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Net interest margin 4.22 % 3.45 % 0.77 %

Net interest margin on a tax equivalent basis 4.27 % 3.47 % 0.80 %

Average loans to average interest-earning assets 57.25 % 62.56 %

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3 Interest income includes loan fees.

Loan fees recognized during the period and included in the yield calculation totaled $2.3 million and $3.4 million in the second quarter of 2022 and 2021, respectively.

Loan fees recognized during the period and included in the yield calculation totaled $2.0 million and $3.9 in the third quarter of 2022 and 2021, respectively.

4 Nonaccrual loans are included with a zero effective yield.

Average nonaccrual loans included in the computation of the average loan balances were $8.8 million and $13.8 million in the second quarter of 2022 and 2021, respectively .

Average nonaccrual loans included in the computation of the average loan balances were $7.7 million and $12.7 million in the third quarter of 2022 and 2021, respectively .

5 The Company does not have any fed funds sold or securities purchased with agreements to resell to disclose as part of its total interest-earning assets in the periods presented.

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the three-month periods ending June 30, 2022 and 2021.

6 Tax-equivalent yields/costs assume a federal tax rate of 21% and state tax rate of 7.43% for a combined tax rate of 28.43%.

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 rates.

The Company did not have any fed funds sold or securities purchased with agreements to resell for the three-month periods ending June 30, 2022 and 2021.

(In Thousands) Three Months Ended June 30, 2022 vs.

The Company did not have any fed funds sold or securities purchased with agreements to resell for the three-month periods ending September 30, 2022 and 2021.

(In Thousands) Three Months Ended September 30, 2022 vs.

Increase (decrease) due to

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Total interest expense $12 $386 $398

The following table compares average balances and rates as well as margins on earning assets for the six-month periods ended June 30, 2022 and 2021.

Average yields or costs are not calculated on a tax-equivalent basis.

(Dollars in Thousands) Six Months Ended June 30,

Interest income/

Average Balances Change expense Change Average Yields/Costs

The following table compares average balances and rates as well as margins on earning assets for the nine-month periods ended September 30, 2022 and 2021.

Average yields or costs are calculated on a tax-equivalent basis.

(Dollars in Thousands) Nine Months Ended September 30,

Interest income/ Average Tax Equivalent

Average Balances Change expense Change Yields/Costs 6

2022 2021 $ % 2022 2021 $ % 2022 2021 Change

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Net interest margin 3.69 % 3.60 % 0.09 %

Net interest margin on a tax equivalent basis 3.73 % 3.62 % 0.11 %

Average loans to average interest-earning assets 56.95 % 68.29 %

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3 Interest income includes loan fees.

Loan fees recognized during the period and included in the yield calculation totaled $5.3 million and $16.2 million in the first six months of 2022 and 2021, respectively.

Loan fees recognized during the period and included in the yield calculation totaled $7.3 million and $11.5 million in the first nine months of 2022 and 2021, respectively.

4 Nonaccrual loans are included with a zero effective yield.

Average nonaccrual loans included in the computation of the average loan balances were $9.9 million and $12.2 million in the first six months of 2022 and 2021, respectively .

Average nonaccrual loans included in the computation of the average loan balances were $9.2 million and $12.2 million in the first nine months of 2022 and 2021, respectively .

5 The Company does not have any fed funds sold or securities purchased with agreements to resell to disclose as part of its total interest-earning assets in the periods presented.

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the six-month periods ending June 30, 2022 and 2021.

6 Tax-equivalent yields/costs assume a federal tax rate of 21% and state tax rate of 7.43% for a combined tax rate of 28.43%.

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the nine-month periods ending September 30, 2022 and 2021.

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 rates.

The Company did not have any fed funds sold or securities purchased with agreements to resell for the six-month periods ending June 30, 2022 and 2021.

(In Thousands) Six Months Ended June 30, 2022 vs.

The Company did not have any fed funds sold or securities purchased with agreements to resell for the nine-month periods ending September 30, 2022 and 2021.

(In Thousands) Nine Months Ended September 30, 2022 vs.

Increase (decrease) due to

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The following table presents the major categories of credit loss expense:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2022 2021 2022 2021

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Total credit loss (benefit) expense ($353) ($1,106) ($40) ($3,021)

The increase in the provision for credit losses on loans for the three and six-month periods ending June 30, 2022 as compared to the same periods in 2021 is primarily the result of increased unguaranteed loan balances in the three and six-month periods ending June 30, 2022 as compared to the same periods in 2021 that were only partially offset by a decrease in the estimated loss rates due to lower forecasted unemployment rates.

During the same periods in 2021, decreases in estimated loss rates were higher than the decreases in 2022 due to larger decreases in the forecasted unemployment rates.

The decrease in the benefit for credit losses for the three and nine-month periods ending September 30, 2022 as compared to the same periods in 2021 is primarily the result of higher forecasted unemployment rates and higher unfunded commitment balances.

This change was partially offset by an increase in net loan recoveries to $1.3 million and $1.0 million during the three and nine-month periods ending September 30, 2022, respectively, as compared to $39,000 and $19,000, respectively, during the same periods in 2021.

The ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration.

Other Operating Income

Other operating income for the three-month period ended June 30, 2022, decreased $6.3 million, or 45%, to $7.8 million as compared to $14.1 million for the same period in 2021, primarily due to a $5.5 million decrease in mortgage banking income in the second quarter of 2022 compared to the same quarter in 2021.

The decrease in mortgage banking income in the three-month period ended June 30, 2022 as compared to the same period in 2021 was primarily due to decreased production volume due to decreased refinance activity resulting from increases in the mortgage interest rates.

Additionally, there was a $988.0 thousand increase in unrealized loss on marketable securities.

These decreases were only partially offset by small increases in bankcard fees and service charges on deposit accounts due to an increase in customers.

Other operating income for the six-month period ended June 30, 2022, decreased $11.4 million, or 38%, to $18.6 million as compared to $30.0 million for the same period in 2021, primarily due to a $12.1 million decrease in mortgage banking income in the first half of 2022 compared to the same period in 2021 for the same reason outlined above.

Other operating income for the three-month period ended September 30, 2022, decreased $4.0 million, or 31%, to $8.7 million as compared to $12.7 million for the same period in 2021, primarily due to a $4.2 million decrease in mortgage banking income in the third quarter of 2022 compared to the same quarter in 2021.

The decrease in mortgage banking income in the three-month period ended September 30, 2022 as compared to the same period in 2021 was primarily due to decreased production volume due to decreased refinance activity resulting from increases in mortgage interest rates.

This decrease was only partially offset by small increases in purchased receivable income, bankcard fees, and service charges on deposit accounts due to an increase in customers.

Other operating income for the nine-month period ended September 30, 2022, decreased $15.4 million, or 36%, to $27.3 million as compared to $42.7 million for the same period in 2021, primarily due to a $16.3 million decrease in mortgage banking income in the first nine months of 2022 compared to the same period in 2021 for largely the same reason outlined above.

Additionally, there was a $1.2 million increase in unrealized loss on marketable securities.

These decreases were only partially offset by $2.0 million in life insurance proceeds received in connection with the death of the Company’s former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021, as well as small increases in bankcard fees and service charges on deposit accounts due to an increase in customers.

These decreases in other operating income were only partially offset by $2.0 million in life insurance proceeds received in connection with the death of the Company’s former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021, as well as a small increase in service charges on deposit accounts due to an increase in customers.

Other Operating Expense

Other operating expense for the second quarter of 2022 increased $902,000, or 4%, to $23.2 million as compared to $22.3 million for the same period in 2021 primarily due to higher salaries and other personnel expense related to the community banking segment that was only partially offset by a decrease in salaries and other personnel expense related to mortgage banking operations, which fluctuate with production volumes.

Additionally, insurance expense increased in the second quarter of 2022 as compared to the second quarter of 2021 due to higher FDIC insurance premiums primarily due to growth in the Company's balance sheet.

Other operating expense for the first half of 2022 increased $676,000, or 2%, to $44.3 million as compared to $43.7 million for the same period in 2021 primarily due to higher insurance expense due to higher FDIC insurance premiums primarily due to growth in the Company's balance sheet.

Additionally, marketing expense and professional fees increased in the first half of 2022 as compared to 2021 due to timing differences of advertising and sponsorships and increased investment management fees attributable to the growth in our investment portfolio.

For the second quarter and first half of 2022, Northrim recorded a lower effective tax rate as compared to the same periods in 2021 as a result of an increase in tax credits and tax exempt interest income as a percentage of pre-tax income in 2022.

In the second quarter of 2022, Northrim recorded $1.5 million in state and federal income tax expense, for an effective tax rate of 24.11% compared to $3.1 million and 26.89% for the same period in 2021.

For the first half of 2022, Northrim recorded $3.5 million in state and federal income tax expense, for an effective tax rate of 22.42% compared to $6.4 million in state and federal income tax expense, for an effective tax rate of 23.88% for the same period in 2021.

Other operating expense for the third quarter of 2022 decreased $248,000, or 1%, to $22.3 million as compared to $22.5 million for the same period in 2021 primarily due to a decrease in salaries and other personnel expense related to mortgage banking operations, which fluctuate with production volumes.

This decrease was only partially offset by increases in OREO expense and insurance expense in the third quarter of 2022 compared to the same period in 2021.

OREO expense increased due to a gain on sale recognized in the third quarter of 2021, and insurance expense increased due to higher FDIC insurance premiums primarily due to growth in the Company's balance sheet.

Other operating expense for the first nine months of 2022 increased $428,000, or 1%, to $66.6 million as compared to $66.2 million for the same period in 2021 primarily due to higher FDIC insurance expense related to the growth in the Company's balance sheet and higher OREO expenses for the same reasons noted above regarding the third quarter of 2022 as compared to the third quarter of 2021.

Additionally, professional fees increased in the first nine months of 2022 as compared to 2021 due to increased investment management fees attributable to the growth in our investment portfolio.

For the third quarter and first nine months of 2022, Northrim recorded a lower effective tax rate as compared to the same periods in 2021 as a result of an increase in tax credits and tax exempt interest income as a percentage of pre-tax income in 2022.

In the third quarter of 2022, Northrim recorded $2.9 million in state and federal income tax expense, for an effective tax rate of 22.41% compared to $2.8 million and 23.88% for the same period in 2021.

For the first nine months of 2022, Northrim recorded $6.4 million in state and federal income tax expense, for an effective tax rate of 22.41% compared to $9.2 million in state and federal income tax expense, for an effective tax rate of 23.88% for the same period in 2021.

FINANCIAL CONDITION

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Portfolio Investments

Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at June 30, 2022 increased 43%, or $195.8 million, to $650.9 million from $455.1 million at December 31, 2021 as proceeds from an increase in deposits that were not lent out were invested in the first six months of 2022.

Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at September 30, 2022 increased 54%, or $244.7 million, to $699.8 million from $455.1 million at December 31, 2021 as the Company shifted short term cash balances from interest bearing deposits in other banks into slightly longer term, higher earning securities primarily through the purchase of agency and treasury securities during the first nine months of 2022.

The table below details portfolio investment balances by portfolio investment type:

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Dollar Amount Percent of Total Dollar Amount Percent of Total

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The following table presents the concentration distribution of the loan portfolio, net of deferred fees and costs, as of the dates indicated:

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Dollar Amount Percent of Total Dollar Amount Percent of Total

14 unchanged sentences

Total loans $1,407,266 $1,413,886

Loans decreased by $8.2 million, or 1%, to $1.406 billion at June 30, 2022 from $1.414 billion at December 31, 2021, primarily as a result of decreased SBA PPP loans.

Loans excluding PPP loans increased $78.2 million, or 6% to $1.374 billion at June 30, 2022 from $1.296 billion at December 31, 2021.

Loans decreased by $6.6 million, or 0.5%, to $1.407 billion at September 30, 2022 from $1.414 billion at December 31, 2021, primarily as a result of decreased SBA PPP loans.

Loans excluding PPP loans increased $100.3 million, or 8% to $1.396 billion at September 30, 2022 from $1.296 billion at December 31, 2021.

Management believes that the significant outreach that the Company has done throughout the SBA PPP lending cycle to both existing customers and new PPP loan customers has contributed to growth in our market share for non-PPP lending relationships.

PPP loans are included in commercial and industrial loans in the table above and totaled $31.9 million at June 30, 2022 and $118.2 million at December 31, 2021.

PPP loans are included in commercial and industrial loans in the table above and totaled $11.3 million at September 30, 2022 and $118.2 million at December 31, 2021.

Information about loan concentrations

The Company defines "direct exposure" to the oil and gas industry as companies that it has identified as significantly reliant upon activity related to the oil and gas industry, such as oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry.

The Company estimates that $59.2 million, or approximately 4% of loans as of June 30, 2022 have direct exposure to the oil and gas industry as compared to $63.6 million, or approximately 5% of loans as of December 31, 2021.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $68.1 million and $66.4 million at June 30, 2022 and December 31, 2021, respectively.

The portion of the Company's

ACL that related to the loans with direct exposure to the oil and gas industry was estimated at $466,000 as of June 30, 2022 and $684,000 as of December 31, 2021.

The Company estimates that $59.6 million, or approximately 4% of loans as of September 30, 2022 have direct exposure to the oil and gas industry as compared to $63.6 million, or approximately 5% of loans as of December 31, 2021.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and

gas industry were $81.4 million and $66.4 million at September 30, 2022 and December 31, 2021, respectively.

The portion of the Company's ACL that related to the loans with direct exposure to the oil and gas industry was estimated at $511,000 as of September 30, 2022 and $684,000 as of December 31, 2021.

The following table details loan balances by loan segment and class of financing receivable for loans with direct oil and gas exposure as of the dates indicated:

(In Thousands) June 30, 2022 December 31, 2021

(In Thousands) September 30, 2022 December 31, 2021

Commercial & industrial loans $42,717 $45,338

5 unchanged sentences

The Company monitors other concentrations within the loan portfolio depending on trends in the current and future estimated economic conditions.

At June 30, 2022, the Company had $121.3 million, or 9% of portfolio loans, in the Healthcare sector, $96.6 million, or 7% of portfolio loans, in the Tourism sector, $63.1 million, or 4% of portfolio loans, in the Retail sector, $59.9 million, or 4% of portfolio loans, in the Accommodations sector, $58.5 million, or 4% of portfolio loans, in the Fishing sector, $51.1 million, or 4% in the Restaurant sector, and $50.0 million, or 4% of portfolio loans, in the Aviation (non-tourism) sector.

The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of June 30, 2022:

At September 30, 2022, the Company had $119.8 million, or 9% of portfolio loans, in the Healthcare sector, $93.3 million, or 7% of portfolio loans, in the Tourism sector, $78.2 million, or 6% of portfolio loans, in the Fishing sector, $64.6 million, or 5% of portfolio loans, in the Accommodations sector, $60.4 million, or 4% of portfolio loans, in the Retail sector, $50.8 million, or 4% of portfolio loans, in the Aviation (non-tourism) sector, and $48.6 million, or 3% in the Restaurant sector.

The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of September 30, 2022:

(In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurant Accommodations Total

1 unchanged sentence

The following table sets forth information regarding changes in the ACL for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2022 2021 2022 2021

2 unchanged sentences

Commercial & industrial loans (45) — (506) (273)

Consumer loans (3) — (3) —

Total charge-offs (48) — (509) (273)

2 unchanged sentences

Owner occupied properties 55 2 55 6

Residential real estate:

1-4 family residential properties secured by first liens 5 — 5 —

1-4 family residential properties secured by junior liens

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The following table sets forth information regarding changes in the ACL for unfunded commitments for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2022 2021 2022 2021

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Deposits are the Company’s primary source of funds.

Total deposits decreased $86.2 million, or 4%, to $2.335 billion as of June 30, 2022 compared to $2.422 billion as of December 31, 2021, primarily due to the drawdown of a large temporary deposit in the first quarter of 2022.

Total deposits increased $17.7 million, or 1%, to $2.439 billion as of September 30, 2022 compared to $2.422 billion as of December 31, 2021.

The following table summarizes the Company's composition of deposits as of the periods indicated:

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(In thousands) Balance % of total Balance % of total

5 unchanged sentences

Total deposits $2,439,335 $2,421,631

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 93% of total deposits at June 30, 2022 and 93% of total deposits at December 31, 2021.

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 93% of total deposits at September 30, 2022 and 93% of total deposits at December 31, 2021.

The only deposit category with stated maturity dates is certificates of deposit.

At June 30, 2022, the Company had $169.9 million in certificates of deposit as compared to certificates of deposit of $178.0 million at December 31, 2021.

At June 30, 2022, $133.1 million, or 78%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $118.5 million, or 67%, of total certificates of deposit at December 31, 2021.

The aggregate amount of certificates of deposit in amounts of $250,000 and greater at June 30, 2022 and December 31, 2021, was $73.3 million and $77.1 million, respectively.

The following table sets forth the amount outstanding of deposits in amounts of $250,000 and greater by time remaining until maturity and percentage of total deposits as of June 30, 2022:

At September 30, 2022, the Company had $165.9 million in certificates of deposit as compared to certificates of deposit of $178.0 million at December 31, 2021.

At September 30, 2022, $130.4 million, or 79%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $118.5 million, or 67%, of total certificates of deposit at December 31, 2021.

The aggregate amount of certificates of deposit in amounts of $250,000 and greater at September 30, 2022 and December 31, 2021, was $65.8 million and $77.1 million, respectively.

The following table sets forth the amount outstanding of deposits in amounts of $250,000 and greater by time remaining until maturity and percentage of total deposits as of September 30, 2022:

Time Certificates of Deposit

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FHLB advances are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Bank’s assets.

At June 30, 2022, our maximum borrowing line from the FHLB was $1.169 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $14.3 million as of June 30, 2022 which were originated to match fund low income housing projects that qualify for long term fixed interest rates.

At September 30, 2022, our maximum borrowing line from the FHLB was $1.216 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $14.2 million as of September 30, 2022 which were originated to match fund low income housing projects that qualify for long term fixed interest rates.

These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23% to 3.25%.

Federal Reserve Bank:

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $50.5 million of loans as collateral to secure advances made through the discount window on June 30, 2022.

There were no discount window advances outstanding at either June 30, 2022 or December 31, 2021.

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $42.1 million of loans as collateral to secure the Company's ability to take advances through the discount window on September 30, 2022.

There were no discount window advances outstanding at either September 30, 2022 or December 31, 2021.

Other Short-term Borrowings:

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $909.4 million at June 30, 2022 and $948.0 million at December 31, 2021.

At June 30, 2022 and December 31, 2021, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $945.6 million at September 30, 2022 and $948.0 million at December 31, 2021.

At September 30, 2022 and December 31, 2021, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

Long-term Borrowings.

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of June 30, 2022 or December 31, 2021.

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of September 30, 2022 or December 31, 2021.

Liquidity and Capital Resources

4 unchanged sentences

Other available sources of liquidity for the bank holding company include the issuance of debt and the issuance of common or preferred stock.

As of June 30, 2022, the Company has 10.0 million authorized shares of common stock, of which 5.7 million are issued and outstanding, leaving 4.3 million shares available for issuance.

As of September 30, 2022, the Company has 10.0 million authorized shares of common stock, of which 5.7 million are issued and outstanding, leaving 4.3 million shares available for issuance.

Additionally, the Company has 2.5 million authorized shares of preferred stock available for issuance.

3 unchanged sentences

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.

The Company had cash and cash equivalents of $336.9 million, or 13% of total assets at June 30, 2022 compared to $645.8 million, or 24% of total assets as of December 31, 2021.

The decrease in cash and cash equivalents is primarily due to an increase in available for sale securities and a decrease in deposits, but is still elevated as compared to historical norms.

The Company had other comprehensive losses, net of tax, of $4.9 million and $15.9 million for the three and six-month periods ending June 30, 2022 primarily due to unrealized holding losses on available for sale securities due to increases in interest rates.

The Company had cash and cash equivalents of $406.9 million, or 15% of total assets at September 30, 2022 compared to $645.8 million, or 24% of total assets as of December 31, 2021.

The decrease in cash and cash equivalents is primarily due to an increase in available for sale securities, but is still elevated as compared to historical norms both in balance and as a percentage of total assets.

The Company had other comprehensive losses, net of tax, of $12.0 million and $28.0 million for the three and nine-month periods ending September 30, 2022 primarily due to unrealized holding losses on available for sale securities due to increases in interest rates.

Management does not believe that liquidation of these securities, which would result in realized losses, will occur prior to maturity of these securities.

Furthermore, management expects that the Company's elevated level of liquidity will continue through 2022 and potentially into subsequent years.

Accordingly, management has invested in slightly longer term investment securities as compared to the last several years.

As of June 30, 2022, the weighted average maturity of available for sale securities is 3.6 years compared to 4.1 years at December 31, 2021 and 2.6 years at December 31, 2020.

At June 30, 2022, no available for sale securities mature within one year, $137.0 million mature within one to two years, and $178.4 million mature within two to three years.

Our total unfunded commitments to fund loans and letters of credit at June 30, 2022 were $415.8 million.

Furthermore, management expects that the Company's elevated level of liquidity will continue through the remainder of 2022 and potentially into subsequent years.

Accordingly, management has invested in slightly longer term investment securities in 2021 and 2022 as compared to the last several years.

As of September 30, 2022, the weighted average maturity of available for sale securities is 3.5 years compared to 4.1 years at December 31, 2021 and 2.6 years at December 31, 2020.

At September 30, 2022, $29.5 million available for sale securities mature within one year, $129.6 million mature within one to two years, and $171.2 million mature within two to three years.

Our total unfunded commitments to fund loans and letters of credit at September 30, 2022 were $466.6 million.

We do not expect that all of these loans are likely to be fully drawn upon at any one time.

At June 30, 2022, certificates of deposit totaling $133.1 million are scheduled to mature over the next 12 months and may be withdrawn from the Bank.

At September 30, 2022, certificates of deposit totaling $130.4 million are scheduled to mature over the next 12 months and may be withdrawn from the Bank.

Similar to loans, we do not expect that these maturing certificates of deposit, or other non-maturity deposits, to be withdrawn from the Bank in a manner that will strain liquidity;

however, unforeseen future circumstances or events may cause higher than anticipated withdrawal of deposits or draws of unfunded commitments to fund new loans.

Management believes that cash requirements to fund future non-deposit liabilities, including operating lease liabilities, other liabilities, or borrowings as of June 30, 2022, are not material to the Company's liquidity position as of June 30, 2022.

Management believes that cash requirements to fund future non-deposit liabilities, including operating lease liabilities, other liabilities, or borrowings as of September 30, 2022, are not material to the Company's liquidity position as of September 30, 2022.

The Company has other available sources of liquidity to fund unforeseen liquidity needs.

These include borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB.

At June 30, 2022, our liquid assets were $578.8 million and our funds available for borrowing under our existing lines of credit were $1.224 billion.

At September 30, 2022, our liquid assets were $651.5 million and our funds available for borrowing under our existing lines of credit were $1.263 billion.

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.

As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 "Financial Statements" of this report, net cash provided by operating activities was $15.3 million for the first six months of 2022, primarily due to cash provided by proceeds from the sale of loans held for sale, which were only partially offset by cash used in connection with the origination of loans held for sale.

Net cash used by investing activities was $218.8 million for the same period, primarily due to purchases of available for sale and held to maturity securities as well as an increase in purchased receivables.

This use of cash was only partially offset by a decrease in loans, mostly attributable to SBA PPP forgiveness.

Net cash used by financing activities in the same period was $105.4 million, primarily due to a decrease in deposits.

As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 "Financial Statements" of this report, net cash provided by operating activities was $40.8 million for the first nine months of 2022, primarily due to cash provided by net income and net proceeds from the sale of loans held for sale, which were only partially offset by cash used in connection with the origination of loans held for sale.

Net cash used by investing activities was $275.4 million for the same period, primarily due to purchases of available for sale and held to maturity securities.

This use of cash was only partially offset by a decrease in loans, primarily attributable to SBA PPP forgiveness.

Net cash used by financing activities in the same period was $4.4 million, primarily due to repurchases of common stock and cash dividends paid to shareholders which were only partially offset by an increase in deposits.

Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market.

The Company repurchased 333,724 shares of its common stock under the Company's previously announced repurchase programs in the first six months of 2022.

At June 30, 2022, there are no shares remaining of the shares previously authorized for repurchase.

The Company repurchased 333,724 shares of its common stock under the Company's previously announced repurchase programs in the first nine months of 2022.

At September 30, 2022, there are no shares remaining of the shares previously authorized for repurchase.

The Company may elect 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 authorize additional shares for repurchase.

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The requirements address both risk-based capital and leverage capital.

We believe as of June 30, 2022, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

We believe as of September 30, 2022, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

The table below illustrates the capital requirements in effect for the periods noted for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements.

2 unchanged sentences

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 $10 million more in regulatory capital than the Bank at both June 30, 2022 and December 31, 2021, which explains most of the difference in the capital ratios for the two entities.

As a result, the Company has $10 million more in regulatory capital than the Bank at both September 30, 2022 and December 31, 2021, which explains most of the difference in the capital ratios for the two entities.

Minimum Required Capital Well-Capitalized Actual Ratio Company Actual Ratio Bank

June 30, 2022

September 30, 2022

Total risk-based capital 8.00% 10.00% 13.75% 11.72%

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a bank is included in the peer group for each loan segment under the following circumstances:

• The percentage the balance of the loan segment compared to total loans over a five year look back period is within 1.5 standard deviations of the Company's data, and

• The percentage the balance of the loan segment compared to total loans over a five year look back period is within 1.5 standard deviations of the Company's data;

• The percentage of total charge offs for the loan segment over a five year look back period is within 1 standard deviation of the Company's data;

2 unchanged sentences

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our assessment of market risk as of June 30, 2022 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2021.

Our assessment of market risk as of September 30, 2022 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2021.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis