NORTHRIM BANCORP INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the unaudited consolidated financial statements of Northrim BanCorp, Inc. (the “Company”) and the notes thereto presented elsewhere in this report and with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Except as otherwise noted, references to "we", "our", "us" or "the Company" refer to Northrim BanCorp, Inc. and its subsidiaries that are consolidated for financial reporting purposes. Note Regarding Forward Looking-Statements This quarterly report on Form 10-Q includes “forward-looking statements,” as that term is defined for purposes of Section 21E of the Securities Exchange Act of 1934, as amended, which are not historical facts. These forward-looking statements describe management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of the Company’s style of banking, the strength of the local economy, and statements related to the expected or potential impact of the novel coronavirus ("COVID-19") pandemic and related responses of the government. All statements other than statements of historical fact, including statements regarding industry prospects, future results of operations or financial position and the expected or potential impact of COVID-19 and related responses of the government, made in this report are forward-looking. We use words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management’s current plans and expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations, and those variations may be both material and adverse. Forward-looking statements, whether concerning COVID-19 and the government response related thereto or otherwise, are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the uncertainties relating to the impact of COVID-19 on the Company's credit quality, business, operations and employees; the availability and terms of funding from government sources related to COVID-19; the impact of the results of government initiatives on the regulatory landscape, natural resource extraction industries, capital markets, and the response to and management of the COVID-19 pandemic, including the effectiveness of previously-enacted fiscal stimulus from the federal government and a potential infrastructure bill; the timing of Paycheck Protection Program ("PPP") loan forgiveness; 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; our ability to maintain or expand our market share or net interest margin; our ability to maintain asset quality; our ability to implement our marketing and growth strategies; and our ability to execute our business plan. Further, actual results may be affected by competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Part II. Item 1A Risk Factors of this report and Part I. Item 1A in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, as well as in our other filings with the Securities and Exchange Commission. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition, you should note that forward looking statements are made only as of the date of this report and that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements, other than as required by law. 39 Update on Economic Conditions 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%. 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%); 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 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. 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. 40 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. 41 Other financial measures are shown in the table below: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Return on average assets, annualized 1.52 % 1.40 % 1.13 % 1.66 % Return on average shareholders' equity, annualized 18.18 % 14.47 % 13.02 % 16.57 % Dividend payout ratio 28.23 % 26.86 % 34.74 % 23.86 % Growth and Paycheck Protection Program: • In 2020 and 2021, Northrim funded a total of nearly 5,800 PPP loans totaling $612.6 million to both existing and new customers. Management estimates that we funded approximately 24% of the number and 32% of the value of all Alaska PPP second round loans. • 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. 42 Credit Quality • Customer Accommodations: 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 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 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 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 September 30, 2022 Nonperforming loans $8,001 $298 ($1,159) ($48) $— $— $— $7,092 Nonperforming loans guaranteed by government (683) — 64 — — — — (619) Nonperforming loans, net 7,318 298 (1,095) (48) — — — 6,473 Other real estate owned 5,638 — — — — — — 5,638 Other real estate owned guaranteed by government (1,279) — — — — — — (1,279) Total nonperforming assets, net of government guarantees $11,677 $298 ($1,095) ($48) $— $— $— $10,832 Writedowns Transfers to (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 September 30, 2021 Nonperforming loans $13,104 $— ($611) $— $— $— $— $12,493 Nonperforming loans guaranteed by government (1,096) — 79 — — — — (1,017) Nonperforming loans, net 12,008 — (532) — — — — 11,476 Other real estate owned 7,073 — — — — — (1,161) 5,912 by government (1,279) — — — — — — (1,279) Total nonperforming assets, net of government guarantees $17,802 $— ($532) $— $— $— ($1,161) $16,109 Potential problem loans: Potential problem loans are loans which are currently performing in accordance with contractual terms but 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 impaired loans. These loans are closely monitored and their performance is reviewed by management on a regular basis. 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. 43 Troubled debt restructurings (“TDRs”): TDRs are those loans 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 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 $5.1 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 Part 1. Item 1 of this report for further discussion of TDRs. RESULTS OF OPERATIONS Income Statement Net Income 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. 44 Net Interest Income/Net Interest Margin 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 % Impact of SBA Paycheck Protection Program loans (0.18) % Interest rates and loan fees 0.74 % Volume and mix of interest-earning assets 0.09 % Change in net interest margin 0.77 % Nine Months Ended September 30, 2022 vs. September 30, 2021 Nonaccrual interest adjustments 0.07 % Impact of SBA Paycheck Protection Program loans (0.01) % Interest rates and loan fees 0.25 % Volume and mix of interest-earning assets (0.22) % Change in net interest margin 0.09 % 45 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 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 Interest-bearing deposits in other banks 1 $324,280 $390,004 ($65,724) (17) % $1,899 $149 $1,750 1,174 % 2.29 % 0.15 % 2.14 % Taxable long-term investments 2 677,807 388,778 289,029 74 % 3,526 1,229 2,297 187 % 1.98 % 1.20 % 0.78 % Non-taxable long-term investments 2 802 853 (51) (6) % 4 4 — — % 2.80 % 2.64 % 0.16 % Loans held for sale 53,769 99,716 (45,947) (46) % 656 727 (71) (10) % 4.88 % 2.92 % 1.96 % Loans 3,4 1,414,982 1,469,072 (54,090) (4) % 21,474 19,173 2,301 12 % 6.05 % 5.19 % 0.86 % Interest-earning assets 5 2,471,640 2,348,423 123,217 5 % 27,559 21,282 6,277 29 % 4.47 % 3.62 % 0.85 % Nonearning assets 174,182 170,317 3,865 2 % Total $2,645,822 $2,518,740 $127,082 5 % Interest-bearing demand $688,566 $609,718 $78,848 13 % $562 $117 $445 380 % 0.32 % 0.08 % 0.24 % Savings deposits 346,306 326,733 19,573 6 % 130 122 8 7 % 0.15 % 0.15 % — % Money market deposits 315,049 267,723 47,326 18 % 158 97 61 63 % 0.20 % 0.14 % 0.06 % Time deposits 167,112 176,287 (9,175) (5) % 214 331 (117) (35) % 0.51 % 0.74 % (0.23) % Total interest-bearing deposits 1,517,033 1,380,461 136,572 10 % 1,064 667 397 60 % 0.28 % 0.19 % 0.09 % Borrowings 24,573 24,962 (389) (2) % 184 183 1 1 % 2.92 % 2.89 % 0.03 % Total interest-bearing liabilities 1,541,606 1,405,423 136,183 10 % 1,248 850 398 47 % 0.32 % 0.24 % 0.08 % Non-interest bearing demand deposits 846,764 826,941 19,823 2 % Other liabilities 36,446 42,923 (6,477) (15) % Equity 221,006 243,453 (22,447) (9) % Total $2,645,822 $2,518,740 $127,082 5 % Net interest income $26,311 $20,432 $5,879 29 % 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 % Average loans to average total deposits 59.86 % 66.55 % Average non-interest deposits to average total deposits 35.82 % 37.46 % Average interest-earning assets to average interest-bearing liabilities 160.33 % 167.10 % 1 Consists of interest bearing deposits in other banks and domestic CDs. 2 Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock. Taxable long-term investments consist of U.S. treasury and government sponsored entities, corporate bonds, collateral loan obligations, marketable equity securities, and Federal Home Loan Bank stock. Non-taxable long-term investments consist of municipal securities. 3 Interest income includes loan fees. 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 $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. 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%. 46 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 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 three-month periods ending September 30, 2022 and 2021. (In Thousands) Three Months Ended September 30, 2022 vs. 2021 Increase (decrease) due to Volume Rate Total Interest Income: Short-term investments ($21) $1,771 $1,750 Taxable long-term investments 1,229 1,068 2,297 Nontaxable long-term investments — — — Loans held for sale (430) 359 (71) Loans (260) 2,561 2,301 Total interest income $518 $5,759 $6,277 Interest Expense: Interest-bearing demand $13 $432 $445 Savings deposits 7 1 8 Money market deposits 11 50 61 Time deposits (18) (99) (117) Interest-bearing deposits 13 384 397 Borrowings (1) 2 1 Total interest expense $12 $386 $398 47 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 Interest-bearing deposits in other banks 1 $414,159 $240,635 $173,524 72 % $2,907 $248 $2,659 1,072 % 0.93 % 0.14 % 0.79 % Taxable long-term investments 2 586,268 347,033 239,235 69 % 7,484 3,583 3,901 109 % 1.64 % 1.31 % 0.33 % Non-taxable long-term investments 2 816 855 (39) (5) % 13 13 — — % 2.76 % 2.63 % 0.13 % Loans held for sale 55,363 108,455 (53,092) (49) % 1,682 2,272 (590) (26) % 4.05 % 2.79 % 1.26 % Loans 3,4 1,397,789 1,501,139 (103,350) (7) % 58,523 56,015 2,508 4 % 5.62 % 5.01 % 0.61 % Interest-earning assets 5 2,454,395 2,198,117 256,278 12 % 70,609 62,131 8,478 14 % 3.88 % 3.80 % 0.08 % Nonearning assets 167,835 171,350 (3,515) (2) % Total $2,622,230 $2,369,467 $252,763 11 % Interest-bearing demand $678,043 $547,734 $130,309 24 % $844 $362 $482 133 % 0.17 % 0.09 % 0.08 % Savings deposits 349,301 318,761 30,540 10 % 376 377 (1) — % 0.14 % 0.16 % (0.02) % Money market deposits 319,379 256,729 62,650 24 % 363 323 40 12 % 0.15 % 0.17 % (0.02) % Time deposits 172,274 178,601 (6,327) (4) % 655 1,433 (778) (54) % 0.51 % 1.07 % (0.56) % Total interest-bearing deposits 1,518,997 1,301,825 217,172 17 % 2,238 2,495 (257) (10) % 0.20 % 0.26 % (0.06) % Borrowings 24,674 25,031 (357) (1) % 544 519 25 5 % 2.91 % 2.75 % 0.16 % Total interest-bearing liabilities 1,543,671 1,326,856 216,815 16 % 2,782 3,014 (232) (8) % 0.24 % 0.30 % (0.06) % Non-interest bearing demand deposits 816,741 761,070 55,671 7 % Other liabilities 34,451 44,273 (9,822) (22) % Equity 227,367 237,268 (9,901) (4) % Total $2,622,230 $2,369,467 $252,763 11 % Net interest income $67,827 $59,117 $8,710 15 % 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 % Average loans to average total deposits 59.84 % 72.77 % Average non-interest deposits to average total deposits 34.97 % 36.89 % Average interest-earning assets to average interest-bearing liabilities 159.00 % 165.66 % 1 Consists of interest bearing deposits in other banks and domestic CDs. 2 Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock. Taxable long-term investments consist of U.S. treasury and government sponsored entities, corporate bonds, collateral loan obligations, marketable equity securities, and Federal Home Loan Bank stock. Non-taxable long-term investments consist of municipal securities. 3 Interest income includes loan fees. 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 $9.2 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. 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%. 48 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 nine-month periods ending September 30, 2022 and 2021. (In Thousands) Nine Months Ended September 30, 2022 vs. 2021 Increase (decrease) due to Volume Rate Total Interest Income: Short-term investments $293 $2,366 $2,659 Taxable long-term investments 3,448 453 3,901 Nontaxable long-term investments (1) 1 — Loans held for sale (1,370) 780 (590) Loans (4,621) 7,129 2,508 Total interest income ($2,251) $10,729 $8,478 Interest Expense: Interest-bearing demand $58 $424 $482 Savings deposits 35 (36) (1) Money market deposits 73 (33) 40 Time deposits (53) (725) (778) Interest-bearing deposits 113 (370) (257) Borrowings (7) 32 25 Total interest expense $106 ($338) ($232) Provision for Credit Losses The provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the Allowance for Credit Losses ("ACL") at an appropriate level under the Current Expected Credit Losses ("CECL") model. The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. The following table presents the major categories of credit loss expense: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2022 2021 2022 2021 Credit loss expense on loans held for investment ($903) ($762) ($797) ($2,828) Credit loss expense on unfunded commitments 550 (344) 757 (193) Credit loss expense on available for sale debt securities — — — — Credit loss expense on held to maturity securities — — — — Credit loss expense on purchased receivables — — — — Total credit loss (benefit) expense ($353) ($1,106) ($40) ($3,021) 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. 49 Other Operating Income 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 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 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. Income Taxes 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 Balance Sheet Overview Portfolio Investments 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. 50 The table below details portfolio investment balances by portfolio investment type: September 30, 2022 December 31, 2021 Dollar Amount Percent of Total Dollar Amount Percent of Total (In Thousands) Balance % of total Balance % of total U.S. Treasury and government sponsored entities $564,072 80.6 % $341,480 75.0 % Municipal securities 796 0.1 % 840 0.2 % Corporate bonds 66,692 9.5 % 52,946 11.6 % Collateralized loan obligations 57,112 8.2 % 51,418 11.3 % Preferred stock 11,149 1.6 % 8,420 1.9 % Total portfolio investments $699,821 $455,104 Loans and Lending Activities The following table presents the concentration distribution of the loan portfolio, net of deferred fees and costs, as of the dates indicated: September 30, 2022 December 31, 2021 Dollar Amount Percent of Total Dollar Amount Percent of Total (In Thousands) Commercial & industrial loans $375,833 26.7 % $448,338 31.7 % Commercial real estate: Owner occupied properties 329,813 23.4 % 300,200 21.2 % Non-owner occupied and multifamily properties 449,760 32.0 % 435,311 30.8 % Residential real estate: 1-4 family residential properties secured by first liens 39,208 2.8 % 32,542 2.3 % 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 23,176 1.6 % 19,610 1.4 % 1-4 family residential construction loans 47,779 3.4 % 36,222 2.6 % Other construction, land development and raw land loans 77,442 5.5 % 88,094 6.2 % Obligations of states and political subdivisions in the US 24,830 1.8 % 16,403 1.2 % Agricultural production, including commercial fishing 32,073 2.3 % 27,959 2.0 % Consumer loans 4,168 0.3 % 4,801 0.3 % Other loans 3,184 0.2 % 4,406 0.3 % Total loans $1,407,266 $1,413,886 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 $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 $59.6 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 51 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) September 30, 2022 December 31, 2021 Commercial & industrial loans $42,717 $45,338 Commercial real estate: Owner occupied properties 9,321 10,244 Non-owner occupied and multifamily properties 6,153 6,564 Other loans 1,446 1,495 Total $59,637 $63,641 The Company monitors other concentrations within the loan portfolio depending on trends in the current and future estimated economic conditions. 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 ACL $505 $372 $971 $547 $571 $426 $523 $3,915 52 The following table sets forth information regarding changes in the ACL for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2022 2021 2022 2021 Balance at beginning of period $11,537 $14,539 $11,739 $21,136 Cumulative effect of adoption of ASU 2016-13 — — — (4,511) Charge-offs: Commercial & industrial loans (45) — (506) (273) Consumer loans (3) — (3) — Total charge-offs (48) — (509) (273) Recoveries: Commercial & industrial loans 1,325 23 1,441 235 Commercial real estate: 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 and revolving secured by 1-4 family first liens 9 9 30 29 Agricultural production, including commercial fishing — 5 15 20 Consumer loans 2 — 3 2 Total recoveries 1,396 39 1,549 292 Net, charge-offs 1,348 39 1,040 19 (Benefit) provision for credit losses (903) (762) (797) (2,828) Balance at end of period $11,982 $13,816 $11,982 $13,816 The following table sets forth information regarding changes in the ACL for unfunded commitments for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2022 2021 2022 2021 Balance at beginning of period $1,303 $1,567 $1,096 $187 Cumulative effect of adoption of ASU 2016-13 — — — 1,229 Adjusted balance, beginning of period 1,303 1,567 1,096 1,416 (Benefit) provision for credit losses 550 (344) 757 (193) Balance at end of period $1,853 $1,223 $1,853 $1,223 While management believes that it uses the best information available to determine the ACL, unforeseen market conditions and other events could result in adjustment to the ACL, and net income could be significantly affected if circumstances differed substantially from the assumptions used in making the final determination of the ACL. Moreover, bank regulators frequently monitor banks' loan loss allowances, and if regulators were to determine that the Company’s ACL is inadequate, they may require the Company to increase the ACL, which may adversely impact the Company’s net income and financial condition. 53 Deposits Deposits are the Company’s primary source of funds. 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: September 30, 2022 December 31, 2021 (In thousands) Balance % of total Balance % of total Demand deposits $861,378 35 % $887,824 37 % Interest-bearing demand 757,422 31 % 692,683 29 % Savings deposits 344,975 14 % 348,164 14 % Money market deposits 309,690 13 % 314,996 13 % Time deposits 165,870 7 % 177,964 7 % 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 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 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 of $250,000 or More Percent of Total Deposits (In Thousands) Amount Amounts maturing in: Three months or less $14,523 22 % Over 3 through 6 months 21,955 33 % Over 6 through 12 months 14,100 21 % Over 12 months 15,270 24 % Total $65,848 100 % Borrowings FHLB: The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). As a member, the Bank is eligible to obtain advances from the FHLB. 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 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 $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. 54 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 $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 September 30, 2022 or December 31, 2021. Liquidity and Capital Resources The Company is a single bank holding company and its primary ongoing source of liquidity is from dividends received from the Bank. Such dividends arise from the cash flow and earnings of the Bank. Banking regulations and regulatory authorities may limit the amount of, or require the Bank to obtain certain approvals before paying, dividends to the Company. Given that the Bank currently meets and the Bank anticipates that it will continue to meet, all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards, the Company expects to continue to receive dividends from the Bank during the remainder of 2022. 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 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. The Bank manages its liquidity through its Asset and Liability Committee. The Bank's primary source of funds are customer deposits. These funds, together with loan repayments, loan sales, maturity of investment securities, borrowed funds, and retained earnings are used to make loans, to acquire securities and other assets, and to fund deposit flows and 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. 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 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 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 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 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. 55 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 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. Capital Requirements and Ratios 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 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. Management intends to maintain capital ratios for the Bank in 2022, exceeding the FDIC’s requirements for the “well-capitalized” classification. The capital ratios for the Company exceed those for the Bank primarily because the $10 million trust preferred securities offering completed in the fourth quarter of 2005 is 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 $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 September 30, 2022 Total risk-based capital 8.00% 10.00% 13.75% 11.72% Tier 1 risk-based capital 6.00% 8.00% 12.98% 10.96% Common equity tier 1 capital 4.50% 6.50% 12.45% 10.97% Leverage ratio 4.00% 5.00% 8.97% 7.55% See Note 23 of the Consolidated Financial Statements in Part II. Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 for a detailed discussion of the capital ratios. The requirements for "well- capitalized" come from the Prompt Corrective Action rules. See Part I. Item 1 - Business - Supervision and Regulation in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. These rules apply to the Bank but not to the Company. Under the rules of the Federal Reserve Bank, a bank holding company such as the Company is generally defined to be "well capitalized" if its Tier 1 risk-based capital ratio is 8.0% or more and its total risk-based capital ratio is 10.0% or more. 56 Critical Accounting Policies Our critical accounting policies are described in detail in Part II. Item 7, Management’s Discussion and Analysis, and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments as a result of the need to make "critical accounting estimates", which are estimates that involve estimation uncertainty that has had or is reasonably likely to have a material impact on the Company's financial condition or results of operations. The Company's critical accounting policies include allowance for credit losses, valuation of goodwill and other intangible assets, the valuation of OREO, the valuation of mortgage servicing rights, and fair value. There have been no material changes to the valuation techniques or models, that affect our estimates during 2022 except as noted below. Allowance for Credit Losses Policy: For loan pools that utilize the discounted cash flow ("DCF") method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default. The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables. As of December 31, 2021, management utilized and forecasted Alaska unemployment as a loss driver for all of the loan pools that utilized the DCF method. Management also utilized and forecasted either one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlated to expected future losses. Additionally, the Company's regression models for PD as of December 31, 2021 utilized the Company's actual historical loan level default data. As of January 1, 2022, management utilizes and forecasts U.S. unemployment as the sole loss driver for all of the loan pools that utilize the DCF method. The Company's regression models for PD as of January 1, 2022 utilize peer historical loan level default data. Peers for this purpose include banks in the United States with total assets between $1 billion and $5 billion whose loan portfolios share certain characteristics with the Company's loan portfolio. Peers differ by loan segment; 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; • 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; and • The percentage of total charge offs for the loan segment during the recessionary period from the fourth quarter of 2008 to the fourth quarter of 2012 is within 1 standard deviation of the Company's data. No other changes have been made to the Company's Allowance for Credit Losses Policy since December 31, 2021. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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. 57