What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-04 · 185 added, 314 removed, 262 unchanged (66% of the section changed)

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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.

All statements, other than statements of historical fact, regarding our financial position, business strategy, management’s plans and objectives for future operations are forward-looking statements.

We use words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions in part to help identify forward-looking statements.

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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.

Forward-looking statements 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 effect of the novel coronavirus (“COVID-19”) pandemic and other infection illness outbreaks that may arise in the future and the resulting governmental or societal responses;

impact of the results of government initiatives on the regulatory landscape, natural resource extraction industries, and capital markets;

the impact of declines in the commercial and residential real estate markets, high unemployment rates, inflationary pressures and slowdowns in economic growth;

potential further increases in interest rates, inflation, supply-chain constraints, and potential geopolitical instability, including the war in Ukraine;

financial stress on borrowers (consumers and businesses) as a result of higher rates or an uncertain economic environment;

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

our ability to maintain or expand our market share or net interest margin;

the sufficiency of our provision for credit losses and the accuracy of the assumptions or estimates used in preparing our financial statements, including those related to current expected credit losses accounting guidance;

the value of securities held in our investment portfolio;

our ability to maintain asset quality;

our ability to implement our marketing and growth strategies;

our ability to identify and address cyber-security risks, including security breaches, “denial of service attacks,” “hacking,” and identity theft;

and our ability to execute our business plan.

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and general trends in the local, regional and national banking industry and economy.

In addition, there are risks inherent in the banking industry relating to collectability of loans and changes in interest rates.

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.

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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%.

The Alaska Department of Labor ("DOL") has released preliminary data through February of 2023.

The DOL reported Alaska’s seasonally adjusted unemployment rate for February of 2023 was 3.8% compared to 3.6% for the U.S.

The DOL reports total payroll jobs in Alaska increased 2.5% or 7,700 jobs compared to February of 2022.

All major sectors showed year over year growth in jobs with the exception of Manufacturing, which declined 100 jobs, or 0.9% over the last 12 months.

According to the DOL, Transportations, Warehousing and Utilities had the largest growth of 11.5% year over year in February, adding 2,300 jobs.

The Leisure and Hospitality sector had strong growth of 7.2% over the same 12 month period, adding 2,100 jobs.

The Oil and Gas sector has benefited from higher energy prices and new exploration activity, resulting in an increase of 300 jobs or 4.3% since February of 2022.

Other Services grew 3.8%;

Professional and Business Services added 2.7%;

Construction grew 2.2%;

and Information increased 2.1% compared to February of 2022.

The Retail sector has fully recovered from pre-COVID levels and now has 900 more jobs than February of 2020.

Alaska’s Gross State Product (“GSP”) was estimated to be $64.1 billion in current dollars at the end of 2022, according to the Federal Bureau of Economic Analysis ("BEA").

Alaska’s inflation adjusted “real” GSP declined 2.4% in 2022.

However, the decrease in “real” GSP was predominantly in the first half of the year and Alaska’s GSP grew at annualized rates of 8.7% in the third quarter and 4.1% in the fourth quarter of 2022.

Alaska’s real GSP improvement in the second half of 2022 was primarily due to gains in the Oil and Gas sector, Transportation and Warehousing, Retail Trade and State & Local Government.

The BEA also calculated Alaska’s seasonally adjusted personal income at $50.6 billion at the end of 2022, an improvement of 4.8% for the year.

The national average was an increase of 2.4% for the same period.

Management notes that Alaskans' personal income from wages, dividends, interest and rents was relatively similar to the US growth rates;

however, Alaska was the only state in the country to have higher levels of government transfer payments in 2022 compared to 2021.

The prior year was driven by large COVID relief payments, while the 2022 increase for Alaska was primarily due to the significantly larger Alaska Permanent Fund dividend payments of $3,284 per person compared to $1,114 in 2021.

For about 650,000 qualified Alaskans that equates to an increase of $1.41 billion in government payments from the prior year.

The Permanent Fund has grown to a value of $75.5 billion.

The Permanent Fund is scheduled to transfer $3.4 billion to the State's General Fund in fiscal year 2023.

It will be divided between dividends to Alaskan citizens and funds for state government services.

The price of Alaska North Slope (“ANS”) crude oil averaged $91.41 per barrel in Alaska’s fiscal year, which ended June 30, 2022.

The Alaska Department of Revenue (“DOR”) forecasts ANS oil to average $85.25 per barrel in Alaska fiscal year 2023 and $73 in 2024.

The DOR calculated ANS crude oil production was 486 thousand barrels per day in Alaska’s fiscal year ending June 30, 2022.

The DOR has forecast production to increase to 501 thousand barrels per day in Alaska’s fiscal year 2023 and 512 thousand barrels per day in 2024.

This is primarily a result of new production coming on line in the NPR-A region west of Prudhoe Bay.

According to the Mortgage Bankers Association, Alaska’s home mortgage delinquency rate in the fourth quarter of 2022 was 2.9% compared to 4.1% in the fourth quarter of 2021.

Alaska’s delinquency rate of 2.9% compares to the national average rate of 3.9% for the fourth quarter of 2022.

The Mortgage Bankers Association survey reported that the mortgage foreclosure inventory in Alaska in the fourth quarter of 2022 was 0.54% and the national average was 0.57%.

According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 7.6% in 2022 to $456,509.

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.

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.

This was the fifth consecutive year of price increases, following growth of 6.9% in 2021 and 5.8% in 2020.

Average sales prices in the Matanuska Susitna Borough rose 9.9% in 2022 to $382,504, continuing a trend of average price increases for more than a decade.

Average home prices in the Matanuska Susitna Borough increased 15.6% in 2021 and 9.9% in 2020.

These two markets represent the locations of the vast majority of the residential lending activities of Northrim Bank (the “Bank”)..

The number of housing units sold in Anchorage did slow in 2022 by 21.2% compared to 2021, as reported by the Alaska Multiple Listing Services.

This was following sales growth of 11.2% in 2021 compared to 2020.

Management believes that a lack of inventory due to a reduction in the supply of new homes being constructed and a lower churn of existing homes being listed on the market are the primary reasons for the decline in sales.

The Matanuska Susitna Borough also experienced a lower volume of home sales, down 11.9% in 2022 compared to the prior year.

The number of units sold in the Matanuska Susitna Borough had been increasing for the prior four years and grew by 11.7% in 2021 as compared to 2020.

The Board of Governors of the Federal Reserve System increased its benchmark interest rate target from 4.25%-4.50% as of December 31, 2022 to 4.75%-5.00% as of March 31, 2023.

Similarly, the prime rate of interest has increased from 7.50% as of December 31, 2022 to 8.00% as of March 31, 2023.

Highlights and Summary of Performance - First Quarter of 2023

The Company reported net income and diluted earnings per share of $4.8 million and $0.84, respectively, for the first quarter of 2023 compared to net income and diluted earnings per share of $7.2 million and $1.20, respectively, for the first quarter of 2022.

The decrease in net income for the three-month period ending March 31, 2023 compared to the same period 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 an increase in salaries and personnel expense in the Community Banking segment.

The first quarter of 2022 also included $2.0 million in keyman insurance proceeds.

This non-recurring item represents 64% of the $3.1 million decrease in pretax income in the first quarter of 2023 compared to the first quarter of 2022.

These decreases were only partially offset by an increase in 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 in the first quarter of 2023 as compared to the same period a year ago.

• Net interest income in the first quarter of 2023 increased 30% to $25.0 million compared to $19.3 million in the first quarter of 2022.

• Net interest margin was 4.22% for the first quarter of 2023, a 104 basis point increase from the first quarter of 2022.

The increase in this period compared to the same period in 2022 was primarily due to higher yields on all interest-earning asset categories, which were only partially offset by higher costs on interest-bearing deposits.

• The weighted average interest rate for new loans booked in the first quarter of 2023 was 6.35% compared to 4.48% in the first quarter a year ago.

• Loans were $1.54 billion at March 31, 2023, up 2% from December 31, 2022 primarily as a result of consumer mortgage loan growth.

At March 31, 2023, 71% of loans are variable and 16% of earning assets are subject to rate increases in the second quarter of 2023 when prime or other indices increase.

• Total deposits were $2.30 billion at March 31, 2023, down 4% from December 31, 2022.

Demand deposits decreased 4% at March 31, 2023 from December 31, 2022 and currently represent 34% of total deposits.

• The average cost of interest-bearing deposits was 1.20% at March 31, 2023, up from 0.15% at March 31, 2022.

• Total liquid assets and investments and loans maturing within one year were $502.0 million and our funds available for borrowing under our existing lines of credit were $1.201 billion at March 31, 2023.

Other financial measures are shown in the table below:

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

2022 2021 2022 2021

Three Months Ended March 31,

Return on average assets, annualized 0.76 % 1.12 %

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Dividend payout ratio 71.30 % 34.20 %

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.

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.

Nonperforming assets, net of government guarantees were $6.4 million at March 31, 2023 and December 31, 2022.

Other Real Estate Owned ("OREO"), net of government guarantees, increased to $273,000 at March 31, 2023, from zero at December 31, 2022.

Nonperforming loans, net of government guarantees decreased $347,000, or 5% to $6.1 million as of March 31, 2023 from $6.4 million as of December 31, 2022, primarily due to payoffs and pay downs in the first three months of 2023 that were only partially offset by the transfer of one lending relationship to nonaccrual status.

$4.5 million, or 74% of nonperforming loans, net of government guarantees at March 31, 2023, are nonaccrual loans related to four commercial relationships.

The following table summarizes nonperforming asset activity for the three-month periods ending March 31, 2023 and 2022.

Writedowns Transfers to

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

(In Thousands) Balance at December 31, 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

this quarter Sales this quarter Balance at March 31, 2023

Nonperforming loans $7,076 $2,836 ($850) ($14) ($273) $— $— $8,775

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Other real estate owned — 273 — — — — — 273

Other real estate owned guaranteed

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

Total nonperforming assets,

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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

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

this quarter Transfers to OREO Performing Status

this quarter Sales this quarter Balance at March 31, 2022

Nonperforming loans $11,650 $166 ($835) ($295) $— ($1,077) $— $9,609

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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.

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.

At March 31, 2023, management had identified potential problem loans of $1.4 million as compared to potential problem loans of $1.6 million at December 31, 2022.

The decrease in potential problem loans from December 31, 2022 to March 31, 2023 is primarily the result of various loan paydowns in the first three months of 2023.

RESULTS OF OPERATIONS

Income Statement

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 income for the first quarter of 2023 decreased $2.4 million to $4.8 million as compared to $7.2 million for the same period in 2022.

The decrease in net income in the first quarter of 2023 as compared to the same quarter a year ago is

mostly attributable to a $3.5 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 $1.1 million increase in net income in the Community Banking segment.

The increase in net income in the Community Banking segment in the three months ended March 31, 2023, 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 an increase in other operating expenses and a higher provision for credit losses.

Additionally, the Company received $2.0 million in life insurance proceeds in the three-month period ended March 31, 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 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

Net interest income for the first quarter of 2023 increased $5.7 million, or 30%, to $25.0 million as compared to $19.3 million for the first quarter of 2022.

The net interest margin increased 104 basis points to 4.22% in the first quarter of 2023 as compared to 3.18% in the first quarter of 2022.

The increase in net interest income in the first quarter of 2023 compared to the same period in 2022 was primarily the result of increased interest on loans, investments, and interest bearing deposits in other banks which was only partially offset by an increase in interest expense on interest-bearing deposits.

The increase in net interest margin in the first quarter of 2023 as compared to the same period of 2022 was primarily the result of higher yields on earning-assets.

Changes in net interest margin in the three-month period ended March 31, 2023 as compared to the same period in the prior year are detailed below:

Three Months Ended March 31, 2023 vs.

March 31, 2022

Nonaccrual interest adjustments 0.02 %

Impact of SBA Paycheck Protection Program loans (0.28) %

Interest rates and loan fees 0.25 %

Volume and mix of interest-earning assets (0.22) %

Interest rates on loans and liabilities and loan fees, all other loans 1.28 %

Volume and mix of other interest-earning assets and liabilities 0.02 %

Change in net interest margin 1.04 %

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 %

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%.

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.

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

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.

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended March 31, 2023 and 2022.

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

(Dollars in Thousands) Nine Months Ended September 30,

(Dollars in Thousands) Three Months Ended March 31,

Interest income/ Average Tax Equivalent

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Net interest margin 4.22 % 3.18 % 1.04 %

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

Average loans to average interest-earning assets 63.41 % 56.04 %

8 unchanged sentences

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.

Loan fees recognized during the period and included in the yield calculation totaled $1.3 million and $3.0 in the first quarter of 2023 and 2022, 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 .

Average nonaccrual loans included in the computation of the average loan balances were $7.1 million and $11.0 million in the first quarter of 2023 and 2022, 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%.

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.

The Company did not have any fed funds sold or securities purchased with agreements to resell for the three-month periods ending March 31, 2023 and 2022.

(In Thousands) Three Months Ended March 31, 2023 vs.

Increase (decrease) due to

3 unchanged sentences

Taxable long-term investments 1,038 2,026 3,064

Nontaxable long-term investments (1) 1 —

Loans held for sale (324) 209 (115)

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

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

Three Months Ended March 31,

(In Thousands) 2023 2022

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Total credit loss (benefit) expense $360 ($150)

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 increase in the ACL for the three-month periods ending March 31, 2023 as compared to the same periods in 2022 is primarily the result of increased loan and unfunded commitment balances, as well as a decrease in management's assumptions for prepayment and curtailment speeds.

These changes are only partially offset by improvement in management's forecasted economic factors.

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 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 income for the three-month period ended March 31, 2023, decreased $5.9 million, or 55%, to $4.9 million as compared to $10.8 million for the same period in 2022, primarily due to a $5.0 million decrease in mortgage banking income in the first quarter of 2023 compared to the same quarter a year ago.

The decrease in mortgage banking income in the three-month period ended March 31, 2023 as compared to the same period in 2022 was primarily due to decreased production volume due to increases in mortgage interest rates.

Additionally, the Company received $2.0 million in keyman insurance proceeds in 2022 which was not repeated in 2023.

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.

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.

Other operating expense for the first quarter of 2023 increased $2.4 million, or 11%, to $23.5 million as compared to $21.1 million for the same period in 2022 primarily due to an increase in salaries and other personnel expense as well as smaller increases in most other expense categories as the Company has grown and increased its number of branches and mortgage origination offices.

The Company opened its 18th branch in Nome in the fourth quarter of 2022 and its 19th branch in Kodiak in the first quarter of 2023 which contributed to increased salaries and personnel expense for the Community Banking segment.

Despite lower mortgage loan production volumes, salaries and personnel expense for the Home Mortgage Lending segment increased as a result of branch expansion in new markets in late 2022 and early 2023.

For the first quarter of 2023, Northrim recorded a lower effective tax rate as compared to the same period in 2022 as a result of an increase in tax credits and tax exempt interest income as a percentage of pre-tax income in 2023.

In the first quarter of 2023, Northrim recorded $1.2 million in state and federal income tax expense, for an effective tax rate of 20.44% compared to $1.9 million and 21.25% for the same period in 2022.

FINANCIAL CONDITION

1 unchanged sentence

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.

Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at March 31, 2023 increased slightly to $725.0 million from $724.5 million at December 31, 2022 as the fair market value of available for sale securities increased but was largely offset by maturities and calls of available for sale securities during the first three months of 2023.

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Dollar Amount Percent of Total Dollar Amount Percent of Total

7 unchanged sentences

Total portfolio investments $724,999 $724,519

The average estimated duration of the investment portfolio at March 31, 2023, was approximately three-years.

As of March 31, 2023, $29.6 million available for sale securities are scheduled to mature in the next six months, $76.9 million are scheduled to mature in six months to one year, and $151.8 million are scheduled to mature in the following year, a total of $258.3 million or 11% of earning assets at March 31, 2023.

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

March 31, 2023 December 31, 2022

Dollar Amount Percent of Total Dollar Amount Percent of Total

14 unchanged sentences

Total loans $1,535,187 $1,501,785

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.

Loans increased by $33.4 million, or 2%, to $1.535 billion at March 31, 2023 from $1.502 billion at December 31, 2022, primarily as a result of increased consumer mortgage loans.

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

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 Company estimates that $79.0 million, or approximately 5% of loans as of March 31, 2023 have direct exposure to the oil and gas industry as compared to $83.4 million, or approximately 6% of loans as of December 31, 2022.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $54.8 million and $51.8 million at March 31, 2023 and December 31, 2022, 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 $764,000 as of March 31, 2023 and $786,000 as of December 31, 2022.

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

(In Thousands) March 31, 2023 December 31, 2022

Commercial & industrial loans $62,821 $66,864

5 unchanged sentences

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:

At March 31, 2023, the Company had $126.7 million, or 8% of portfolio loans, in the Healthcare sector, $99.9 million, or 6% of portfolio loans, in the Tourism sector, $69.5 million, or 5% of portfolio loans, in the Fishing sector, $68.7 million, or 4% of portfolio loans, in the Accommodations sector, $54.2 million, or 4% of portfolio loans, in the Retail sector, $50.3 million, or 3% of portfolio loans, in the Aviation (non-tourism) sector, and $47.3 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 March 31, 2023:

(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 September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(In Thousands) 2023 2022

Balance at beginning of period $13,838 $11,739

Cumulative effect of adoption of ASU 2016-13 — — — (4,511)

Commercial & industrial loans — (295)

Consumer loans (14) —

Other loans — —

Total charge-offs (14) (295)

Commercial & industrial loans 65 13

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

4 unchanged sentences

Net, charge-offs 60 (262)

(Benefit) provision for credit losses (903) (762) (797) (2,828)

Provision (benefit) for credit losses 259 (167)

Balance at end of period $14,157 $11,310

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,

Three Months Ended March 31,

(In Thousands) 2023 2022

Balance at beginning of period $1,970 $1,096

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)

Provision for credit losses 101 17

Balance at end of period $2,071 $1,113

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.

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.

Total deposits decreased $90.9 million, or 4%, to $2.296 billion as of March 31, 2023 compared to $2.387 billion as of December 31, 2022.

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

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

5 unchanged sentences

Total deposits $2,296,273 $2,387,211

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 Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 89% of total deposits at March 31, 2023 and 92% of total deposits at December 31, 2022.

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:

At March 31, 2023, the Company had $255.3 million in certificates of deposit as compared to certificates of deposit of $192.9 million at December 31, 2022.

At March 31, 2023, $154.2 million, or 60%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $128.4 million, or 67%, of total certificates of deposit at December 31, 2022.

The aggregate amount of certificates of deposit in amounts of $250,000 and greater at March 31, 2023 and December 31, 2022, was $105.6 million and $77.5 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 March 31, 2023:

Time Certificates of Deposit

8 unchanged sentences

Total $105,558 100 %

At March 31, 2023, 68% of total deposits were held in business accounts and 32% of deposit balances were held in consumer accounts.

Northrim had approximately 33,000 deposit customers with an average balance of $69,000 as of March 31, 2023.

Northrim had 16 customers with balances over $10 million as of March 31, 2023 which accounted for $346.9 million, or 15%, of total deposits.

Uninsured deposits totaled $981.3 million or 43% of total deposits as of March 31, 2023 compared to $1.1 billion or 46% of total deposits as of December 31, 2022.

As interest rates continued to increase in the first quarter of 2023, Northrim began a proactive, targeted approach to increase deposit rates.

There was no unusual deposit activity during the first quarter of 2023.

The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB").

1 unchanged sentence

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.

At March 31, 2023, our maximum borrowing line from the FHLB was $1.154 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $14.0 million as of March 31, 2023 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.

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $43.6 million of loans as collateral to secure the Company's ability to take advances through the discount window on March 31, 2023.

There were no discount window advances outstanding at either March 31, 2023 or December 31, 2022.

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.

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $897.6 million at March 31, 2023 and $930.1 million at December 31, 2022.

At March 31, 2023 and December 31, 2022, 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.

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of March 31, 2023 or December 31, 2022.

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 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.

As of March 31, 2023, 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.

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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.

The Company had cash and cash equivalents of $139.2 million, or 5% of total assets at March 31, 2023 compared to $259.4 million, or 10% of total assets as of December 31, 2022.

The decrease in cash and cash equivalents since the end of 2022 is primarily due to a decrease in deposits, but is still elevated as compared to historical norms both in balance and as a percentage of total assets.

The Company had other comprehensive income, net of tax, of $5.6 million for the three-month period ending March 31, 2023 primarily due to unrealized holding gains on available for sale securities.

Accumulated unrealized losses, net of income taxes on available for sale securities, which are recorded in total shareholders' equity, are $24.3 million as of March 31, 2023.

Accumulated unrealized losses, net of income taxes on held to maturity securities, which are not recorded in shareholders' equity, are $3.0 million as of March 31, 2023.

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.

As of March 31, 2023, the weighted average maturity of available for sale securities is 3.1 years compared to 3.3 years at December 31, 2022 and 4.1 years at December 31, 2021.

At March 31, 2023, $106.6 million available for sale securities mature within one year, $151.8 million mature within one to two years, and $164.3 million mature within two to three years.

Our total unfunded commitments to fund loans and letters of credit at March 31, 2023 were $445.7 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.

At March 31, 2023, certificates of deposit totaling $154.2 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.

Management believes that cash requirements to fund future non-deposit liabilities, including operating lease liabilities, other liabilities, or borrowings as of March 31, 2023, are not material to the Company's liquidity position as of March 31, 2023.

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

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.

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.

At March 31, 2023, our liquid assets, which include investments and loans maturing within a year, were $502.0 million and our funds available for borrowing under our existing lines of credit were $1.201 billion.

Additionally, the Company can obtain borrowings under the Federal Reserve Bank's newly created Bank Term Funding Program ("BTFP") as a source of liquidity in order to help assure that banks have the ability to meet the needs of all depositors.

The BTFP allows eligible depository institutions to pledge high-quality securities to obtain liquidity and eliminate the need for the financial institution to sell securities quickly in times of stress.

The Company did not borrow from the BTFP in the first quarter of 2023.

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 for 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 $4.3 million for the first three months of 2023, 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 $28.7 million for the same period, primarily due to an increase in loans which was only partially offset by maturities and calls of available for sale securities.

Net cash used by financing activities in the same period was $95.8 million, primarily due to a decrease in deposits, as well as cash dividends paid to shareholder and repurchases of common stock.

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 repurchased 27,887 shares of its common stock under the Company's previously announced repurchase programs in the first three months of 2023.

At March 31, 2023, there are 257,113 shares remaining under the repurchase program.

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 September 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 March 31, 2023, 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 2023, 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.

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.

As a result, the Company has $10 million more in regulatory capital than the Bank at March 31, 2023, 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

March 31, 2023

Total risk-based capital 8.00% 10.00% 13.60% 11.45%

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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;

• 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.

The Company's critical accounting policies include allowance for credit losses, valuation of goodwill and other intangible assets, 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 2023.

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.

Our assessment of market risk as of March 31, 2023 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, 2022.

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