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Item 2. Management’s Discussion and Analysis

2023-11-03 compared with 2023-08-04 · 166 added, 169 removed, 353 unchanged (49% of the section changed)

18 unchanged sentences

changes in banking regulation or actions by bank regulators;

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

inflation, supply-chain constraints, and potential geopolitical instability, including the wars in Ukraine and the Middle East;

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

18 unchanged sentences

Update on Economic Conditions

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

The DOL reported Alaska’s seasonally adjusted unemployment rate for May of 2023 decreased to 3.6%, which is now lower than the U.S.

rate, which rose to 3.7%.

The DOL reports total payroll jobs in Alaska increased 1.8% or 5,800 jobs compared to May of 2022.

According to the DOL, Leisure and Hospitality had the largest growth of 7.2% year over year in May 2023.

The 2,600 job increase over the prior 12 months brings the sector to 38,700 jobs, which is higher than the pre-pandemic level.

Professional and Business Services added 800 jobs and Health Care increased by 600 jobs over the same 12 month period.

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 May of 2022.

Transportation, Warehousing and Utilities added 400 jobs and Retail also increased by 400 jobs year over year compared to May of 2022.

Manufacturing, which is primarily seafood processing, declined 500 jobs and Information decreased 100 jobs for the same 12 month period.

The Alaska Department of Labor (“DOL”) has reported that Alaska’s seasonally adjusted unemployment rate in August of 2023 was 3.9% compared to the U.S.

rate of 3.8%.

The total number of payroll jobs in Alaska, not including uniformed military, increased 1.4% or 4,800 jobs between August of 2022 and August of 2023.

According to the DOL, Leisure and Hospitality had the largest growth in new jobs through August compared to the prior year.

The sector added 2,000 positions for a year over year growth rate of 4.8% in August of 2023.

The Oil & Gas sector grew the quickest as a percentage of growth at 5.7% or 400 new jobs.

Construction added 600 jobs for a 3.2% growth rate and Health Care grew 2.3% or 900 jobs between August of 2022 and August of 2023.

Manufacturing decreased 2.2% or 400 jobs due to a decline in seafood processing.

The Information and Financial Activities sectors both declined by 100 jobs year over year in August of 2023.

Alaska’s Gross State Product (“GSP”) in the first quarter of 2023, was estimated to be $63.8 billion in current dollars, according to the Federal Bureau of Economic Analysis (“BEA”).

Alaska’s inflation adjusted “real” GSP grew 1.6% at annualized rates in the first quarter of 2023, compared to the average U.S.

Alaska’s real GSP improvement in the first quarter of 2023 was most positively impacted by gains in the Construction and Health Care sectors.

Alaska’s inflation adjusted “real” GSP grew 1.6% at an annualized rate in the first quarter of 2023, compared to the average U.S.

Alaska’s real GSP improvement in the first quarter of 2023 was aided by gains in the Construction and Health Care sectors.

The BEA also calculated Alaska’s seasonally adjusted personal income at $52.1 billion in the first quarter of 2023.

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Alaskans had annualized wage earnings growth of 6.6%, compared to a U.S.

average of 4.6% in the first quarter of 2023 as compared to a year ago.

The monthly average price of Alaska North Slope (“ANS”) crude oil has been in a stable range between $75.81 and $82.83 in the first six months of 2023.

average of 4.6% in the first quarter of 2023.

The monthly average price of Alaska North Slope (“ANS”) crude oil has been in a range between $75.64 and $95.05 in the first nine months of 2023.

The Alaska Department of Revenue (“DOR”) calculated ANS crude oil production was 480 thousand barrels per day (“bpd”) in Alaska’s fiscal year ending June 30, 2023.

The DOR has forecast production to increase to 494 thousand bpd in Alaska’s fiscal year 2023 and 504 thousand bpd in 2024.

That number is projected by the DOR to grow to 556 thousand bpd in 2028.

The DOR has forecast production to increase to 504 thousand bpd in Alaska’s fiscal year 2024.

That number is projected to grow by the DOR to 556 thousand bpd in 2028.

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 first quarter of 2023 improved to 2.7% compared to 2.9% in the fourth quarter of 2022.

Alaska’s delinquency rate of 2.7% compares to the national average rate of 3.3% for the first quarter of 2023.

The Mortgage Bankers Association survey reported that the mortgage foreclosure inventory in Alaska in the first quarter of 2023 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 $456,544.

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

In the first six months of 2023, the average sales price in Anchorage continued to increase 3.7% to $473,330.

In the first nine months of 2023, the average sales price in Anchorage continued to increase 5.4% to $481,360.

Average sales prices for single family homes in the Matanuska Susitna Borough rose 9.9% in 2022 to $382,439, 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.

In the first six months of 2023, the average sales price in the Matanuska Susitna Borough has increased 3.5% to $395,952.

These two markets represent the regions where the vast majority of the residential lending activity of Northrim Bank (the “Bank”) occurs.

The Alaska Multiple Listing Services reported there were 934 housing units sold in Anchorage in the first six months of 2023, compared to 1,298 in the first half of 2022 for a decline of 33.2%.

In the first nine months of 2023, the average sales price in the Matanuska Susitna Borough has increased 5.3% to $402,799.

These two markets represent where the vast majority of the residential lending activity of Northrim Bank (the “Bank”) occurs.

The Alaska Multiple Listing Services reported there were 1,616 housing units sold in Anchorage in the first nine months of 2023, compared to 2,274 through September of 2022 for a decline of 28.9%.

Anchorage home sales also declined by 21.2% in 2022 compared to 2021.

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 limited supply of homes is not keeping up with demand and therefore price increases are continuing, despite the higher interest rate environment.

The Matanuska Susitna Borough also experienced a lower volume of home sales in the last 18 months.

For the first six months of 2023 there were 761 homes sales in the Matanuska Susitna Borough, compared to 1,077 in the first half of 2022 for a decrease of 29.3%.

Matanuska Susitna Borough home sales also declined 11.9% in 2022 compared to the prior year according to the Alaska Multiple Listing Services.

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 5.00%-5.25% as of June 30, 2023.

Similarly, the prime rate of interest has increased from 7.50% as of December 31, 2022 to 8.25% as of June 30, 2023.

Highlights and Summary of Performance - Second Quarter of 2023

The Company reported net income and earnings per diluted share of $5.6 million and $0.98, respectively, for the second quarter of 2023 compared to net income and earnings per diluted share of $4.8 million and $0.83, respectively, for the second quarter of 2022.

The Company reported net income and earnings per diluted share of $10.4 million and $1.82, respectively, for the first six months of 2023 compared to net income and earnings per diluted share of $12.0 million and $2.03, respectively, for the first six months of 2022.

The increase in net income for the three-month period ending June 30, 2023 compared to the same period last year is primarily attributable to an increase in net interest income, which was only partially offset by a higher provision for credit losses and a decrease in net income in the Home Mortgage Lending segment as a result of decreased production and yields on sold loans.

The decrease in net income for the six-month period ending June 30, 2023 compared to the same period last year is primarily the result of decreased mortgage banking income and a higher provision for credit losses which was only partially offset by increased net interest income.

For the first nine months of 2023 there were 1,258 homes sales in the Matanuska Susitna Borough, compared to 1,670 through September of 2022 for a decrease of 24.7%.

Matanuska Susitna Borough home sales also declined 11.9% in 2022 compared to the prior year.

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 5.25%-5.50% as of September 30, 2023.

Similarly, the prime rate of interest has increased from 7.50% as of December 31, 2022 to 8.50% as of September 30, 2023.

Highlights and Summary of Performance - Third Quarter of 2023

The Company reported net income and earnings per diluted share of $8.4 million and $1.48, respectively, for the third quarter of 2023 compared to net income and earnings per diluted share of $10.1 million and $1.76, respectively, for the third quarter of 2022.

The Company reported net income and earnings per diluted share of $18.8 million and $3.30, respectively, for the first nine months of 2023 compared to net income and earnings per diluted share of $22.1 million and $3.79, respectively, for the first nine months of 2022.

The decrease in net income for the three-month period ending September 30, 2023 compared to the same period last year is primarily attributable to a higher provision for credit losses due to loan growth, a decrease in net income in the Home Mortgage Lending segment as a result of decreased production and yields on sold loans, and an increase in salaries and other personnel expense that was only partially offset by a gain on an Other Real Estate Owned (“OREO”) sale.

The decrease in net income for the nine-month period ending September 30, 2023 compared to the same period last year is primarily the result of decreased mortgage banking income, a higher provision for credit losses, and an increase in salaries and other personnel expense.

These changes were only partially offset by increased net interest income, purchased receivable income, unrealized gains on marketable securities and the gain on the OREO sale.

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

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 six months of 2023 as compared to the same period a year ago.

• Net interest income in the second quarter of 2023 increased 13% to $25.1 million compared to $22.2 million in the second quarter of 2022.

Net interest income in the first six months of 2023 increased 21% to $50.2 million compared to $41.5 million in the first six months of 2022.

• Net interest margin was 4.14% for the second quarter of 2023, a 47 basis point increase from the second quarter of 2022.

Net interest margin was 4.18% for the first six months of 2023, a 76 basis point increase from the first six months of 2022.

The increase in both periods compared to the same periods 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 second quarter of 2023 was 6.93% compared to 5.07% in the second quarter a year ago.

• Loans were $1.66 billion at June 30, 2023, up 10% from December 31, 2022 primarily as a result of commercial and consumer mortgage loan growth.

At June 30, 2023, approximately 74% of loans are variable and 15% of earning assets are subject to rate increases in the third quarter of 2023 when prime or other rate indices increase.

• Total deposits were $2.30 billion at June 30, 2023, down 4% from December 31, 2022.

Demand deposits decreased 11% at June 30, 2023 from December 31, 2022 and currently represent 31% of total deposits.

• The average cost of interest-bearing deposits for the quarter was 1.56% at June 30, 2023, up from 0.16% at June 30, 2022.

• Total liquid assets and investments and loans maturing within one year were $442.9 million and our funds available for borrowing under our existing lines of credit were $1.224 billion at June 30, 2023.

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 nine months of 2023 as compared to the same period a year ago.

• Net interest income in the third quarter of 2023 increased slightly to $26.4 million compared to $26.3 million in the third quarter of 2022.

Net interest income in the first nine months of 2023 increased 13% to $76.5 million compared to $67.8 million in the first nine months of 2022.

• Net interest margin was 4.15% for the third quarter of 2023, a 7 basis point decrease from the third quarter of 2022.

Net interest margin was 4.17% for the first nine months of 2023, a 48 basis point increase from the first nine months of 2022.

The decrease in the third quarter of 2023 compared to the same period in 2022 was primarily due to lower recoveries of interest income on nonaccrual loans and lower fee income on Paycheck Protection Program loans.

These decreases were only partially offset by higher yields on interest-earning assets, net of higher costs on interest-bearing deposits.

The increase in the first nine months of 2023 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 third quarter of 2023 was 7.39% compared to 5.83% in the third quarter a year ago.

• Loans were $1.72 billion at September 30, 2023, up 14% from December 31, 2022 primarily as a result of commercial and consumer mortgage loan growth.

At September 30, 2023, approximately 74% of loans are variable and 18% of earning assets are subject to rate increases in the fourth quarter of 2023 when prime or other rate indices increase.

• Total deposits were $2.43 billion at September 30, 2023, up 2% from December 31, 2022.

Demand deposits decreased 4% at September 30, 2023 from December 31, 2022 and currently represent 31% of total deposits.

• The average cost of interest-bearing deposits for the quarter was 1.75% at September 30, 2023, up from 0.28% at September 30, 2022.

• Total liquid assets and investments and loans maturing within one year were $517.8 million and our funds available for borrowing under our existing lines of credit were $717.2 million at September 30, 2023.

Other financial measures are shown in the table below:

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

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

2023 2022 2023 2022

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Nonperforming assets:

Nonperforming assets, net of government guarantees were $5.6 million at June 30, 2023 and $6.4 million at December 31, 2022.

Other Real Estate Owned ("OREO"), net of government guarantees, increased to $272,000 at June 30, 2023, from zero at December 31, 2022.

Nonperforming loans, net of government guarantees decreased $1.1 million, or 17% to $5.3 million as of June 30, 2023 from $6.4 million as of December 31, 2022, primarily due to payoffs and pay downs in the first six months of 2023 that were only partially offset by the transfer of one lending relationship to nonaccrual status.

$3.9 million, or 70% of nonperforming loans, net of government guarantees at June 30, 2023, are nonaccrual loans related to three commercial relationships.

The following table summarizes nonperforming asset activity for the three-month periods ending June 30, 2023 and 2022.

Nonperforming assets, net of government guarantees were $5.2 million at September 30, 2023 and $6.4 million at December 31, 2022.

OREO, net of government guarantees, increased to $150,000 at September 30, 2023, from zero at December 31, 2022.

Nonperforming loans, net of government guarantees decreased $1.3 million, or 20% to $5.1 million as of September 30, 2023 from $6.4 million as of December 31, 2022, primarily due to payoffs and pay downs in the first nine months of 2023 that were only partially offset by the transfer of two lending relationships to nonaccrual status.

$3.8 million, or 73% of nonperforming loans, net of government guarantees at September 30, 2023, are nonaccrual loans related to three commercial relationships.

The following table summarizes nonperforming asset activity for the three-month periods ending September 30, 2023 and 2022.

Writedowns Transfers to

(In Thousands) Balance at March 31, 2023 Additions this quarter Payments this quarter /Charge-offs

(In Thousands) Balance at June 30, 2023 Additions this quarter Payments this quarter /Charge-offs

this quarter Transfers to OREO Performing Status

this quarter Sales this quarter Balance at June 30, 2023

this quarter Sales this quarter Balance at September 30, 2023

Nonperforming loans $7,723 $291 ($1,403) ($91) $— $— $— $6,520

5 unchanged sentences

Writedowns Transfers to

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

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

this quarter Transfers to OREO Performing Status

this quarter Sales this quarter Balance at June 30, 2022

this quarter Sales this quarter Balance at September 30, 2022

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

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net of government guarantees $11,677 $298 ($1,095) ($48) $— $— $— $10,832

Potential problem loans:

Potential problem assets:

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 June 30, 2023, management had identified potential problem loans of $1.7 million as compared to potential problem loans of $1.6 million at December 31, 2022.

The slight increase in potential problem loans from December 31, 2022 to June 30, 2023 is primarily the result of increased loan balances which were only partially offset by various loan paydowns in the first six months of 2023.

At September 30, 2023, management had identified $2.2 million potential problem loans as compared to potential problem loans of $1.6 million at December 31, 2022.

The increase in potential problem loans from December 31, 2022 to September 30, 2023 is primarily the result of increased line of credit usage on one loan balance and two new potential problem loans which were only partially offset by various loan paydowns and the movement of one potential problem loan to nonaccrual in the first nine months of 2023.

Additionally, the Company has $1.0 million in adversely classified purchased receivables.

As of September 30, 2023, management believes that these receivables are collectible and no Allowance for Credit Losses (“ACL”) is considered necessary at this time;

however, negative indications may require an ACL in the future.

RESULTS OF OPERATIONS

Income Statement

Net income for the second quarter of 2023 increased $782,000 to $5.6 million as compared to $4.8 million for the

same period in 2022.

The increase in net income in the second quarter of 2023 as compared to the same quarter a year ago is mostly attributable to a $2.9 million increase in net interest income, which was only partially offset by a $2.0 million decrease in mortgage banking income and an increase in the provision for credit losses.

Net income for the first half of 2023 decreased $1.6 million to $10.4 million as compared to $12.0 million for the same period in 2022.

The decrease in net income in the first six months of 2023 as compared to the same period a year ago is primarily due to a decrease in mortgage banking income, due to lower production volume, as well as an increase in the provision for credit losses which was only partially offset by an increase in net interest income.

Additionally, the Company received $2.0 million in life insurance proceeds in the six-month period ended June 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 third quarter of 2023 decreased $1.8 million to $8.4 million as compared to $10.1 million for the same period in 2022.

The decrease in net income in the third quarter of 2023 as compared to the same quarter a year ago is largely attributable to a $1.5 million increase in the provision for credit losses due to loan growth, a $1.3 million decrease in mortgage banking income and $1.1 million increase in salaries and other personnel expense that was only partially offset by a gain on OREO sale and lower marketing expenses.

Net income for the first nine months of 2023 decreased $3.4 million to $18.8 million as compared to $22.1 million for the same period in 2022.

The decrease in net income in the first nine months of 2023 as compared to the same period a year ago is primarily due to a decrease in mortgage banking income, due to lower production volume, as well as an increase in the provision for credit losses which was only partially offset by an increase in net interest income.

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

Net Interest Income/Net Interest Margin

Net interest income for the second quarter of 2023 increased $2.9 million, or 13%, to $25.1 million as compared to $22.2 million for the second quarter of 2022.

The net interest margin increased 47 basis points to 4.14% in the second quarter of 2023 as compared to 3.67% in the second quarter of 2022.

Net interest income for the first six months of 2023 increased $8.7 million, or 21%, to $50.2 million as compared to $41.5 million for the first six months of 2022.

The net interest margin increased 76 basis points to 4.18% in the first six months of 2023 as compared to 3.42% in the first six months of 2022.

The increase in net interest income in the second quarter and first six months of 2023 compared to the same periods 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 and borrowings.

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

Changes in net interest margin in the three and six-month period ended June 30, 2023 as compared to the same period in the prior year are detailed below:

Three Months Ended June 30, 2023 vs.

June 30, 2022

Net interest income for the third quarter of 2023 increased slightly by $39,000, to $26.4 million as compared to $26.3 million for the third quarter of 2022.

The net interest margin decreased 7 basis points to 4.15% in the third quarter of 2023 as compared to 4.22% in the third quarter of 2022.

Net interest income for the first nine months of 2023 increased $8.7 million, or 13%, to $76.5 million as compared to $67.8 million for the first nine months of 2022.

The net interest margin increased 48 basis points to 4.17% in the first nine months of 2023 as compared to 3.69% in the first nine months of 2022.

The increase in net interest income in the third quarter and first nine months of 2023 compared to the same periods 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 and borrowings.

The decrease in net interest margin in the third quarter as compared to the same period of 2022 was primarily due to a decrease in recoveries of interest income on nonaccrual loans which was only partially offset by a favorable change in the mix of earning-assets towards higher loan balances as a percentage of earning-assets.

The increase in net interest margin in the first nine months of 2023 as compared to the same period of 2022 was primarily the result of higher yields on earning-assets that was only partially offset by increases in interest expense on borrowings and deposits.

Changes in net interest margin in the three and nine-month periods ended September 30, 2023 as compared to the same periods in the prior year are detailed below:

Three Months Ended September 30, 2023 vs.

September 30, 2022

Nonaccrual interest adjustments (0.16) %

3 unchanged sentences

Change in net interest margin (0.07) %

Six Months Ended June 30, 2023 vs.

June 30, 2022

Nine Months Ended September 30, 2023 vs.

September 30, 2022

Nonaccrual interest adjustments (0.09) %

4 unchanged sentences

Components of Net Interest Margin

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended June 30, 2023 and 2022.

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended September 30, 2023 and 2022.

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

(Dollars in Thousands) Three Months Ended June 30,

(Dollars in Thousands) Three Months Ended September 30,

Interest income/ Average Tax Equivalent

31 unchanged sentences

3 Interest income includes loan fees.

Loan fees recognized during the period and included in the yield calculation totaled $1.1 million and $2.3 in the second quarter of 2023 and 2022, respectively.

Loan fees recognized during the period and included in the yield calculation totaled $881,000 and $2.0 million in the third 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 $8.3 million and $8.8 million in the second quarter of 2023 and 2022, respectively .

Average nonaccrual loans included in the computation of the average loan balances were $7.2 million and $7.7 million in the third 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 three-month periods ending June 30, 2023 and 2022.

Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates.

The Company did not have any fed funds sold or securities purchased with agreements to resell for the three-month periods ending June 30, 2023 and 2022.

(In Thousands) Three Months Ended June 30, 2023 vs.

The Company did not have any fed funds sold or securities purchased with agreements to resell for the three-month periods ending September 30, 2023 and 2022.

(In Thousands) Three Months Ended September 30, 2023 vs.

Increase (decrease) due to

14 unchanged sentences

Total interest expense $754 $6,056 $6,810

The following table compares average balances and rates as well as margins on earning assets for the six-month periods ended June 30, 2023 and 2022.

The following table compares average balances and rates as well as margins on earning assets for the nine-month periods ended September 30, 2023 and 2022.

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

(Dollars in Thousands) Six Months Ended June 30,

(Dollars in Thousands) Nine Months Ended September 30,

Interest income/ Average Tax Equivalent

31 unchanged sentences

3 Interest income includes loan fees.

Loan fees recognized during the period and included in the yield calculation totaled $2.3 million and $5.3 million in the first six months of 2023 and 2022, respectively.

Loan fees recognized during the period and included in the yield calculation totaled $3.2 million and $7.3 million in the first nine months 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 $7.6 million and $9.9 million in the first six months of 2023 and 2022, respectively .

Average nonaccrual loans included in the computation of the average loan balances were $7.4 million and $9.2 million in the first nine months 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 six-month periods ending June 30, 2023 and 2022.

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, 2023 and 2022.

Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates.

The Company did not have any fed funds sold or securities purchased with agreements to resell for the six-month periods ending June 30, 2023 and 2022.

(In Thousands) Six Months Ended June 30, 2023 vs.

The Company did not have any fed funds sold or securities purchased with agreements to resell for the nine-month periods ending September 30, 2023 and 2022.

(In Thousands) Nine Months Ended September 30, 2023 vs.

Increase (decrease) due to

15 unchanged sentences

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 provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the 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 June 30, Six Months Ended June 30,

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

(In Thousands) 2023 2022 2023 2022

5 unchanged sentences

Total credit loss (benefit) expense $1,190 ($353) $2,957 ($40)

The increase in the ACL for the three and six-month periods ending June 30, 2023 as compared to the same periods in 2022 is primarily the result of increased loan 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 and a decrease in unfunded commitment balances.

The increase in the ACL for the three and nine-month periods ending September 30, 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 June 30, 2023 decreased $827,000, or 11%, to $7.0 million as compared to $7.8 million for the same period in 2022, primarily due to a $2.0 million decrease in mortgage banking income in the second quarter of 2023 compared to the same quarter a year ago.

The decrease in mortgage banking income in the three-month period ended June 30, 2023 as compared to the same period in 2022 was primarily due to decreased production volume due primarily to increases in mortgage interest rates.

Other operating income for the six-month period ended June 30, 2023 decreased $6.7 million, or 36%, to $11.9 million as compared to $18.6 million for the same period in 2022, primarily due to a $7.0 million decrease in mortgage banking income in the first six months of 2023 compared to the same period a year ago, which was only partially offset by a $1.0 million increase in purchased receivable income and a $775,000 increase in the fair market value of marketable securities.

The decrease in mortgage banking income in the six-month period ended June 30, 2023 as compared to the same period in 2022 was primarily due to decreased production volume due largely to increases in mortgage interest rates.

Other operating income for the three-month period ended September 30, 2023 decreased $670,000, or 8%, to $8.0 million as compared to $8.7 million for the same period in 2022, primarily due to a $1.3 million decrease in mortgage banking income in the third quarter of 2023 compared to the same quarter a year ago, which was only partially offset by a $619,000 increase in purchased receivable income.

The decrease in mortgage banking income in the three-month period ended September 30, 2023 as compared to the same period in 2022 was primarily due to decreased production volume due primarily to increases in mortgage interest rates.

Other operating income for the nine-month period ended September 30, 2023 decreased $7.4 million, or 27%, to $19.9 million as compared to $27.3 million for the same period in 2022, primarily due to a $8.3 million decrease in mortgage banking income in the first nine months of 2023 compared to the same period a year ago, which was only partially offset by a $1.6 million increase in purchased receivable income and a $754,000 increase in the fair market value of marketable securities.

The decrease in mortgage banking income in the nine-month period ended September 30, 2023 as compared to the same period in 2022 was primarily due to decreased production volume due largely to increases in mortgage interest rates.

Other Operating Expense

Other operating expense for the second quarter of 2023 increased $544,000, or 2%, to $23.8 million as compared to $23.2 million for the same period in 2022 primarily due to increased marketing and insurance expenses as well as an increase in other operating expenses.

Other operating expense for the first six months of 2023 increased $3.0 million, or 7%, to $47.3 million as compared to $44.3 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.

Other operating expense for the third quarter of 2023 increased $610,000, or 3%, to $22.9 million as compared to $22.3 million for the same period in 2022 is primarily due to increased salaries and other personnel expense which was only partially offset by a decrease in OREO expense due to subsequent proceeds received in the third quarter of 2023 that are related to a government guarantee on an OREO property sold in December 2022.

Other operating expense for the first nine months of 2023 increased $3.6 million, or 5%, to $70.2 million as compared to $66.6 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, its 19th branch in Kodiak in the first quarter of 2023, and a loan production office in Homer in the second quarter of 2023 which contributed to increased salaries and personnel expense for the Community Banking segment.

For the second quarter and first six months of 2023, Northrim recorded a lower effective tax rate as compared to the same periods 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 second quarter of 2023, Northrim recorded $1.4 million in state and federal income tax expense, for an effective tax rate of 19.56% compared to $1.5 million and 24.11% for the same period in 2022.

In the first six months of 2023, Northrim recorded $2.6 million in state and federal income tax expense, for an effective tax rate of 19.97% compared to $3.5 million and 22.42% for the same period in 2022.

For the third quarter and first nine months of 2023, Northrim recorded a lower effective tax rate as compared to the same periods 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 third quarter of 2023, Northrim recorded $1.9 million in state and federal income tax expense, for an effective tax rate of 18.43% compared to $2.9 million and 22.41% for the same period in 2022.

In the first nine months of 2023, Northrim recorded $4.5 million in state and federal income tax expense, for an effective tax rate of 19.29% compared to $6.4 million and 22.41% for the same period in 2022.

FINANCIAL CONDITION

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Portfolio Investments

Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at June 30, 2023 decreased 1% to $718.5 million from $724.5 million at December 31, 2022 mostly due to maturities and calls of available for sale securities during the first six months of 2023.

Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at September 30, 2023 decreased 3% to $699.5 million from $724.5 million at December 31, 2022 mostly due to maturities and calls of available for sale securities during the first nine months of 2023.

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Dollar Amount Percent of Total Dollar Amount Percent of Total

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Total portfolio investments $699,515 $724,519

The average estimated duration of the investment portfolio at June 30, 2023, was approximately three-years.

As of June 30, 2023, $66.1 million available for sale securities are scheduled to mature in the next six months, $61.9 million are scheduled to mature in six months to one year, and $175.6 million are scheduled to mature in the following year, a total of $303.5 million or 12% of earning assets at June 30, 2023.

The average estimated duration of the investment portfolio at September 30, 2023, was approximately 2.8 years.

As of September 30, 2023, $87.7 million available for sale securities are scheduled to mature in the next six months, $47.4 million are scheduled to mature in six months to one year, and $173.9 million are scheduled to mature in the following year, a total of $308.9 million or 12% of earning assets at September 30, 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:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Dollar Amount Percent of Total Dollar Amount Percent of Total

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Total loans $1,720,091 $1,501,785

Loans increased by $157.5 million, or 10%, to $1.659 billion at June 30, 2023 from $1.502 billion at December 31, 2022, primarily as a result of increased commercial and consumer mortgage loans.

Loans increased by $218.3 million, or 15%, to $1.720 billion at September 30, 2023 from $1.502 billion at December 31, 2022, primarily as a result of increased commercial and 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 $97.3 million, or approximately 6% of loans as of June 30, 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 $42.5 million and $51.8 million at June 30, 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 $882,000 as of June 30, 2023 and $786,000 as of December 31, 2022.

The Company estimates that $100.3 million, or approximately 6% of loans as of September 30, 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 $34.9 million and $51.8 million at September 30, 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 $920,000 as of September 30, 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) June 30, 2023 December 31, 2022

(In Thousands) September 30, 2023 December 31, 2022

Commercial & industrial loans $81,713 $66,864

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

At June 30, 2023, the Company had $127.6 million, or 8% of portfolio loans, in the Healthcare sector, $102.2 million, or 6% of portfolio loans, in the Tourism sector, $75.7 million, or 5% of portfolio loans, in the Accommodations sector, $72.5 million, or 4% of portfolio loans, in the Retail sector, $71.6 million, or 4% of portfolio loans, in the Fishing sector, $64.7 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 June 30, 2023:

At September 30, 2023, the Company had $124.3 million, or 7% of portfolio loans, in the Healthcare sector, $103.0 million, or 6% of portfolio loans, in the Tourism sector, $79.6 million, or 5% of portfolio loans, in the Accommodations sector, $78.3 million, or 5% of portfolio loans, in the Fishing sector, $71.8 million, or 4% of portfolio loans, in the Retail sector, $62.5 million, or 4% of portfolio loans, in the Aviation (non-tourism) sector, and $48.4 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, 2023:

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

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

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

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

(In Thousands) 2023 2022 2023 2022

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Total recoveries 187 1,396 288 1,549

Net, charge-offs (22) (46) 38 (308)

Net, recoveries 96 1,348 134 1,040

Provision (benefit) for credit losses 750 (903) 2,519 (797)

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

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

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

(In Thousands) 2023 2022 2023 2022

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Deposits are the Company’s primary source of funds.

Total deposits decreased $84.9 million, or 4%, to $2.302 billion as of June 30, 2023 compared to $2.387 billion as of December 31, 2022.

Total deposits increased $40.7 million, or 2%, to $2.428 billion as of September 30, 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:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

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

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Total deposits $2,427,930 $2,387,211

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 88% of total deposits at June 30, 2023 and 92% of total deposits at December 31, 2022.

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 88% of total deposits at September 30, 2023 and 92% of total deposits at December 31, 2022.

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

At June 30, 2023, the Company had $287.5 million in certificates of deposit as compared to certificates of deposit of $192.9 million at December 31, 2022.

At June 30, 2023, $175.9 million, or 61%, 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 June 30, 2023 and December 31, 2022, was $117.3 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 June 30, 2023:

At September 30, 2023, the Company had $290.9 million in certificates of deposit as compared to certificates of deposit of $192.9 million at December 31, 2022.

At September 30, 2023, $182.0 million, or 61%, 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 September 30, 2023 and December 31, 2022, was $121.1 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 September 30, 2023:

Time Certificates of Deposit

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Total $121,059 100 %

At June 30, 2023, 69% of total deposits were held in business accounts and 31% of deposit balances were held in consumer accounts.

Northrim had approximately 33,000 deposit customers with an average balance of $70,000 as of June 30, 2023.

Northrim had 15 customers with balances over $10 million as of June 30, 2023 which accounted for $332.6 million, or 14%, of total deposits.

Uninsured deposits totaled $910.7 million or 40% of total deposits as of June 30, 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 six months of 2023, Northrim has taken a proactive, targeted approach to increase deposit rates.

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

At September 30, 2023, 71% of total deposits were held in business accounts and 29% of deposit balances were held in consumer accounts.

Northrim had approximately 33,000 deposit customers with an average balance of $73,000 as of September 30, 2023.

Northrim had 16 customers with balances over $10 million as of September 30, 2023 which accounted for $370.6 million, or 15%, of total deposits.

Uninsured deposits totaled $999.5 million or 41% of total deposits as of September 30, 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 nine months of 2023, Northrim has taken a proactive, targeted approach to increase deposit rates.

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

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

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

At June 30, 2023, our maximum borrowing line from the FHLB was $1.180 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 June 30, 2023 which were originated to match fund low income housing projects that qualify for long term fixed interest rates.

At September 30, 2023, our maximum borrowing line from the FHLB was $1.248 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 September 30, 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%.

Additionally, the Company has a short-term $50.0 million advance from the FHLB outstanding as of June 30, 2023 at a fixed rate of 5.49% which matures on November 14, 2023.

Additionally, the Company has a short-term $50.0 million advance from the FHLB outstanding as of September 30, 2023 at a fixed rate of 5.49% which matures on November 14, 2023.

Federal Reserve Bank:

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $20.0 million of loans as collateral to secure the Company's ability to take advances through the discount window on June 30, 2023.

There were no discount window advances outstanding at either June 30, 2023 or December 31, 2022.

The Federal Reserve Bank is holding $60.0 million of securities as collateral to secure the Company's ability to take advances through the Federal Reserve Bank's recently created Bank Term Funding Program ("BTFP") on June 30, 2023.

There were no BTFP advances outstanding at June 30, 2023.

The Federal Reserve Bank of San Francisco (the “Federal Reserve Bank”) is holding $60.0 million of securities as collateral to secure the Company's ability to take advances through the discount window on September 30, 2023.

There were no discount window advances outstanding at either September 30, 2023 or December 31, 2022.

The Federal Reserve Bank is holding $20.0 million of securities as collateral to secure the Company's ability to take advances through the Federal Reserve Bank's Bank Term Funding Program (“BTFP”) on September 30, 2023.

There were no BTFP advances outstanding at September 30, 2023.

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 $917.7 million at June 30, 2023 and $930.1 million at December 31, 2022.

The Company had an overnight advance of $1.0 million outstanding at 5.75% at June 30, 2023.

At June 30, 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.

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $970.5 million at September 30, 2023 and $930.1 million at December 31, 2022.

At September 30, 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 June 30, 2023 or December 31, 2022.

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of September 30, 2023 or December 31, 2022.

Liquidity and Capital Resources

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

As of June 30, 2023, the Company has 10.0 million authorized shares of common stock, of which 5.6 million are issued and outstanding, leaving 4.4 million shares available for issuance.

As of September 30, 2023, the Company has 10.0 million authorized shares of common stock, of which 5.5 million are issued and outstanding, leaving 4.5 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 $36.8 million, or 1% of total assets at June 30, 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 an increase in loans and a decrease in deposits.

The Company had other comprehensive income, net of tax, of $3.0 million for the six-month period ending June 30, 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 $27.5 million as of June 30, 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 June 30, 2023.

The Company had cash and cash equivalents of $111.2 million, or 4% of total assets at September 30, 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 an increase in loans.

The Company had other comprehensive income, net of tax, of $1.4 million for the nine-month period ending September 30, 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 $26.5 million as of September 30, 2023.

Accumulated unrealized losses, net of income taxes on held to maturity securities, which are not recorded in shareholders' equity, are $3.2 million as of September 30, 2023.

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

As of June 30, 2023, the weighted average maturity of available for sale securities is 3.0 years compared to 3.3 years at December 31, 2022 and 4.1 years at December 31, 2021.

At June 30, 2023, $128.0 million available for sale securities mature within one year, $175.6 million mature within one to two years, and $167.8 million mature within two to three years.

Our total unfunded commitments to fund loans and letters of credit at June 30, 2023 were $418.2 million.

As of September 30, 2023, the weighted average maturity of available for sale securities is 2.8 years compared to 3.3 years at December 31, 2022 and 4.1 years at December 31, 2021.

At September 30, 2023, $135.1 million available for sale securities mature within one year, $173.9 million mature within one to two years, and $186.8 million mature within two to three years.

Our total unfunded commitments to fund loans and letters of credit at September 30, 2023 were $460.3 million.

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

At June 30, 2023, certificates of deposit totaling $175.9 million are scheduled to mature over the next 12 months and may be withdrawn from the Bank.

At September 30, 2023, certificates of deposit totaling $182.0 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.

At June 30, 2023 the Company has a $50 million FHLB advance that is due in November 2023.

Management believes that cash requirements to fund future non-deposit and non-borrowing liabilities, including operating lease liabilities and other liabilities, as of June 30, 2023, are not material to the Company's liquidity position as of June 30, 2023.

At September 30, 2023 the Company has a $50 million FHLB advance that is due in November 2023.

Management believes that cash requirements to fund future non-deposit and non-borrowing liabilities, including operating lease liabilities and other liabilities, as of September 30, 2023, are not material to the Company's liquidity position as of September 30, 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 June 30, 2023, our liquid assets, which include investments and loans maturing within a year, were $442.9 million and our funds available for borrowing under our existing lines of credit were $1.224 billion.

At September 30, 2023, our liquid assets, which include investments and loans maturing within a year, were $517.8 million.

Our funds available for borrowing under our existing lines of credit based on loans currently pledged and investments available to be pledged as collateral were $717.2 million.

Additionally, the Company can obtain borrowings under the BTFP as a source of liquidity in order to help assure that banks have the ability to meet the needs of all depositors.

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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 used by operating activities was $22.5 million for the first six months of 2023, primarily due to cash used in connection with the origination of loans held for sale, which was only partially offset by cash provided by net income and net proceeds from the sale of loans held for sale.

As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 “Financial Statements” of this report, net cash used by operating activities was $11.1 million for the first nine months of 2023, primarily due to cash used in connection with the origination of loans held for sale, which was only partially offset by cash provided by net income and net proceeds from the sale of loans held for sale.

Net cash used by investing activities was $210.7 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 $44.8 million, primarily due to a decrease in deposits, as well as cash dividends paid to shareholder and repurchases of common stock.

These decreases were only partially offset by an increase in borrowings.

Net cash provided by financing activities in the same period was $73.7 million, primarily due to increases in deposits and borrowings, which were only partially offset by 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 89,887 shares of its common stock under the Company's previously announced repurchase programs in the first six months of 2023.

At June 30, 2023, there are 195,113 shares remaining under the repurchase program.

The Company repurchased 152,887 shares of its common stock under the Company's previously announced repurchase programs in the first nine months of 2023.

At September 30, 2023, there are 132,113 shares remaining under the repurchase program.

The Company may elect to continue to repurchase our common stock from time-to-time depending upon market conditions, but we can make no assurances that we will continue this program or that we will authorize additional shares for repurchase.

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

We believe as of June 30, 2023, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

We believe as of September 30, 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.

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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 June 30, 2023, 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 September 30, 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

June 30, 2023

September 30, 2023

Total risk-based capital 8.00% 10.00% 12.58% 10.97%

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our assessment of market risk as of June 30, 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.

Our assessment of market risk as of September 30, 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