What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-08 compared with 2023-03-07 · 141 added, 160 removed, 749 unchanged (29% of the section changed)

11 unchanged sentences

Net income decreased 17% to $25.4 million or $4.49 per diluted share for the year ended December 31, 2023, from $30.7 million, or $5.27 per diluted share, for the year ended December 31, 2022.

The decrease in net income is primarily the result of a $11.2 million decrease in net income in the Home Mortgage Lending segment, which was only partially offset by an $4.5 million increase in net income in the Community Banking segment.

The decrease in net income is primarily the result of a $3.8 million decrease in net income in the Community Banking segment, as well as a $1.6 million decrease in net income in the Home Mortgage Lending segment.

Highlights for the year ended December 31, 2023 are as follows:

• Net income in the Home Mortgage Lending segment decreased 109%, or $11.2 million, to a loss of $897,000 in 2022 from $10.3 million in 2021 driven by a decrease in production volume to $585.5 million in 2022 from $1.118 billion in 2021 largely due to the significant increase in interest rates in 2022.

• Net income in the Community Banking segment increased 16% or $4.5 million, to $31.6 million in 2022 as compared to 2021.

This increase was primarily the result of the following:

◦ Net interest income increased $14.8 million to $92.9 million in 2022 from $78.1 million in 2021 despite a decrease of $10.7 million in PPP interest and fee income primarily due to the increase in interest rates in 2022, and due to growth in core loans (excluding PPP loans) and higher average balances in long-term investments and interest-bearing deposits in other banks.

◦ The provision for credit losses increased in 2022 to a provision of $1.8 million from a benefit of $4.1 million in 2021.

In 2022, the provision for credit losses included a provision for growth in both unguaranteed loan balances and unfunded commitments, and a provision for a slight increase in projected loss rates.

These increases were only partially offset by net recoveries for the year.

In 2021, there was a reversal of the provision for credit losses due to a decrease in projected loss rates that was only partially offset by growth in unguaranteed loan and unfunded commitment balances and net charge offs for the year.

• The net interest margin increased to 3.85% in 2022 from 3.58% in 2021 mostly due to an increase in average yields on interest earning assets to 4.06% in 2022 compared to 3.74% in 2021 as a result of higher interest rates.

• In 2020 and 2021, Northrim funded approximately 5,800 PPP loans totaling approximately $612.6 million to both existing and new customers.

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

• As of December 31, 2022, Northrim's PPP efforts have resulted in approximately 2,300 new customers totaling $135.9 million in new deposit balances and contributed to the growth in core portfolio loans.

• The Company implemented assistance to help its customers experiencing financial challenges as a result of COVID-19.

The total outstanding principal balance of loan modifications due to the impacts of COVID-19 as of December 31, 2022 was $1.0 million, down from $8.4 million as of September 30, 2022 and $49.2 million as of December 31, 2021.

The $1.0 million of remaining COVID-19 loan accommodations are scheduled to return to normal principal and interest payments in the first quarter of 2023.

• Net income in the Community Banking segment decreased 12% or $3.8 million, to $27.9 million in 2023 as compared to 2022.

This decrease was primarily the result of the following:

◦ Loan and deposit growth supported 2023 earnings in the Community Banking segment but were offset by increased other operating expenses in the segment, which increased $6.8 million to $70.7 million in 2023 from $63.9 million in 2022, primarily due to increases in salaries and other personnel expense as the Company continues to expand its branch network into new markets.

◦ The provision for credit losses increased in 2023 to a provision of $3.8 million from a provision of $1.8 million in 2022 primarily due to higher loan growth in 2023 compared to 2022.

• Net income in the Home Mortgage Lending segment decreased 178%, or $1.6 million, to a loss of $2.5 million in 2023 from a loss of $897,000 in 2022 driven by a decrease in production volume sold to $376.2 million in 2023 from $585.5 million in 2022 largely due to the significant increase in interest rates in 2023 as well as the fact that the Company retained $146.3 million in mortgage loan originations on its balance sheet in 2023 compared to $34.6 million in 2022.

• The net interest margin increased to 4.14% in 2023 from 3.85% in 2022 mostly due to an increase in average yields on interest earning assets to in 2023 compared to 2022 as a result of higher interest rates.

This was only partially offset by an increase in the cost of interest-bearing liabilities.

• Loans increased 19% to $1.79 billion at December 31, 2023 compared to $1.50 billion at December 31, 2022, and deposits increased 4% to $2.49 billion at December 31, 2023 compared to $2.39 billion at December 31, 2022.

• Nonperforming loans, net of government guarantees, decreased to $5.0 million at the end of 2023 compared to $6.4 million at the end of 2022, while total adversely classified loans, net of government guarantees at December 31, 2023 decreased to $7.1 million from $7.6 million at December 31, 2022.

The Allowance for Credit Losses ("ACL") totaled 0.97% of total portfolio loans at December 31, 2023, compared to 0.92% at December 31, 2022.

This increase is primarily due to a decrease in government loan guarantees resulting from a decrease in PPP loans as a percentage of the Company's loan portfolio.

The ACL as a percentage of total portfolio loans, net of government guarantees was 1.02% at December 31, 2023 compared to 0.99% at December 31, 2022.

• The aggregate cash dividends paid by the Company in 2023 rose 28% to $13.6 million from $10.6 million paid in 2022.

The Company paid cash dividends of $2.40 per share in 2023 and $1.82 per share in 2022.

• The Company repurchased 208,673 shares of its common stock in 2023 at an average price of $43.34 per share.

• Total shareholders' equity was $218.6 million as of December 31, 2022, up 4% from the preceding quarter, and down 8% from $237.8 million a year ago.

Shareholders' equity was negatively impacted by the fair value of the available for sales securities portfolio which decreased $27.4 million in 2022 and, to a lesser extent the share repurchases totaling $14.2 million.

• Total shareholders' equity was $234.7 million as of December 31, 2023, up 4% from the preceding quarter, and up 7% from $218.6 million a year ago.

Shareholders' equity was positively impacted by the fair value of the available for sales securities portfolio which increased $12.6 million in 2023 and negatively impacted, but to a lesser extent, by the share repurchases totaling $9.0 million.

The Company continued to maintain strong regulatory capital ratios with Tier 1 Capital to Risk Adjusted Assets of 11.43% at December 31, 2023.

4 unchanged sentences

Net interest income $103,256 $95,115 $80,827 $70,665 $64,442 $61,208 11 %

Provision (benefit) for credit losses 1,846 (4,099) 2,432 (1,175) (500) 3,200 (10) %

Provision (benefit) for credit losses 3,842 1,846 (4,099) 2,432 (1,175) (500) NM

Other operating income 26,375 34,077 52,263 63,328 37,346 32,167 (4) %

Compensation expense, RML acquisition payments — — — 468 — 130 (100) %

Compensation expense, RML acquisition payments — — — — 468 — NM

Other operating expense 94,181 88,852 89,196 89,114 76,370 69,800 6 %

2 unchanged sentences

Net income $25,394 $30,741 $37,517 $32,888 $20,691 $20,004 5 %

Net income attributable to

noncontrolling interest — — — — — 327 (100) %

Net income attributable to Northrim Bancorp, Inc.

$30,741 $37,517 $32,888 $20,691 $20,004 $13,151 19 %

Year End Balance Sheet

20 unchanged sentences

Years Ended December 31,

(In thousands, except per share data and shares outstanding amounts)

2023 2022 2021 2020 2019 2018 Five Year Compound Growth Rate

16 unchanged sentences

Nonperforming loans, net of government guarantees/portfolio loans 0.28 % 0.43 % 0.75 % 0.70 % 1.34 % 1.49 % (28) %

Net charge-offs (recoveries)/average loans (0.08) % 0.07 % 0.03 % (0.07) % 0.15 % 0.15 % NM

Net charge-offs (recoveries)/average loans — % (0.08) % 0.07 % 0.03 % (0.07) % 0.15 % (100) %

Allowance for credit losses/portfolio loans 0.97 % 0.92 % 0.83 % 1.46 % 1.83 % 1.98 % (13) %

14 unchanged sentences

The most comparable GAAP measure of shareholders' equity to total assets is calculated by dividing total shareholders' equity by total assets.

See reconciliation to shareholders' equity to total assets below.

4 Tax-equivalent net interest margin is a non-GAAP performance measurement in which interest income on non-taxable investments and loans is presented on a tax-equivalent basis using a combined federal and state statutory rate of 28.43% in 2018 through 2022 and 41.11% in 2017.

Management believes that tax-equivalent net interest margin is a useful financial measure because it enables investors to evaluate net interest margin excluding tax expense in order to monitor our effectiveness in growing higher interest yielding assets and managing our costs of

interest bearing liabilities over time on a fully tax equivalent basis.

See reconciliation to net interest margin, the comparable GAAP measurement below.

See reconciliation to shareholders' equity to total assets, the most comparable GAAP measurement below.

Management believes that tax-equivalent net interest margin is a useful financial measure because it enables investors to evaluate net interest margin

excluding tax expense in order to monitor our effectiveness in growing higher interest yielding assets and managing our costs of interest bearing liabilities over time on a fully tax equivalent basis.

See reconciliation to net interest margin, the most comparable GAAP measurement below.

5 In managing our business, we review the efficiency ratio exclusive of intangible asset amortization, which is a non-GAAP performance measurement.

4 unchanged sentences

Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.

See reconciliation to comparable GAAP measurement below.

See reconciliation to efficiency ratio, the most comparable GAAP measurement below.

6 The Company’s 2017 results included the impact of the enactment of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.

4 unchanged sentences

7 Number of banking offices does not include RML locations.

2022 number of banking offices includes 18 full service branches and 1 loan production office.

2021 number of banking offices includes 17 full service branches and 1 loan production office.

2020 number of banking offices includes 16 full service branches and 1 loan production office.

2023 number of banking offices includes 19 full service branches and one loan production office.

2022 number of banking offices includes 18 full service branches and one loan production office.

2021 number of banking offices includes 17 full service branches and one loan production office.

2020 number of banking offices includes 16 full service branches and one loan production office.

2018 number of banking offices includes 15 full service branches and 1 loan production office.

8 FTE includes 336, 321, 312, 311, 320, and 314 Community Banking employees in 2022, 2021, 2020, 2019, 2018 and 2017, respectively.

FTE includes 133, 130, 126, 120, 110, and 115 Home Mortgage Lending employees in 2022, 2021, 2020, 2019, 2018 and 2017, respectively.

8 FTE includes 332, 336, 321, 312, 311, and 320 Community Banking employees at the end of 2023, 2022, 2021, 2020, 2019 and 2018, respectively.

FTE includes 140, 133, 130, 126, 120, and 110 Home Mortgage Lending employees at the end of 2023, 2022, 2021, 2020, 2019 and 2018, respectively.

Reconciliation of Selected Non-GAAP Financial Data to GAAP Financial Measures

39 unchanged sentences

Tax-equivalent net interest margin 4.21 % 3.89 % 3.60 % 4.05 % 4.70 % 4.60 %

Calculation of efficiency ratio

Reconciliation of efficiency ratio exclusive of intangible asset amortization (non-GAAP) to efficiency ratio.

(In Thousands) 2023 2022 2021 2020 2019 2018

25 unchanged sentences

Net interest income in 2023 was $103.3 million, compared to $95.1 million in 2022.

The increase in 2022 as compared to 2021 was primarily the result of increased interest on core loans (excluding PPP loans), investments, and interest bearing deposits in other banks which was only partially offset by a decrease in loan interest and fee income from PPP loans.

Interest income on PPP loans was $405,000 and $2.9 million in 2022 and 2021, respectively.

Loan fee income on PPP loans was $4.3 million and $12.5 million in 2022 and 2021, respectively.

Loan fee income on PPP loans is largely made up of fees fully recognized upon loan forgiveness from the SBA.

Loan fee income decreased due to decreased recognition of the deferred PPP loan fees upon forgiveness through the SBA in 2022 compared to 2021.

Interest income on core loans increased $26.5 million in 2022 as compared to 2021 due to an increase in interest rates and higher net average interest-earning asset balances.

Interest expense increased $1.4 million as a result of higher interest rates and average higher interest-bearing deposit balances.

The increase in 2023 as compared to 2022 was primarily the result of increased interest on loans and investments which was only partially offset by an increase in interest expense on deposits and borrowings.

Interest income on loans increased $25.8 million in 2023 as compared to 2022 due to an increase in interest rates and higher net average interest-earning asset balances.

Interest expense increased $23.5 million in 2023 as compared to the prior year as a result of higher interest rates and higher average interest-bearing deposit balances.

During 2023 and 2022, net interest margins were 4.14% and 3.85%, respectively.

The increase in net interest margin in 2022 as compared to 2021 is primarily the result of higher yields on earning-assets and higher average core portfolio loan balances and long-term and short-term investment balances.

The increase in net interest margin in 2023 as compared to 2022 is primarily the result of higher yields on earning-assets and higher average portfolio loan balances.

The following table sets forth for the periods indicated information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities.

Average yields or costs, net interest income, and net interest margin are also presented.

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

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

Years ended December 31, 2023 2022 2021

Average outstanding balance Interest income / expense Average Yield / Cost Average outstanding balance Interest income / expense Average Yield / Cost Average outstanding balance Interest income / expense Average Yield / Cost

Average outstanding balance Interest income / expense Average Tax Equivalent Yield / Cost (6)

(In Thousands)

4 unchanged sentences

715,367 18,695 2.73 % 618,782 11,878 1.84 % 369,172 4,918 1.27 %

Non-taxable long-term investments (3)

810 18 2.22 % 853 18 2.11 % 2,236 82 3.67 %

Interest-bearing deposits in other banks (4)

27 unchanged sentences

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.

treasury and government sponsored entities, corporate bonds, collateral loan obligations, municipal securities, marketable equity securities, and Federal Home Loan Bank stock.

4 Consists of interest bearing deposits in other banks and domestic CDs.

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 yield/costs assume a federal tax rate of 21% and a state tax rate of 7.43% for a combined tax rate of 28.43%.

The following table sets forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates.

19 unchanged sentences

Provision for Credit Losses

The Company adopted ASU 2016-13 effective January 1, 2021.

The Company adopted ASU 2016-13, Financial Instruments - Credit Losses, effective January 1, 2021.

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 loss methodology ("CECL").

10 unchanged sentences

Total credit loss expense $3,842 $1,846 ($4,099)

As noted above, the provision for credit losses was recorded in accordance with CECL in 2022 and 2021.

In general the increase in the provision for credit losses in 2023 as compared to 2022 is primarily the result of increased portfolio loans and unfunded commitment balances, and, to a lesser extent, a decrease in management's assumptions for prepayment and curtailment speeds.

These increases were only partially offset by a decrease in rate due to improvement in management's forecast of economic factors as of December 31, 2023 compared to December 31, 2022.

In general the increase in the provision for credit losses in 2022 as compared to 2021 is primarily the result of increased portfolio loan and unfunded commitment balances, and, to a lesser extent, an increase in projected loss rates.

In 2021, there was a reversal of the provision primarily due to a decrease in projected loss rates following the uncertainty of the impacts of the COVID-19 pandemic in 2020 and the first half of 2021.

In 2021, there was a reversal of the provision primarily due to a decrease in projected loss rates following the uncertainty of the impacts of the COVID-19 pandemic in 2020

and the first half of 2021.

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

6 unchanged sentences

Mortgage banking income $12,763 ($8,809) (41) % $21,572 ($20,572) (49) % $42,144

Bankcard fees 3,697 308 9 % 3,389 552 19 % 2,837

Purchased receivable income 4,482 2,480 124 % 2,002 (257) (11) % 2,259

Keyman insurance proceeds 2,002 2,002 NM — — NM —

Commercial servicing revenue 1,628 1,322 432 % 306 (221) (42) % 527

Bankcard fees 3,862 165 4 % 3,697 308 9 % 3,389

Service charges on deposit accounts 2,044 433 27 % 1,611 314 24 % 1,297

Interest rate swap income 157 (295) (65) % 452 (497) (52) % 949

Gain (loss) on sale of securities — (67) (100) % 67 (31) 100 % 98

(Loss) gain on marketable equity securities (1,119) (1,018) (1,008) % (101) (162) 266 % 61

Commercial servicing revenue 554 (1,074) (66) % 1,628 1,322 432 % 306

Gain (loss) on marketable equity securities 120 1,239 111 % (1,119) (1,018) (1,008) % (101)

Keyman insurance proceeds — (2,002) NM 2,002 2,002 NM —

Gain (loss) on sale of securities — — NM — (67) 100 % 67

Other income 2,550 (134) (5) % 2,684 (218) (8) % 2,902

1 unchanged sentence

2023 Compared to 2022

The most significant decreases in other operating income in 2022 was a decrease in mortgage banking income, followed by a decrease in the fair market value of marketable equity securities, a decrease in interest rate swap income, and a decrease in purchased receivable income.

These decreases were partially offset by life insurance proceeds received in connections 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 increases in commercial servicing revenue, service charges on deposit accounts, and bankcard fees.

The most significant item contributing to the decrease in other operating income in 2023 was a decrease in mortgage banking income, followed by a decrease in keyman insurance proceeds and commercial servicing revenue.

Life insurance proceeds were received in 2022 in connections with the death of the Company's former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021.

These decreases were partially offset by increases in purchased receivable income, gain on marketable equity securities, service charges on deposit accounts, and bankcard fees.

Mortgage banking income consists of gross income from the origination and sale of mortgages as well as mortgage loan servicing fees and is the largest component of other operating income at 48% of total other operating income in 2023 and 63% in 2022.

Mortgage banking income decreased in 2022 compared to 2021 mainly due to a decrease in mortgage loans originated and sold as this volume decreased to $585.5 million in 2022 from $1.12 billion in 2021.

The overall decrease in mortgage originations in 2022 as compared to the prior year is primarily the result of the changes in interest rates during the year that led to decreased activity.

Interest rate swap income decreased in 2022 as compared to 2021 due to a decrease in the origination of new swap contracts with commercial loan customers.

The Company executed new customer swap contracts with a notional value of $11.7 million in 2022 as compared to new customer swap contracts with a notional value of $15.7 million in 2021.

Purchased receivable income decreased in 2022 as compared to 2021 due to customers reportedly using PPP funds instead of selling receivables to fund their operating cash needs.

Commercial servicing revenue increased in 2022 as compared to 2021 primarily resulting from an increase in the fair value of our commercial servicing rights, which generally increase when interest rates rise causing the expected life of the servicing asset, and the resulting cash flow to the Company, to increase.

Bankcard fees and service charges on deposit accounts increased in 2022 due an increase in the number of the Company's deposit customers, as well as due to the cessation of COVID-19 quarantine restrictions, which both led to higher transaction volume as compared to 2021.

Mortgage banking income decreased in 2023 compared to 2022 mainly due to a decrease in mortgage loans originated and sold which decreased to $376.2 million in 2023 from $585.5 million in 2022.

The overall decrease in mortgage originations sold in 2023 as compared to the prior year is primarily the result of the changes in interest rates during the year that led to decreased activity, as well as the fact that the Company retained $146.3 million in mortgage loan originations on its balance sheet in 2023 compared to $34.6 million in 2022.

Commercial servicing revenue decreased in 2023 as compared to 2022 primarily due to a smaller increase in the fair value of commercial servicing rights in 2023 as compared to 2022.

Purchased receivable income increased in 2023 as compared to 2022 due to higher average balances as customers sold receivables to fund their operating cash needs.

Gain on marketable equity securities increased in 2023 as compared to 2022 due to increased fair value on this portfolio.

Bankcard fees and service charges on deposit accounts increased in 2023 due an increase in the number of the Company's deposit customers which led to higher transaction volume as compared to 2022.

Other Operating Expense

11 unchanged sentences

OREO operating expense 16 (618) (97) % 634 (143) (18) % 777

Impairment on OREO 123 123 100 % — — NM —

Rental income on OREO (4) 544 99 % (548) (24) (5) % (524)

Losses (gains) on sale of OREO 414 1,099 160 % (685) (294) NM (391)

Losses (gains) on sale of OREO (929) (1,343) 324 % 414 1,099 160 % (685)

Subtotal (794) (1,294) (259) % 500 932 216 % (432)

2 unchanged sentences

2023 Compared to 2022

Other operating expense decreased by less than 1% in 2022 as compared to 2021.

The largest decrease was in salaries and other personnel expense primarily related to mortgage banking operations, which fluctuate with production volumes.

Occupancy expense and intangible asset expense also decreased slightly in 2022 compared to 2021 due to lower repairs and maintenance costs.

These decreases were mostly offset by increases in OREO expense, insurance expense, data processing expense, and professional and outside services.

OREO expense increased in 2022 primarily due to increased losses on sale of OREO properties as compared to 2021.

Insurance expense, data processing expense, and professional and outside services increased in 2022 as compared to 2021 due to increased FDIC insurance costs associated with asset growth, increased customer and transaction volume, and increased investment management fees attributable to the growth in our investment portfolio.

Other operating expense increased by 6% in 2023 as compared to 2022.

The largest increase was in salaries and other personnel expense, primarily related to community banking operations, as the Company expanded its branch network into new markets.

Data processing expense, occupancy expense, insurance expense, marketing expense and professional and outside services also increased in 2023 compared to 2022 due to the increase in branch locations, increased customer and transaction volume, increased FDIC insurance costs associated with asset growth, and increased legal and investment management fees.

These increases were partially offset by decreases in other real estate owned (“OREO”) expense.

OREO expense decreased in 2023 primarily due to gains on sale of OREO properties as compared to 2022 as subsequent proceeds were received related to a government guarantee on an OREO property sold in December 2022.

The provision for income taxes decreased $1.5 million or 20%, to $6.2 million in 2023 as compared to 2022.

7 unchanged sentences

Our investment portfolio consists primarily of government sponsored entity securities, corporate securities, collateralized loan obligations, and municipal securities.

Investment securities at December 31, 2022 increased $269.4 million, or 59%, to $724.5 million from $455.1 million at December 31, 2021.

The increase at December 31, 2022 as compared to December 31, 2021 came from the investment of short-term funds included in interest bearing deposits in other banks.

The average maturity of the investment portfolio was approximately three and a quarter years at December 31, 2022.

Investment securities at December 31, 2023 decreased $36.7 million, or 5%, to $687.8 million from $724.5 million at December 31, 2022.

The decrease at December 31, 2023 as compared to December 31, 2022 came from investment maturities and calls that were used to fund growth in portfolio loans.

The average maturity of the investment portfolio was approximately 2.8 years at December 31, 2023 as compared to approximately 3.3 years at December 31, 2022.

Investment securities may be pledged as collateral to secure public deposits or borrowings.

73 unchanged sentences

however, no individual direct relationship exceeded the loans-to-one borrower limitation.

The Company's loans have grown significantly in recent history, in part due to PPP loans, but over the last 3 years, core loans have also increased significantly.

The Company's loans have grown significantly in recent history, in part due to PPP loans, but over the last four years, core loans have also increased significantly.

Management attributes higher growth in core loans in 2023 and 2022 to our ability to attract new customers through our outreach to the community.

53 unchanged sentences

$100.4 million, or 6% of portfolio loans, in the Tourism sector;

$70.8 million, or 5% in the Fishing sector;

$84.2 million, or 5% in the Accommodations sector;

$75.0 million, or 4% in the Fishing sector;

$72.8 million, or 4% in Retail loans;

13 unchanged sentences

Net nonperforming loans $5,002 $6,430

Other real estate owned — $5,638

Other real estate owned guaranteed by government — ($1,279)

Nonperforming purchased receivables 808 —

Net nonperforming assets $5,810 $6,430

3 unchanged sentences

Nonperforming assets, net of government guarantees / total assets net of government guarantees 0.21 % 0.25 %

Performing restructured loans $291 $2,355

Performing restructured loans guaranteed by government — ($2,518)

Net performing restructured loans $291 $773

Nonperforming loans plus performing restructured loans, net of government guarantees $6,721 $11,445

Nonperforming loans plus performing restructured loans, net of government

guarantees / portfolio loans 0.45 % 0.81 %

Nonperforming loans plus performing restructured loans, net of government

guarantees / portfolio loans, net of government guarantees 0.48 % 0.94 %

Nonperforming assets plus performing restructured loans, net of government

guarantees / total assets 0.25 % 0.58 %

Nonperforming assets plus performing restructured loans, net of government

guarantees / total assets, net of government guarantees 0.26 % 0.63 %

Adversely classified loans, net of government guarantees $7,057 $7,581

15 unchanged sentences

The Company’s nonperforming assets, net of government guarantees decreased to $5.8 million at December 31, 2023 as compared to $6.4 million at December 31, 2022.

This decrease was mostly due to principal paydowns on nonaccrual loans

which were only partially offset by additions to nonaccrual loans in 2022.

There was interest income of $2.2 million and $1.6 million recognized in net income for 2022 and 2021, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.

Additionally, the sale of the only OREO property held by the Company for all of 2022 reduced OREO to zero as of December 31, 2022 from $4.4 million, net of government guarantees, at December 31, 2021.

The Company holds a government guarantee related to the OREO property that was sold in December 2022;

however, the value of this guarantee has not been included in the Company's financial statements in 2022 due to uncertainty as to the total amount that will be received from the guarantee.

For the fourth quarter of 2022, a loss from the sale of OREO of $414,000 is included in OREO expense, net of rental income in the income statement.

We expect to receive proceeds related to this government guarantee in 2023.

The Company had $291,000 and $773,000 in loans classified as TDRs, net of government guarantees that were performing as of December 31, 2022 and 2021, respectively.

Additionally, there were $4.8 million and $6.5 million in TDRs included in nonaccrual loans at December 31, 2022 and 2021, respectively, for total TDRs, net of government guarantees of $5.1 million and $7.3 million at December 31, 2022 and 2021, respectively.

The decrease in TDRs at December 31, 2022 as compared to 2021 was primarily due to payoffs and paydowns on loans classified as TDRs in 2022.

See Note 5 of the Notes to Consolidated Financial Statements included in Part II.

Item 8 of this report for further discussion of TDRs.

At December 31, 2022, management had identified potential problem loans of $1.6 million as compared to potential problem loans of $2.1 million at December 31, 2021.

Potential problem loans are loans which are currently performing 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.

The decrease in potential problem loans at December 31, 2022 from December 31, 2021 was primarily due to paydowns and credit risk upgrades to existing potential problem loans that were partially offset by the addition of new potential problem loans in 2022.

The Company acquired a vessel totaling $231,000 in the third quarter of 2019 through foreclosure proceedings related to one lending relationship that was sold in the second quarter of 2021.

This decrease was mostly due to principal paydowns on nonaccrual loans which were only partially offset by additions to nonaccrual loans in 2023.

There was interest income of $656,000 and $2.2 million recognized in net income for 2023 and 2022, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.

The Company held a government guarantee related to the OREO property that was sold in December 2022;

however, the value of this guarantee was not included in the Company's financial statements in 2022 due to uncertainty as to the total amount that would be received from the guarantee.

The Company received proceeds from the guarantee in the third quarter of 2023 which were recorded as a gain on sale of OREO.

The following summarizes OREO activity for the periods indicated:

3 unchanged sentences

Proceeds from the sale of other real estate owned (1,079) (5,224) (2,610)

(Loss) Gain on sale of other real estate owned, net (414) 685 391

Gain (loss) on sale of other real estate owned, net 929 (414) 685

Impairment on other real estate owned (123) — —

Balance, end of year — — 5,638

1 unchanged sentence

Balance, end of year, net of government guarantees $— $— $4,359

The Company made a $1.0 million loan in 2021 to facilitate the sale of OREO in 2021, but did not make any loans to facilitate the sale of OREO in 2022.

The Company made a $1.0 million loan in 2021 to facilitate the sale of OREO in 2021, but did not make any loans to facilitate the sale of OREO in 2022 or 2023.

Our underwriting policies and procedures for loans to facilitate the sale of OREO are no different than our standard loan policies and procedures.

At December 31, 2023, management had identified potential problem loans of $1.9 million as compared to potential problem loans of $1.6 million at December 31, 2022.

The increase in potential problem loans at December 31, 2023 from December 31, 2022 was primarily due to the addition of four new potential problem loans in 2023 that were partially offset by paydowns to existing potential problem loans.

Allowance for Credit Losses

The Company adopted ASU 2016-13 effective January 1, 2021.

The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity.

Refer to Note 1 of the notes to Consolidated Financial

Statements included in Part II.

Refer to Note 1 of the notes to Consolidated Financial Statements included in Part II.

Item 8 of this report for detailed discussion regarding the ACL methodology for loans and unfunded commitments.

36 unchanged sentences

1 Represents percentage of this category of loans to total portfolio loans.

The ACL for loans increased to $13.8 million at December 31, 2022 compared to $11.7 million at December 31, 2021 primarily due to an increase in loan balances, net of guarantees, as well as a slight increase in expected future loss rates.

The ACL for loans increased to $17.3 million at December 31, 2023 compared to $13.8 million at December 31, 2022 primarily due to an increase in loan balances, net of guarantees, as well as a slight increase in expected future loss rates due to a decrease in management's assumptions about prepayment and curtailment rates.

The Company determined that an ACL of $17.3 million, or 0.97% of portfolio loans, is appropriate as of December 31, 2023 based on our analysis of the current credit quality of the portfolio and forecasted economic conditions.

3 unchanged sentences

Balance at beginning of period $1,970 $1,096 $187

Impact of adopting ASC 326 — 1,229

Adjusted balance, beginning of period 1,096 1,416

(Benefit) provision for credit losses 874 (320)

Provision for credit losses 448 874 (320)

Balance at end of period $2,418 $1,970 $1,096

3 unchanged sentences

Purchased receivable income was $4.5 million and $2.0 million in 2023 and 2022, respectively.

Purchased receivable income in 2022 decreased from 2021 due to customers reportedly using PPP loans to fund liquidity needs instead of selling receivables.

The following table sets forth information regarding changes in the purchased receivable ACL for the years indicated:

9 unchanged sentences

Deposits are our primary source of funds.

Total deposits decreased 1% to $2.39 billion at December 31, 2022 from $2.42 billion at December 31, 2021.

Total deposits increased 4% to $2.49 billion at December 31, 2023 from $2.39 billion at December 31, 2022.

Our deposits generally are expected to fluctuate according to the level of our market share, economic conditions, and normal seasonal trends.

29 unchanged sentences

The Company had $48.1 million CDARS certificates of deposits at December 31, 2023 and $30.2 million CDARS certificates of deposits at December 31, 2022.

Uninsured deposits totaled $1.0 billion or 41% of total deposits as of December 31, 2023 compared to $1.1 billion or 46% of total deposits as of December 31, 2022.

As interest rates continued to increase in 2023, Northrim took a proactive, targeted approach to increase deposit rates.

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 Company’s assets.

At December 31, 2022, our maximum borrowing line from the FHLB was $1.195 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $14.1 million as of December 31, 2022 which were originated to match fund low income housing projects that qualify for long term fixed interest rates.

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

Based on the Company's current collateral pledged to the FHLB, less outstanding advances, the Company's borrowing line is $348.0 million as of December 31, 2023.

The Company has outstanding advances of $13.7 million and $14.1 million as of December 31, 2023 and 2022, respectively, 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%.

The Company paid $330,000 and $339,000 in interest on these advances in 2023 and 2022, respectively.

There were no additional advances outstanding as of December 31, 2023 and 2022, however, the Company had an average short-term advance of $21.8 million in 2023 compared to an average short-term advance of zero in 2022.

The Company took out a $50.0 million short-term advance in the second quarter of 2023 which was paid off in the fourth quarter of 2023.

The Company paid $1.2 million in interest expense on the short-term advance in 2023.

Federal Reserve Bank :

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $44.3 million of loans as collateral to secure advances made through the discount window as of December 31, 2022.

The Federal Reserve Bank of San Francisco (the “Federal Reserve Bank”) is holding $60 million of investment securities as collateral to secure advances made through the discount window as of December 31, 2023.

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

The Company paid less than $1,000 in interest in 2023 and 2022 on this agreement.

The Federal Reserve Bank is holding $20 million of investment securities as collateral to secure the Company's ability to take advances through the Federal Reserve Bank's Bank Term Funding Program (“BTFP”) as of December 31, 2023.

There were no BTFP advances outstanding at December 31, 2023, however, the Company had an average outstanding balance of $5.0 million in 2023.

The Company paid $241,000 in interest expense on this BTFP advance in 2023.

Other Short and Long-term Borrowings:

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

The Company is subject to provisions under Alaska state law which generally limits the amount of outstanding debt to 35% of total assets or $929.3 million at December 31, 2021 and 35% of total assets or $948.0 million at December 31, 2021.

The Company is subject to provisions under Alaska state law which generally limits the amount of outstanding debt to 35% of total assets or $975.9 million at December 31, 2023 and $929.3 million at December 31, 2022.

Junior Subordinated Debentures

On December 16, 2005, the Company’s subsidiary, NST2, issued trust preferred securities in the principal amount of $10 million.

These securities carry an interest rate of 90-day LIBOR plus 1.37% per annum that was initially set at 5.86% adjusted quarterly.

These securities carried an interest rate of 90-day LIBOR plus 1.37% per annum that was initially set at 5.86% adjusted quarterly until the cessation of LIBOR in 2023.

As of December 31, 2023, these securities now carry an interest rate of 90-day CME SOFR plus tenor spread adjustment of 0.26% plus 1.37% per annum, adjusted quarterly.

The securities have a maturity date of March 15, 2036, and are callable by the Company on or after March 15, 2011.

6 unchanged sentences

Net of the impact of the interest rate swap, interest expense on these securities was $379,000 in 2023 and $379,000 in 2022.

The Company also had interest expense of $21,000 in 2023 and $9,000 in 2022 on common securities related to junior subordinated debt.

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 December 31, 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 December 31, 2023, the Company has 10.0 million authorized shares of common stock, of which approximately 5.5 million are issued and outstanding, leaving approximately 4.5 million shares available for issuance.

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

4 unchanged sentences

The Company had cash and cash equivalents of $118.5 million, or 4% of total assets at December 31, 2023 compared to $259.4 million, or 10% of total assets as of December 31, 2022.

The decrease in cash and cash equivalents is primarily due to increases in investment securities and loans.

While down from December 31, 2021, this level of cash and cash equivalents is still elevated as compared to historical norms both in balance and as a percentage of total assets.

The decrease in cash and cash equivalents is primarily due to an increase in loans which is only partially offset by an increase in deposits.

The Company had cumulative other comprehensive losses, net of tax, of $16.4 million in 2023, primarily due to unrealized holding losses on available for sale securities due to increases in interest rates.

This is a decrease from $29.1 million in 2022.

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 into 2023 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 December 31, 2022, the weighted average maturity of available for sale securities is 3.3 years compared to 4.1 years at December 31, 2021 and 2.6 years at December 31, 2020.

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

At December 31, 2023, $162.9 million available for sale securities mature within one year, $141.3 million mature in 2025, and $196.3 million mature in 2026.

7 unchanged sentences

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

At December 31, 2022, our liquid assets were $570.7 million and our funds available for borrowing under our existing lines of credit were $1.24 billion.

At December 31, 2023, our liquid assets were $575.6 million and our funds available for borrowing under our existing lines of credit were $742.9 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.

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.

Advances are available through the BTFP until March 11, 2024.

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.

1 unchanged sentence

Item 8 of this report, net cash provided by operating activities was $38.9 million in 2023 and $78.1 million in 2022, respectively.

The primary source of cash provided by operating activities for both periods was proceeds from the sale of loans held for sale net of proceeds used in originations, as well as positive net income.

The primary source of cash provided by operating activities for both periods was positive net income, and in 2022 also included proceeds from the sale of loans held for sale net of proceeds used in originations.

In 2023, proceeds from the sale of loans held for sale net of proceeds used in originations decreased as compared to 2022 as refinance and purchase activity slowed.

Net cash used by investing activities was $405.6 million in 2022 primarily due to purchases of available for sale and held to maturity securities and to a lesser extent, increases in loans and purchased receivables.

Net cash used by investing activities was $159.1 million in 2021 primarily due to purchases of available for sale and held to maturity securities, net of proceeds from the maturity of available for sale securities.

Financing activities used cash of $59.0 million in 2022 and provided cash of $577.0 million in 2021.

Financing activities used cash in 2022 due to a decrease in deposits as wells as payment of cash dividends to shareholders and the repurchase of shares of the Company's common stock.

Net cash used by investing activities was $255.1 million in 2023 primarily due to increases in loans and to a lesser extent, purchases of available for sale and marketable equity securities and an increase in purchased receivables.

Net cash used by investing activities was $405.6 million in 2022 primarily due to purchases of available for sale and held to maturity securities.

Financing activities provided cash of $75.3 million in 2023 and used cash of $59.0 million in 2022.

Financing activities provided cash in 2023 due to increases in deposits that were only partially offset by the payment of cash dividends to shareholders and the repurchase of shares of the Company's common stock.

Financing activities used cash in 2022 due to a decrease in deposits as wells as payment of cash dividends to shareholders and the repurchase of shares of the Company's common stock.

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

7 unchanged sentences

2019 347,676 $36.15

At December, 31, 2022, there were no shares available under the previously announced stock repurchase program.

At December, 31, 2023, there were 76,327 shares available under the previously announced stock repurchase program.

However, on January 26, 2024 the Company announced that its Board of Directors authorized the repurchase of up to an additional 110,000 shares of common stock.

11 unchanged sentences

Federal banking agencies have adopted regulations establishing minimum requirements for the capital adequacy of banks and bank holding companies.

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

requirements address both risk-based capital and leverage capital.

We believe as of December 31, 2023, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

36 unchanged sentences

Depending on the nature and size of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow (“DCF”) method or a weighted average remaining life method to estimate expected credit losses quantitatively.

The Company uses a DCF method for 8 of its 11 loan pools, which represent 95% of the amortized cost basis of total loan pools at December 31, 2022.

The weighted average remaining life method is used for the remaining 3 loan pools primarily because loan level data constraints preclude the use of the DCF model.

The Company uses a DCF method for eight of its 11 loan pools, which represent 95% of the amortized cost basis

of total loan pools at December 31, 2023.

The weighted average remaining life method is used for the remaining three loan pools primarily because loan level data constraints preclude the use of the DCF model.

Under the 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 ("LGD").

3 unchanged sentences

Management leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the Company's four quarter forecast period.

As of December 31, 2021, management utilized and forecasted Alaska unemployment as a loss driver for all of the loans pools that utilize 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 correlates to expected future losses.

Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

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.

As of December 31, 2023 and 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.

The Company's regression models for PD as of these time periods 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.

8 unchanged sentences

The LGD is the expected loss which would be realized presuming a default has occurred and primarily measures the value of the collateral or other secondary source of repayment related to the collateral.

The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses under CECL as adopted by the Company on January 1, 2021, which are unchanged as of December 31, 2022:

The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses under CECL, which are unchanged as of December 31, 2023:

Commercial & industrial - Commercial loans are loans for commercial, corporate and business purposes.

8 unchanged sentences

The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

industrial buildings, warehouses or retail buildings where the owner of the building does not occupy the property, non-owner occupied apartment or multifamily residential buildings, and various special purpose properties.

Non-owner occupied and multifamily - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including investment real estate loans that are primarily secured by office and industrial buildings, warehouses or retail buildings where the owner of the building does not occupy the property, non-owner occupied apartment or multifamily residential buildings, and various special purpose properties.

Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal.

36 unchanged sentences

• Changes in the nature and volume of the loan portfolio.

Management performs a hypothetical sensitivity analysis of our ACL quarterly to understand the impact of a change in a key input on our ACL.

As of December 31, 2023, if the four-quarter national unemployment rate forecast had been approximately 7% higher, our ACL for loans would have increased $420,000, or 2%.

As of December 31, 2023, if the four-quarter national unemployment rate forecast had been approximately 50% higher, our ACL for loans would have increased $3.7 million, or 21%.

This sensitivity analysis includes the impact to both the quantitative and qualitative components of our ACL.

Changes in quantitative inputs and qualitative loss factors may not occur in the same direction or magnitude across all segments of our loan portfolio and deterioration in some quantitative inputs and qualitative loss factors may offset improvement in others.

This sensitivity analysis does not represent a change to our expectations of the economic environment but provides a hypothetical result to assess the sensitivity of the ACL to a change in a key input.

This sensitivity analysis does not incorporate changes to management’s judgment of qualitative loss factors.

Valuation of goodwill and other intangibles:

25 unchanged sentences

Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates and ancillary fee income net of servicing costs.

The model assumptions for MSRs are also compared to publicly filed information from several large MSR holders, as available.

A hierarchical disclosure framework associated with the level of pricing observability is utilized in measuring financial instruments at fair value.

The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability.

Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value.

Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value.

Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.

A sensitivity analysis of our servicing rights was performed as of December 31, 2023.

See Note 7 to the financial statements included in Part II.

Item 8 of this report for the results of this analysis.

Other Accounting Policies and Estimates:

The Company evaluates its estimates, including those that materially affect the financial statements and are related to investments, mortgage servicing rights, derivative instruments, fair value measurements, and intangible assets on an on-going basis.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

The Company's policies related to these estimates can be found in Note 1 in the Notes to Consolidated Financial Statements in Part II.

Item 8 of this report.

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-K

Item 7. Management’s Discussion and Analysis