What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2023-11-03 · 202 added, 268 removed, 251 unchanged (65% of the section changed)

39 unchanged sentences

Update on Economic Conditions

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.

The Alaska Department of Labor (“DOL”) has reported Alaska’s seasonally adjusted unemployment rate in February of 2024 was 4.7% compared to the U.S.

rate of 3.9%.

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 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.

This was an annualized improvement of 7.2% for Alaska and larger than the national average of 5.1%.

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

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 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 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 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.

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

The total number of payroll jobs in Alaska, not including uniformed military, increased 2.6% or 8,200 jobs between February of 2023 and February of 2024.

According to the DOL, Construction and Health Care had the largest growth in new jobs through February of 2024 compared to the prior year.

The Construction sector added 1,900 positions for a year over year growth rate of 13.3% in February.

The Health Care sector grew by 1,600 jobs for an annual growth rate of 4%.

The Oil & Gas sector increased by 6.8% or 500 direct new jobs.

Trade, Transportation & Utilities added 1,500 jobs year over year through February of 2024, up 2.4%.

The Government sector grew by 1,400 jobs over the same period for 1.8% growth, mainly due to more state and local positions in Alaska.

Alaska’s Gross State Product (“GSP”) in the fourth quarter of 2023, was estimated to be $68.7 billion in current dollars, according to the Federal Bureau of Economic Analysis (“BEA”).

Alaska’s inflation adjusted “real” GSP grew 5.3% in all of 2023, placing Alaska fourth best of all 50 states.

In the fourth quarter of 2023 Alaska grew at an annualized rate of 4.5%, compared to the average U.S.

rate of 3.4%.

Alaska’s real GSP improvement in the fourth quarter of 2023 was aided by gains in the Mining, Oil and Gas sector.

The BEA also calculated Alaska’s seasonally adjusted personal income at $53.7 billion in the fourth quarter of 2023.

This was an annual improvement of 4.3% for Alaska compared to the national average improvement of 5.2%.

The monthly average price of Alaska North Slope (“ANS”) crude oil was in a range between $75.64 and $95.05 in 2023.

The Alaska Department of Revenue (“DOR”) calculated ANS crude oil production was 479,000 barrels per day (“bpd”) in Alaska’s fiscal year ending June 30, 2023.

The DOR has forecast production to decline slightly to 468,000 bpd in Alaska’s fiscal year 2024 and grow to 477,000 bpd in fiscal year 2025.

The DOR projects the number to reach 641,000 bpd by fiscal year 2034.

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

According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 5.4% in 2023 to $481,181, following a 7.6% increase in 2022.

This was the sixth consecutive year of price increases.

Average sales prices for single family homes in the Matanuska Susitna Borough rose 4% in 2023 to $397,589, after increasing 9.9% in 2022.

This continues a trend of average price increases for more than a decade in the region.

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.

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 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.

However, the Alaska Multiple Listing Services reported a large decrease in the number of units sold in both communities.

There were 2,162 housing units sold in Anchorage in 2023, down 24.1% compared to 2,849 in 2022.

In the Matanuska Susitna Borough there were 1,636 homes sold in 2023, compared to 2,103 in 2022, a decrease of 22.2%.

The Board of Governors of the Federal Reserve System kept its benchmark interest rate target 5.25%-5.50% as of December 31, 2023 and as of March 31, 2024.

The prime rate of interest has remained consistent at 8.50% as of December 31, 2023 and as of March 31, 2024.

Highlights and Summary of Performance - First Quarter of 2024

The Company reported net income and earnings per diluted share of $8.2 million and $1.48, respectively, for the first quarter of 2024 compared to net income and earnings per diluted share of $4.8 million and $0.84, respectively, for the first quarter of 2023.

The increase in net income for the three-month period ending March 31, 2024 compared to the same period last year is primarily attributable to an increase in mortgage banking income, higher net interest income, a lower provision for credit losses, unrealized gains on marketable equity securities, and a gain on an other real estate ("OREO") sale.

• Net interest income in the first quarter of 2024 increased 6% to $26.4 million compared to $25.0 million in the first quarter of 2023.

• Net interest margin was 4.16% for the first quarter of 2024, an 8 basis point decrease from the first quarter of 2023.

The decrease in the first quarter of 2024 compared to the same period in 2023 was primarily due to a higher interest costs which were only partially offset by higher yields on earning assets, a favorable change in the mix of earning-assets, and an increase in total earning assets.

• The weighted average interest rate for new loans booked in the first quarter of 2024 was 7.15% compared to 6.04% in the first quarter a year ago.

• Loans were $1.81 billion at March 31, 2024, up 1% from December 31, 2023 primarily as a result of commercial real estate and consumer mortgage loan growth.

• Total deposits were $2.43 billion at March 31, 2024, down 2% from December 31, 2023.

Demand deposits decreased 5% at March 31, 2024 from December 31, 2023 and represent 29% of total deposits at March 31, 2024.

• The average cost of interest-bearing deposits for the quarter was 2.13% at March 31, 2024, up from 1.20% at March 31, 2023.

• Total liquid assets and investments and loans maturing within one year were $515.6 million and our funds available for borrowing under our existing lines of credit were $712.3 million at March 31, 2024.

Other financial measures are shown in the table below:

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

2023 2022 2023 2022

Three Months Ended March 31,

Return on average assets, annualized 1.19 % 0.76 %

2 unchanged sentences

Nonperforming assets:

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 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 September 30, 2023

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

Nonperforming loans guaranteed by government (2,374) — 919 — — — — (1,455)

Nonperforming loans, net 5,349 291 (484) (91) — — — 5,065

Other real estate owned 273 — — (123) — — — 150

Total nonperforming assets,

net of government guarantees $5,622 $291 ($484) ($214) $— $— $— $5,215

Writedowns Transfers to

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

this quarter Transfers to OREO Performing Status

this quarter Sales this quarter Balance at September 30, 2022

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

Nonperforming loans guaranteed by government (683) — 64 — — — — (619)

Nonperforming loans, net 7,318 298 (1,095) (48) — — — 6,473

Other real estate owned 5,638 — — — — — — 5,638

Other real estate owned guaranteed

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

Total nonperforming assets,

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

Nonperforming assets, net of government guarantees were $5.4 million at March 31, 2024 and $5.8 million at December 31, 2023.

OREO, net of government guarantees was zero at March 31, 2024 and December 31, 2023.

Nonperforming loans, net of government guarantees increased $258,000 or 5% to $5.3 million as of March 31, 2024 from $5.0 million as of December 31, 2023, primarily due to the transfer of one nonaccrual purchased receivable relationship to nonaccrual loans which was only partially offset by payoffs and pay downs in the first three months of 2024.

$3.3 million, or 61% of nonperforming assets, net of government guarantees at March 31, 2024, are nonaccrual loans related to three commercial relationships.

Potential problem assets:

1 unchanged sentence

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

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.

At March 31, 2024, management had identified $1.9 million potential problem loans unchanged from $1.9 million at December 31, 2023.

RESULTS OF OPERATIONS

Income Statement

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 income for the first quarter of 2024 increased $3.4 million to $8.2 million as compared to $4.8 million for the same period in 2023.

The increase in net income in the first quarter of 2024 as compared to the same quarter a year ago is largely attributable to a $2.0 million increase in mortgage banking income, a $1.4 million increase in net interest income, and a $392,000 gain on OREO sale.

Net Interest Income/Net Interest Margin

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) %

Impact of SBA Paycheck Protection Program loans (0.08) %

Interest rates on loans and liabilities and loan fees, all other loans 0.01 %

Volume and mix of other interest-earning assets and liabilities 0.16 %

Change in net interest margin (0.07) %

Nine Months Ended September 30, 2023 vs.

September 30, 2022

Net interest income for the first quarter of 2024 increased 6% or $1.4 million, to $26.4 million as compared to $25.0 million for the first quarter of 2023.

The net interest margin decreased 8 basis points to 4.16% in the first quarter of 2024 as compared to 4.22% in the first quarter of 2023.

The increase in net interest income in the first quarter of 2024 compared to the same period in 2023 was primarily the result of increased interest on loans which was only partially offset by a decrease in interest income on investments and interest bearing deposits in other banks, as well as an increase in interest expense on interest-bearing deposits and borrowings.

The decrease in net interest margin in the first quarter of 2024 as compared to the same period of 2023 was primarily due to higher interest costs which were only partially offset by higher yields on earning assets, a favorable change in the mix of earning-assets, and an increase in total earning assets.

Changes in net interest margin in the three-month period ended March 31, 2024 as compared to the same period in the prior year are detailed below:

Three Months Ended March 31, 2024 vs.

March 31, 2023

Nonaccrual interest adjustments — %

Impact of SBA Paycheck Protection Program loans (0.13) %

Interest rates on loans and liabilities and loan fees, all other loans (0.35) %

2 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 September 30, 2023 and 2022.

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

(Dollars in Thousands) Three Months Ended September 30,

Interest income/ Average Tax Equivalent

Average Balances Change expense Change Yields/Costs 6

2023 2022 $ % 2023 2022 $ % 2023 2022 Change

Interest-bearing deposits in other banks 1

$42,273 $324,280 ($282,007) (87) % $584 $1,899 ($1,315) (69) % 5.39 % 2.29 % 3.10 %

Taxable long-term investments 2

715,767 678,609 37,158 5 % 4,727 3,530 1,197 34 % 2.43 % 1.98 % 0.45 %

Loans held for sale 62,350 53,769 8,581 16 % 988 656 332 51 % 6.34 % 4.88 % 1.46 %

1,695,736 1,414,982 280,754 20 % 28,109 21,474 6,635 31 % 6.61 % 6.05 % 0.56 %

Interest-earning assets 5

2,516,126 2,471,640 44,486 2 % 34,408 27,559 6,849 25 % 5.48 % 4.47 % 1.01 %

Nonearning assets 205,770 174,182 31,588 18 %

Total $2,721,896 $2,645,822 $76,074 3 %

Interest-bearing demand $828,854 $688,566 $140,288 20 % $3,614 $562 $3,052 543 % 1.73 % 0.32 % 1.41 %

Savings deposits 270,945 346,306 (75,361) (22) % 322 130 192 148 % 0.47 % 0.15 % 0.32 %

Money market deposits 232,054 315,049 (82,995) (26) % 766 158 608 385 % 1.31 % 0.20 % 1.11 %

Time deposits 287,625 167,112 120,513 72 % 2,436 214 2,222 1,038 % 3.36 % 0.51 % 2.85 %

Total interest-bearing deposits 1,619,478 1,517,033 102,445 7 % 7,138 1,064 6,074 571 % 1.75 % 0.28 % 1.47 %

Borrowings 76,681 24,573 52,108 212 % 920 184 736 400 % 4.73 % 2.92 % 1.81 %

Total interest-bearing liabilities 1,696,159 1,541,606 154,553 10 % 8,058 1,248 6,810 546 % 1.88 % 0.32 % 1.56 %

Non-interest bearing demand deposits 747,147 846,764 (99,617) (12) %

Other liabilities 52,078 36,446 15,632 43 %

Equity 226,512 221,006 5,506 2 %

Total $2,721,896 $2,645,822 $76,074 3 %

Net interest income $26,350 $26,311 $39 — %

Net interest margin 4.15 % 4.22 % (0.07) %

Average loans to average interest-earning assets 67.39 % 57.25 %

Average loans to average total deposits 71.65 % 59.86 %

Average non-interest deposits to average total deposits 31.57 % 35.82 %

Average interest-earning assets to average interest-bearing liabilities 148.34 % 160.33 %

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

2 Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock.

3 Interest income includes loan fees.

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 $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 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 three-month periods ending September 30, 2023 and 2022.

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

Increase (decrease) due to

Volume Rate Total

Interest Income:

Short-term investments ($2,497) $1,182 ($1,315)

Taxable long-term investments 231 966 1,197

Loans held for sale 72 260 332

Loans 4,065 2,570 6,635

Total interest income $1,871 $4,978 $6,849

Interest Expense:

Interest-bearing demand $90 $2,962 $3,052

Savings deposits (34) 226 192

Money market deposits (53) 661 608

Time deposits 27 2,195 2,222

Interest-bearing deposits 30 6,044 6,074

Borrowings 724 12 736

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 nine-month periods ended September 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 March 31, 2024 and 2023.

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

(Dollars in Thousands) Nine Months Ended September 30,

(Dollars in Thousands) Three Months Ended March 31,

Interest income/ Average Tax Equivalent

31 unchanged sentences

3 Interest income includes loan fees.

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.

Loan fees recognized during the period and included in the yield calculation totaled $1.0 million and $1.3 million in the first quarter of 2024 and 2023, respectively.

4 Nonaccrual loans are included with a zero effective yield.

Average nonaccrual loans included in the computation of the average loan balances were $7.4 million and $9.2 million in the first nine months of 2023 and 2022, respectively .

Average nonaccrual loans included in the computation of the average loan balances were $5.7 million and $7.1 million in the first quarter of 2024 and 2023, respectively .

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

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

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the nine-month periods ending September 30, 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 nine-month periods ending September 30, 2023 and 2022.

(In Thousands) Nine Months Ended September 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 March 31, 2024 and 2023.

(In Thousands) Three Months Ended March 31, 2024 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 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 Allowance for Credit Losses (“ACL”) at an appropriate level under the Current Expected Credit Losses (“CECL”) model.

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

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

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

Three Months Ended March 31,

(In Thousands) 2024 2023

4 unchanged sentences

Credit loss expense on purchased receivables — —

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

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.

Total credit loss expense $149 $360

The decrease in the provision for credit losses for the three-month periods ending March 31, 2024 as compared to the same period in 2023 is primarily the result of a decrease in estimated loss rates for both loans and unfunded commitments that was only partially offset by growth in outstanding balances and a specific allowance for one individually evaluated loan.

Fluctuations in the provision for credit losses in the future will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration.

Other Operating Income

Other operating income for the three-month period ended September 30, 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 income for the three-month period ended March 31, 2024 increased $2.9 million, or 60%, to $7.8 million as compared to $4.9 million for the same period in 2023, primarily due to a $2.0 million increase in mortgage banking income in the first quarter of 2024 compared to the same quarter a year ago as well as a $537,000 increase in the fair value of marketable equity securities and a $368,000 increase in purchased receivable income.

The increase in mortgage banking income in the three-month period ended March 31, 2024 as compared to the same period in 2023 was primarily due to increased production volume due to stabilizing mortgage interest rates.

Other Operating Expense

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 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.

Other operating expense for the first quarter of 2024 increased $129,000, or 1%, to $23.6 million as compared to $23.5 million for the same period in 2023 is primarily due to a $304,000 increase in data processing expense and a $222,000 increase in insurance expense, which was only partially offset by a decrease in OREO expense due to subsequent proceeds received in the first quarter of 2024 that are related to a government guarantee on an OREO property sold in December 2022.

For the first quarter of 2024, Northrim recorded a higher effective tax rate as compared to the same period in 2023 as a result of a decrease in tax credits and tax exempt interest income as a percentage of pre-tax income in 2024.

In the first quarter of 2024, Northrim recorded $2.3 million in state and federal income tax expense, for an effective tax rate of 21.94% compared to $1.2 million and 20.44% for the same period in 2023.

FINANCIAL CONDITION

Balance Sheet Overview

Portfolio Investments

Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at September 30, 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:

September 30, 2023 December 31, 2022

Investment Securities

Investment Securities include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at March 31, 2024 decreased 7% to $642.7 million from $687.8 million at December 31, 2023 primarily due to maturities and calls of available for sale securities during the first three months of 2024.

The table below details portfolio investment balances by portfolio investment type for the periods indicated:

March 31, 2024 December 31, 2023

Dollar Amount Percent of Total Dollar Amount Percent of Total

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Preferred stock 13,467 2.1 % 13,153 1.9 %

Total portfolio investments $699,515 $724,519

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.

Total $642,696 $687,839

The average estimated duration of the investment portfolio at March 31, 2024, was approximately 2.7 years.

As of March 31, 2024, $48.8 million of available for sale securities with a weighted average yield of 1.83% are scheduled to mature in the next six months, $40.1 million with a weighted average yield of 0.66% are scheduled to mature in six months to one year, and $238.1 million with a weighted average yield of 1.52% are scheduled to mature in the following year, representing a total of $326.9 million or 13% of earning assets that are scheduled to mature in the next 24 months.

Loans and Lending Activities

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Dollar Amount Percent of Total Dollar Amount Percent of Total

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Total loans $1,811,135 $1,789,497

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

Loans increased by $21.6 million, or 1%, to $1.811 billion at March 31, 2024 from $1.789 billion at December 31, 2023, primarily as a result of increased commercial real estate and consumer mortgage loans.

Information about industry 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 $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 Company estimates that $88.0 million, or approximately 5% of loans as of March 31, 2024 have direct exposure to the oil and gas industry as compared to $96.1 million, or approximately 5% of loans as of December 31, 2023.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $42.6 million and $38.6 million at March 31, 2024 and December 31, 2023, 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 $807,000 as of March 31, 2024 and $884,000 as of December 31, 2023.

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

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

(In Thousands) March 31, 2024 December 31, 2023

Commercial & industrial loans $70,222 $77,917

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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 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:

At March 31, 2024, the Company had $123.1 million, or 7% of portfolio loans, in the Healthcare sector, $108.6 million, or 6% of portfolio loans, in the Tourism sector, $92.6 million, or 5% of portfolio loans, in the Accommodations sector, $74.0 million, or 4% of portfolio loans, in the Fishing sector, $74.0 million, or 4% of portfolio loans, in the Retail sector, $59.6 million, or 3% of portfolio loans, in the Aviation (non-tourism) sector, and $52.5 million, or 3% in the Restaurant sector.

The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of March 31, 2024:

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

ACL $650 $574 $1,013 $653 $461 $389 $849 $4,589

Credit Quality and Nonperforming Assets

The following table sets forth information regarding our nonperforming loans and total nonperforming assets for the periods indicated:

March 31, December 31,

(In Thousands) 2024 2023

Nonaccrual loans $5,260 $6,069

Loans 90 days past due and accruing — —

Total nonperforming loans $5,260 $6,069

Nonperforming loans guaranteed by government — (1,067)

Net nonperforming loans $5,260 $5,002

Nonperforming purchased receivables 183 808

Net nonperforming assets $5,443 $5,810

Nonperforming loans, net of government guarantees / portfolio loans 0.29 % 0.28 %

Nonperforming loans, net of government guarantees / portfolio loans, net of government guarantees 0.31 % 0.30 %

Nonperforming assets, net of government guarantees / total assets 0.20 % 0.21 %

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

Adversely classified loans, net of government guarantees $7,206 $7,057

Special mention loans, net of government guarantees $9,976 $6,580

Loans 30-89 days past due and accruing, net of government guarantees /portfolio loans 0.03 % 0.03 %

Loans 30-89 days past due and accruing, net of government guarantees /

portfolio loans, net of government guarantees 0.04 % 0.03 %

Allowance for credit losses / portfolio loans 0.97 % 0.97 %

Allowance for credit losses / portfolio loans, net of government guarantees 1.03 % 1.02 %

Allowance for credit losses / nonperforming loans, net of government

guarantees 333 % 345 %

Gross loan charge-offs for the quarter $25 $281

Gross loan recoveries for the quarter ($67) ($185)

Net loan (recoveries) charge-offs for the quarter ($42) $96

Net loan (recoveries) charge-offs year-to-date ($42) ($38)

Net loan (recoveries) charge-offs for the quarter / average loans, for the quarter — % 0.01 %

Net loan (recoveries) charge-offs year-to-date / average loans,

year-to-date annualized — % — %

Allowance for Credit Losses

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

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

Three Months Ended March 31,

(In Thousands) 2024 2023

Balance at beginning of period $17,270 $13,838

Commercial & industrial loans (91) (45) (140) (506)

Agricultural production, including commercial fishing (25) —

Consumer loans — (14)

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and revolving secured by 1-4 family first liens 6 7

Agricultural production, including commercial fishing — — — 15

Consumer loans 1 2

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Net, recoveries 42 60

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

Provision for credit losses

Balance at end of period $17,533 $14,157

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

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

Three Months Ended March 31,

(In Thousands) 2024 2023

Balance at beginning of period $2,418 $1,970

Provision for credit losses 440 550 438 757

(Benefit) provision for credit losses (72) 101

Balance at end of period $2,346 $2,071

The ACL for loans held for investment at March 31, 2024 increased $263,000 from December 31, 2023 primarily due to higher non-government guaranteed loan balances, changes in management's CECL model assumptions, and an increase in the allowance for loans individually evaluated.

These changes were only partially offset by a decrease in the Company's forecasted future economic drivers.

While management believes that it uses the best information available to determine the ACL, unforeseen market conditions and other events could result in adjustment to the ACL, and net income could be significantly affected if circumstances differed substantially from the assumptions used in making the final determination of the ACL.

Deposits are the Company’s primary source of funds.

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.

Total deposits decreased $51.0 million, or 2%, to $2.434 billion as of March 31, 2024 compared to $2.485 billion as of December 31, 2023, primarily due to seasonality.

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

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

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Total deposits $2,434,083 $2,485,055

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 Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 85% of total deposits at March 31, 2024 and 87% of total deposits at December 31, 2023.

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

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:

At March 31, 2024, the Company had $373.6 million in certificates of deposit as compared to certificates of deposit of $331.3 million at December 31, 2023.

At March 31, 2024, $324.2 million, or 87%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $268.5 million, or 81%, of total certificates of deposit at December 31, 2023.

The aggregate amount of certificates of deposit in amounts of $250,000 and greater at March 31, 2024 and December 31, 2023, was $165.9 million and $142.1 million, respectively.

The following table sets forth the amount outstanding of deposits in amounts of $250,000 and greater by time remaining until maturity and percentage of total deposits as of March 31, 2024:

Time Certificates of Deposit

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Total $165,926 100 %

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.

At March 31, 2024, 70% of total deposits were held in business accounts and 30% of deposit balances were held in consumer accounts.

Northrim had approximately 33,000 deposit customers with an average balance of $73,000 as of March 31, 2024.

Northrim had 19 customers with balances over $10 million as of March 31, 2024 which accounted for $459.9 million, or 19%, of total deposits.

Uninsured deposits totaled approximately $989.5 million or 41% of total deposits as of March 31, 2024 compared to $1.0 billion or 41% of total deposits as of December 31, 2023.

Since interest rates began increasing in 2023, Northrim has taken a proactive, targeted approach to increase deposit rates.

There was no unusual deposit activity during the first three months of 2024.

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 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.

At March 31, 2024, 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 $359.5 million as of March 31, 2024.

The Company has outstanding advances of $13.6 million as of March 31, 2024 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 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 $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.

The Federal Reserve Bank of San Francisco (the “Federal Reserve Bank”) is holding $70.0 million of securities as collateral to secure the Company's ability to take advances through the discount window on March 31, 2024.

There were no discount window advances outstanding at either March 31, 2024 or December 31, 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 $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.

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $959.4 million at March 31, 2024 and $975.9 million at December 31, 2023.

At March 31, 2024 and December 31, 2023, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

Long-term Borrowings.

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

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of March 31, 2024 or December 31, 2023.

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 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.

As of March 31, 2024, 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 $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.

The Company had cash and cash equivalents of $80.4 million, or 3% of total assets at March 31, 2024 compared to $118.5 million, or 4% of total assets as of December 31, 2023.

The decrease in cash and cash equivalents since the end of 2023 is primarily due to an increase in loans and a decrease in deposits.

The Company had other comprehensive income, net of tax, of $404,000 for the three-month period ending March 31, 2024 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 $17.2 million as of March 31, 2024.

Accumulated unrealized losses, net of income taxes on held to maturity securities, which are not recorded in shareholders' equity, are $2.4 million as of March 31, 2024.

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 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.

As of March 31, 2024, the weighted average maturity of available for sale securities is 2.7 years, compared to 2.8 years at December 31, 2023, and 3.3 years at December 31, 2022.

At March 31, 2024, $150.9 million available for sale securities mature within one year, $156.0 million mature within one to two years, and $158.1 million mature within two to three years.

Our total unfunded commitments to fund loans and letters of credit at March 31, 2024 were $483.0 million.

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

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.

At March 31, 2024, certificates of deposit totaling $324.2 million are scheduled to mature over the next 12 months and may be withdrawn from the Bank.

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

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

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.

Management believes that cash requirements to fund future non-deposit and non-borrowing liabilities, including operating lease liabilities and other liabilities, as of March 31, 2024, are not material to the Company's liquidity position as of March 31, 2024.

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

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

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

At March 31, 2024, our liquid assets, which include investments and loans maturing within a year, were $515.6 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 $712.3 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.

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 $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 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.

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 $5.5 million for the first three months of 2024, 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 provided by investing activities was $22.6 million for the same period, primarily due to maturities and calls of available for sale securities which was only partially offset by an increase in loans.

Net cash used by financing activities in the same period was $55.2 million, primarily due to a decreases in deposits and to a lesser extent 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 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 repurchased 15,034 shares of its common stock under the Company's previously announced repurchase programs in the first three months of 2024.

At March 31, 2024, there are 110,000 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 September 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 March 31, 2024, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

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

Management intends to maintain capital ratios for the Bank in 2024, exceeding the FDIC’s requirements for the “well-capitalized” classification.

The capital ratios for the Company exceed those for the Bank primarily because the $10 million trust preferred securities offering completed in the fourth quarter of 2005 is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our

financial statements.

The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital.

As a result, the Company has $10 million more in regulatory capital than the Bank at September 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 March 31, 2024, which explains most of the difference in the capital ratios for the two entities.

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

September 30, 2023

March 31, 2024

Total risk-based capital 8.00% 10.00% 12.47% 11.02%

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The SEC defines “critical accounting policies” as those that require application of management's most difficult, subjective or complex judgments as a result of the need to make “critical accounting estimates”, which are estimates that involve estimation uncertainty that has had or is reasonably likely to have a material impact on the Company's financial condition or results of operations.

The Company's critical accounting policies include allowance for credit losses, valuation of goodwill and other intangible assets, the valuation of mortgage servicing rights, and fair value.

There have been no material changes to the valuation techniques or models, that affect our estimates during 2023.

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

There have been no material changes to the valuation techniques or assumptions within the models, that affect our estimates during 2024 except as noted below.

Allowance for Credit Losses Policy :

For loan pools that utilize the discounted cash flow ("DCF") method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD").

The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables.

As of December 31, 2023, management used a DCF method for eight of its 11 loan pools, which represented 96% of the amortized cost basis of total loan pools at December 31, 2023.

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

As of December 31, 2023, management utilized and forecasted 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 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.

Peers differ by loan segment;

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

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

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

• The percentage of total charge offs for the loan segment during the recessionary period from the fourth quarter of 2008 to the fourth quarter of 2012 is within 1 standard deviation of the Company's data.

As of January 1, 2024, management uses a DCF method for seven of its 11 loan pools, which represented 95% of the amortized cost basis of total loan pools at March 31, 2024.

The weighted average remaining life method was used for the remaining four loan pools;

management changed the consumer pool to the remaining life method primarily because the regression model under the DCF model for this pool fell outside of acceptable levels for certain statistical tests performed by management to determine the appropriateness of model method selections.

Additionally, as of January 1, 2024, management utilizes and forecasts both U.S.

unemployment and U.S.

Gross Domestic Product in a multi-loss driver model for all of the loan pools that utilize the DCF method.

The Company's regression models for PD as of January 1, 2024 utilize peer historical loan level default data.

Peers for this purpose include banks in the United States with total assets between $1 billion and $5 billion whose loan portfolios share certain characteristics with the Company's loan portfolio.

Peers differ by loan segment;

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

• The percentage the balance of the loan segment compared to total loans over a five year look back period is within 0.5 standard deviations of the Company's data, and

• The percentage of total charge offs for the loan segment over a five year look back period is within 0.25 standard deviation of the Company's data;

• The percentage of total charge offs for the loan segment during the recessionary period from the fourth quarter of 2008 to the fourth quarter of 2012 is within 0.25 standard deviation of the Company's data.

There were no other changes to estimates and assumptions used in the Company's Allowance for Credit Losses since December 31, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

Our assessment of market risk as of March 31, 2024 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, 2023.

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