What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2025-03-10 compared with 2024-03-08 · 141 added, 130 removed, 760 unchanged (26% of the section changed)

10 unchanged sentences

Executive Overview

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 $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.

Net income increased 46% to $37.0 million or $6.62 per diluted share for the year ended December 31, 2024, from $25.4 million, or $4.49 per diluted share, for the year ended December 31, 2023.

The increase in net income is primarily the result of a $7.3 million increase in net income in the Home Mortgage Lending segment, as well as a $4.9 million increase in net income in the Community Banking segment.

On October 31, 2024, the Company completed the acquisition of SCF in an all cash transaction valued at approximately $53.9 million.

The Company determined that a new Specialty Finance segment is appropriate for the Company upon completion of the acquisition.

The Specialty Finance segment also includes Northrim Funding Services, which was previously reported in the Community Banking segment.

Net income in the Specialty Finance segment decreased 25% to $1.8 million in 2024 from $2.5 million in 2023, primarily due to $1.1 million in one-time deal related costs.

Highlights for the year ended December 31, 2024 are as follows:

• 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.

• Net income in the Community Banking segment increased 19% or $4.9 million, to $30.3 million in 2024 as compared to 2023.

This increase was primarily the result of a 7% increase in net interest income due to increased interest income on loans which was only partially offset by higher interest expense on deposits.

• Net income in the Home Mortgage Lending segment increased 292%, or $7.3 million, to income of $4.8 million in 2024 from a loss of $2.5 million in 2023 driven by an increase in production volume sold to $609.2 million in 2024 from $376.2 million in 2023.

Production volume outside of Alaska increased $85 million in 2024 compared to 2023, while production in Alaska increased $148 million in 2024 compared to 2023.

Additionally, interest income on home mortgages held for investment increased in 2024 due to increased average balances.

• The net interest margin increased to 4.28% in 2024 from 4.14% in 2023 mostly due to an increase in average yields on interest earning assets in 2024 compared to 2023 as a result of higher interest rates, as well as an increase in the mix of earning assets which includes a higher percentage of loans in 2024 versus 2023.

These factors were only partially offset by an increase in the cost of interest-bearing liabilities.

• Loans increased 19% to $2.13 billion at December 31, 2024 compared to $1.79 billion at December 31, 2023, and deposits increased 8% to $2.68 billion at December 31, 2024 compared to $2.49 billion at December 31, 2023.

• 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.

• Nonperforming loans, net of government guarantees, increased to $7.5 million at the end of 2024 compared to $5.0 million at the end of 2023, while total adversely classified loans, net of government guarantees at December 31, 2024 increased to $9.6 million from $7.1 million at December 31, 2023.

The Allowance for Credit Losses (“ACL”) totaled 1.03% of total portfolio loans at December 31, 2024, compared to 0.97% at December 31, 2023.

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The Company paid cash dividends of $2.46 per share in 2024 and $2.40 per share in 2023.

• 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 $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.

• Total shareholders' equity was $267.1 million as of December 31, 2024, up 14% from $234.7 million a year ago.

Shareholders' equity was positively impacted by the fair value of the available for sales securities portfolio which increased $9.4 million in 2024 as compared to 2023.

The Company continued to maintain strong regulatory capital ratios with Tier 1 Capital to Risk Adjusted Assets of 9.76% at December 31, 2024.

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Effective tax rate 21 % 20 % 20 % 22 % 23 % 21 % — %

20 % 20 % 22 % 23 % 21 % 17 % 3 %

Number of banking offices (6)

20 20 19 18 17 16 5 %

Number of employees (FTE) (8)

472 469 451 438 431 430 2 %

Community Banking employees (FTE) 329 325 329 315 305 304 2 %

Home Mortgage Lending employees (FTE) 142 140 133 130 126 120 3 %

Specialty Finance employees (FTE) 32 7 7 6 7 7 36 %

Total number of employees (FTE) 503 472 469 451 438 431 3 %

1 These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with Part II Item 7.

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See reconciliation to shareholders' equity to total assets, the most comparable GAAP measurement 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 2023.

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.

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.

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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.

The law includes significant changes to the U.S.

corporate tax system, including a Federal corporate rate reduction from 35% to 21%.

In 2017, the Company applied the newly enacted corporate federal income tax rate of 21%, reducing the value of the Company's net deferred tax asset, resulting in approximately a $2.7 million increase in tax expense.

In 2018, the Company finalized changes related to the reduction in the federal tax rate which resulted in a $470,000 reduction in tax expense.

7 Number of banking offices does not include RML locations.

6 Number of banking offices does not include RML, NFS, or SCF locations.

2024 number of banking offices includes 20 full service branches.

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

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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 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

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Efficiency ratio 67.60 % 72.64 % 68.76 % 66.99 % 66.47 % 75.43 %

9 Amount represents net interest income before provision for loan losses.

9 Amount represents net interest income before provision for credit losses.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.

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Net interest income in 2024 was $113.2 million, compared to $103.3 million in 2023.

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.

The increase in 2024 as compared to 2023 was primarily the result of increased interest on loans which was only partially offset by decreases of interest income on available for sale securities and deposits in other banks, as well as an increase in interest expense on deposits.

Interest income on loans increased $26.1 million in 2024 as compared to 2023 due to an increase in interest rates and higher net average interest-earning asset balances.

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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.

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

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 rate:

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Taxable long-term investments (2,501) 644 (1,857) 2,056 4,761 6,817

Non-taxable long-term investments — — — — — —

Interest-bearing deposits in other banks (2,365) 63 (2,302) (6,833) 5,812 (1,021)

9 unchanged sentences

Provision for Credit Losses

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”).

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(In Thousands) 2024 2023 2022

Credit loss expense on loans held for investment $3,394 $972 ($3,779)

Credit loss expense on unfunded commitments 448 874 (320)

Credit loss expense on available for sale debt securities — — —

Credit loss expense on held to maturity securities — — —

Credit loss expense on purchased receivables — — —

Provision for credit loss expense on loans held for investment $3,276 $3,394 $972

Provision for credit loss (benefit) expense on unfunded commitments (108) 448 874

Provision for credit loss expense on available for sale debt securities — — —

Provision for credit loss expense on held to maturity securities — — —

Provision for credit loss expense on purchased receivables 125 — —

Total credit loss expense $3,293 $3,842 $1,846

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.

The provision for credit losses on loans held for investment remained relatively consistent in 2024 compared to 2023 due to continued growth in the portfolio and the fact that forecasted economic conditions remain stable between the two periods.

The decrease in the provision for credit losses on unfunded commitments in 2024 compared to 2023 in primarily due to a change in the mix of unfunded commitments.

In general the increase in the provision for credit losses in 2023 as compared to 2022 is primarily the result of increased portfolio loan 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.

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.

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Service charges on deposit accounts 2,348 304 15 % 2,044 433 27 % 1,611

Interest rate swap income 540 479 785 % 61 (96) (61) % 157

Commercial servicing revenue 486 (68) (12) % 554 (1,074) (66) % 1,628

Gain (loss) on marketable equity securities 465 345 (288) % 120 1,239 111 % (1,119)

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

Gain (loss) on sale of securities 112 112 100 % — — NM —

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

Other income 2,576 87 3 % 2,489 (38) (2) % 2,527

1 unchanged sentence

2024 Compared to 2023

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.

The most significant item contributing to the increase in other operating income in 2024 was an increase in mortgage banking income, followed by an increase in purchased receivable income.

Bankcard fees, service charges on deposit accounts, interest rate swap income, gain on marketable equity securities, and gain on sale of securities also increased.

These increases were partially offset by a decrease in commercial servicing revenue.

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 57% of total other operating income in 2024 and 48% in 2023.

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.

Mortgage banking income increased in 2024 compared to 2023 mainly due to an increase in mortgage loans originated and sold which increased to $609.2 million in 2024 from $376.2 million in 2023.

Approximately one third of the overall increase in mortgage originations sold in 2024 as compared to 2023 is from outside of Alaska and the two thirds is from production in the state of Alaska.

Purchased receivable income increased in 2024 as compared to 2023 primarily due to the acquisition of SCF in October 2024.

Purchased receivable income from operations at Northrim Funding Services remained relatively consistent with the prior year at $4.4 million.

Bankcard fees and service charges on deposit accounts increased in 2024 due an increase in the number of the Company's deposit customers which led to higher transaction volume as compared to 2023, as well as an increase in some transactional fees.

Gain on marketable equity securities increased in 2024 as compared to 2023 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.

Gain on sale of securities increased in 2024 as compared to 2023 due to the sale of marketable equity securities in 2024.

Commercial servicing revenue decreased in 2024 as compared to 2023 primarily due to a decrease in commercial loan servicing balances.

Other Operating Expense

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OREO operating expense 7 (9) (56) % 16 (618) (97) % 634

Impairment on OREO 123 123 100 % — — NM —

Impairment on OREO — (123) (100) % 123 123 100 % —

Rental income on OREO — 4 100 % (4) 544 99 % (548)

5 unchanged sentences

Other operating expense increased by 11% in 2024 as compared to 2023.

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.

The decrease in 2023 is primarily due to lower pretax income.

The Company's effective tax rate decreased to 19.7% in 2023 from 20.1% in 2022, primarily due to an increase in tax exempt income and low income housing tax credits as a percentage of pre-tax income in 2023 compared to 2022.

The largest increase was in salaries and other personnel expense.

Salaries and other personnel expense increased $3.1 million in the Home Mortgage Lending segment due to increased mortgage production which resulted in higher loan officer commissions.

Salaries and other personnel expense increased $2.1 million in the Community Banking segment primarily due to higher profit share expense, which generally increases when net income increases to reflect a higher payout to employees.

Data processing expense, occupancy expense, insurance expense, marketing expense and professional and outside services also increased in 2024 compared to 2023 due to the increase in branch locations, increased customer and transaction volume, increased FDIC insurance costs associated with asset growth, and increased professional and outside services related to the acquisition of SCF.

Other real estate owned (“OREO”) expense, net of rental income and gains on sale also increased in 2024 primarily due to smaller gains on sale of OREO properties as compared to 2023 as subsequent proceeds were received related to a government guarantee on an OREO property sold in December 2022.

The provision for income taxes increased $3.8 million or 61%, to $10.0 million in 2024 as compared to 2023.

The increase in 2024 is primarily due to higher pretax income.

The Company's effective tax rate increased to 21.3% in 2024 from 19.7% in 2023, primarily due to a decrease in tax exempt income and low income housing tax credits as a percentage of pre-tax income in 2024 compared to 2023.

FINANCIAL CONDITION

1 unchanged sentence

The composition of our investment securities portfolio, which includes securities available for sale, held-to-maturity investments, and marketable equity securities, reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income.

The investment securities portfolio also mitigates interest rate and credit risk inherent in the loan portfolio, while providing a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral or through repurchase agreements), and collateral for certain public funds deposits.

The investment securities portfolio also mitigates credit risk inherent in the loan portfolio, while providing a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral or through repurchase agreements), and collateral for certain public funds deposits.

Investment securities designated as available for sale comprised 91% of the portfolio as of December 31, 2024 and are available to meet liquidity requirements in a contingency situation.

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

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

Investment securities at December 31, 2024 decreased $163.8 million, or 24%, to $524.1 million from $687.8 million at December 31, 2023.

7 unchanged sentences

Treasury and government sponsored entities $444,370 $432,931

Municipal Securities 820 816

Corporate Bonds 9,009 8,795

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1.81 % 2.22 % — % — % 2.10 %

Municipal securities

Balance $816 $— $— $— $816

Weighted average yield (1)

2.12 % — % — % — % 2.12 %

Corporate bonds

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The legal lending limit for the Bank was $37.0 million at December 31, 2024.

At December 31, 2023, the Company had two relationships whose total direct and indirect commitments exceeded $34.5 million;

At December 31, 2024, the Company had one relationship whose total direct and indirect commitments exceeded $37.0 million;

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 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.

The Company's "Land and Expand" program was designed to increase both loans and deposits as we attract a broader customer base and convert new PPP customers into full banking relationships.

The following table presents growth information for loans and loans excluding PPP loans:

The Company's loans have grown significantly in recent years.

Management attributes higher growth in loans in 2024 and 2023 to our ability to attract new customers through our outreach to the community.

The Company's “Land and Expand” program was designed to increase both loans and deposits as we attract a broader customer base and convert new customers into full banking relationships.

The following table presents growth information for loans and loans excluding Paycheck Protection Program (“PPP”) loans:

Years Ended December 31,

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The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $45.8 million and $38.6 million at December 31, 2024 and 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 $884,000 and $786,000 as of December 31, 2023 and 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 $1.1 million and $884,000 as of December 31, 2024 and 2023, respectively.

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:

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$104.3 million, or 5% in the Accommodations sector;

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

$87.4 million, or 4% in Retail loans;

$84.6 million, or 4% of portfolio loans, in the Aviation (non-tourism) sector;

$76.5 million, or 4% in the Fishing sector;

and $55.1 million, or 3% in the Restaurants and Breweries sector.

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Credit Quality and Nonperforming Assets

The following table sets forth information regarding our nonperforming loans and total nonperforming assets:

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

December 31, December 31,

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portfolio loans, net of government guarantees 0.03 % 0.03 %

Allowance for credit losses / portfolio loans 0.97 % 0.92 %

Allowance for credit losses / portfolio loans, net of government guarantees 1.02 % 0.99 %

Allowance for credit losses / nonperforming loans, net of government

Allowance for credit losses - loans / portfolio loans 1.03 % 0.97 %

Allowance for credit losses - loans / portfolio loans, net of government guarantees 1.10 % 1.02 %

Allowance for credit losses - loans / nonperforming loans, net of government

guarantees 292 % 345 %

Allowance for credit losses - purchased receivables / purchased receivables 4.69 % — %

Allowance for credit losses - purchased receivables / nonperforming purchased receivables 96.84 % — %

Gross loan charge-offs for the quarter $149 $281

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year-to-date annualized (0.01) % 0.00 %

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 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’s nonperforming assets, net of government guarantees increased to $11.6 million at December 31, 2024 as compared to $5.8 million at December 31, 2023.

This increase was mostly due to the addition of an SCF nonaccrual loan and an SCF purchased receivable relationship, which were only partially offset by paydowns to nonaccrual loans in 2024.

There was interest income of $241,000 and $656,000 recognized in net income for 2024 and 2023, 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 Company received proceeds from the guarantee in the third quarter of 2023 and first quarter of 2024 which were recorded as a gain on sale of OREO.

The following summarizes OREO activity for the periods indicated:

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

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.

The Company did not make any loans to facilitate the sale of OREO in 2024, 2023, or 2022.

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

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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 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.

The decrease in potential problem loans at December 31, 2024 from December 31, 2023 was primarily due to paydowns to existing potential problem loans in 2024 that were partially offset by the addition of two new potential problem loans.

Allowance for Credit Losses

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

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 ACL for loans increased to $22.0 million at December 31, 2024 compared to $17.3 million at December 31, 2023 primarily due to an increase in loan balances, net of guarantees.

The Company determined that an ACL of $22.0 million, or 1.03% of portfolio loans, is appropriate as of December 31, 2024 based on our analysis of the current credit quality of the portfolio and forecasted economic conditions.

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Purchased receivable income was $7.1 million and $4.5 million in 2024 and 2023, respectively.

The increase in purchased receivable balances at December 31, 2024 and the increase in purchased receivable income as compared to the prior year is primarily due to the acquisition of SCF on October 31, 2024.

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

1 unchanged sentence

Balance at beginning of year $— $— $—

Cumulative effect of adopting ASU 2016-13 — — (73)

Impact from acquisition of Sallyport Commercial Finance, LLC 3,524 — —

Charge-offs — — —

34 unchanged sentences

Total $217,074 100 %

The Company offers the Certificate of Deposit Account Registry Service® (CDARS®) as a member of Promontory Interfinancial Network, LLCSM (Network).

The Company offers the Certificate of Deposit Account Registry Service® (CDARS®) as a member of IntraFi® Network SM (Network).

When a Network member places a deposit using CDARS, that certificate of deposit is divided into amounts under the standard FDIC insurance maximum ($250,000) and is allocated among member banks, making the large deposit eligible for FDIC insurance.

1 unchanged sentence

Uninsured deposits totaled $1.1 billion or 40% of total deposits as of December 31, 2024 compared to $1.0 billion or 41% of total deposits as of December 31, 2023.

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

As interest rates continued to increase in 2024, Northrim took a proactive, targeted approach to increase deposit rates and retain deposit customers.

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

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The Company paid $389,000 and $330,000 in interest on these advances in 2024 and 2023, 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.

Additionally, the Company has a short-term $9.8 million advance from the FHLB outstanding as of December 31, 2024 at an interest rate of 4.62% which resets daily.

There were no additional advances outstanding as of December 31, 2023.

The Company had an average short-term FHLB advance of $9.8 million in 2024 compared to an average short-term FHLB advance of $21.8 million in 2023.

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.

The Company paid $528,000 and $1.2 million in interest expense on short-term advances in 2024 and 2023, respectively.

Federal Reserve Bank :

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The Company paid less than $1,000 in interest in 2024 and 2023 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 Federal Reserve Bank is not holding any 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, 2024.

There were no BTFP advances outstanding at December 31, 2024, 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.

The Federal Reserve Bank ended the BTFP on March 11, 2024.

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, 2024 or 2023.

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.

The Company is subject to provisions under Alaska state law which generally limits the amount of outstanding debt to 35% of total assets or $1.1 billion at December 31, 2024 and $975.9 million at December 31, 2023.

Junior Subordinated Debentures

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These securities are treated as Tier 1 capital by the Company’s regulators for capital adequacy calculations.

The interest cost to the Company of these securities was $692,000 in 2023.

The interest cost to the Company on these securities was $717,000 in 2024 and $693,000 in 2023.

At December 31, 2024, the securities had an interest rate of 5.99%.

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The Company had cash and cash equivalents of $62.7 million, or 2% of total assets at December 31, 2024 compared to $118.5 million, or 4% of total assets as of December 31, 2023.

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 decrease in cash and cash equivalents is primarily due to an increase in loans, the acquisition of SCF, and the repayment of debt.

These uses of cash were only partially offset by an increase in deposits and the maturity available for sale investments, net of purchases in 2024.

The Company had cumulative other comprehensive losses, net of tax, of $7.0 million in 2024, primarily due to unrealized holding losses on available for sale securities due to increases in interest rates.

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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.

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

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

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

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.

At December 31, 2024, our liquid assets, which include investments and loans maturing within a year, were $1.01 billion.

Our funds available for borrowing under our existing lines of credit were $566.8 million.

Given these sources of liquidity and our expectations for customer demands for cash and for our operating cash needs, we believe our sources of liquidity to be sufficient in the foreseeable future.

As shown in the Consolidated Statements of Cash Flows included in Part II.

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 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 $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.

Item 8 of this report, net cash used by operating activities was $8.7 million in 2024 and net cash provided by operating activities was $38.8 million in 2023.

In 2024, net cash was used primarily in connection with origination of loans held for sale, which was only partially offset by net income and net proceeds from the sale of loans held for sale.

In 2023, proceeds from the sale of loans held for sale net of proceeds used in originations, as well as net income were largely the source of net cash provided.

Net cash used by investing activities was $197.6 million in 2024 primarily due to an increase in loans and the acquisition of SCF.

These uses of cash were only partially offset by proceeds from maturities and sales of investment securities.

Net cash used by investing activities was $254.9 million in 2023 primarily due to increases in loans and to a lesser extent, purchases of available for sale and held to maturity securities and an increase in purchased receivables.

Financing activities provided cash of $150.6 million in 2024 and $75.3 million in 2023, respectively.

Financing activities provided cash in 2024 due to increases in deposits that were only partially offset by the repayment of borrowings and the payment of cash dividends to shareholders.

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.

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2020 327,000 $30.51

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.

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

At December, 31, 2024, there were 110,000 shares available under the previously announced stock repurchase program, which lapsed on December 31, 2024, leaving zero shares currently available for repurchase.

The Company may continue to repurchase its stock from time-to-time depending upon market conditions, but we can make no assurances that we will continue this program and the Board of Directors has not presently authorized any repurchases of its common stock for 2025.

The table below shows the cumulative effect the repurchase of common shares since the inception of the Company on diluted earnings per share:

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

requirements address both risk-based capital and leverage capital.

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

We believe as of December 31, 2024, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

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Allowance for Credit Losses Policy :

The Company adopted CECL on January 1, 2021.

The Company's Executive Loan Management Committee and Asset Liability Committee are both involved in monitoring various aspects of the Company's ACL methodology.

The Executive Loan Management Committee reviews and approves significant assumptions used in model at least annually.

The Company's Audit Committee provides board oversight of the ACL process and reviews and approves the ACL methodology on a quarterly basis.

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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 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.

In 2024, the Company uses a DCF method for seven of its 11 loan pools, which represent 96% of the amortized cost basis of total loan pools at December 31, 2024.

Prior to 2024, the Company used a DCF method for eight of its 11 loan pools.

The weighted average remaining life method is used for the remaining 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”).

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.

The Company's regression models for PD utilize the Company's actual historical loan level default data.

The Company's regression models for PD utilize peer historical loan level default data.

The Company determines a reasonable and supportable forecast and applies that forecast to the regression model to estimate defaults over the forecast period.

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, 2023 and 2022, management utilizes and forecasts U.S.

Management leverages economic projections from the Federal Reserve to inform its loss driver forecasts over the Company's four quarter forecast period.

As of December 31, 2024, management utilizes and forecasts U.S.

unemployment and U.S.

gross domestic product as the loss drivers for all of the loan pools that utilize the DCF method.

The Company added U.S.

gross domestic product as a loss driver in 2024 because we determined that there is better model fit using this multi-factor model.

The Company's regression models for PD as of December 31, 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;

the Company refined the peer groups in 2024 in order to add more precision to the model.

A bank is included in the peer group for each loan segment in 2024 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;

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

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.

The Company's regression models for PD as of December 31, 2023 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:

a bank is included in the peer group for each loan segment in 2023 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;

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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, which are unchanged as of December 31, 2023:

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, 2024 and December 31, 2023:

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

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Commercial loans are generally secured by accounts receivable, inventory and other business assets.

Also included in commercial loans are our PPP loans originated during 2020 and 2021.

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

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Consumer - Loans used for personal use, which may be secured or unsecured, and customer overdrafts.

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

The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool.

Obligations of states and political subdivisions in the US - This category of loans includes all loans made to states, counties municipalities, school districts, drainage and sewer districts, and Indian tribes in the U.S.

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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%.

As of December 31, 2024, management utilized the Federal Reserve's median forecasts of national unemployment and national gross domestic product.

If the four-quarter national unemployment rate forecast had been approximately 10% higher and the four-quarter national gross domestic product forecast been 42% lower, which represents the Federal Reserve's more conservative forecasts, our ACL for loans would have increased $1.4 million, or 7%.

As of December 31, 2024, if the four-quarter national unemployment rate forecast had been approximately 35% higher and the four-quarter national gross domestic product forecast been 4% higher, which represent forecasts at approximately the historical mean, our ACL for loans would have increased $2.7 million, or 13%.

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:

Management performs an impairment analysis for the intangible assets with indefinite lives on an annual basis as of December 31.

Management performs an impairment analysis for the intangible assets with indefinite lives at each reportable segment on an annual basis as of December 31.

Additionally, goodwill and other intangible assets with indefinite lives are evaluated on an interim basis when events or circumstances indicate impairment potentially exists.

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increases in the Company's market share of mortgage originations;

and increases in the Company's stock price.

Significant negative inputs to the qualitative assessment included the muted pace of growth in the Alaska economy and a decline in home mortgage originations.

We believe that the positive inputs to the qualitative assessment noted above outweigh the negative inputs for both of the Company's operating segments, and we therefore concluded that it is more likely than not that the fair value of the Company exceeds its carrying value at December 31, 2023 and that no potential impairment existed at that time.

increases in purchased receivable income following the acquisition of SCF, and increases in the Company's stock price.

Significant negative inputs to the qualitative assessment included the muted pace of growth in the Alaska economy and a decline in home mortgage originations compared to historical activity.

We believe that the positive inputs to the qualitative assessment noted above outweigh the negative inputs for all of the Company's operating segments, and we therefore concluded that it is more likely than not that the fair value of the Company exceeds its carrying value at December 31, 2024 and that no potential impairment existed at that time.

Servicing rights:

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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 evaluates its estimates, including those that materially affect the financial statements and are related to investments, 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.

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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