NORTHRIM BANCORP INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the unaudited consolidated financial statements of Northrim BanCorp, Inc. (the “Company”) and the notes thereto presented elsewhere in this report and with the Company’s Annual Report on Form 10-K for the year ended December 31, 2024. Except as otherwise noted, references to “we”, “our”, “us” or “the Company” refer to Northrim BanCorp, Inc. and its subsidiaries that are consolidated for financial reporting purposes. Note Regarding Forward Looking-Statements This quarterly report on Form 10-Q includes “forward-looking statements,” as that term is defined for purposes of Section 21E of the Securities Exchange Act of 1934, as amended, which are not historical facts. These forward-looking statements describe management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of the Company’s style of banking, and the strength of the local economy. All statements, other than statements of historical fact, regarding our financial position, business strategy, management’s plans and objectives for future operations are forward-looking statements. We use words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management’s current plans and expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations, and those variations may be both material and adverse. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: descriptions of the financial condition, results of operations, asset based lending volumes, asset and credit quality trends and profitability and statements about the expected financial benefits and other effects of the acquisition of Sallyport Commercial Finance, LLC (“Sallyport”) by Northrim Bank; expected cost savings, synergies and other financial benefits from the acquisition of Sallyport by Northrim Bank might not be realized within the expected time frames and costs or difficulties relating to integration matters might be greater than expected; the ability of Northrim and Sallyport to execute their respective business plans; potential further increases in interest rates; the value of securities held in our investment portfolio; impact of the results of government initiatives, including tariffs, on the regulatory landscape, natural resource extraction industries, and capital markets; the impact of declines in the value of commercial and residential real estate markets, high unemployment rates, inflationary pressures and slowdowns in economic growth; changes in banking regulation or actions by bank regulators; potential further increases in inflation, supply-chain constraints, and potential geopolitical instability, including the wars in Ukraine and the Middle East; financial stress on borrowers (consumers and businesses) as a result of higher rates or an uncertain economic environment; the general condition of, and changes in, the Alaska economy; our ability to maintain or expand our market share or net interest margin; the sufficiency of our allowance for credit losses and the accuracy of the assumptions or estimates used in preparing our financial statements, including those related to current expected credit losses accounting guidance; our ability to maintain asset quality; our ability to implement our marketing and growth strategies; our ability to identify and address cyber-security risks, including security breaches, “denial of service attacks,” “hacking,” and identity theft; disease outbreaks; and our ability to execute our business plan. Further, actual results may be affected by competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. In addition, there are risks inherent in the banking industry relating to collectability of loans and changes in interest rates. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Part II. Item 1A Risk Factors of this report and Part I. Item 1A in the Company's Annual Report on Form 10-K for the year ended December 31, 2024, as well as in our other filings with the Securities and Exchange Commission. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition, you should note that forward looking statements are made only as of the date of this report and that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements, other than as required by law. 44 Update on Economic Conditions The Alaska Department of Labor (“DOL”) has reported Alaska’s seasonally adjusted unemployment rate in February of 2025 was 4.7% compared to the U.S. rate of 4.1%. The total number of payroll jobs in Alaska, not including uniformed military, increased 1.6% or 5,200 jobs between February of 2024 and February of 2025. According to the DOL, the Oil and Gas sector had the largest growth rate in new jobs of 7.5% through February 2025 compared to the prior year, up 600 direct jobs. The Construction sector added 1,000 positions for a year-over-year growth rate of 6.1% in February of 2025. The larger Health Care sector grew by 1,400 jobs for an annual growth rate of 3.4%. Transportation, Warehousing and Utilities added 1,100 jobs for a 5% growth rate. Leisure and Hospitality increased 500 jobs year-over-year through February of 2025, up 1.6%. The Government sector grew by 600 jobs for 0.7% growth, adding 100 Federal jobs, and 500 State positions in Alaska over the same period. Declining sectors between February 2024 and February 2025 were Manufacturing (primarily seafood processing) shrinking 500 positions (-4.4%), Financial Activities, down 100 jobs (-0.9%), and Retail lost 100 jobs (-0.3%). Alaska’s seasonally adjusted personal income was $56.5 billion in the fourth quarter of 2024 according to the Federal Bureau of Economic Analysis (“BEA”). This was an annualized improvement in the fourth quarter of 4.7% for Alaska, compared to the national average of 4.6%. Alaska enjoyed an annual personal income improvement of 6% in 2024 compared to the U.S. increase of 5.4%, ranking Alaska 6 th best in the nation. The $650 million increase in personal income in the fourth quarter in Alaska came from a $446 million increase in net earnings from wages, $154 million growth in government transfer receipts, and a $49 million increase in investment income. Alaska’s Gross State Product (“GSP”) in 2024, reached $70 billion for the first time according to the BEA. Alaska’s inflation adjusted “real” GSP increased 1.5% in 2024 and 4% annualized in the fourth quarter of 2024, placing Alaska third best of all 50 states for the quarter. The average U.S. GDP growth rate was 2.8% for the year and 2.4% in the fourth quarter of 2024. Alaska’s real GSP improvement in the fourth quarter of 2024 was primarily caused by growth in the Mining, Oil & Gas; Transportation & Warehousing; and to a lesser extent the Health Care sector. Construction played a larger role in the annual state GSP performance. Based on data from the U.S. Chamber of Commerce, Alaska exported $5.2 billion in goods to foreign countries in 2023. China is the largest importer of Alaska’s products at $1.2 billion, followed by Japan at $710 million and Korea at $702 million in 2023. Fish and related maritime products accounted for the largest volume at $2.1 billion, followed by minerals and ores $1.5 billion, and primary metals at $780 million in 2023. Chief Credit Officer and Bank Economist Mark Edwards stated, “President Trump’s significant changes to international tariffs has created uncertainty in trade markets. At this time, it is unknown how each country will respond. Alaska’s natural resources are highly valued commodities throughout the world. If issues arise with one country, such as China, it is most likely that Alaska’s products will be redirected to other markets like Japan and South Korea or sold domestically in the United States. Canada is the largest long-term investor in Alaska’s mining industry. This involves significant fixed capital investments made over decades that are unlikely to shift dramatically in the short-run. According to the US Bureau of Labor Statistics, the Consumer Price Index, or CPI, for the U.S. increased 2.8% between February of 2024 and February of 2025. In Alaska, the rate of increase was 2.9% for the same time period. Food and beverage; housing rents and mortgage rates; transportation; and medical care costs are the largest causes for inflation. Declining motor fuel prices, new and used car prices, and household furnishing costs have helped moderate inflationary pressures in Alaska. The monthly average price of Alaska North Slope (“ANS”) crude oil was $76.39 in January, $74.03 in February and $73.39 in March of 2025. The Alaska Department of Revenue (“DOR”) calculated ANS crude oil production was 461 thousand barrels per day (“bpd”) in Alaska’s fiscal year ending June 30, 2024. Through nine months of the fiscal year 2025, production has averaged slightly above the State of Alaska forecast of 467 thousand bpd. In the Spring 2025 Revenue Forecast published March 12, 2025, the DOR expects production to continue to grow to 663 thousand 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. A partnership between Santos and Repsol is constructing the new Pikka oil field and ConocoPhillips is developing the large new Willow oil field. There are also a number of smaller new oil fields in Alaska’s North Slope that are contributing to the State of Alaska’s production growth estimates. The Alaska Permanent Fund is seeded annually by the oil wealth the State continues to save each year and has grown significantly over 40 years of successful investment. As of February 28, 2025 the funds value was $81.35 billion. According to 45 the DOR it is scheduled to contribute $3.7 billion to the Alaska General Fund in fiscal year 2025 for general government spending and to pay the annual dividend to Alaskan residents. According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 6.2% in 2024 to $510,109, following a 5.2% increase in 2023. This was the seventh consecutive year of price increases. The average sales price for single family homes in the Matanuska Susitna Borough rose 3.8% in 2024 to $412,859, after increasing 4% in 2023. 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 for Northrim Bank (the “Bank”) occurs. The Alaska Multiple Listing Services reported a 3.4% increase in the number of units sold in Anchorage when comparing 2024 to 2023. There was virtually no change in the number of homes sold in the Matanuska Susitna Borough, with only four fewer homes sold in 2024 than in 2023 or -0.2%. The Board of Governors of the Federal Reserve System lowered its benchmark interest rate target to 4.25%-4.50% as of both March 31, 2025 and December 31, 2024. The prime rate of interest is 7.50% as of both March 31, 2025 and December 31, 2024. Highlights and Summary of Performance - First Quarter of 2025 The Company reported net income and earnings per diluted share of $13.3 million and $2.38, respectively, for the first quarter of 2025 compared to net income and earnings per diluted share of $8.2 million and $1.48, respectively, for the first quarter of 2024. The increase in net income for the three-month period ending March 31, 2025 compared to the same period last year is primarily attributable to an increase in purchased receivable income, higher net interest income, increased mortgage banking income, and a benefit to the provision for credit losses, which were only partially offset by higher operating expenses. • Net interest income in the first quarter of 2025 increased 18% to $31.3 million compared to $26.4 million in the first quarter of 2024. • Net interest margin was 4.55% for the first quarter of 2025, a 31 basis point increase from the first quarter of 2024. The increase in net interest margin in the first quarter of 2025 compared to the same period in 2024 was primarily to a favorable change in the mix of earning-assets towards higher loan balances as a percentage of total earning-assets, slightly higher yields on those assets, and a decrease in costs on interest-bearing liabilities. • The weighted average interest rate for new loans booked in the first quarter of 2025 was 7.30% compared to 7.84% in the first quarter a year ago. • Loans were $2.12 billion at March 31, 2025, down slightly from December 31, 2024 primarily due to the reclassification of $100 million of consumer mortgages previously held as residential real estate loans to loans held for sale and a $57.9 million decrease in construction loans offset by growth in commercial and commercial real estate loans. We intend to sell the consumer mortgages in 2025 to reduce our concentration of residential real estate loans and provide additional liquidity for future commercial and construction loan growth. • Total deposits were $2.78 billion at March 31, 2025, up 4% from December 31, 2024. Demand deposits increased 5% at March 31, 2025 from December 31, 2024 and represent 27% of total deposits at March 31, 2025. • The average cost of interest-bearing deposits for the quarter was 2.01% at March 31, 2025, down from 2.13% at March 31, 2024. • Total liquid assets and investments and loans maturing within one year were $1.11 billion and our funds available for borrowing under our existing lines of credit were $571.7 million at March 31, 2025. • Mortgage loan originations increased to $121.56 million in the first quarter of 2025, up from $101.73 million in the first quarter a year ago. Mortgage loans funded for sale were $108.50 million in the first quarter of 2025, compared to $84.32 million in the first quarter of 2024. Other financial measures are shown in the table below: Three Months Ended March 31, 2025 2024 Return on average assets, annualized 1.76 % 1.19 % Return on average shareholders' equity, annualized 19.70 % 13.84 % Dividend payout ratio 26.82 % 41.32 % 46 Nonperforming assets: Nonperforming assets, net of government guarantees were $12.3 million at March 31, 2025 and $11.6 million at December 31, 2024. Other Real Estate Owned (“OREO”), net of government guarantees was zero at both March 31, 2025 and December 31, 2024. Repossessed assets were $297,000 as of both March 31, 2025 and December 31, 2024. Nonperforming loans, net of government guarantees increased $455,000 or 6% to $8.0 million as of March 31, 2025 from $7.5 million as of December 31, 2024, primarily due to the addition of four loans in the first three months of 2025. Nonperforming purchased receivables increased $239,000 or 6% to $4.0 million as of March 31, 2025 from $3.8 million as of December 31, 2024. Of the nonperforming assets at March 31, 2025, $4.5 million are attributable to the Community Banking segment and $7.6 million are attributable to the Specialty Finance segment. Potential problem assets: Potential problem loans are loans which are currently performing in accordance with contractual terms but that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual or past due. These loans are closely monitored and their performance is reviewed by management on a regular basis. At March 31, 2025, management had identified $12.5 million potential problem loans, up from $1.6 million at December 31, 2024. RESULTS OF OPERATIONS Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024 Net Income Net income for the first quarter of 2025 increased $5.1 million to $13.3 million as compared to $8.2 million for the same period in 2024. The increase in net income in the first quarter of 2025 as compared to the same quarter a year ago is largely attributable to a $4.8 million increase in purchased receivable income, a $4.9 million increase in net interest income, a $1.6 million decrease in the provision for credit losses, and a $1.4 million increase in mortgage banking income. These changes were only partially offset by higher operating expenses and a higher provision for income taxes. Details of the changes in the various components of net income are discussed below. Net Interest Income/Net Interest Margin Net interest income for the first quarter of 2025 increased 18% or $4.9 million, to $31.3 million as compared to $26.4 million for the first quarter of 2024. The net interest margin increased 31 basis points to 4.55% in the first quarter of 2025 as compared to 4.16% in the first quarter of 2024. The increase in net interest income in the first quarter of 2025 compared to the same period in 2024 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 increase in net interest margin in the first quarter of 2025 as compared to the same period of 2024 was primarily due to a favorable change in the mix of earning-assets, an increase in total earning assets, and higher yields on earning assets, which were only partially offset by higher interest costs. 47 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 March 31, 2025 and 2024. Average yields or costs are calculated on a tax-equivalent basis. (Dollars in Thousands) Three Months Ended March 31, Interest income/ Average Tax Equivalent Average Balances Change expense Change Yields/Costs 6 2025 2024 $ % 2025 2024 $ % 2025 2024 Change Interest-bearing deposits in other banks 1 $37,969 $61,561 ($23,592) (38) % $416 $838 ($422) (50) % 4.44 % 5.38 % (0.94) % Taxable long-term investments 2 523,753 670,937 (147,184) (22) % 3,675 4,520 (845) (19) % 2.97 % 2.82 % 0.15 % Loans held for sale 46,223 32,635 13,588 42 % 677 500 177 35 % 5.86 % 6.13 % (0.27) % Loans 3,4 2,173,425 1,793,425 380,000 21 % 36,793 29,950 6,843 23 % 6.89 % 6.75 % 0.14 % Interest-earning assets 5 2,781,370 2,558,558 222,812 9 % 41,561 35,808 5,753 16 % 6.03 % 5.69 % 0.34 % Nonearning assets 293,415 201,137 92,278 46 % Total $3,074,785 $2,759,695 $315,090 11 % Interest-bearing demand $1,152,543 $906,047 $246,496 27 % $5,431 $4,426 $1,005 23 % 1.91 % 1.96 % (0.05) % Savings deposits 251,335 250,569 766 — % 362 280 82 29 % 0.58 % 0.45 % 0.13 % Money market deposits 193,966 216,005 (22,039) (10) % 807 837 (30) (4) % 1.69 % 1.56 % 0.13 % Time deposits 404,750 359,302 45,448 13 % 3,335 3,637 (302) (8) % 3.34 % 4.07 % (0.73) % Total interest-bearing deposits 2,002,594 1,731,923 270,671 16 % 9,935 9,180 755 8 % 2.01 % 2.13 % (0.12) % Borrowings 37,081 23,944 13,137 55 % 329 181 148 82 % 3.55 % 2.95 % 0.60 % Total interest-bearing liabilities 2,039,675 1,755,867 283,808 16 % 10,264 9,361 903 10 % 2.04 % 2.14 % (0.10) % Non-interest bearing demand deposits 697,534 705,134 (7,600) (1) % Other liabilities 63,348 60,407 2,941 5 % Equity 274,228 238,287 35,941 15 % Total $3,074,785 $2,759,695 $315,090 11 % Net interest income $31,297 $26,447 $4,850 18 % Net interest margin 4.55 % 4.16 % 0.39 % Average loans to average interest-earning assets 78.14 % 70.10 % Average loans to average total deposits 80.49 % 73.59 % Average non-interest deposits to average total deposits 25.83 % 28.93 % Average interest-earning assets to average interest-bearing liabilities 136.36 % 145.71 % 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 $1.1 million and $1.0 million in the first quarter of 2025 and 2024, respectively. 4 Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were $7.6 million and $5.7 million in the first quarter of 2025 and 2024, 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%. 48 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 March 31, 2025 and 2024. 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 March 31, 2025 and 2024. (In Thousands) Three Months Ended March 31, 2025 vs. 2024 Increase (decrease) due to Volume Rate Total Interest Income: Short-term investments ($246) ($176) ($422) Taxable long-term investments (1,117) 272 (845) Loans held for sale 200 (23) 177 Loans 6,522 321 6,843 Total interest income $5,359 $394 $5,753 Interest Expense: Interest-bearing demand $1,133 ($128) $1,005 Savings deposits 1 81 82 Money market deposits (93) 63 (30) Time deposits 720 (1,022) (302) Interest-bearing deposits 1,761 (1,006) 755 Borrowings 121 27 148 Total interest expense $1,882 ($979) $903 49 Provision for Credit Losses The provision or benefit for credit loss is the amount of expense or benefit that, based on our judgment, is required to maintain the Allowance for Credit Losses (“ACL”) at an appropriate level under the Company's 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 for the three-month periods ended March 31, 2025 and 2024: Three Months Ended March 31, (In Thousands) 2025 2024 Credit loss (benefit) expense on loans held for investment ($1,132) $221 Credit loss (benefit) expense on unfunded commitments (323) (72) Credit loss expense on available for sale debt securities — — Credit loss expense on held to maturity securities — — Credit loss expense on purchased receivables 46 — Total credit loss (benefit) expense ($1,409) $149 The decrease in the provision for credit losses for the three-month period ended March 31, 2025 as compared to the same period in 2024 is as primarily a result of the reclassification of $100 million in mortgage loans to loans held for sale, which provided a benefit of $2.2 million in the Home Mortgage Lending segment for the first quarter of 2025. This benefit was only partially offset by a $1.5 million provision for credit losses in the Home Mortgage Lending segment due to changes in the Company's loss rate regression models for home mortgage loans. Additionally, the Company recorded $1.7 million net benefit for credit losses in the Community Banking segment related to changes in the Company's loss rate regression models for commercial, commercial real estate, and construction loans. These decreases in the provision were only partially offset by increases in estimated loss rates for management's assessment of economic conditions, an increase for higher loan balances in other loan segments, and specific provisions for credit losses in the Specialty Finance segment. These items reduced the overall benefit by $1.3 million. The provision for credit losses related to the Specialty Finance segment of $666,000 in the first quarter of 2025 consisted of a $621,000 provision for credit losses on loans and a $46,000 provision for credit losses on purchased receivables. The provision for credit losses in the Specialty Finance segment for loans represents management's estimate of collateral shortfalls for four loans. The benefit to the provision for unfunded commitments was primarily due to a decrease in estimated loss rates due to changes in mix that was only partially offset by management's assessment of economic conditions and estimated funding rates. 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 March 31, 2025 increased $6.4 million, or 81%, to $14.2 million as compared to $7.8 million for the same period in 2024, primarily due to a $4.8 million increase in purchased receivable income, as well as a $1.4 million increase in mortgage banking income in the first quarter of 2025 compared to the same quarter a year ago. The fair value of marketable equity securities also increased $364,000 in the first quarter of 2025 compared to the same quarter a year ago. The increase in purchased receivable income in the three-month period ended March 31, 2025 as compared to the same period in 2024 was primarily due to the acquisition of Sallyport in the fourth quarter of 2024. Other Operating Expense Other operating expense for the first quarter of 2025 increased $5.7 million, or 24%, to $29.3 million as compared to $23.6 million for the same period in 2024, primarily due to a $1.8 million increase in salaries and other personnel expense as well as a $394,000 increase 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 prior years. The increase in salaries and other personnel expense was primarily due to $1.3 million attributable to Sallyport, as well as higher mortgage commissions expense due to higher production in the first quarter of 2025 compared to the same period in 2024 and a higher profit sharing expense, which generally increases when net income increases to reflect a higher expected payout to employees. Additionally, the Company recorded $600,000 in compensation expense for Sallyport acquisition payments and an increase in other operating expense for a decrease in fair value of loans held for sale of $628,000 in the first quarter of 2025. 50 Income Taxes For the first quarter of 2025, Northrim recorded a higher effective tax rate as compared to the same period in 2024 as a result of a decrease in tax credits and tax exempt interest income as a percentage of pre-tax income in 2025. In the first quarter of 2025, Northrim recorded $4.3 million in state and federal income tax expense, for an effective tax rate of 24.19% compared to $2.3 million and 21.94% for the same period in 2024. ANALYSIS OF FINANCIAL CONDITION Balance Sheet Overview Investment Securities Investment Securities include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at March 31, 2025 decreased 3% to $508.5 million from $524.1 million at December 31, 2024 primarily due to maturities and calls of available for sale securities during the first three months of 2025. The table below details portfolio investment balances by portfolio investment type for the periods indicated: March 31, 2025 December 31, 2024 Dollar Amount Percent of Total Dollar Amount Percent of Total (In Thousands) Balance % of total Balance % of total U.S. Treasury and government sponsored entities $416,971 82.0 % $432,931 82.6 % U.S. Agency mortgage-backed securities 5,063 1.0 % — 0.0 % Corporate bonds 41,586 8.2 % 45,545 8.7 % Collateralized loan obligations 36,226 7.1 % 36,891 7.0 % Preferred stock 8,669 1.7 % 8,719 1.7 % Total $508,515 $524,086 The average estimated duration of the investment portfolio at March 31, 2025, was approximately 2.4 years. As of March 31, 2025, $70.0 million of available for sale securities with a weighted average yield of 2.25% are scheduled to mature in the next six months, $80.7 million with a weighted average yield of 1.16% are scheduled to mature in six months to one year, and $168.6 million with a weighted average yield of 1.67% are scheduled to mature in the following year, representing a total of $319.4 million or 11% of earning assets that are scheduled to mature in the next 24 months. 51 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: March 31, 2025 December 31, 2024 Dollar Amount Percent of Total Dollar Amount Percent of Total (In Thousands) Commercial & industrial loans $491,945 23.1 % $437,922 20.6 % Commercial real estate: Owner occupied properties 428,443 20.1 % 418,092 19.6 % Non-owner occupied and multifamily properties 686,097 32.2 % 615,662 28.8 % Residential real estate: 1-4 family residential properties secured by first liens 188,086 8.9 % 270,966 12.7 % 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 54,225 2.6 % 49,160 2.3 % 1-4 family residential construction loans 33,786 1.6 % 39,516 1.9 % Other construction, land development and raw land loans 155,158 7.3 % 212,561 10.0 % Obligations of states and political subdivisions in the US 30,941 1.5 % 29,471 1.4 % Agricultural production, including commercial fishing 46,296 2.2 % 45,840 2.2 % Consumer loans 7,508 0.4 % 7,638 0.4 % Other loans 1,845 0.1 % 2,435 0.1 % Total loans $2,124,330 $2,129,263 Loans decreased slightly by $4.9 million, to $2.124 billion at March 31, 2025 from $2.129 billion at December 31, 2024, mostly as a result of the reclassification of $100.4 million 1-4 family residential properties secured by first liens to loans held for sale which was only partially offset by increased commercial and commercial real estate 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 $106.3 million, or approximately 5% of loans as of March 31, 2025 have direct exposure to the oil and gas industry as compared to $99.7 million, or approximately 5% of loans as of December 31, 2024. The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $32.6 million and $45.8 million at March 31, 2025 and December 31, 2024, 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 $1.4 million as of March 31, 2025 and $1.1 million as of December 31, 2024. 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) March 31, 2025 December 31, 2024 Commercial & industrial loans $94,440 $87,935 Commercial real estate: Owner occupied properties 5,968 5,611 Non-owner occupied and multifamily properties 4,670 4,828 Other loans 1,262 1,282 Total $106,340 $99,656 The Company monitors other concentrations within the loan portfolio depending on trends in the current and future estimated economic conditions. At March 31, 2025, the Company had $140.7 million, or 7% of portfolio loans, in the Healthcare sector, $122.5 million, or 6% of portfolio loans, in the Tourism sector, $110.9 million, or 5% of portfolio loans, in the Accommodations sector, $91.2 million, or 4% of portfolio loans, in the Retail sector, $85.7 million, or 4% of portfolio loans, in the Aviation (non-tourism) sector, $75.5 million, or 4% of portfolio loans, in the Fishing sector, and $60.2 million, or 3% in the Restaurant sector. 52 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, 2025: (In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurant Accommodations Total ACL $670 $781 $919 $787 $397 $431 $718 $4,703 53 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) 2025 2024 Nonaccrual loans $8,068 $7,516 Loans 90 days past due and accruing — 17 Total nonperforming loans $8,068 $7,533 Nonperforming loans guaranteed by government 80 — Net nonperforming loans $7,988 $7,533 Repossessed assets 297 297 Nonperforming purchased receivables 4,007 3,768 Net nonperforming assets $12,292 $11,598 Nonperforming loans, net of government guarantees / portfolio loans 0.38 % 0.35 % Nonperforming loans, net of government guarantees / portfolio loans, net of government guarantees 0.40 % 0.38 % Nonperforming assets, net of government guarantees / total assets 0.39 % 0.38 % Nonperforming assets, net of government guarantees / total assets net of government guarantees 0.41 % 0.40 % Adversely classified loans, net of government guarantees $20,417 $9,636 Special mention loans, net of government guarantees $15,133 $19,769 Loans 30-89 days past due and accruing, net of government guarantees /portfolio loans 0.04 % 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 0.98 % 1.03 % Allowance for credit losses / portfolio loans, net of government guarantees 1.06 % 1.10 % Allowance for credit losses / nonperforming loans, net of government guarantees 262 % 292 % Gross loan charge-offs for the quarter $50 $149 Gross loan recoveries for the quarter ($84) ($200) Net loan (recoveries) charge-offs for the quarter ($34) ($51) Net loan (recoveries) charge-offs year-to-date ($34) ($215) Net loan (recoveries) charge-offs for the quarter / average loans, for the quarter — % — % 54 Allowance for Credit Losses The following table sets forth information regarding changes in the ACL for the periods indicated: Three Months Ended March 31, (In Thousands) 2025 2024 Balance at beginning of period $22,020 $17,270 Charge-offs: Commercial & industrial loans (37) — Agricultural production, including commercial fishing — (25) Consumer loans (13) — Total charge-offs (50) (25) Recoveries: Commercial & industrial loans 74 60 Residential real estate: 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 7 6 Agricultural production, including commercial fishing 2 — Consumer loans 1 1 Total recoveries 84 67 Net, recoveries 34 42 (Benefit) provision for credit losses (1,132) 221 Balance at end of period $20,922 $17,533 The following table sets forth information regarding changes in the ACL for unfunded commitments for the periods indicated: Three Months Ended March 31, (In Thousands) 2025 2024 Balance at beginning of period $2,310 $2,418 (Benefit) provision for credit losses (323) (72) Balance at end of period $1,987 $2,346 55 The ACL for loans held for investment at March 31, 2025 decreased $1.1 million from December 31, 2024 primarily due to the reclassification of $100.4 million in loans held for investment to loans held for sale. This change was only partially offset by increases in other loan balances and other changes in management's CECL model assumptions. 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 Deposits are the Company’s primary source of funds. Total deposits increased $97.8 million, or 4%, to $2.78 billion as of March 31, 2025 compared to $2.68 billion as of December 31, 2024, primarily due to new deposit relationships. The following table summarizes the Company's composition of deposits as of the periods indicated: March 31, 2025 December 31, 2024 (In thousands) Balance % of total Balance % of total Demand deposits $742,560 27 % $706,225 27 % Interest-bearing demand 1,187,465 43 % 1,108,404 41 % Savings deposits 256,650 9 % 250,900 9 % Money market deposits 193,842 7 % 196,290 7 % Time deposits 397,460 14 % 418,370 16 % Total deposits $2,777,977 $2,680,189 The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 86% of total deposits at March 31, 2025 and 84% of total deposits at December 31, 2024. The only deposit category with stated maturity dates is certificates of deposit. At March 31, 2025, the Company had $397.5 million in certificates of deposit as compared to certificates of deposit of $418.4 million at December 31, 2024. At March 31, 2025, $361.4 million, or 91%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $369.7 million, or 88%, of total certificates of deposit at December 31, 2024. The aggregate amount of certificates of deposit in amounts of $250,000 and greater at March 31, 2025 and December 31, 2024, was $199.1 million and $217.1 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, 2025: Time Certificates of Deposit of $250,000 or More Percent of Total Deposits (In Thousands) Amount Amounts maturing in: Three months or less $90,293 45 % Over 3 through 6 months 34,943 18 % Over 6 through 12 months 55,078 28 % Over 12 months 18,791 9 % Total $199,105 100 % At March 31, 2025, 74% of total deposits were held in business accounts and 26% of deposit balances were held in consumer accounts. Northrim had approximately 34,000 deposit customers with an average balance of $61,000 as of March 31, 2025. Northrim had 27 customers with balances over $10 million as of March 31, 2025 which accounted for $694.7 million, or 26%, of total deposits. Uninsured deposits totaled approximately $1.04 billion or 37% of total deposits as of March 31, 2025 compared to $1.1 billion or 40% of total deposits as of December 31, 2024. There was no unusual deposit activity during the first three months of 2025. 56 Borrowings FHLB: The Bank is a member of the Federal Home Loan Bank of Des Moines (the “FHLB”). As a member, the Bank is eligible to obtain advances from the FHLB. 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 March 31, 2025, 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 $374.8 million as of March 31, 2025. The Company has outstanding advances of $13.1 million as of March 31, 2025 which were originated to match fund low income housing projects that qualify for long term fixed interest rates. These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23% to 3.25%. Federal Reserve Bank: The Federal Reserve Bank of San Francisco (the “Federal Reserve Bank”) is holding $70.0 million of securities as collateral to secure the Company's ability to take advances through the discount window on March 31, 2025. There were no discount window advances outstanding at either March 31, 2025 or December 31, 2024. 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 $1.10 billion at March 31, 2025 and $1.06 billion at December 31, 2024. At March 31, 2025 and December 31, 2024, 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 March 31, 2025 or December 31, 2024. Liquidity and Capital Resources The Company is a single bank holding company and its primary ongoing source of liquidity is from dividends received from the Bank. Such dividends arise from the cash flow and earnings of the Bank. Banking regulations and regulatory authorities may limit the amount of, or require the Bank to obtain certain approvals before paying, dividends to the Company. Given that the Bank currently meets and the Bank anticipates that it will continue to meet, all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards, the Company expects to continue to receive dividends from the Bank during the remainder of 2025. 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 March 31, 2025, the Company has 10.0 million authorized shares of common stock, of which approximately 5.5 million are issued and outstanding, leaving approximately 4.5 million shares available for issuance. Additionally, the Company has 2.5 million authorized shares of preferred stock available for issuance. The Bank manages its liquidity through its Asset and Liability Committee. The Bank's primary source of funds are customer deposits. These funds, together with loan repayments, loan sales, maturity and sale of investment securities, borrowed funds, and retained earnings are used to make loans, to acquire securities and other assets, and to fund deposit flows and continuing operations. 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. 57 The Company had cash and cash equivalents of $65.5 million, or 2% of total assets at March 31, 2025 compared to $62.7 million, or 2% of total assets as of December 31, 2024. The increase in cash and cash equivalents since the end of 2024 is primarily due to an increase in deposits. The Company had other comprehensive income, net of tax, of $2.7 million for the three-month period ending March 31, 2025 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 $5.5 million as of March 31, 2025. Accumulated unrealized losses, net of income taxes on held to maturity securities, which are not recorded in shareholders' equity, are $759,000 as of March 31, 2025. 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 both March 31, 2025 and December 31, 2024, the weighted average maturity of available for sale securities is 2.4 years, compared to 2.8 years at December 31, 2023. At March 31, 2025, $150.8 million available for sale securities mature within one year, $168.6 million mature within one to two years, and $60.1 million mature within two to three years. Our total unfunded commitments to fund loans and letters of credit at March 31, 2025 were $523.2 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. At March 31, 2025, certificates of deposit totaling $361.4 million are scheduled to mature over the next 12 months and may be withdrawn from the Bank. Similar to loans, we do not expect that these maturing certificates of deposit, or other non-maturity deposits, to be withdrawn from the Bank in a manner that will strain liquidity; however, unforeseen future circumstances or events may cause higher than anticipated withdrawal of deposits or draws of unfunded commitments to fund new loans. Management believes that cash requirements to fund future non-deposit and non-borrowing liabilities, including operating lease liabilities and other liabilities, as of March 31, 2025, are not material to the Company's liquidity position as of March 31, 2025. 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 March 31, 2025, our liquid assets, which include investments and loans maturing within a year, were $1.11 billion. 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 $571.7 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 for the foreseeable future. As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 “Financial Statements” of this report, net cash provided by operating activities was $16.5 million for the first three months of 2025, primarily due to net proceeds from the sale of loans held for sale and cash provided by net income, which was only partially offset by cash used in connection with the origination of loans held for sale. Net cash used by investing activities was $98.1 million for the same period, primarily due to an increase in loans and purchased receivables which were only partially offset by maturities and calls of available for sale securities. Net cash provided by financing activities in the same period was $84.3 million, primarily due to an increase in deposits which was only partially offset by a decreased in borrowings and cash dividends paid to shareholders. Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market. At March 31, 2025, there are no shares remaining under the repurchase program, and we did not repurchase any shares in the first quarter of 2025. The Company currently has no plans to repurchase shares of its common stock. Capital Requirements and Ratios We are subject to minimum capital requirements. Federal banking agencies have adopted regulations establishing minimum requirements for the capital adequacy of banks and bank holding companies. The requirements address both risk-based capital and leverage capital. We believe as of March 31, 2025, 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 2025, 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 March 31, 2025, which explains most of the difference in the capital ratios for the two entities. 58 Minimum Required Capital Well-Capitalized Actual Ratio Company Actual Ratio Bank March 31, 2025 Total risk-based capital 8.00% 10.00% 10.62% 10.11% Tier 1 risk-based capital 6.00% 8.00% 9.76% 9.24% Common equity tier 1 capital 4.50% 6.50% 9.37% 9.24% Leverage ratio 4.00% 5.00% 8.02% 7.59% See Note 23 of the Consolidated Financial Statements in Part II. Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2024 for a detailed discussion of the capital ratios. The requirements for “well-capitalized” come from the Prompt Corrective Action rules. See Part I. Item 1 - Business - Supervision and Regulation in the Company's Annual Report on Form 10-K for the year ended December 31, 2024. These rules apply to the Bank but not to the Company. Under the rules of the Federal Reserve Bank, a bank holding company such as the Company is generally defined to be “well capitalized” if its Tier 1 risk-based capital ratio is 8.0% or more and its total risk-based capital ratio is 10.0% or more. Critical Accounting Estimates SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. Our critical accounting estimates are described in detail in Part II. Item 7, Management’s Discussion and Analysis, and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024. There have been no material changes to the valuation techniques or assumptions within the models that affect our estimates during the first quarter of 2025. Allowance for Credit Losses Policy : 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 March 31, 2025, if the four-quarter U.S. unemployment rate forecast had been approximately 6% higher and the four-quarter annualized growth rate in the U.S. Gross Domestic Product had been approximately 42% lower, our ACL for loans would have increased $1.1 million, or 6%. As of March 31, 2025, if the four-quarter national unemployment rate forecast had been approximately 34% higher and the four-quarter annualized growth rate in the U.S. Gross Domestic Product had been approximately 28% higher, which represents management's estimate of long-term mean rates for these economic factors, our ACL for loans would have increased $1.7 million, or 9%. As of March 31, 2025, if the estimated prepayment and curtailment rates are doubled (with a maximum rate of 100%), our ACL for loans would have decreased $1.9 million, or 10%. As of March 31, 2025, if the estimated prepayment and curtailment rates are cut in half, our ACL for loans would have increased $1.4 million, or 7%. These sensitivity analyses include 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our assessment of market risk as of March 31, 2025 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, 2024. 59