株探米国株
英語
エドガーで原本を確認する
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
FORM 10-Q
(Mark One)
☑    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2023
☐    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from_____to____
Commission File Number 000-33501
NORTHRIM BANCORP, INC.
(Exact name of registrant as specified in its charter)
Alaska   92-0175752
(State or other jurisdiction of incorporation or organization)
   (I.R.S. Employer Identification No.)
3111 C Street
Anchorage, Alaska 99503
(Address of principal executive offices)    (Zip Code) 

(907) 562-0062

(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
TITLE OF EACH CLASS TRADING SYMBOL NAME OF EXCHANGE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   
ý Yes  ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 
ý Yes  ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:  
Large Accelerated Filer ¨  Accelerated Filer ý    Non-accelerated Filer ¨
Smaller Reporting Company ☐ Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      
☐ Yes  ý No

The number of shares of the issuer’s Common Stock, par value $1 per share, outstanding at August 4, 2023 was 5,588,841.


TABLE OF CONTENTS
     
Part  I FINANCIAL INFORMATION  
Item 1. Financial Statements (unaudited)
Item 2.
Item 3.
Item 4.
Part II OTHER INFORMATION  
Item 1.
Item 1A.
Item 2.
Item 6.

1

PART I. FINANCIAL INFORMATION
These consolidated financial statements should be read in conjunction with the consolidated financial statements, accompanying notes and other relevant information included in Northrim BanCorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 1. FINANCIAL STATEMENTS
2

CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.
Consolidated Balance Sheets
(Unaudited)
  June 30,
2023		 December 31,
2022
(In Thousands, Except Share Data)
ASSETS    
Cash and due from banks $34,809  $27,747 
Interest bearing deposits in other banks 1,943  231,603 
Investment securities available for sale, at fair value 671,139  677,029 
Marketable equity securities 10,604  10,740 
Investment securities held to maturity, at amortized cost 36,750  36,750 
Investment in Federal Home Loan Bank stock 5,858  3,816 
Loans held for sale 60,759  27,538 
Loans 1,659,239  1,501,785 
Allowance for credit losses, loans (15,645) (13,838)
Net loans 1,643,594  1,487,947 
Purchased receivables, net 21,866  19,994 
Mortgage servicing rights, at fair value 18,248  18,635 
Other real estate owned, net 273  — 
Premises and equipment, net 39,573  37,821 
Operating lease right-of-use assets 10,088  9,868 
Goodwill 15,017  15,017 
Other intangible assets, net 960  967 
Other assets 66,726  68,846 
Total assets $2,638,207  $2,674,318 
LIABILITIES    
Deposits:    
Demand $711,390  $797,434 
Interest-bearing demand 795,128  767,686 
Savings 275,602  320,917 
Money market 232,698  308,317 
Certificates of deposit less than $250,000 170,182  115,330 
Certificates of deposit $250,000 and greater 117,311  77,527 
Total deposits 2,302,311  2,387,211 
Borrowings 64,887  14,095 
Junior subordinated debentures 10,310  10,310 
Operating lease liabilities 10,087  9,865 
Other liabilities 29,276  34,208 
Total liabilities 2,416,871  2,455,689 
SHAREHOLDERS' EQUITY    
Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding
 —  — 
Common stock, $1 par value, 10,000,000 shares authorized, 5,610,841 and 5,700,728 issued and outstanding at June 30, 2023 and December 31, 2022, respectively
 5,611  5,701 
Additional paid-in capital 14,411  17,784 
Retained earnings 227,756  224,225 
Accumulated other comprehensive loss, net of tax (26,442) (29,081)
Total shareholders' equity 221,336  218,629 
Total liabilities and shareholders' equity $2,638,207  $2,674,318 
See notes to consolidated financial statements
3

NORTHRIM BANCORP, INC.
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(In Thousands, Except Per Share Data) 2023 2022 2023 2022
Interest and Dividend Income    
Interest and fees on loans and loans held for sale $26,313  $19,807  $50,007  $38,075 
Interest on investment securities available for sale 3,996  1,926  7,930  3,061 
Dividends on marketable equity securities 175  113  343  225 
Interest on investment securities held to maturity 473  352  947  625 
Dividends on Federal Home Loan Bank stock 35  28  71  56 
Interest on deposits in other banks 828  766  2,317  1,008 
Total Interest and Dividend Income 31,820  22,992  61,615  43,050 
Interest Expense    
Interest expense on deposits 6,114  599  10,697  1,174 
Interest expense on borrowings 470  87  557  173 
Interest expense on junior subordinated debentures 94  94  187  187 
Total Interest Expense 6,678  780  11,441  1,534 
Net Interest Income 25,142  22,212  50,174  41,516 
Provision for credit losses 1,407  463  1,767  313 
Net Interest Income After Provision for Credit Losses 23,735  21,749  48,407  41,203 
Other Operating Income    
Mortgage banking income 3,913  5,900  5,921  12,882 
Purchased receivable income 1,018  566  1,995  968 
Bankcard fees 986  927  1,894  1,731 
Service charges on deposit accounts 505  402  962  776 
Keyman life insurance proceeds —  —  —  2,002 
Unrealized loss on marketable equity securities (234) (810) (457) (1,232)
Other income 792  822  1,573  1,503 
Total Other Operating Income 6,980  7,807  11,888  18,630 
Other Operating Expense    
Salaries and other personnel expense 15,183  15,401  30,667  29,507 
Data processing expense 2,377  2,311  4,732  4,303 
Occupancy expense 1,811  1,748  3,754  3,474 
Professional and outside services 801  708  1,523  1,430 
Marketing expense 933  814  1,497  1,239 
Insurance expense 647  516  1,204  1,082 
Intangible asset amortization expense 3  6  7  12 
OREO expense, net rental income and gains on sale (8) 19  18  7 
Other operating expense 2,035  1,715  3,889  3,285 
Total Other Operating Expense 23,782  23,238  47,291  44,339 
Income Before Provision for Income Taxes 6,933  6,318  13,004  15,494 
Provision for income taxes 1,356  1,523  2,597  3,473 
Net Income $5,577  $4,795  $10,407  $12,021 
Earnings Per Share, Basic $0.99  $0.83  $1.84  $2.05 
Earnings Per Share, Diluted $0.98  $0.83  $1.82  $2.03 
Weighted Average Shares Outstanding, Basic 5,632,174  5,750,873  5,661,803  5,844,455 
Weighted Average Shares Outstanding, Diluted 5,677,292  5,805,870  5,719,453  5,902,287 
See notes to consolidated financial statements
4

NORTHRIM BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
2010
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2023 2022 2023 2022
Net income $5,577  $4,795  $10,407  $12,021 
Other comprehensive income (loss), net of tax:    
   Securities available for sale:    
         Unrealized holding gains (losses) arising during the period ($4,414) ($7,715) $3,705  ($24,017)
Derivatives and hedging activities:
     Unrealized holding (losses) gains arising during the period 281  827  (18) 1,754 
Income tax benefit related to unrealized (gains) and losses 1,175  1,958  (1,048) 6,329 
Other comprehensive income (loss), net of tax (2,958) (4,930) 2,639  (15,934)
Comprehensive income (loss) $2,619  ($135) $13,046  ($3,913)
 
See notes to consolidated financial statements

5

NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
  Common Stock Additional Paid-in Capital  Retained Earnings Accumulated Other Comprehensive Income (Loss), net of Tax  Total
  Number of Shares Par Value
(In Thousands)
Balance as of January 1, 2022 6,015  $6,015  $31,162  $204,046  ($3,406) $237,817 
Cash dividend on common stock ($0.41 per share)
 —  —  —  (2,471) —  (2,471)
Stock-based compensation expense —  —  187  —  —  187 
Repurchase of common stock (133) (133) (5,790) —  —  (5,923)
Other comprehensive loss, net of tax —  —  —  —  (11,004) (11,004)
Net income —  —  —  7,226  —  7,226 
Balance as of March 31, 2022 5,882  $5,882  $25,559  $208,801  ($14,410) $225,832 
Cash dividend on common stock ($0.41 per share)
 —  —  —  (2,364) —  (2,364)
Stock-based compensation expense —  —  190  —  —  190 
Other comprehensive loss, net of tax —  —  —  —  (4,930) (4,930)
Net income —  —  —  4,795  —  4,795 
Balance as of June 30, 2022 5,681  $5,681  $17,716  $211,232  ($19,340) $215,289 
Cash dividend on common stock ($0.50 per share)
 —  —  —  (2,858) —  (2,858)
Stock-based compensation expense —  —  191  —  —  191 
Other comprehensive loss, net of tax —  —  —  —  (12,048) (12,048)
Net income —  —  —  10,125  —  10,125 
Balance as of September 30, 2022 5,681  $5,681  $17,907  $218,499  ($31,388) $210,699 
Cash dividend on common stock ($0.50 per share)
 —  —  —  (2,869) —  (2,869)
Stock-based compensation expense —  —  174  —  —  174 
Exercise of stock options and vesting of restricted stock units, net 20  20  (297) —  —  (277)
Other comprehensive loss, net of tax —  —  —  —  2,307  2,307 
Net income —  —  —  8,595  —  8,595 
Balance as of December 31, 2022 5,701  $5,701  $17,784  $224,225  ($29,081) $218,629 
 See notes to consolidated financial statements





6

NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Continued)
(Unaudited)
  Common Stock Additional Paid-in Capital  Retained Earnings Accumulated Other Comprehensive Income (Loss), net of Tax  Total
  Number of Shares Par Value
(In Thousands)
Balance as of January 1, 2023 5,701  $5,701  $17,784  $224,225  ($29,081) $218,629 
Cash dividend on common stock ($0.60 per share)
 —  —  —  (3,444) —  (3,444)
Stock-based compensation expense —  —  140  —  —  140 
Repurchase of common stock (28) (28) (1,299) —  —  (1,327)
Other comprehensive loss, net of tax —  —  —  —  5,597  5,597 
Net income —  —  —  4,830  —  4,830 
Balance as of March 31, 2023 5,673  $5,673  $16,625  $225,611  ($23,484) $224,425 
Cash dividend on common stock ($0.60 per share)
 —  —  —  (3,432) —  (3,432)
Stock-based compensation expense —  —  225  —  —  225 
Exercise of stock options and vesting of restricted stock units, net —  —  —  —  —  — 
Repurchase of common stock (62) (62) (2,439) —  —  (2,501)
Other comprehensive loss, net of tax —  —  —  —  (2,958) (2,958)
Net income —  —  —  5,577  —  5,577 
Balance as of June 30, 2023 5,611  $5,611  $14,411  $227,756  ($26,442) $221,336 
See notes to consolidated financial statements
7

NORTHRIM BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
(In Thousands) 2023 2022
Operating Activities:    
Net income $10,407  $12,021 
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities:    
Depreciation and amortization of premises and equipment 1,576  1,585 
Amortization of software 576  587 
Intangible asset amortization 7  12 
Amortization of investment security premium, net of discount accretion 255  347 
Unrealized loss on marketable equity securities 457  1,232 
Stock-based compensation 365  377 
Deferred loan fees and amortization, net of costs (676) (3,247)
Provision for credit losses 1,767  313 
Additions to home mortgage servicing rights carried at fair value (982) (2,115)
Change in fair value of home mortgage servicing rights carried at fair value 1,369  (462)
Change in fair value of commercial servicing rights carried at fair value 105  48 
Gain on sale of loans (3,875) (8,569)
Proceeds from the sale of loans held for sale 135,203  353,737 
Origination of loans held for sale (164,549) (334,598)
Proceeds from keyman life insurance —  (2,002)
Net changes in assets and liabilities:    
(Increase) in accrued interest receivable (595) (1,271)
Decrease in other assets 739  3,324 
(Decrease) in other liabilities (4,668) (6,010)
Net Cash (Used) Provided by Operating Activities (22,519) 15,309 
Investing Activities:    
Investment in securities:    
Purchases of investment securities available for sale (6,000) (214,703)
Purchases of marketable equity securities (324) (1,937)
Purchases of FHLB stock (2,715) (727)
Purchases of investment securities held to maturity —  (9,750)
Proceeds from sales/calls/maturities of securities available for sale 15,340  5,000 
Proceeds from redemption of FHLB stock 673  10 
(Increase) in purchased receivables, net (1,872) (8,290)
 (Increase) decrease in loans, net (157,013) 11,116 
 Proceeds from keyman life insurance —  2,002 
Purchases of software (90) (14)
Purchases of premises and equipment (3,328) (1,527)
Net Cash (Used) by Investing Activities (155,329) (218,820)
Financing Activities:    
(Decrease) in deposits (84,900) (86,241)
Increase (decrease) in borrowings 50,792  (206)
Repurchase of common stock (3,828) (14,157)
Cash dividends paid (6,814) (4,789)
Net Cash Used by Financing Activities (44,750) (105,393)
Net Change in Cash and Cash Equivalents (222,598) (308,904)
Cash and Cash Equivalents at Beginning of Period 259,350  645,827 
Cash and Cash Equivalents at End of Period $36,752  $336,923 
8

Supplemental Information:    
Income taxes paid $856  $40 
Interest paid $11,081  $1,471 
Transfer of loans to other real estate owned $273  $— 
Non-cash lease liability arising from obtaining right of use assets $423  $— 
Cash dividends declared but not paid $62  $46 
 
See notes to consolidated financial statements
9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited consolidated financial statements and corresponding footnotes have been prepared by Northrim BanCorp, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. The year-end Consolidated Balance Sheet data was derived from the Company's audited financial statements. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company owns a 100% interest in Residential Mortgage Holding Company, LLC, the parent company of Residential Mortgage, LLC (collectively "RML") and consolidates their balance sheets and income statement into its financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company determined that it operates in two primary operating segments: Community Banking and Home Mortgage Lending. The Company has evaluated subsequent events and transactions for potential recognition or disclosure. Operating results for the interim period ended June 30, 2023 are not necessarily indicative of the results anticipated for the year ending December 31, 2023. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes in our application of these accounting policies in 2023.
Reclassification of Prior Period Presentation
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or total shareholders' equity.
Recent Accounting Pronouncements
Accounting pronouncements implemented in 2023
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). The amendments in ASU 2022-02 eliminate the accounting guidance for troubled debt restructurings ("TDRs") by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs which includes an assessment of whether the creditor has granted a concession, an entity must evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6. The Company adopted ASU 2022-02 on January 1, 2023. The Company elected to adopt the updated guidance on TDR recognition and measurement prospectively; therefore the guidance is applied to modifications occurring after the date of adoption. The amendments on TDR disclosures and vintage disclosures must be adopted prospectively. The adoption of ASU 2022-02 did not have a material impact on the Company's consolidated financial position or results of operations.
Accounting pronouncements to be implemented in future periods    
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method ("ASU 2023-02"). Under current GAAP, an entity can only elect to apply the proportional amortization method to investments in low income housing tax credit ("LIHTC") structures. The amendments in ASU 2023-02 allow entities to elect to account for equity investments made primarily for the purpose of receiving income tax credits using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, if certain conditions are met. ASU 2023-02 provides amendments to paragraph ASC 323-740-25-1, which sets forth the conditions needed to apply the proportional amortization method.
10

The amendments make certain limited changes to those conditions to clarify their application to a broader group of tax credit investment programs. However, the conditions in substance remain consistent with current GAAP. The amendments in this ASU 2023-02 also eliminate certain LIHTC-specific guidance to align the accounting more closely for LIHTCs with the accounting for other equity investments in tax credit structures and require that the delayed equity contribution guidance in paragraph ASC 323-740-25-3 apply only to tax equity investments accounted for using the proportional amortization method. ASU 2023-02 is effective for the Company for fiscal years beginning after December 15, 2023 and must be applied on either a modified retrospective or a retrospective basis. The Company does not have any equity investments made primarily for the purpose of receiving income tax credits except for LIHTC structures, which it accounts for using the proportional amortization method. The Company does not believe that the adoption of ASU 2023-02 will have a material impact on the Company's consolidated financial statements.


2. Investment Securities
Marketable Equity Securities
The Company held marketable equity securities with fair values of $10.6 million and $10.7 million at June 30, 2023 and December 31, 2022, respectively. The gross realized and unrealized gains (losses) recognized on marketable equity securities in other operating income in the Company's Consolidated Statements of Income were as follows:
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2023 2022 2023 2022
Unrealized gain (loss) on marketable equity securities ($234) ($810) ($457) ($1,232)
Gain on sale of marketable equity securities, net —  —  —  — 
   Total ($234) ($810) ($457) ($1,232)

Debt securities
Debt securities have been classified in the financial statements as available for sale or held to maturity. The following table summarizes the amortized cost, estimated fair value, and the Allowance for Credit Losses ("ACL") of debt securities and the corresponding amounts of gross unrealized gains and losses of available-for-sale securities recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses of held to maturity securities at the periods indicated:
(In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value
June 30, 2023        
Securities available for sale        
U.S. Treasury and government sponsored entities $634,335  $—  ($36,670) $—  $597,665 
Municipal securities 820  —  (18) —  802 
Corporate bonds 14,016  38  (574) —  13,480 
Collateralized loan obligations 60,352  —  (1,160) —  59,192 
Total securities available for sale $709,523  $38  ($38,422) $—  $671,139 
(In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
June 30, 2023
Securities held to maturity
Corporate bonds $36,750  $—  ($4,150) $32,600 
   Allowance for credit losses —  —  —  — 
Total securities held to maturity, net of ACL $36,750  $—  ($4,150) $32,600 
11

(In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value
December 31, 2022        
Securities available for sale        
U.S. Treasury and government sponsored entities $634,582  $1  ($39,422) $—  $595,161 
Municipal securities 820  —  (25) —  795 
Corporate bonds 24,281  37  (674) —  23,644 
Collateralized loan obligations 59,434  —  (2,005) —  57,429 
Total securities available for sale $719,117  $38  ($42,126) $—  $677,029 
(In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
December 31, 2022
Securities held to maturity
Corporate bonds $36,750  $—  ($4,111) $32,639 
   Allowance for credit losses —  —  —  — 
Total securities held to maturity, net of ACL $36,750  $—  ($4,111) $32,639 

Gross unrealized losses on available for sale securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2023 and December 31, 2022 were as follows:

Less Than 12 Months More Than 12 Months Total
(In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
June 30, 2023
Securities available for sale
     U.S. Treasury and government sponsored entities $131,239  ($3,162) $466,426  ($33,508) $597,665  ($36,670)
     Corporate bonds —  —  6,446  (574) 6,446  (574)
     Collateralized loan obligations 3,909  (91) 49,283  (1,069) 53,192  (1,160)
     Municipal securities —  —  802  (18) 802  (18)
          Total $135,148  ($3,253) $522,957  ($35,169) $658,105  ($38,422)
December 31, 2022:
Securities available for sale
     U.S. Treasury and government sponsored entities $282,319  ($8,876) $302,840  ($30,546) $585,159  ($39,422)
     Corporate bonds 13,216  (43) 4,394  (631) 17,610  (674)
     Collateralized loan obligations 22,309  (632) 35,120  (1,373) 57,429  (2,005)
     Municipal securities 795  (25) —  —  795  (25)
          Total $318,639  ($9,576) $342,354  ($32,550) $660,993  ($42,126)

Management evaluates available for sale debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

At June 30, 2023, the Company had 83 available for sale securities in an unrealized loss position without an ACL. At June 30, 2023, the Company had five held to maturity securities in an unrealized loss position without an ACL. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.
12

Accordingly, as of June 30, 2023, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, primarily changes in interest rates, and therefore no losses have been recognized in the Company's Consolidated Statements of Income.

At June 30, 2023 and December 31, 2022, carrying amounts of $161.7 million and $59.3 million in securities were pledged for deposits and borrowings, respectively.

The amortized cost and estimated fair values of debt securities at June 30, 2023, are distributed by contractual maturity as shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 
(In Thousands) Amortized Cost Fair Value
US Treasury and government sponsored entities    
Within 1 year $127,447  $125,183 
1-5 years 506,888  472,482 
Total $634,335  $597,665 
Corporate bonds    
Within 1 year $2,000  $1,971 
1-5 years 22,016  20,726 
5-10 years 26,750  25,853 
Total $50,766  $48,550 
Collateralized loan obligations
5-10 years $24,859  $24,556 
Over 10 years 35,493  34,636 
Total $60,352  $59,192 
Municipal securities    
Within 1 year $820  $802 
Total $820  $802 

There were no proceeds from sales of investment securities for the three or six-month periods ending June 30, 2023 and 2022.
A summary of interest income for the three and six-month periods ending June 30, 2023 and 2022, on available for sale investment securities are as follows:
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2023 2022 2023 2022
US Treasury and government sponsored entities $2,835  $1,432  $5,630  $2,238 
Other 1,156  489  2,291  814 
Total taxable interest income $3,991  $1,921  $7,921  $3,052 
Municipal securities $5  $5  $9  $9 
Total tax-exempt interest income $5  $5  $9  $9 
Total $3,996  $1,926  $7,930  $3,061 
13


3.  Loans and Allowance for Credit Losses
Loans Held for Sale
Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of June 30, 2023 and December 31, 2022.
Loans Held for Investment
The following table presents amortized cost and unpaid principal balance of loans, categorized by the segments used in the Company's Current Expected Credit Losses methodology to assess credit risk, for the periods indicated:
June 30, 2023 December 31, 2022
(In Thousands) Amortized Cost Unpaid Principal Difference Amortized Cost Unpaid Principal Difference
Commercial & industrial loans $418,752  $420,443  ($1,691) $358,128  $359,900  ($1,772)
Commercial real estate:
Owner occupied properties 348,834  350,411  (1,577) 349,973  351,580  (1,607)
Non-owner occupied and multifamily properties 490,821  494,505  (3,684) 482,270  486,021  (3,751)
Residential real estate:
1-4 family residential properties secured by first liens 160,546  160,467  79  73,381  73,674  (293)
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 25,156  24,970  186  20,259  20,103  156 
1-4 family residential construction loans 35,349  35,527  (178) 44,000  44,314  (314)
Other construction, land development and raw land loans 95,124  96,015  (891) 99,182  100,075  (893)
Obligations of states and political subdivisions in the US 35,325  35,327  (2) 32,539  32,540  (1)
Agricultural production, including commercial fishing 40,767  40,975  (208) 34,099  34,263  (164)
Consumer loans 5,551  5,498  53  4,335  4,293  42 
Other loans 3,014  3,035  (21) 3,619  3,632  (13)
Total 1,659,239  1,667,173  (7,934) 1,501,785  1,510,395  (8,610)
Allowance for credit losses (15,645) (13,838)
$1,643,594  $1,667,173  ($7,934) $1,487,947  $1,510,395  ($8,610)
The difference between the amortized cost and unpaid principal balance is net deferred origination fees totaling $7.9 million at June 30, 2023 and $8.6 million at December 31, 2022.
Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $6.7 million and $5.5 million at June 30, 2023 and December 31, 2022, respectively, and is included in other assets in the Consolidated Balance Sheets.
Amortized cost in the above table includes $3.6 million and $7.1 million as of June 30, 2023 and December 31, 2022, respectively, in Paycheck Protection Program loans administered by the U.S. Small Business Administration ("SBA") within the Commercial & industrial loan segment.



14

Allowance for Credit Losses
The activity in the ACL related to loans held for investment for the periods indicated is as follows:
Three Months Ended June 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance
(In Thousands)
2023        
Commercial & industrial loans $3,080  $366  ($49) $21  $3,418 
Commercial real estate:
Owner occupied properties 2,778  29  —  —  2,807 
Non-owner occupied and multifamily properties 3,174  86  —  —  3,260 
Residential real estate:
1-4 family residential properties secured by first liens 2,226  980  —  —  3,206 
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 392  26  —  5  423 
1-4 family residential construction loans 260  (54) —  —  206 
Other construction, land development and raw land loans 1,925  71  —  —  1,996 
Obligations of states and political subdivisions in the US 106  (18) —  —  88 
Agricultural production, including commercial fishing 150  12  —  —  162 
Consumer loans 61  12  —  1  74 
Other loans 5  —  —  —  5 
Total $14,157  $1,510  ($49) $27  $15,645 
2022
Commercial & industrial loans $2,901  $123  ($166) $103  $2,961 
Commercial real estate:
Owner occupied properties 2,513  60  —  —  2,573 
Non-owner occupied and multifamily properties 3,063  44  —  —  3,107 
Residential real estate:
1-4 family residential properties secured by first liens 510  110  —  —  620 
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 301  17  —  9  327 
1-4 family residential construction loans 210  21  —  —  231 
Other construction, land development and raw land loans 1,550  (88) —  —  1,462 
Obligations of states and political subdivisions in the US 52  7  —  —  59 
Agricultural production, including commercial fishing 128  (8) —  7  127 
Consumer loans 75  (12) —  1  64 
Other loans 7  (1) —  —  6 
Total $11,310  $273  ($166) $120  $11,537 

15

Six Months Ended June 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance
(In Thousands)
2023        
Commercial & industrial loans $2,914  $467  ($49) $86  $3,418 
Commercial real estate:
Owner occupied properties 3,094  (287) —  —  2,807 
Non-owner occupied and multifamily properties 3,615  (355) —  —  3,260 
Residential real estate:
1-4 family residential properties secured by first liens 1,413  1,793  —  —  3,206 
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 389  22  —  12  423 
1-4 family residential construction loans 312  (106) —  —  206 
Other construction, land development and raw land loans 1,803  193  —  —  1,996 
Obligations of states and political subdivisions in the US 79  9  —  —  88 
Agricultural production, including commercial fishing 145  17  —  —  162 
Consumer loans 68  17  (14) 3  74 
Other loans 6  (1) —  —  5 
Total $13,838  $1,769  ($63) $101  $15,645 
2022
Commercial & industrial loans $3,027  $279  ($461) $116  $2,961 
Commercial real estate:
Owner occupied properties 3,176  (603) —  —  2,573 
Non-owner occupied and multifamily properties 2,930  177  —  —  3,107 
Residential real estate:
1-4 family residential properties secured by first liens 439  181  —  —  620 
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 215  91  —  21  327 
1-4 family residential construction loans 120  111  —  —  231 
Other construction, land development and raw land loans 1,635  (173) —  —  1,462 
Obligations of states and political subdivisions in the US 32  27  —  —  59 
Agricultural production, including commercial fishing 91  21  —  15  127 
Consumer loans 67  (4) —  1  64 
Other loans 7  (1) —  —  6 
Total $11,739  $106  ($461) $153  $11,537 


16

The following table shows gross charge-offs by grade and by year of loan origination for the periods indicated:
Six Months Ended June 30,
(In Thousands) 2023 2022 2021 2020 2019 Prior Total
2023
Commercial & industrial loans $—  $—  $49  $—  $—  $—  $49 
Commercial real estate:
Owner occupied properties —  —  —  —  —  —  — 
Non-owner occupied and multifamily properties —  —  —  —  —  —  — 
Residential real estate:
1-4 family residential properties secured by first liens —  —  —  —  —  —  — 
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens —  —  —  —  —  —  — 
1-4 family residential construction loans —  —  —  —  —  —  — 
Other construction, land development and raw land loans —  —  —  —  —  —  — 
Obligations of states and political subdivisions in the US —  —  —  —  —  —  — 
Agricultural production, including commercial fishing —  —  —  —  —  —  — 
Consumer loans —  1  —  —  —  13  14 
Other loans —  —  —  —  —  —  — 
Total $—  $1  $49  $—  $—  $13  $63 
Credit Quality Information
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management utilizes a loan risk grading system called the Asset Quality Rating (“AQR”) system to assign a risk classification to each of its loans. The risk classification is a dual rating system that contemplates both probability of default and risk of loss given default. Loans are graded on a scale of 1 to 10 and, loans graded 1 – 6 are considered “pass” grade loans. Loans graded 7 or higher are considered "classified" loans. A description of the general characteristics of the AQR risk classifications are as follows:
Pass grade loans – 1 through 6: The borrower demonstrates sufficient cash flow to fund debt service, including acceptable profit margins, cash flows, liquidity and other balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The borrower has competent management with an acceptable track record. The category does not include loans with undue or unwarranted credit risks that constitute identifiable weaknesses.

Classified loans:
Special Mention – 7: A "special mention" credit has weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date.

Substandard – 8: A "substandard" credit is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Northrim Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – 9: An asset classified "doubtful" has all the weaknesses inherent in one that is classified "substandard-8" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. The loan has substandard characteristics, and available information suggests that it is unlikely that the loan will be repaid in its entirety.

Loss – 10: An asset classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future.
17


The following tables present the Company's portfolio of risk-rated loans by grade and by year of origination. Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below.

June 30, 2023 2023 2022 2021 2020 2019 Prior Total
(In Thousands)
Commercial & industrial loans
Pass $84,022  $157,326  $67,058  $34,816  $14,899  $47,016  $405,137 
Classified 2,468  1,988  6,108  296  74  2,681  13,615 
Total commercial & industrial loans $86,490  $159,314  $73,166  $35,112  $14,973  $49,697  $418,752 
Commercial real estate:
Owner occupied properties
Pass $20,413  $70,774  $69,552  $78,317  $30,643  $74,370  $344,069 
Classified —  —  —  1,189  —  3,576  4,765 
Total commercial real estate owner occupied properties $20,413  $70,774  $69,552  $79,506  $30,643  $77,946  $348,834 
Non-owner occupied and multifamily properties
Pass $26,893  $88,664  $84,365  $68,986  $57,212  $155,191  $481,311 
Classified —  —  —  —  —  9,510  9,510 
Total commercial real estate non-owner occupied and multifamily properties $26,893  $88,664  $84,365  $68,986  $57,212  $164,701  $490,821 
Residential real estate:
1-4 family residential properties secured by first liens
Pass $92,980  $48,795  $4,349  $5,009  $2,469  $6,757  $160,359 
Classified —  —  —  —  —  187  187 
Total residential real estate 1-4 family residential properties secured by first liens $92,980  $48,795  $4,349  $5,009  $2,469  $6,944  $160,546 
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens
Pass $4,976  $6,636  $3,739  $1,749  $2,610  $5,112  $24,822 
Classified —  —  —  —  —  334  334 
Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $4,976  $6,636  $3,739  $1,749  $2,610  $5,446  $25,156 
1-4 family residential construction loans
Pass $11,456  $14,639  $2,004  $419  $—  $6,722  $35,240 
Classified —  —  —  —  —  109  109 
Total residential real estate 1-4 family residential construction loans $11,456  $14,639  $2,004  $419  $—  $6,831  $35,349 
Other construction, land development and raw land loans
Pass $9,629  $38,765  $27,770  $7,508  $1,500  $8,163  $93,335 
Classified —  —  —  —  —  1,789  1,789 
Total other construction, land development and raw land loans $9,629  $38,765  $27,770  $7,508  $1,500  $9,952  $95,124 
Obligations of states and political subdivisions in the US
Pass $—  $29,346  $4,055  $1,771  $—  $153  $35,325 
Classified —  —  —  —  —  —  — 
Total obligations of states and political subdivisions in the US $—  $29,346  $4,055  $1,771  $—  $153  $35,325 
Agricultural production, including commercial fishing
Pass $7,049  $10,377  $17,006  $3,582  $594  $2,159  $40,767 
Classified —  —  —  —  —  —  — 
Total agricultural production, including commercial fishing $7,049  $10,377  $17,006  $3,582  $594  $2,159  $40,767 
18

Consumer loans
Pass $2,076  $1,209  $303  $391  $313  $1,259  $5,551 
Classified —  —  —  —  —  —  — 
Total consumer loans $2,076  $1,209  $303  $391  $313  $1,259  $5,551 
Other loans
Pass $610  $203  $319  $1,492  $351  $39  $3,014 
Classified —  —  —  —  —  —  — 
Total other loans $610  $203  $319  $1,492  $351  $39  $3,014 
Total loans
Pass $260,104  $466,734  $280,520  $204,040  $110,591  $306,941  $1,628,930 
Classified 2,468  1,988  6,108  1,485  74  18,186  30,309 
Total loans $262,572  $468,722  $286,628  $205,525  $110,665  $325,127  $1,659,239 
Total pass loans $260,104  $466,734  $280,520  $204,040  $110,591  $306,941  $1,628,930 
Government guarantees (2,965) (24,663) (29,973) (9,042) (12,519) (8,004) (87,166)
Total pass loans, net of government guarantees $257,139  $442,071  $250,547  $194,998  $98,072  $298,937  $1,541,764 
Total classified loans $2,468  $1,988  $6,108  $1,485  $74  $18,186  $30,309 
Government guarantees (2,271) —  (5,497) (1,070) —  (8,662) (17,500)
Total classified loans, net government guarantees $197  $1,988  $611  $415  $74  $9,524  $12,809 

December 31, 2022 2022 2021 2020 2019 2018 Prior Total
(In Thousands)
Commercial & industrial loans
Pass $157,555  $86,543  $37,147  $17,881  $9,844  $40,571  $349,541 
Classified 137  4,879  397  91  2,737  346  8,587 
Total commercial & industrial loans $157,692  $91,422  $37,544  $17,972  $12,581  $40,917  $358,128 
Commercial real estate:
Owner occupied properties
Pass $66,955  $70,777  $90,496  $32,564  $13,233  $69,701  $343,726 
Classified —  —  1,261  —  165  4,821  6,247 
Total commercial real estate owner occupied properties $66,955  $70,777  $91,757  $32,564  $13,398  $74,522  $349,973 
Non-owner occupied and multifamily properties
Pass $94,412  $82,352  $71,407  $58,033  $16,905  $149,223  $472,332 
Classified —  —  —  274  3  9,661  9,938 
Total commercial real estate non-owner occupied and multifamily properties $94,412  $82,352  $71,407  $58,307  $16,908  $158,884  $482,270 
Residential real estate:
1-4 family residential properties secured by first liens
Pass $52,117  $5,088  $6,001  $2,535  $462  $6,968  $73,171 
Classified —  —  —  —  79  131  210 
Total residential real estate 1-4 family residential properties secured by first liens $52,117  $5,088  $6,001  $2,535  $541  $7,099  $73,381 
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens
Pass $6,992  $3,376  $2,041  $2,763  $2,781  $2,060  $20,013 
Classified —  —  —  239  7  246 
Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $6,992  $3,376  $2,041  $2,763  $3,020  $2,067  $20,259 
1-4 family residential construction loans
Pass $26,860  $3,897  $61  $—  $—  $13,073  $43,891 
Classified —  —  —  —  —  109  109 
Total residential real estate 1-4 family residential construction loans $26,860  $3,897  $61  $—  $—  $13,182  $44,000 
19

Other construction, land development and raw land loans
Pass $38,673  $42,448  $5,740  $1,713  $3,675  $5,112  $97,361 
Classified —  —  —  —  369  1,452  1,821 
Total other construction, land development and raw land loans $38,673  $42,448  $5,740  $1,713  $4,044  $6,564  $99,182 
Obligations of states and political subdivisions in the US
Pass $32,319  $—  $—  $—  $219  $1  $32,539 
Classified —  —  —  —  —  —  — 
Total obligations of states and political subdivisions in the US $32,319  $—  $—  $—  $219  $1  $32,539 
Agricultural production, including commercial fishing
Pass $9,748  $17,692  $3,740  $604  $879  $1,436  $34,099 
Classified —  —  —  —  —  —  — 
Total agricultural production, including commercial fishing $9,748  $17,692  $3,740  $604  $879  $1,436  $34,099 
Consumer loans
Pass $1,513  $363  $481  $345  $235  $1,391  $4,328 
Classified —  —  —  —  —  7  7 
Total consumer loans $1,513  $363  $481  $345  $235  $1,398  $4,335 
Other loans
Pass $1,291  $330  $1,547  $384  $—  $67  $3,619 
Classified —  —  —  —  —  —  — 
Total other loans $1,291  $330  $1,547  $384  $—  $67  $3,619 
Total loans
Pass $488,435  $312,866  $218,661  $116,822  $48,233  $289,603  $1,474,620 
Classified 137  4,879  1,658  365  3,592  16,534  27,165 
Total loans $488,572  $317,745  $220,319  $117,187  $51,825  $306,137  $1,501,785 
Total pass loans $488,435  $312,866  $218,661  $116,822  $48,233  $289,603  $1,474,620 
Government guarantees (25,172) (36,531) (9,751) (12,885) (2,964) (5,314) (92,617)
Total pass loans, net of government guarantees $463,263  $276,335  $208,910  $103,937  $45,269  $284,289  $1,382,003 
Total classified loans $137  $4,879  $1,658  $365  $3,592  $16,534  $27,165 
Government guarantees —  (4,396) (1,135) —  —  (9,293) (14,824)
Total classified loans, net government guarantees $137  $483  $523  $365  $3,592  $7,241  $12,341 


20


Past Due Loans: The following tables present an aging of contractually past due loans as of the periods presented:
(In Thousands) 30-59 Days
Past Due		 60-89 Days
Past Due		 Greater Than
90 Days Past Due		 Total Past
Due		 Current Total Greater Than 90 Days Past Due Still Accruing
June 30, 2023            
Commercial & industrial loans $—  $—  $400  $400  $418,352  $418,752  $— 
Commercial real estate:
     Owner occupied properties —  —  411  411  348,423  348,834  — 
     Non-owner occupied and multifamily properties —  —  —  490,821  490,821  — 
Residential real estate:
     1-4 family residential properties secured by first liens 28  128  —  156  160,390  160,546  — 
     1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens —  —  161  161  24,995  25,156  — 
     1-4 family residential construction loans —  —  109  109  35,240  35,349  — 
Other construction, land development and raw land loans —  1,545  1,545  93,579  95,124  — 
Obligations of states and political subdivisions in the US —  —  —  —  35,325  35,325  — 
Agricultural production, including commercial fishing —  —  —  —  40,767  40,767  — 
Consumer loans —  —  —  —  5,551  5,551  — 
Other loans —  —  —  —  3,014  3,014  — 
Total $28  $128  $2,626  $2,782  $1,656,457  $1,659,239  $— 
December 31, 2022
Commercial & industrial loans $37  $521  $56  $614  $357,514  $358,128  $— 
Commercial real estate:
     Owner occupied properties —  —  798  798  349,175  349,973  — 
     Non-owner occupied and multifamily properties —  —  274  274  481,996  482,270  — 
Residential real estate:
     1-4 family residential properties secured by first liens 60  79  72  211  73,170  73,381  — 
     1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 112  —  127  239  20,020  20,259  — 
     1-4 family residential construction loans —  —  109  109  43,891  44,000  — 
Other construction, land development and raw land loans —  —  1,545  1,545  97,637  99,182  — 
Obligations of states and political subdivisions in the US —  —  —  —  32,539  32,539  — 
Agricultural production, including commercial fishing —  —  —  —  34,099  34,099  — 
Consumer loans 6  80  —  86  4,249  4,335  — 
Other loans —  —  —  —  3,619  3,619  — 
Total $215  $680  $2,981  $3,876  $1,497,909  $1,501,785  $— 


21

Nonaccrual loans: Nonaccrual loans net of government guarantees totaled $5.3 million and $6.4 million at June 30, 2023 and December 31, 2022, respectively. The following table presents loans on nonaccrual status and loans on nonaccrual status for the periods presented for which there was no related ACL. All loans with no ACL are individually evaluated for credit losses in the Company's Current Expected Credit Losses methodology.

June 30, 2023 December 31, 2022
(In  Thousands) Nonaccrual Nonaccrual With No ACL Nonaccrual Nonaccrual With No ACL
Commercial & industrial loans $5,236  $5,236  $3,294  $3,287 
Commercial real estate:
     Owner occupied properties 470  470  1,457  1,457 
     Non-owner occupied and multifamily properties —  —  274  274 
Residential real estate:
     1-4 family residential properties secured by first liens 132  129  151  144 
     1-4 family residential properties secured by junior liens
      and revolving secured by 1-4 family first liens		 231  186  246  198 
     1-4 family residential construction loans 109  109  109  109 
Other construction, land development and raw land loans 1,545  1,545  1,545  1,545 
Total nonaccrual loans 7,723  7,675  7,076  7,014 
Government guarantees on nonaccrual loans (2,374) (2,374) (646) (646)
Net nonaccrual loans $5,349  $5,301  $6,430  $6,368 


There was no interest on nonaccrual loans reversed through interest income during three and six-month periods ending June 30, 2023. There was no interest on nonaccrual loans reversed through interest income during the three-month period ending June 30, 2022 and $2,000 interest on nonaccrual loans reversed through interest income during the six-month period ending June 30, 2022.

There was no interest earned on nonaccrual loans with a principal balance during the three and six-month periods ending June 30, 2023 and June 30, 2022. However, the Company recognized interest income of $205,000 and $873,000 in the three-month periods ending June 30, 2023 and 2022, respectively, and $384,000 and $930,000 in the six-month periods ending June 30, 2023 and 2022, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.

Loan Modifications: The Company modifies loans to borrowers experiencing financial difficulty as a normal part of our business. These modifications include providing term extensions/modifications, payment modifications, interest rate modifications, or, on rare occasions, principal forgiveness. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL. The Company may provide multiple types of concessions on one loan.

As noted in Note 1, the Company adopted ASU 2022-02 effective January 1, 2023. ASU 2022-02 eliminates the accounting guidance for loans classified as TDRs. TDRs totaled $5.1 million at December 31, 2022.
The following table shows the amortized cost basis of the loans that were both experiencing financial difficulty and modified during the period indicated, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below:

22

June 30, 2023
Term Modification Payment Modification Interest Rate Modification Principal Forgiveness Total Modifications Percentage of Class of Financing Receivable
(In Thousands)
Commercial & industrial loans $2,468  $1,988  $—  $—  $4,456  1  %
Commercial real estate:
Owner occupied properties —  —  —  —  —  —  %
Non-owner occupied and multifamily properties —  —  —  —  —  —  %
Residential real estate:
1-4 family residential properties secured by first liens —  —  —  —  —  —  %
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens —  —  —  —  —  —  %
1-4 family residential construction loans —  —  —  —  —  —  %
Other construction, land development and raw land loans —  —  —  —  —  —  %
Obligations of states and political subdivisions in the US —  —  —  —  —  —  %
Agricultural production, including commercial fishing —  —  —  —  —  —  %
Consumer loans —  —  —  —  —  —  %
Other loans —  —  —  —  —  —  %
Total $2,468  $1,988  $—  $—  $4,456  —  %

The Company has no outstanding commitments to the borrowers included in the previous table.

The Company monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. As of June 30, 2023, no loan modifications were past due.

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three-months ended June 30, 2023:

June 30, 2023
Principal Forgiveness Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (months)
(In Thousands)
Commercial & industrial loans $—  —  % 3
Commercial real estate:
Owner occupied properties —  —  % 0
Non-owner occupied and multifamily properties —  —  % 0
Residential real estate:
1-4 family residential properties secured by first liens —  —  % 0
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens —  —  % 0
1-4 family residential construction loans —  —  % 0
Other construction, land development and raw land loans —  —  % 0
Obligations of states and political subdivisions in the US —  —  % 0
Agricultural production, including commercial fishing —  —  % 0
Consumer loans —  —  % 0
Other loans —  —  % 0
Total $—  —  % 3
23


There were no loans that had a payment default during the three-months ended June 30, 2023 which were modified in the twelve months prior to that default to borrowers experiencing financial difficulty.

Upon the Company's determination that a modified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

The provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company has elected to adopt these provisions of the CARES Act. As of June 30, 2023, the Company has no loan modifications related to COVID-19, which are not classified as TDRs. At December 31, 2022, the Company had made the following types of loan modifications related to COVID-19, which are not classified as TDRs principal balance outstanding of:
Loan Modifications due to COVID-19 as of December 31, 2022
(Dollars in thousands) Interest Only Full Payment Deferral Total
Portfolio loans $999  $—  $999 
Number of modifications 1  —  1 
4. Purchased Receivables
Purchased receivables are carried at their principal amount outstanding, net of an ACL, and have a maturity of less than one year. There were no purchased receivables past due at June 30, 2023 or December 31, 2022, and there were no restructured purchased receivables at June 30, 2023 or December 31, 2022.
Income on purchased receivables is accrued and recognized on the principal amount outstanding using an effective interest method except when management believes doubt exists as to the collectability of the income or principal.  There were no nonperforming purchased receivables as of June 30, 2023 or December 31, 2022.
There was no activity and no balance in the ACL for purchased receivables as of June 30, 2023 or December 31, 2022.
The following table summarizes the components of net purchased receivables for the dates indicated:
(In Thousands) June 30, 2023 December 31, 2022
Purchased receivables $21,866  $19,994 
Allowance for credit losses - purchased receivables —  — 
Total $21,866  $19,994 

24

5. Servicing Rights
Mortgage servicing rights
The following table details the activity in the Company's mortgage servicing rights ("MSR") for the six-month periods ended June 30, 2023 and 2022:
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2023 2022 2023 2022
Balance, beginning of period $18,303  $15,422  $18,635  $13,724 
Additions for new MSR capitalized 519  1,128  982  2,115 
Changes in fair value:
  Due to changes in model inputs of assumptions (1)
 (3) (225) (215) 967 
  Other (2)
 (571) (24) (1,154) (505)
Balance, end of period $18,248  $16,301  $18,248  $16,301 

(1) Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates.
(2) Represents changes due to collection/realization of expected cash flows over time.

The following table details information related to our serviced mortgage loan portfolio as of June 30, 2023 and December 31, 2022:
(In Thousands) June 30, 2023 December 31, 2022
Balance of mortgage loans serviced for others $921,616  $898,840 
MSR as a percentage of serviced loans 1.98  % 2.07  %

    The Company recognized servicing fees of $906,000 and $804,000 during the three-month periods ending June 30, 2023 and 2022, respectively, and $1,811,000 and $1,587,000 during the six-month periods ending June 30, 2023 and 2022, respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

    The following table outlines the weighted average key assumptions used in measuring the fair value of MSR as of June 30, 2023 and December 31, 2022:
June 30, 2023 December 31, 2022
Constant prepayment rate 7.70  % 6.64  %
Discount rate 10.97  % 11.25  %

25

    Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at June 30, 2023 and December 31, 2022 were as follows:
(In Thousands) June 30, 2023 December 31, 2022
Aggregate portfolio principal balance $921,616  $898,840 
Weighted average rate of note 3.62  % 3.47  %
June 30, 2023 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change
Constant prepayment rate 7.70  % 8.38  % 10.82  %
Discount rate 10.97  % 9.97  % 8.97  %
Fair value MSR $18,248  $17,490  $14,387 
Percentage of MSR 1.98  % 1.90  % 1.56  %
December 31, 2022
Constant prepayment rate 6.64  % 13.28  % 19.92  %
Discount rate 11.25  % 10.25  % 9.25  %
Fair value MSR $18,635  $14,763  $11,796 
Percentage of MSR 2.07  % 1.64  % 1.31  %

    The above tables show the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four family Alaska Housing Finance Corporation/FNMA/FHLMC serviced home loan. The above tables reference a 100 basis point and 200 basis point decrease in discount rates.

    These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSR is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.

Commercial servicing rights
    The commercial servicing rights asset ("CSR") has a carrying value of $2.1 million at June 30, 2023 and December 31, 2022, respectively, and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets. Total commercial loans serviced for others were $286.6 million and $285.3 million at June 30, 2023 and December 31, 2022, respectively. Key assumptions used in measuring the fair value of the CSR as of June 30, 2023 and December 31, 2022 include a constant prepayment rate of 10.19% and a discount rate of 12.00%.


6. Leases

    The Company's lease commitments consist primarily of agreements to lease land and office facilities that it occupies to operate several of its retail branch locations that are classified as operating leases and are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities. As of June 30, 2023, the Company has operating lease ROU assets of $10.1 million and operating lease liabilities of $10.1 million. As of December 31, 2022, the Company had operating lease ROU assets of $9.9 million and operating lease liabilities of $9.9 million. The Company did not have any agreements that are classified as finance leases as of June 30, 2023 or December 31, 2022.

26

    The following table presents additional information about the Company's operating leases:
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2023 2022 2023 2022
Lease Cost
Operating lease cost(1)
 $702  $672  $1,401  $1,353 
Short term lease cost(1)
 46  5  79  17 
Total lease cost $748  $677  $1,480  $1,370 
Other information
Operating leases - operating cash flows $1,307  $1,278 
Weighted average lease term - operating leases, in years 10.47 10.79
Weighted average discount rate - operating leases 3.49  % 3.26  %
(1)
 Expenses are classified within occupancy expense on the Consolidated Statements of Income.

    The table below reconciles the remaining undiscounted cash flows for the next five years for each twelve-month period presented (unless otherwise indicated) and the total of the subsequent remaining years to the operating lease liabilities recorded on the balance sheet:
(In Thousands) Operating Leases
2023 (Six months) $1,321 
2024 2,478 
2025 2,271 
2026 1,130 
2027 731 
Thereafter 4,418 
Total minimum lease payments $12,349 
Less: amount of lease payment representing interest (2,262)
Present value of future minimum lease payments $10,087 

27

7.  Derivatives
Derivatives swaps related to community banking activities     
    The Company enters into commercial loan interest rate swap agreements with commercial banking customers which are offset with a corresponding swap agreement with a third party financial institution ("counterparty"). The Company has agreements with its counterparties that contain provisions that provide that if the Company fails to maintain its status as a "well-capitalized" institution under regulatory guidelines, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. These agreements also require that the Company and the counterparty collateralize any fair value shortfalls that exceed $250,000 with eligible collateral, which includes cash and securities backed with the full faith and credit of the federal government. Similarly, the Company could be required to settle its obligations under the agreement if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels. The Company pledged $553,000 as of both June 30, 2023 and December 31, 2022 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.
    The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $221.6 million and $226.2 million at June 30, 2023 and December 31, 2022, respectively. At June 30, 2023, the notional amount of interest rate swaps is made up of 20 variable to fixed rate swaps to commercial loan customers totaling $110.8 million, and 20 fixed to variable rate swaps with a counterparty totaling $110.8 million. Changes in fair value from these 20 interest rate swaps offset each other in the first six months of 2023. The Company recognized $61,000 and $87,000 in fee income related to interest rate swaps in the three-month periods ending June 30, 2023 and 2022, respectively, and $61,000 and $90,000 in fee income related to interest rate swaps in the six-month periods ending June 30, 2023 and 2022, respectively. Interest rate swap income is recorded in other operating income on the Consolidated Statements of Income. None of these interest rate swaps are designated as hedging instruments.
    The Company has an interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures, which is floating rate debt, by swapping the cash flows with an interest rate swap which receives floating and pays fixed. The Company has designated this interest rate swap as a hedging instrument. The interest rate swap effectively fixes the Company's interest payments on the $10.0 million of junior subordinated debentures held under Northrim Statutory Trust 2 at 3.72% through its maturity date. As of June 30, 2023, the floating rate that the dealer pays is equal to the three month LIBOR plus 1.37% which reprices quarterly on the payment date. This rate was 6.92% as of June 30, 2023. Upon the next reprice date, which is September 15, 2023, the floating rate will be based on the three month Secured Overnight Financing Rate, also known as SOFR, as LIBOR rates ceased to be published effective July 1, 2023. The Company pledged $130,000 in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of June 30, 2023 and $130,000 as of December 31, 2022. Changes in the fair value of this interest rate swap are reported in other comprehensive income on the Consolidated Statements of Income. The unrealized gain on this interest rate swap was $1.4 million as of June 30, 2023 and the unrealized loss was $1.5 million as of December 31, 2022.
Derivatives related to home mortgage banking activities    
    The Company also uses derivatives to hedge the risk of changes in the fair values of interest rate lock commitments. The Company enters into commitments to originate residential mortgage loans at specific rates; the value of these commitments are detailed in the table below as "interest rate lock commitments". The Company also hedges the interest rate risk associated with its residential mortgage loan commitments, which are referred to as "retail interest rate contracts" in the table below. Market risk with respect to commitments to originate loans arises from changes in the value of contractual positions due to changes in interest rates. RML had commitments to originate mortgage loans held for sale totaling $71.1 million and $29.1 million at June 30, 2023 and December 31, 2022, respectively. Changes in the value of RML's interest rate derivatives are recorded in mortgage banking income on the Consolidated Statements of Income. None of these derivatives are designated as hedging instruments.

28

    The following table presents the fair value of derivatives not designated as hedging instruments at June 30, 2023 and December 31, 2022:
(In Thousands) Asset Derivatives
June 30, 2023 December 31, 2022
Balance Sheet Location Fair Value Fair Value
Interest rate swaps Other assets $12,401  $12,725 
Interest rate lock commitments Other assets 851  440 
Retail interest rate contracts Other assets 122  — 
Total $13,374  $13,165 
(In Thousands) Liability Derivatives
June 30, 2023 December 31, 2022
Balance Sheet Location Fair Value Fair Value
Interest rate swaps Other liabilities $12,401  $12,725 
Retail interest rate contracts Other liabilities —  3 
Total $12,401  $12,728 
    The following table presents the net gains (losses) of derivatives not designated as hedging instruments for periods indicated below:
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) Income Statement Location 2023 2022 2023 2022
Retail interest rate contracts Mortgage banking income $291  $391  $168  $2,951 
Interest rate lock commitments Mortgage banking income 129  829  358  349 
Total $420  $1,220  $526  $3,300 
    Our derivative transactions with counterparties under International Swaps and Derivative Association master agreements include "right of set-off" provisions. "Right of set-off" provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes.

29

    The following table summarizes the derivatives that have a right of offset as of June 30, 2023 and December 31, 2022:
June 30, 2023 Gross amounts not offset in the Statement of Financial Position
(In Thousands) Gross amounts of recognized assets and liabilities Gross amounts offset in the Statement of Financial Position Net amounts of assets and liabilities presented in the Statement of Financial Position Financial Instruments Collateral Posted Net Amount
Asset Derivatives
Interest rate swaps $12,401 $—  $12,401 $—  $—  $12,401 
Retail interest rate contracts 122  —  122  —  —  122 
Liability Derivatives
Interest rate swaps $12,401 $—  $12,401 $—  $12,401 $— 
December 31, 2022 Gross amounts not offset in the Statement of Financial Position
(In Thousands) Gross amounts of recognized assets and liabilities Gross amounts offset in the Statement of Financial Position Net amounts of assets and liabilities presented in the Statement of Financial Position Financial Instruments Collateral Posted Net Amount
Asset Derivatives
Interest rate swaps $12,725 $—  $12,725 $—  $—  $12,725 
Liability Derivatives
Interest rate swaps $12,725 $—  $12,725 $—  $12,725 $— 
Retail interest rate contracts 3  —  3  —  —  3 


8.  Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Investment securities available for sale and marketable equity securities: Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Servicing rights: MSR and CSR are measured at fair value on a recurring basis. These assets are classified as Level 3 as quoted prices are not available. In order to determine the fair value of MSR and CSR, the present value of net expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates, and ancillary fee income net of servicing costs.

Derivative instruments: The fair value of the interest rate lock commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Company has determined that the majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.
30

However, as of June 30, 2023, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives. As a result, the Company has classified its interest rate derivative valuations in Level 2 of the fair value hierarchy.

Commitments to extend credit and standby letters of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

Assets Subject to Nonrecurring Adjustment to Fair Value

    The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets, impaired loans, and Other Real Estate Owned ("OREO") at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the write-down of individual assets.

    The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and impaired loans as of each reporting date. In-house appraisals are considered Level 3 inputs and external appraisals are considered Level 2 inputs. The Company’s determination of which method to use is based upon several factors. The Company takes into account compliance with legal and regulatory guidelines, the amount of the loan, the size of the assets, the location and type of property to be valued and how critical the timing of completion of the analysis is to the assessment of value. Those factors are balanced with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists.

Limitations

    Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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    Estimated fair values as of the periods indicated are as follows:
  June 30, 2023 December 31, 2022
(In Thousands) Carrying Amount Fair Value Carrying Amount Fair  Value
Financial assets:    
Level 1 inputs:    
     Cash, due from banks and deposits in other banks $36,752  $36,752  $259,350  $259,350 
     Investment securities available for sale 347,171  347,171  356,837  356,837 
     Marketable equity securities 10,604  10,604  10,740  10,740 
Level 2 inputs:    
     Investment securities available for sale 323,968  323,968  320,192  320,192 
     Investment in Federal Home Loan Bank stock 5,858  5,858  3,816  3,816 
     Loans held for sale 60,759  60,759  27,538  27,538 
     Interest rate swaps 13,883  13,883  14,179  14,179 
     Retail interest rate contracts 122  122  —  — 
Level 3 inputs:    
     Investment securities held to maturity 36,750  32,600  36,750  32,639 
     Loans 1,659,239  1,549,359  1,501,785  1,408,350 
     Purchased receivables, net 21,866  21,866  19,994  19,994 
     Interest rate lock commitments 851  851  440  440 
     Mortgage servicing rights 18,248 18,248 18,635  18,635 
     Commercial servicing rights 2,139 2,139 2,129  2,129 
Financial liabilities:    
Level 2 inputs:    
     Deposits $2,302,311  $2,298,145  $2,387,211  $2,383,975 
     Borrowings 64,887  63,041  14,095  12,382 
     Interest rate swaps 12,401  12,401  12,725  12,725 
     Retail interest rate contracts —  —  3  3 
Level 3 inputs:
     Junior subordinated debentures 10,310  11,700  10,310  11,266 


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    The following table sets forth the balances as of the periods indicated of assets and liabilities measured at fair value on a recurring basis:
(In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
June 30, 2023        
Assets:
    Available for sale securities        
    U.S. Treasury and government sponsored entities $597,665  $333,691  $263,974  $— 
    Municipal securities 802  —  802  — 
    Corporate bonds 13,480  13,480  —  — 
    Collateralized loan obligations 59,192  —  59,192  — 
           Total available for sale securities $671,139  $347,171  $323,968  $— 
    Marketable equity securities $10,604  $10,604  $—  $— 
           Total marketable equity securities $10,604  $10,604  $—  $— 
Interest rate swaps $13,556  $—  $13,556  $— 
Interest rate lock commitments 851  —  —  851 
Mortgage servicing rights 18,248  —  —  18,248 
Commercial servicing rights 2,139  —  —  2,139 
Retail interest rate contracts 122  —  122  — 
           Total other assets $34,916  $—  $13,678  $21,238 
Liabilities:
Interest rate swaps $12,401  $—  $12,401  $— 
           Total other liabilities $12,401  $—  $12,401  $— 
December 31, 2022        
Assets:
Available for sale securities        
U.S. Treasury and government sponsored entities $595,161  $333,193  $261,968  $— 
Municipal securities 795  —  795  — 
Corporate bonds 23,644  23,644  —  — 
Collateralized loan obligations 57,429  —  57,429  — 
           Total available for sale securities $677,029  $356,837  $320,192  $— 
Marketable equity securities $10,740  $10,740  $—  $— 
           Total marketable securities $10,740  $10,740  $—  $— 
Interest rate swaps $14,178  $—  $14,178  $— 
Interest rate lock commitments 440  —  —  440 
Mortgage servicing rights 18,635  —  —  18,635 
Commercial servicing rights 2,129  —  —  2,129 
           Total other assets $35,382  $—  $14,178  $21,204 
Liabilities:
Interest rate swaps $12,725  $—  $12,725  $— 
Retail interest rate contracts 3  —  3  — 
           Total other liabilities $12,728  $—  $12,728  $— 

    



33

    
The following tables provide a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the six-month periods ended June 30, 2023 and 2022:

(In Thousands) Beginning balance Change included in earnings Purchases and issuances Sales and settlements Ending balance Net change in unrealized gains (losses) relating to items held at end of period
Three Months Ended June 30, 2023  
Interest rate lock commitments $685  ($378) $2,735  ($2,191) $851  $851 
Mortgage servicing rights 18,303  (574) 519  —  18,248  — 
Commercial servicing rights 2,170  (56) 25  —  2,139  — 
Total $21,158  ($1,008) $3,279  ($2,191) $21,238  $851 
Three Months Ended June 30, 2022
Interest rate lock commitments $965  ($520) $3,863  ($1,741) $2,567  $2,567 
Mortgage servicing rights 15,422  (249) 1,128  —  16,301  — 
Commercial servicing rights 1,091  (22) —  —  1,069  — 
Total $17,478  ($791) $4,991  ($1,741) $19,937  $2,567 
(In Thousands) Beginning balance Change included in earnings Purchases and issuances Sales and settlements Ending balance Net change in unrealized gains (losses) relating to items held at end of period
Six Months Ended June 30, 2023  
Interest rate lock commitments $440  ($552) $4,232  ($3,269) $851  $851 
Mortgage servicing rights 18,635  (1,369) 982  —  18,248  — 
Commercial servicing rights 2,129  (105) 115  —  2,139  — 
Total $21,204  ($2,026) $5,329  ($3,269) $21,238  $851 
Six Months Ended June 30, 2022
Interest rate lock commitments $1,387  ($1,029) $8,212  ($6,004) $2,567  $2,567 
Mortgage servicing rights 13,724  462  2,115  —  16,301  — 
Commercial servicing rights 1,084  (48) 33  —  1,069  — 
Total $16,195  ($615) $10,360  ($6,004) $19,937  $2,567 

    There were no changes in unrealized gains and losses for the three and six-month periods ending June 30, 2023 and 2022 included in other comprehensive income for recurring Level 3 fair value measurements.

34

    As of and for the periods ending June 30, 2023 and December 31, 2022, except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis.  For loans individually measured for credit losses, the Company classifies fair value measurements using observable inputs, such as external appraisals, as Level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as Level 3 valuations in the fair value hierarchy.               
(In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
June 30, 2023        
  Loans individually measured for credit losses $—  $—  $—  $— 
Total $—  $—  $—  $— 
December 31, 2022        
  Loans individually measured for credit losses $—  $—  $—  $— 
Total $—  $—  $—  $— 
    The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three and six-month periods ended June 30, 2023 and 2022:

Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2023 2022 2023 2022
Loans individually measured for credit losses ($27) ($89) $—  $— 
Total loss from nonrecurring measurements ($27) ($89) $—  $— 


Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
    The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at June 30, 2023 and December 31, 2022:
Financial Instrument Valuation Technique Unobservable Input Weighted Average Rate Range
June 30, 2023
Interest rate lock commitment External pricing model Pull through rate 92.17  %
Mortgage servicing rights Discounted cash flow Constant prepayment rate
7.20% - 14.62%
Discount rate
9.50% - 11.00%
Commercial servicing rights Discounted cash flow Constant prepayment rate
4.19% - 22.87%
Discount rate 12.00  %
December 31, 2022
Interest rate lock commitment External pricing model Pull through rate 93.18  %
Mortgage servicing rights Discounted cash flow Constant prepayment rate
6.62% - 7.43%
Discount rate
11.25%
Commercial servicing rights Discounted cash flow Constant prepayment rate
4.19% - 22.87%
Discount rate 12.00  %

35



9.  Segment Information
    The Company's operations are managed along two operating segments: Community Banking and Home Mortgage Lending. The Community Banking segment's principal business focus is the offering of loan and deposit products to business and consumer customers in its primary market areas. As of June 30, 2023, the Community Banking segment operated 19 branches throughout Alaska. The Home Mortgage Lending segment's principal business focus is the origination and sale of mortgage loans for 1-4 family residential properties.
    Summarized financial information for the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables:
Three Months Ended June 30, 2023
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Interest income $28,675  $3,145  $31,820 
Interest expense 5,975  703  6,678 
   Net interest income 22,700  2,442  25,142 
Provision for credit losses 1,407  —  1,407 
Other operating income 3,067  3,913  6,980 
Other operating expense 17,805  5,977  23,782 
   Income before provision for income taxes 6,555  378  6,933 
Provision for income taxes 1,192  164  1,356 
Net income $5,363  $214  $5,577 

Three Months Ended June 30, 2022
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Interest income $22,369  $623  $22,992 
Interest expense 766  14  780 
   Net interest income 21,603  609  22,212 
Provision for credit losses 463  —  463 
Other operating income 1,907  5,900  7,807 
Other operating expense 16,415  6,823  23,238 
   Income (loss) before provision for income taxes 6,632  (314) 6,318 
Provision for income taxes 1,605  (82) 1,523 
Net income (loss) $5,027  ($232) $4,795 

36

Six Months Ended June 30, 2023
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Interest income $58,168  $3,447  $61,615 
Interest expense 10,716  725  11,441 
   Net interest income 47,452  2,722  50,174 
Provision for credit losses 1,767  —  1,767 
Other operating income 5,967  5,921  11,888 
Other operating expense 35,222  12,069  47,291 
   Income (loss) before provision for income taxes 16,430  (3,426) 13,004 
Provision for income taxes 3,507  (910) 2,597 
Net income (loss) $12,923  ($2,516) $10,407 

Six Months Ended June 30, 2022
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Interest income $42,019  $1,031  $43,050 
Interest expense 1,507  27  1,534 
   Net interest income 40,512  1,004  41,516 
Provision for credit losses 313  —  313 
Other operating income 5,748  12,882  18,630 
Other operating expense 31,246  13,093  44,339 
   Income before provision for income taxes 14,701  793  15,494 
Provision for income taxes 3,246  227  3,473 
Net income $11,455  $566  $12,021 

June 30, 2023
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Total assets $2,396,571  $241,636  $2,638,207 
Loans held for sale $—  $60,759  $60,759 
December 31, 2022
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Total assets $2,550,578  $123,740  $2,674,318 
Loans held for sale $—  $27,538  $27,538 


37

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, 2022.
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: potential further increases in interest rates; the value of securities held in our investment portfolio; the impact of the results of government initiatives 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; inflation, supply-chain constraints, and potential geopolitical instability, including the war in Ukraine; 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 provision 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, such as the COVID-19 pandemic, or similar health threats and measures implemented to combat them; 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, 2022, 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.
    




38

Update on Economic Conditions

The Alaska Department of Labor ("DOL") has released preliminary jobs data through May of 2023. The DOL reported Alaska’s seasonally adjusted unemployment rate for May of 2023 decreased to 3.6%, which is now lower than the U.S. rate, which rose to 3.7%. The DOL reports total payroll jobs in Alaska increased 1.8% or 5,800 jobs compared to May of 2022.
According to the DOL, Leisure and Hospitality had the largest growth of 7.2% year over year in May 2023. The 2,600 job increase over the prior 12 months brings the sector to 38,700 jobs, which is higher than the pre-pandemic level. Professional and Business Services added 800 jobs and Health Care increased by 600 jobs over the same 12 month period. The Oil and Gas sector has benefited from higher energy prices and new exploration activity, resulting in an increase of 300 jobs or 4.3% since May of 2022. Transportation, Warehousing and Utilities added 400 jobs and Retail also increased by 400 jobs year over year compared to May of 2022. Manufacturing, which is primarily seafood processing, declined 500 jobs and Information decreased 100 jobs for the same 12 month period.

Alaska’s Gross State Product (“GSP”) in the first quarter of 2023, was estimated to be $63.8 billion in current dollars, according to the Federal Bureau of Economic Analysis ("BEA"). Alaska’s inflation adjusted “real” GSP grew 1.6% at annualized rates in the first quarter of 2023, compared to the average U.S. rate of 2%. Alaska’s real GSP improvement in the first quarter of 2023 was most positively impacted by gains in the Construction and Health Care sectors.

The BEA also calculated Alaska’s seasonally adjusted personal income at $52.1 billion in the first quarter of 2023. This was an annualized improvement of 7.2% for Alaska and larger than the national average of 5.1%. Alaskans had annualized wage earnings growth of 6.6%, compared to a U.S. average of 4.6% in the first quarter of 2023 as compared to a year ago.

The monthly average price of Alaska North Slope (“ANS”) crude oil has been in a stable range between $75.81 and $82.83 in the first six months of 2023. The Alaska Department of Revenue (“DOR”) calculated ANS crude oil production was 486 thousand barrels per day (“bpd”) in Alaska’s fiscal year ending June 30, 2022. The DOR has forecast production to increase to 494 thousand bpd in Alaska’s fiscal year 2023 and 504 thousand bpd in 2024. That number is projected by the DOR to grow to 556 thousand bpd in 2028. This is primarily a result of new production coming on line in the NPR-A region west of Prudhoe Bay.

According to the Mortgage Bankers Association, Alaska’s home mortgage delinquency rate in the first quarter of 2023 improved to 2.7% compared to 2.9% in the fourth quarter of 2022. Alaska’s delinquency rate of 2.7% compares to the national average rate of 3.3% for the first quarter of 2023. The Mortgage Bankers Association survey reported that the mortgage foreclosure inventory in Alaska in the first quarter of 2023 was 0.54% and the national average was 0.57%.

According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 7.6% in 2022 to $456,544. This was the fifth consecutive year of price increases, following growth of 6.9% in 2021 and 5.8% in 2020. In the first six months of 2023, the average sales price in Anchorage continued to increase 3.7% to $473,330.

Average sales prices for single family homes in the Matanuska Susitna Borough rose 9.9% in 2022 to $382,504, continuing a trend of average price increases for more than a decade. Average home prices in the Matanuska Susitna Borough increased 15.6% in 2021 and 9.9% in 2020. In the first six months of 2023, the average sales price in the Matanuska Susitna Borough has increased 3.5% to $395,952. These two markets represent the regions where the vast majority of the residential lending activity of Northrim Bank (the “Bank”) occurs.

The Alaska Multiple Listing Services reported there were 934 housing units sold in Anchorage in the first six months of 2023, compared to 1,298 in the first half of 2022 for a decline of 33.2%. Anchorage home sales also declined by 21.2% in 2022 compared to 2021. A lack of inventory due to a reduction in the supply of new homes being constructed and a lower churn of existing homes being listed on the market are the primary reasons for the decline in sales. The limited supply of homes is not keeping up with demand and therefore price increases are continuing, despite the higher interest rate environment. The Matanuska Susitna Borough also experienced a lower volume of home sales in the last 18 months. For the first six months of 2023 there were 761 homes sales in the Matanuska Susitna Borough, compared to 1,077 in the first half of 2022 for a decrease of 29.3%. Matanuska Susitna Borough home sales also declined 11.9% in 2022 compared to the prior year according to the Alaska Multiple Listing Services.

The Board of Governors of the Federal Reserve System increased its benchmark interest rate target from 4.25%-4.50% as of December 31, 2022 to 5.00%-5.25% as of June 30, 2023. Similarly, the prime rate of interest has increased from 7.50% as of December 31, 2022 to 8.25% as of June 30, 2023.

39



Highlights and Summary of Performance - Second Quarter of 2023

The Company reported net income and earnings per diluted share of $5.6 million and $0.98, respectively, for the second quarter of 2023 compared to net income and earnings per diluted share of $4.8 million and $0.83, respectively, for the second quarter of 2022. The Company reported net income and earnings per diluted share of $10.4 million and $1.82, respectively, for the first six months of 2023 compared to net income and earnings per diluted share of $12.0 million and $2.03, respectively, for the first six months of 2022. The increase in net income for the three-month period ending June 30, 2023 compared to the same period last year is primarily attributable to an increase in net interest income, which was only partially offset by a higher provision for credit losses and a decrease in net income in the Home Mortgage Lending segment as a result of decreased production and yields on sold loans. The decrease in net income for the six-month period ending June 30, 2023 compared to the same period last year is primarily the result of decreased mortgage banking income and a higher provision for credit losses which was only partially offset by increased net interest income. The first quarter of 2022 also included $2.0 million in keyman insurance proceeds. Increases in interest rates drove the decrease in production in the Home Mortgage Lending segment and the increase in net interest income in the first six months of 2023 as compared to the same period a year ago.
•Net interest income in the second quarter of 2023 increased 13% to $25.1 million compared to $22.2 million in the second quarter of 2022. Net interest income in the first six months of 2023 increased 21% to $50.2 million compared to $41.5 million in the first six months of 2022.
•Net interest margin was 4.14% for the second quarter of 2023, a 47 basis point increase from the second quarter of 2022. Net interest margin was 4.18% for the first six months of 2023, a 76 basis point increase from the first six months of 2022. The increase in both periods compared to the same periods in 2022 was primarily due to higher yields on all interest-earning asset categories, which were only partially offset by higher costs on interest-bearing deposits.
•The weighted average interest rate for new loans booked in the second quarter of 2023 was 6.93% compared to 5.07% in the second quarter a year ago.
•Loans were $1.66 billion at June 30, 2023, up 10% from December 31, 2022 primarily as a result of commercial and consumer mortgage loan growth. At June 30, 2023, approximately 74% of loans are variable and 15% of earning assets are subject to rate increases in the third quarter of 2023 when prime or other rate indices increase.
•Total deposits were $2.30 billion at June 30, 2023, down 4% from December 31, 2022. Demand deposits decreased 11% at June 30, 2023 from December 31, 2022 and currently represent 31% of total deposits.
•The average cost of interest-bearing deposits for the quarter was 1.56% at June 30, 2023, up from 0.16% at June 30, 2022.
•Total liquid assets and investments and loans maturing within one year were $442.9 million and our funds available for borrowing under our existing lines of credit were $1.224 billion at June 30, 2023.

Other financial measures are shown in the table below:
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Return on average assets, annualized 0.85  % 0.74  % 0.81  % 0.93  %
Return on average shareholders' equity, annualized 9.85  % 8.58  % 9.30  % 10.51  %
Dividend payout ratio 61.54  % 49.30  % 66.07  % 40.22  %
40

Nonperforming assets: Nonperforming assets, net of government guarantees were $5.6 million at June 30, 2023 and $6.4 million at December 31, 2022. Other Real Estate Owned ("OREO"), net of government guarantees, increased to $272,000 at June 30, 2023, from zero at December 31, 2022. Nonperforming loans, net of government guarantees decreased $1.1 million, or 17% to $5.3 million as of June 30, 2023 from $6.4 million as of December 31, 2022, primarily due to payoffs and pay downs in the first six months of 2023 that were only partially offset by the transfer of one lending relationship to nonaccrual status. $3.9 million, or 70% of nonperforming loans, net of government guarantees at June 30, 2023, are nonaccrual loans related to three commercial relationships.
    The following table summarizes nonperforming asset activity for the three-month periods ending June 30, 2023 and 2022.
Writedowns Transfers to
(In Thousands) Balance at March 31, 2023 Additions this quarter Payments this quarter /Charge-offs
 this quarter		 Transfers to OREO Performing Status
this quarter		 Sales this quarter Balance at June 30, 2023
Nonperforming loans $8,775  $—  ($1,003) ($49) $—  $—  $—  $7,723 
Nonperforming loans guaranteed by government (2,692) —  269  49  —  —  —  (2,374)
   Nonperforming loans, net 6,083  —  (734) —  —  —  —  5,349 
Other real estate owned 273  —  —  —  —  —  —  273 
   Total nonperforming assets,
   net of government guarantees $6,356  $—  ($734) $—  $—  $—  $—  $5,622 
Writedowns Transfers to
(In Thousands) Balance at March 31, 2022 Additions this quarter Payments this quarter /Charge-offs
 this quarter		 Transfers to OREO Performing Status
this quarter		 Sales this quarter Balance at June 30, 2022
Nonperforming loans $9,609  $22  ($1,464) ($166) $—  $—  $—  $8,001 
Nonperforming loans guaranteed by government (907) —  224  —  —  —  —  (683)
   Nonperforming loans, net 8,702  22  (1,240) (166) —  —  —  7,318 
Other real estate owned 5,638  —  —  —  —  —  —  5,638 
Other real estate owned guaranteed
by government (1,279) —  —  —  —  —  —  (1,279)
   Total nonperforming assets,
   net of government guarantees $13,061  $22  ($1,240) ($166) $—  $—  $—  $11,677 
Potential problem loans: Potential problem loans are loans which are currently performing in accordance with contractual terms but that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, or impaired loans. These loans are closely monitored and their performance is reviewed by management on a regular basis. At June 30, 2023, management had identified potential problem loans of $1.7 million as compared to potential problem loans of $1.6 million at December 31, 2022. The slight increase in potential problem loans from December 31, 2022 to June 30, 2023 is primarily the result of increased loan balances which were only partially offset by various loan paydowns in the first six months of 2023.


RESULTS OF OPERATIONS
Income Statement
    Net Income
Net income for the second quarter of 2023 increased $782,000 to $5.6 million as compared to $4.8 million for the same period in 2022.
41

The increase in net income in the second quarter of 2023 as compared to the same quarter a year ago is mostly attributable to a $2.9 million increase in net interest income, which was only partially offset by a $2.0 million decrease in mortgage banking income and an increase in the provision for credit losses.
Net income for the first half of 2023 decreased $1.6 million to $10.4 million as compared to $12.0 million for the same period in 2022. The decrease in net income in the first six months of 2023 as compared to the same period a year ago is primarily due to a decrease in mortgage banking income, due to lower production volume, as well as an increase in the provision for credit losses which was only partially offset by an increase in net interest income. Additionally, the Company received $2.0 million in life insurance proceeds in the six-month period ended June 30, 2022 in connection with the death of the Company’s former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021.
    Net Interest Income/Net Interest Margin
    Net interest income for the second quarter of 2023 increased $2.9 million, or 13%, to $25.1 million as compared to $22.2 million for the second quarter of 2022. The net interest margin increased 47 basis points to 4.14% in the second quarter of 2023 as compared to 3.67% in the second quarter of 2022. Net interest income for the first six months of 2023 increased $8.7 million, or 21%, to $50.2 million as compared to $41.5 million for the first six months of 2022. The net interest margin increased 76 basis points to 4.18% in the first six months of 2023 as compared to 3.42% in the first six months of 2022.
The increase in net interest income in the second quarter and first six months of 2023 compared to the same periods in 2022 was primarily the result of increased interest on loans, investments, and interest bearing deposits in other banks which was only partially offset by an increase in interest expense on interest-bearing deposits and borrowings.
The increase in net interest margin in the second quarter and first six months of 2023 as compared to the same periods of 2022 was primarily the result of higher yields on earning-assets. Changes in net interest margin in the three and six-month period ended June 30, 2023 as compared to the same period in the prior year are detailed below:
Three Months Ended June 30, 2023 vs. June 30, 2022
Nonaccrual interest adjustments (0.11) %
Impact of SBA Paycheck Protection Program loans (0.17) %
Interest rates on loans and liabilities and loan fees, all other loans 0.68  %
Volume and mix of other interest-earning assets and liabilities 0.07  %
Change in net interest margin 0.47  %
Six Months Ended June 30, 2023 vs. June 30, 2022
Nonaccrual interest adjustments (0.05) %
Impact of SBA Paycheck Protection Program loans (0.20) %
Interest rates on loans and liabilities and loan fees, all other loans 0.96  %
Volume and mix of other interest-earning assets and liabilities 0.05  %
Change in net interest margin 0.76  %


42

Components of Net Interest Margin

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended June 30, 2023 and 2022. Average yields or costs are calculated on a tax-equivalent basis.
(Dollars in Thousands) Three Months Ended June 30,
Interest income/ Average Tax Equivalent
Average Balances Change expense Change
 Yields/Costs6
2023 2022 $ % 2023 2022 $ % 2023 2022 Change
Interest-bearing deposits in other banks1
 $66,058  $382,015  ($315,957) (83) % $828  $766  $62  8  % 4.96  % 0.79  % 4.17  %
Taxable long-term investments2
 727,833  589,553  138,280  23  % 4,679  2,419  2,260  93  % 2.40  % 1.59  % 0.81  %
Loans held for sale 37,594  59,677  (22,083) (37) % 559  620  (61) (10) % 5.96  % 4.16  % 1.80  %
Loans3,4
 1,603,126  1,398,149  204,977  15  % 25,754  19,187  6,567  34  % 6.48  % 5.52  % 0.96  %
   Interest-earning assets5
 2,434,611  2,429,394  5,217  0  % 31,820  22,992  8,828  38  % 5.31  % 3.83  % 1.48  %
Nonearning assets 185,342  172,655  12,687  7  %
          Total $2,619,953  $2,602,049  $17,904  1  %
Interest-bearing demand $765,984  $669,848  $96,136  14  % $2,849  $167  $2,682  1,606  % 1.49  % 0.10  % 1.39  %
Savings deposits 282,579  349,108  (66,529) (19) % 326  118  208  176  % 0.46  % 0.14  % 0.32  %
Money market deposits 245,790  322,384  (76,594) (24) % 813  103  710  689  % 1.33  % 0.13  % 1.20  %
Time deposits 273,820  172,617  101,203  59  % 2,126  211  1,915  908  % 3.11  % 0.49  % 2.62  %
   Total interest-bearing deposits 1,568,173  1,513,957  54,216  4  % 6,114  599  5,515  921  % 1.56  % 0.16  % 1.40  %
Borrowings 54,602  24,675  29,927  121  % 564  181  383  212  % 4.11  % 2.92  % 1.19  %
   Total interest-bearing liabilities 1,622,775  1,538,632  84,143  5  % 6,678  780  5,898  756  % 1.65  % 0.20  % 1.45  %
Non-interest bearing demand deposits 735,615  808,186  (72,571) (9) %
Other liabilities 34,514  31,064  3,450  11  %
Equity 227,049  224,167  2,882  1  %
          Total $2,619,953  $2,602,049  $17,904  1  %
Net interest income $25,142  $22,212  $2,930  13  %
Net interest margin 4.14  % 3.67  % 0.47  %
Average loans to average interest-earning assets 65.85  % 57.55  %
Average loans to average total deposits 69.59  % 60.21  %
Average non-interest deposits to average total deposits 31.93  % 34.80  %
Average interest-earning assets to average interest-bearing liabilities 150.03  % 157.89  %

1Consists of interest bearing deposits in other banks and domestic CDs.
2Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock.
3Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $1.1 million and $2.3 in the second quarter of 2023 and 2022, respectively.
4Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were $8.3 million and $8.8 million in the second quarter of 2023 and 2022, respectively.
5The 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.
6Tax-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%.
    
43

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the three-month periods ending June 30, 2023 and 2022. Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates. The Company did not have any fed funds sold or securities purchased with agreements to resell for the three-month periods ending June 30, 2023 and 2022.
(In Thousands) Three Months Ended June 30, 2023 vs. 2022
Increase (decrease) due to
Volume Rate Total
Interest Income:
   Short-term investments ($12) $74  $62 
   Taxable long-term investments 704  1,556  2,260 
   Loans held for sale (275) 214  (61)
   Loans 2,297  4,270  6,567 
          Total interest income $2,714  $6,114  $8,828 
Interest Expense:
   Interest-bearing demand $21  $2,661  $2,682 
   Savings deposits (27) 235  208 
   Money market deposits (31) 741  710 
   Time deposits 42  1,873  1,915 
         Interest-bearing deposits 5  5,510  5,515 
   Borrowings 356  27  383 
          Total interest expense $361  $5,537  $5,898 


44

The following table compares average balances and rates as well as margins on earning assets for the six-month periods ended June 30, 2023 and 2022. Average yields or costs are calculated on a tax-equivalent basis.
(Dollars in Thousands) Six Months Ended June 30,
Interest income/ Average Tax Equivalent
Average Balances Change expense Change
 Yields/Costs6
2023 2022 $ % 2023 2022 $ % 2023 2022 Change
Interest-bearing deposits in other banks1
 $98,314  $459,843  ($361,529) (79) % $2,317  $1,008  $1,309  130  % 4.69  % 0.44  % 4.25  %
Taxable long-term investments2
 727,722  540,563  187,159  35  % 9,291  3,967  5,324  134  % 2.40  % 1.43  % 0.97  %
Loans held for sale 29,294  56,173  (26,879) (48) % 849  1,025  (176) (17) % 5.80  % 3.65  % 2.15  %
Loans3,4
 1,563,847  1,389,050  174,797  13  % 49,158  37,050  12,108  33  % 6.39  % 5.40  % 0.99  %
   Interest-earning assets5
 2,419,177  2,445,629  (26,452) (1) % 61,615  43,050  18,565  43  % 5.21  % 3.58  % 1.63  %
Nonearning assets 185,545  164,611  20,934  13  %
          Total $2,604,722  $2,610,240  ($5,518) 0  %
Interest-bearing demand $742,356  $672,694  $69,662  10  % $4,876  $282  $4,594  1,629  % 1.32  % 0.08  % 1.24  %
Savings deposits 291,904  350,823  (58,919) (17) % 667  246  421  171  % 0.46  % 0.14  % 0.32  %
Money market deposits 269,584  321,580  (51,996) (16) % 1,595  205  1,390  678  % 1.19  % 0.13  % 1.06  %
Time deposits 252,030  174,898  77,132  44  % 3,559  441  3,118  707  % 2.85  % 0.51  % 2.34  %
   Total interest-bearing deposits 1,555,874  1,519,995  35,879  2  % 10,697  1,174  9,523  811  % 1.39  % 0.16  % 1.23  %
Borrowings 39,567  24,726  14,841  60  % 744  360  384  107  % 3.74  % 2.94  % 0.80  %
   Total interest-bearing liabilities 1,595,441  1,544,721  50,720  3  % 11,441  1,534  9,907  646  % 1.44  % 0.20  % 1.24  %
Non-interest bearing demand deposits 745,795  801,481  (55,686) (7) %
Other liabilities 37,772  33,436  4,336  13  %
Equity 225,714  230,602  (4,888) (2) %
          Total $2,604,722  $2,610,240  ($5,518) 0  %
Net interest income $50,174  $41,516  $8,658  21  %
Net interest margin 4.18  % 3.42  % 0.76  %
Average loans to average interest-earning assets 64.64  % 56.80  %
Average loans to average total deposits 67.94  % 59.83  %
Average non-interest deposits to average total deposits 32.40  % 34.52  %
Average interest-earning assets to average interest-bearing liabilities 151.63  % 158.32  %

1Consists of interest bearing deposits in other banks and domestic CDs.
2Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock.
3Interest income includes loan fees.  Loan fees recognized during the period and included in the yield calculation totaled $2.3 million and $5.3 million in the first six months of 2023 and 2022, respectively.
4Nonaccrual loans are included with a zero effective yield.  Average nonaccrual loans included in the computation of the average loan balances were $7.6 million and $9.9 million in the first six months of 2023 and 2022, respectively.
5The 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.
6Tax-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%.
    
45

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the six-month periods ending June 30, 2023 and 2022. Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates. The Company did not have any fed funds sold or securities purchased with agreements to resell for the six-month periods ending June 30, 2023 and 2022.
(In Thousands) Six Months Ended June 30, 2023 vs. 2022
Increase (decrease) due to
Volume Rate Total
Interest Income:
   Short-term investments ($115) $1,424  $1,309 
   Taxable long-term investments 1,800  3,524  5,324 
   Loans held for sale (616) 440  (176)
   Loans 503  11,605  12,108 
          Total interest income $1,572  $16,993  $18,565 
Interest Expense:
   Interest-bearing demand $26  $4,568  $4,594 
   Savings deposits (47) 468  421 
   Money market deposits (38) 1,428  1,390 
   Time deposits 99  3,019  3,118 
         Interest-bearing deposits 40  9,483  9,523 
   Borrowings 345  39  384 
          Total interest expense $385  $9,522  $9,907 


46

Provision for Credit Losses 
The provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the Allowance for Credit Losses ("ACL") at an appropriate level under the Current Expected Credit Losses ("CECL") model. The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. The following table presents the major categories of credit loss expense:
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2023 2022 2023 2022
Credit loss expense on loans held for investment $1,510  $273  $1,769  $106 
Credit loss expense on unfunded commitments (103) 190  (2) 207 
Credit loss expense on available for sale debt securities —  —  —  — 
Credit loss expense on held to maturity securities —  —  —  — 
Credit loss expense on purchased receivables —  —  —  — 
Total credit loss (benefit) expense $1,407  $463  $1,767  $313 
The increase in the ACL for the three and six-month periods ending June 30, 2023 as compared to the same periods in 2022 is primarily the result of increased loan balances, as well as a decrease in management's assumptions for prepayment and curtailment speeds. These changes are only partially offset by improvement in management's forecasted economic factors and a decrease in unfunded commitment balances. The ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration.
    Other Operating Income
    Other operating income for the three-month period ended June 30, 2023 decreased $827,000, or 11%, to $7.0 million as compared to $7.8 million for the same period in 2022, primarily due to a $2.0 million decrease in mortgage banking income in the second quarter of 2023 compared to the same quarter a year ago. The decrease in mortgage banking income in the three-month period ended June 30, 2023 as compared to the same period in 2022 was primarily due to decreased production volume due primarily to increases in mortgage interest rates.

Other operating income for the six-month period ended June 30, 2023 decreased $6.7 million, or 36%, to $11.9 million as compared to $18.6 million for the same period in 2022, primarily due to a $7.0 million decrease in mortgage banking income in the first six months of 2023 compared to the same period a year ago, which was only partially offset by a $1.0 million increase in purchased receivable income and a $775,000 increase in the fair market value of marketable securities. The decrease in mortgage banking income in the six-month period ended June 30, 2023 as compared to the same period in 2022 was primarily due to decreased production volume due largely to increases in mortgage interest rates. Additionally, the Company received $2.0 million in life insurance proceeds in the six-month period ended June 30, 2022 in connection with the death of the Company’s former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021.
Other Operating Expense
    Other operating expense for the second quarter of 2023 increased $544,000, or 2%, to $23.8 million as compared to $23.2 million for the same period in 2022 primarily due to increased marketing and insurance expenses as well as an increase in other operating expenses.
Other operating expense for the first six months of 2023 increased $3.0 million, or 7%, to $47.3 million as compared to $44.3 million for the same period in 2022 primarily due to an increase in salaries and other personnel expense as well as smaller increases in most other expense categories as the Company has grown and increased its number of branches and mortgage origination offices. The Company opened its 18th branch in Nome in the fourth quarter of 2022, its 19th branch in Kodiak in the first quarter of 2023, and a loan production office in Homer in the second quarter of 2023 which contributed to increased salaries and personnel expense for the Community Banking segment.
47

Income Taxes
    For the second quarter and first six months of 2023, Northrim recorded a lower effective tax rate as compared to the same periods in 2022 as a result of an increase in tax credits and tax exempt interest income as a percentage of pre-tax income in 2023. In the second quarter of 2023, Northrim recorded $1.4 million in state and federal income tax expense, for an effective tax rate of 19.56% compared to $1.5 million and 24.11% for the same period in 2022. In the first six months of 2023, Northrim recorded $2.6 million in state and federal income tax expense, for an effective tax rate of 19.97% compared to $3.5 million and 22.42% for the same period in 2022.
    

FINANCIAL CONDITION
    Balance Sheet Overview
Portfolio Investments
Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at June 30, 2023 decreased 1% to $718.5 million from $724.5 million at December 31, 2022 mostly due to maturities and calls of available for sale securities during the first six months of 2023.
The table below details portfolio investment balances by portfolio investment type:
  June 30, 2023 December 31, 2022
  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 $597,665  83.1  % $595,161  82.2  %
Municipal securities 802  0.1  % 795  0.1  %
Corporate bonds 50,230  7.0  % 60,394  8.3  %
Collateralized loan obligations 59,192  8.2  % 57,429  7.9  %
Preferred stock 10,604  1.5  % 10,740  1.5  %
   Total portfolio investments $718,493  $724,519 

The average estimated duration of the investment portfolio at June 30, 2023, was approximately three-years. As of June 30, 2023, $66.1 million available for sale securities are scheduled to mature in the next six months, $61.9 million are scheduled to mature in six months to one year, and $175.6 million are scheduled to mature in the following year, a total of $303.5 million or 12% of earning assets at June 30, 2023.

48

Loans and Lending Activities
The following table presents the concentration distribution of the loan portfolio, net of deferred fees and costs, as of the dates indicated:
  June 30, 2023 December 31, 2022
  Dollar Amount Percent of Total Dollar Amount Percent of Total
(In Thousands)
Commercial & industrial loans $418,752  25.2  % $358,128  23.8  %
Commercial real estate:
Owner occupied properties 348,834  21.0  % 349,973  23.3  %
Non-owner occupied and multifamily properties 490,821  29.7  % 482,270  32.2  %
Residential real estate:
1-4 family residential properties secured by first liens 160,546  9.7  % 73,381  4.9  %
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 25,156  1.5  % 20,259  1.3  %
1-4 family residential construction loans 35,349  2.1  % 44,000  2.9  %
Other construction, land development and raw land loans 95,124  5.7  % 99,182  6.6  %
Obligations of states and political subdivisions in the US 35,325  2.1  % 32,539  2.2  %
Agricultural production, including commercial fishing 40,767  2.5  % 34,099  2.3  %
Consumer loans 5,551  0.3  % 4,335  0.3  %
Other loans 3,014  0.2  % 3,619  0.2  %
Total loans $1,659,239    $1,501,785   
Loans increased by $157.5 million, or 10%, to $1.659 billion at June 30, 2023 from $1.502 billion at December 31, 2022, primarily as a result of increased commercial and consumer mortgage loans.     

Information about loan concentrations

The Company defines "direct exposure" to the oil and gas industry as companies that it has identified as significantly reliant upon activity related to the oil and gas industry, such as oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry. The Company estimates that $97.3 million, or approximately 6% of loans as of June 30, 2023 have direct exposure to the oil and gas industry as compared to $83.4 million, or approximately 6% of loans as of December 31, 2022. The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $42.5 million and $51.8 million at June 30, 2023 and December 31, 2022, respectively. The portion of the Company's ACL that related to the loans with direct exposure to the oil and gas industry was estimated at $882,000 as of June 30, 2023 and $786,000 as of December 31, 2022.
    
    The following table details loan balances by loan segment and class of financing receivable for loans with direct oil and gas exposure as of the dates indicated:

(In Thousands) June 30, 2023 December 31, 2022
Commercial & industrial loans $78,223  $66,864 
Commercial real estate:
     Owner occupied properties 11,911  9,108 
     Non-owner occupied and multifamily properties 5,727  6,013 
Other loans 1,394  1,431 
Total $97,255  $83,416 

The Company monitors other concentrations within the loan portfolio depending on trends in the current and future estimated economic conditions. At June 30, 2023, the Company had $127.6 million, or 8% of portfolio loans, in the Healthcare sector, $102.2 million, or 6% of portfolio loans, in the Tourism sector, $75.7 million, or 5% of portfolio loans, in the Accommodations sector, $72.5 million, or 4% of portfolio loans, in the Retail sector, $71.6 million, or 4% of portfolio loans, in the Fishing sector, $64.7 million, or 4% of portfolio loans, in the Aviation (non-tourism) sector, and $48.6 million, or 3% in the Restaurant sector.
49

The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of June 30, 2023:
(In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurant Accommodations Total
ACL $658  $557  $1,072  $614  $445  $385  $587  $4,318 

The following table sets forth information regarding changes in the ACL for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2023 2022 2023 2022
Balance at beginning of period $14,157  $11,310  $13,838  $11,739 
Commercial & industrial loans (49) (166) (49) (461)
Consumer loans —  —  (14) — 
Total charge-offs (49) (166) (63) (461)
Recoveries:        
Commercial & industrial loans 21  103  86  116 
Residential real estate:
     1-4 family residential properties secured by junior liens
     and revolving secured by 1-4 family first liens		 5  9  12  21 
Agricultural production, including commercial fishing —  7  —  15 
Consumer loans 1  1  3  1 
Total recoveries 27  120  101  153 
Net, charge-offs (22) (46) 38  (308)
Provision (benefit) for credit losses 1,510  273  1,769  106 
Balance at end of period $15,645  $11,537  $15,645  $11,537 
    The following table sets forth information regarding changes in the ACL for unfunded commitments for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2023 2022 2023 2022
Balance at beginning of period $2,071  $1,113  $1,970  $1,096 
Provision for credit losses (103) 190  (2) 207 
Balance at end of period $1,968  $1,303  $1,968  $1,303 
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.
50

Deposits
Deposits are the Company’s primary source of funds. Total deposits decreased $84.9 million, or 4%, to $2.302 billion as of June 30, 2023 compared to $2.387 billion as of December 31, 2022. The following table summarizes the Company's composition of deposits as of the periods indicated:
June 30, 2023 December 31, 2022
(In thousands) Balance % of total Balance % of total
Demand deposits $711,390  31  % $797,434  34  %
Interest-bearing demand 795,128  35  % 767,686  32  %
Savings deposits 275,602  12  % 320,917  13  %
Money market deposits 232,698  10  % 308,317  13  %
Time deposits 287,493  12  % 192,857  8  %
   Total deposits $2,302,311  $2,387,211 
The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 88% of total deposits at June 30, 2023 and 92% of total deposits at December 31, 2022.
    The only deposit category with stated maturity dates is certificates of deposit. At June 30, 2023, the Company had $287.5 million in certificates of deposit as compared to certificates of deposit of $192.9 million at December 31, 2022. At June 30, 2023, $175.9 million, or 61%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $128.4 million, or 67%, of total certificates of deposit at December 31, 2022. The aggregate amount of certificates of deposit in amounts of $250,000 and greater at June 30, 2023 and December 31, 2022, was $117.3 million and $77.5 million, respectively. The following table sets forth the amount outstanding of deposits in amounts of $250,000 and greater by time remaining until maturity and percentage of total deposits as of June 30, 2023:

  Time Certificates of Deposit
  of $250,000 or More
    Percent of Total Deposits
(In Thousands) Amount
Amounts maturing in:    
Three months or less $8,585  7  %
Over 3 through 6 months 31,350  27  %
Over 6 through 12 months 21,190  18  %
Over 12 months 56,186  48  %
Total $117,311  100  %

At June 30, 2023, 69% of total deposits were held in business accounts and 31% of deposit balances were held in consumer accounts. Northrim had approximately 33,000 deposit customers with an average balance of $70,000 as of June 30, 2023. Northrim had 15 customers with balances over $10 million as of June 30, 2023 which accounted for $332.6 million, or 14%, of total deposits.

Uninsured deposits totaled $910.7 million or 40% of total deposits as of June 30, 2023 compared to $1.1 billion or 46% of total deposits as of December 31, 2022. As interest rates continued to increase in the first six months of 2023, Northrim has taken a proactive, targeted approach to increase deposit rates. There was no unusual deposit activity during the first six months of 2023.

51

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 June 30, 2023, our maximum borrowing line from the FHLB was $1.180 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements. The Company has outstanding advances of $14.0 million as of June 30, 2023 which were originated to match fund low income housing projects that qualify for long term fixed interest rates. These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23% to 3.25%. Additionally, the Company has a short-term $50.0 million advance from the FHLB outstanding as of June 30, 2023 at a fixed rate of 5.49% which matures on November 14, 2023.

    Federal Reserve Bank: The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $20.0 million of loans as collateral to secure the Company's ability to take advances through the discount window on June 30, 2023. There were no discount window advances outstanding at either June 30, 2023 or December 31, 2022. The Federal Reserve Bank is holding $60.0 million of securities as collateral to secure the Company's ability to take advances through the Federal Reserve Bank's recently created Bank Term Funding Program ("BTFP") on June 30, 2023. There were no BTFP advances outstanding at June 30, 2023.

    Other Short-term Borrowings: The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $917.7 million at June 30, 2023 and $930.1 million at December 31, 2022.

The Company had an overnight advance of $1.0 million outstanding at 5.75% at June 30, 2023.
    
    At June 30, 2023 and December 31, 2022, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.
    Long-term Borrowings. The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of June 30, 2023 or December 31, 2022.    
    
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 2023. Other available sources of liquidity for the bank holding company include the issuance of debt and the issuance of common or preferred stock. As of June 30, 2023, the Company has 10.0 million authorized shares of common stock, of which 5.6 million are issued and outstanding, leaving 4.4 million shares available for issuance. 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 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.
52

The Company had cash and cash equivalents of $36.8 million, or 1% of total assets at June 30, 2023 compared to $259.4 million, or 10% of total assets as of December 31, 2022. The decrease in cash and cash equivalents since the end of 2022 is primarily due to an increase in loans and a decrease in deposits. The Company had other comprehensive income, net of tax, of $3.0 million for the six-month period ending June 30, 2023 primarily due to unrealized holding gains on available for sale securities. Accumulated unrealized losses, net of income taxes on available for sale securities, which are recorded in total shareholders' equity, are $27.5 million as of June 30, 2023. Accumulated unrealized losses, net of income taxes on held to maturity securities, which are not recorded in shareholders' equity, are $3.0 million as of June 30, 2023. Management does not believe that liquidation of these securities, which would result in realized losses, will occur prior to maturity of these securities. As of June 30, 2023, the weighted average maturity of available for sale securities is 3.0 years compared to 3.3 years at December 31, 2022 and 4.1 years at December 31, 2021. At June 30, 2023, $128.0 million available for sale securities mature within one year, $175.6 million mature within one to two years, and $167.8 million mature within two to three years. Our total unfunded commitments to fund loans and letters of credit at June 30, 2023 were $418.2 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. At June 30, 2023, certificates of deposit totaling $175.9 million are scheduled to mature over the next 12 months and may be withdrawn from the Bank. Similar to loans, we do not expect that these maturing certificates of deposit, or other non-maturity deposits, to be withdrawn from the Bank in a manner that will strain liquidity; however, unforeseen future circumstances or events may cause higher than anticipated withdrawal of deposits or draws of unfunded commitments to fund new loans. At June 30, 2023 the Company has a $50 million FHLB advance that is due in November 2023. Management believes that cash requirements to fund future non-deposit and non-borrowing liabilities, including operating lease liabilities and other liabilities, as of June 30, 2023, are not material to the Company's liquidity position as of June 30, 2023.
The Company has other available sources of liquidity to fund unforeseen liquidity requirements. These include borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB. At June 30, 2023, our liquid assets, which include investments and loans maturing within a year, were $442.9 million and our funds available for borrowing under our existing lines of credit were $1.224 billion. Additionally, the Company can obtain borrowings under the BTFP as a source of liquidity in order to help assure that banks have the ability to meet the needs of all depositors. The BTFP allows eligible depository institutions to pledge high-quality securities to obtain liquidity and eliminate the need for the financial institution to sell securities quickly in times of stress. Given these sources of liquidity and our expectations for customer demands for cash and for our operating cash needs, we believe our sources of liquidity to be sufficient for the foreseeable future.
As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 "Financial Statements" of this report, net cash used by operating activities was $22.5 million for the first six months of 2023, primarily due to cash used in connection with the origination of loans held for sale, which was only partially offset by cash provided by net income and net proceeds from the sale of loans held for sale. Net cash used by investing activities was $155.3 million for the same period, primarily due to an increase in loans which was only partially offset by maturities and calls of available for sale securities. Net cash used by financing activities in the same period was $44.8 million, primarily due to a decrease in deposits, as well as cash dividends paid to shareholder and repurchases of common stock. These decreases were only partially offset by an increase in borrowings.
Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market. The Company repurchased 89,887 shares of its common stock under the Company's previously announced repurchase programs in the first six months of 2023. At June 30, 2023, there are 195,113 shares remaining under the repurchase program. The Company may elect to continue to repurchase our common stock from time-to-time depending upon market conditions, but we can make no assurances that we will continue this program or that we will authorize additional shares for repurchase.
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 June 30, 2023, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

The table below illustrates the capital requirements in effect for the periods noted for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements. Management intends to maintain capital ratios for the Bank in 2023, 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.
53

The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital. As a result, the Company has $10 million more in regulatory capital than the Bank at June 30, 2023, which explains most of the difference in the capital ratios for the two entities.

  Minimum Required Capital  Well-Capitalized Actual Ratio Company Actual Ratio Bank
 
June 30, 2023
Total risk-based capital 8.00% 10.00% 13.02% 11.16%
Tier 1 risk-based capital 6.00% 8.00% 12.13% 10.26%
Common equity tier 1 capital 4.50% 6.50% 11.64% 10.27%
Leverage ratio 4.00% 5.00% 9.28% 7.83%

    See Note 22 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, 2022 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, 2022. 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 Policies

    Our critical accounting policies 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, 2022. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments as a result of the need to make "critical accounting estimates", which are estimates that involve estimation uncertainty that has had or is reasonably likely to have a material impact on the Company's financial condition or results of operations. The Company's critical accounting policies include allowance for credit losses, valuation of goodwill and other intangible assets, the valuation of mortgage servicing rights, and fair value. There have been no material changes to the valuation techniques or models, that affect our estimates during 2023.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Our assessment of market risk as of June 30, 2023 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2022.

54

ITEM 4. CONTROLS AND PROCEDURES 
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934). Our principal executive and financial officers supervised and participated in this evaluation. Based on this evaluation, our principal executive and financial officers each concluded that as of June 30, 2023, the disclosure controls and procedures are effective in timely alerting them to material information required to be included in the periodic reports to the Securities and Exchange Commission. The design of any system of controls is based in part upon various assumptions about the likelihood of future events, and there can be no assurance that any of our plans, products, services or procedures will succeed in achieving their intended goals under future conditions.
Changes in Internal Control over Disclosure and Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15-d-15(f) of the Securities Exchange Act of 1934) that occurred during the quarterly period ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
During the normal course of its business, the Company is a party to various debtor-creditor legal actions, disputes, claims, and litigation related to the conduct of its banking business. These include cases filed as a plaintiff in collection and foreclosure cases, and the enforcement of creditors’ rights in bankruptcy proceedings. Management does not expect that the resolution of these matters will have a material effect on the Company’s business, financial position, results of operations, or cash flows.
ITEM 1A. RISK FACTORS
For information regarding risk factors, please refer to Part I. Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as updated by the Company's periodic filings with the SEC. These risk factors have not changed materially as of June 30, 2023.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)-(b) Not applicable
55

(c) The Company repurchased 62,000 shares of its common stock during the three-month period ending June 30, 2023.
Total Number of Shares (or Units) Purchased Average Price Paid per Shares (or Unit) Total Number of Shares (or Units) Purchased as Part of the Publicly Announced Plans or Programs Maximum Number (1) (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Period (a) (b) (c) (d)
Month No. 1
April 1, 2023 - April 30, 2023 19,000  $44.34  19,000  238,113 
Month No. 2
May 1, 2023 - May 31, 2023 22,000  $37.10  22,000  216,113 
Month No. 3
June 1, 2023 - June 30, 2023 21,000  $40.09  21,000 195,113
Total 62,000 $40.30  62,000 195,113
    (1) On January 27, 2023, the Company publicly announced that its Board of Directors had authorized the repurchase of up to an additional 285,000 shares of common stock. In the first quarter of 2023, the Company repurchased 27,887 shares, bringing the total shares remaining available and authorized for repurchase to 257,113. In the second quarter of 2023, the Company purchased 62,000 shares, bringing the total shares remaining available and authorized for repurchase to 195,113.
ITEM 6. EXHIBITS
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
104
The cover page for the Company's Quarterly Report on 10-Q for the quarter ended June 30, 2023 - formatted in Inline XBRL (included in Exhibit 101)

56

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NORTHRIM BANCORP, INC.
August 4, 2023 By /s/ Joseph M. Schierhorn
Joseph M. Schierhorn
Chairman, President, Chief Executive Officer
 and Chief Operating Officer
(Principal Executive Officer)

    
August 4, 2023 By /s/ Jed W. Ballard
Jed W. Ballard
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)

57
EX-31.1 2 exhibit3112023q2.htm EX-31.1 Document

Exhibit 31.1 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 
I, Joseph M. Schierhorn, certify that: 
1.I have reviewed this report on Form 10-Q of Northrim BanCorp, Inc.; 
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;  
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures,  as of the end of the period covered by this report based on such evaluation; and 
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 
a.    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 

Date:    August 4, 2023
 
/s/ Joseph M. Schierhorn
Joseph M. Schierhorn
Chief Executive Officer


EX-31.2 3 exhibit3122023q2.htm EX-31.2 Document

Exhibit 31.2 
CERTIFICATION OF CHIEF FINANCIAL OFFICER 
I, Jed W. Ballard, certify that: 
1.I have reviewed this Quarterly report on Form 10-Q of Northrim BanCorp, Inc.; 
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;  
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures,  as of the end of the period covered by this report based on such evaluation; and 
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 
a.    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 

Date:   August 4, 2023
 
/s/ Jed W. Ballard
Jed W. Ballard
Chief Financial Officer

EX-32.1 4 exhibit3212023q2.htm EX-32.1 Document

Exhibit 32.1


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

    In connection with the report of Northrim BanCorp, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph M. Schierhorn, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification is being furnished solely to comply with the requirements of 18 U.S.C. Section 1350, and shall not be incorporated by reference into any of the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, or otherwise be deemed to be filed as part of the Report or under such Acts.

Date:    August 4, 2023
 
/s/ Joseph M. Schierhorn
Joseph M. Schierhorn
Chief Executive Officer
 



EX-32.2 5 exhibit3222023q2.htm EX-32.2 Document

Exhibit 32.2


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

    In connection with the report of Northrim BanCorp, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jed W. Ballard, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification is being furnished solely to comply with the requirements of 18 U.S.C. Section 1350, and shall not be incorporated by reference into any of the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, or otherwise be deemed to be filed as part of the Report or under such Acts.

Date:    August 4, 2023
 
/s/ Jed W. Ballard
Jed W. Ballard
Chief Financial Officer