NORTHRIM BANCORP INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We have prepared this Management's Discussion and Analysis as an aid to understanding our financial results. It highlights key information as determined by management but may not contain all of the information that is important to you. It should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in Part II. Item 8 of this report. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II. Item 7 of our Annual Report on Form 10-K for fiscal year ended December 31, 2022. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.” Executive Overview Net income decreased 17% to $25.4 million or $4.49 per diluted share for the year ended December 31, 2023, from $30.7 million, or $5.27 per diluted share, for the year ended December 31, 2022. The decrease in net income is primarily the result of a $3.8 million decrease in net income in the Community Banking segment, as well as a $1.6 million decrease in net income in the Home Mortgage Lending segment. Highlights for the year ended December 31, 2023 are as follows: • Net income in the Community Banking segment decreased 12% or $3.8 million, to $27.9 million in 2023 as compared to 2022. This decrease was primarily the result of the following: ◦ Loan and deposit growth supported 2023 earnings in the Community Banking segment but were offset by increased other operating expenses in the segment, which increased $6.8 million to $70.7 million in 2023 from $63.9 million in 2022, primarily due to increases in salaries and other personnel expense as the Company continues to expand its branch network into new markets. ◦ The provision for credit losses increased in 2023 to a provision of $3.8 million from a provision of $1.8 million in 2022 primarily due to higher loan growth in 2023 compared to 2022. • Net income in the Home Mortgage Lending segment decreased 178%, or $1.6 million, to a loss of $2.5 million in 2023 from a loss of $897,000 in 2022 driven by a decrease in production volume sold to $376.2 million in 2023 from $585.5 million in 2022 largely due to the significant increase in interest rates in 2023 as well as the fact that the Company retained $146.3 million in mortgage loan originations on its balance sheet in 2023 compared to $34.6 million in 2022. • The net interest margin increased to 4.14% in 2023 from 3.85% in 2022 mostly due to an increase in average yields on interest earning assets to in 2023 compared to 2022 as a result of higher interest rates. This was only partially offset by an increase in the cost of interest-bearing liabilities. • Loans increased 19% to $1.79 billion at December 31, 2023 compared to $1.50 billion at December 31, 2022, and deposits increased 4% to $2.49 billion at December 31, 2023 compared to $2.39 billion at December 31, 2022. • Nonperforming loans, net of government guarantees, decreased to $5.0 million at the end of 2023 compared to $6.4 million at the end of 2022, while total adversely classified loans, net of government guarantees at December 31, 2023 decreased to $7.1 million from $7.6 million at December 31, 2022. The Allowance for Credit Losses ("ACL") totaled 0.97% of total portfolio loans at December 31, 2023, compared to 0.92% at December 31, 2022. The ACL as a percentage of total portfolio loans, net of government guarantees was 1.02% at December 31, 2023 compared to 0.99% at December 31, 2022. • The aggregate cash dividends paid by the Company in 2023 rose 28% to $13.6 million from $10.6 million paid in 2022. The Company paid cash dividends of $2.40 per share in 2023 and $1.82 per share in 2022. 38 • The Company repurchased 208,673 shares of its common stock in 2023 at an average price of $43.34 per share. • Total shareholders' equity was $234.7 million as of December 31, 2023, up 4% from the preceding quarter, and up 7% from $218.6 million a year ago. Shareholders' equity was positively impacted by the fair value of the available for sales securities portfolio which increased $12.6 million in 2023 and negatively impacted, but to a lesser extent, by the share repurchases totaling $9.0 million. The Company continued to maintain strong regulatory capital ratios with Tier 1 Capital to Risk Adjusted Assets of 11.43% at December 31, 2023. Trends in Miscellaneous Financial Data (1) Years Ended December 31, (In thousands, except per share data and shares outstanding amounts) 2023 2022 2021 2020 2019 2018 Five Year Compound Growth Rate (Unaudited) Net interest income $103,256 $95,115 $80,827 $70,665 $64,442 $61,208 11 % Provision (benefit) for credit losses 3,842 1,846 (4,099) 2,432 (1,175) (500) NM Other operating income 26,375 34,077 52,263 63,328 37,346 32,167 (4) % Compensation expense, RML acquisition payments — — — — 468 — NM Other operating expense 94,181 88,852 89,196 89,114 76,370 69,800 6 % Income before provision for income taxes 31,608 38,494 47,993 42,447 26,125 24,075 6 % Provision for income taxes 6,214 7,753 10,476 9,559 5,434 4,071 9 % Net income $25,394 $30,741 $37,517 $32,888 $20,691 $20,004 5 % Year End Balance Sheet Assets $2,807,497 $2,674,318 $2,724,719 $2,121,798 $1,643,996 $1,502,988 13 % Loans 1,789,497 1,501,785 1,413,886 1,444,050 1,043,371 984,346 13 % Deposits 2,485,055 2,387,211 2,421,631 1,824,981 1,372,351 1,228,088 15 % Shareholders' equity 234,718 218,629 237,817 221,575 207,117 205,947 3 % Common shares outstanding 5,513,459 5,700,728 6,014,813 6,251,004 6,558,809 6,883,216 (4) % Average Balance Sheet Assets $2,690,347 $2,641,008 $2,432,599 $1,936,047 $1,555,707 $1,493,385 12 % Earning assets 2,492,240 2,469,383 2,260,778 1,758,839 1,386,557 1,346,449 13 % Loans 1,643,943 1,415,125 1,478,318 1,339,908 1,010,098 971,548 11 % Deposits 2,364,245 2,354,881 2,125,080 1,638,216 1,276,407 1,227,272 14 % Shareholders' equity 227,244 224,773 239,214 211,721 208,602 201,022 2 % Basic common shares outstanding 5,601,471 5,765,088 6,180,801 6,354,687 6,708,622 6,877,573 (4) % Diluted common shares outstanding 5,661,460 5,829,412 6,249,313 6,431,367 6,808,209 6,981,557 (4) % Per Common Share Data Basic earnings $4.53 $5.33 $6.07 $5.18 $3.08 $2.91 9 % Diluted earnings $4.49 $5.27 $6.00 $5.11 $3.04 $2.86 9 % Book value per share $42.57 $38.35 $39.54 $35.45 $31.58 $29.92 7 % Tangible book value per share (2) $39.68 $35.55 $36.88 $32.88 $29.12 $27.57 8 % Cash dividends per share $2.40 $1.82 $1.50 $1.38 $1.26 $1.02 19 % 39 Years Ended December 31, (In thousands, except per share data and shares outstanding amounts) 2023 2022 2021 2020 2019 2018 Five Year Compound Growth Rate (Unaudited) Performance Ratios Return on average assets 0.94 % 1.16 % 1.54 % 1.70 % 1.33 % 1.34 % (7) % Return on average equity 11.17 % 13.68 % 15.68 % 15.53 % 9.92 % 9.95 % 2 % Equity/assets 8.36 % 8.18 % 8.73 % 10.44 % 12.60 % 13.70 % (9) % Tangible common equity/tangible assets (3) 7.84 % 7.62 % 8.19 % 9.76 % 11.73 % 12.76 % (9) % Net interest margin 4.14 % 3.85 % 3.58 % 4.02 % 4.65 % 4.55 % (2) % Net interest margin (tax equivalent) (4) 4.21 % 3.89 % 3.60 % 4.05 % 4.70 % 4.60 % (2) % Non-interest income/total revenue 20.35 % 26.38 % 39.27 % 47.26 % 36.69 % 34.45 % (10) % Efficiency ratio (5) 72.64 % 68.76 % 66.99 % 66.47 % 75.43 % 74.68 % (1) % Dividend payout ratio 53.59 % 34.17 % 25.02 % 26.66 % 40.79 % 35.08 % 9 % Asset Quality Nonperforming loans, net of government guarantees $5,002 $6,430 $10,672 $10,048 $13,951 $14,694 (19) % Nonperforming assets, net of government guarantees 5,810 6,430 15,031 16,289 19,946 22,619 (24) % Nonperforming loans, net of government guarantees/portfolio loans 0.28 % 0.43 % 0.75 % 0.70 % 1.34 % 1.49 % (28) % Net charge-offs (recoveries)/average loans — % (0.08) % 0.07 % 0.03 % (0.07) % 0.15 % (100) % Allowance for credit losses/portfolio loans 0.97 % 0.92 % 0.83 % 1.46 % 1.83 % 1.98 % (13) % Nonperforming assets, net of government guarantees/assets 0.21 % 0.24 % 0.55 % 0.77 % 1.21 % 1.50 % (33) % Other Data Effective tax rate (6) 20 % 20 % 22 % 23 % 21 % 17 % 3 % Number of banking offices (7) 20 19 18 17 16 16 5 % Number of employees (FTE) (8) 472 469 451 438 431 430 2 % 1 These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with Part II Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report. 2 Tangible book value per share is a non-GAAP ratio defined as shareholders’ equity, less intangible assets, divided by common shares outstanding. Management believes that tangible book value is a useful measurement of the value of the Company’s equity because it excludes the effect of intangible assets on the Company’s equity. See reconciliation to book value per share, the most comparable GAAP measurement below. 3 Tangible common equity to tangible assets is a non-GAAP ratio that represents total equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. Management believes this ratio is important as it has received more attention over the past several years from stock analysts and regulators. The most comparable GAAP measure of shareholders' equity to total assets is calculated by dividing total shareholders' equity by total assets. See reconciliation to shareholders' equity to total assets, the most comparable GAAP measurement below. 4 Tax-equivalent net interest margin is a non-GAAP performance measurement in which interest income on non-taxable investments and loans is presented on a tax-equivalent basis using a combined federal and state statutory rate of 28.43% in 2018 through 2023. Management believes that tax-equivalent net interest margin is a useful financial measure because it enables investors to evaluate net interest margin 40 excluding tax expense in order to monitor our effectiveness in growing higher interest yielding assets and managing our costs of interest bearing liabilities over time on a fully tax equivalent basis. See reconciliation to net interest margin, the most comparable GAAP measurement below. 5 In managing our business, we review the efficiency ratio exclusive of intangible asset amortization, which is a non-GAAP performance measurement. Management believes that this is a useful financial measurement because we believe this presentation provides investors with a more accurate picture of our operating efficiency. The efficiency ratio is calculated by dividing other operating expense, exclusive of intangible asset amortization, by the sum of net interest income and other operating income. Other companies may define or calculate this data differently. For additional information see the "Other Operating Expense" section in Part II. Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report. See reconciliation to efficiency ratio, the most comparable GAAP measurement below. 6 The Company’s 2017 results included the impact of the enactment of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017. The law includes significant changes to the U.S. corporate tax system, including a Federal corporate rate reduction from 35% to 21%. In 2017, the Company applied the newly enacted corporate federal income tax rate of 21%, reducing the value of the Company's net deferred tax asset, resulting in approximately a $2.7 million increase in tax expense. In 2018, the Company finalized changes related to the reduction in the federal tax rate which resulted in a $470,000 reduction in tax expense. 7 Number of banking offices does not include RML locations. 2023 number of banking offices includes 19 full service branches and one loan production office. 2022 number of banking offices includes 18 full service branches and one loan production office. 2021 number of banking offices includes 17 full service branches and one loan production office. 2020 number of banking offices includes 16 full service branches and one loan production office. 2018 number of banking offices includes 15 full service branches and 1 loan production office. 8 FTE includes 332, 336, 321, 312, 311, and 320 Community Banking employees at the end of 2023, 2022, 2021, 2020, 2019 and 2018, respectively. FTE includes 140, 133, 130, 126, 120, and 110 Home Mortgage Lending employees at the end of 2023, 2022, 2021, 2020, 2019 and 2018, respectively. Reconciliation of Selected Non-GAAP Financial Data to GAAP Financial Measures These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report. 41 Reconciliation of total shareholders' equity to tangible common shareholders’ equity (Non-GAAP) and total assets to tangible assets: (In Thousands) 2023 2022 2021 2020 2019 2018 Total shareholders' equity $234,718 $218,629 $237,817 $221,575 $207,117 $205,947 Total assets 2,807,497 2,674,318 2,724,719 2,121,798 1,643,996 1,502,988 Total shareholders' equity to total assets ratio 8.36 % 8.18 % 8.73 % 10.44 % 12.60 % 13.70 % (In Thousands) 2023 2022 2021 2020 2019 2018 Total shareholders' equity $234,718 $218,629 $237,817 $221,575 $207,117 $205,947 Less: goodwill and other intangible assets, net 15,967 15,984 16,009 16,046 16,094 16,154 Tangible common shareholders' equity $218,751 $202,645 $221,808 $205,529 $191,023 $189,793 Total assets $2,807,497 $2,674,318 $2,724,719 $2,121,798 $1,643,996 $1,502,988 Less: goodwill and other intangible assets, net 15,967 15,984 16,009 16,046 16,094 16,154 Tangible assets $2,791,530 $2,658,334 $2,708,710 $2,105,752 $1,627,902 $1,486,834 Tangible common equity to tangible assets ratio 7.84 % 7.62 % 8.19 % 9.76 % 11.73 % 12.76 % Reconciliation of tangible book value per share (Non-GAAP) to book value per share (In thousands, except per share data) 2023 2022 2021 2020 2019 2018 Total shareholders' equity $234,718 $218,629 $237,817 $221,575 $207,117 $205,947 Divided by common shares outstanding 5,513,459 5,700,728 6,014,813 6,251,004 6,558,809 6,883,216 Book value per share $42.57 $38.35 $39.54 $35.45 $31.58 $29.92 (In thousands, except per share data) 2023 2022 2021 2020 2019 2018 Total shareholders' equity $234,718 $218,629 $237,817 $221,575 $207,117 $205,947 Less: goodwill and intangible assets, net 15,967 15,984 16,009 16,046 16,094 16,154 Tangible book value $218,751 $202,645 $221,808 $205,529 $191,023 $189,793 Divided by common shares outstanding 5,513,459 5,700,728 6,014,813 6,251,004 6,558,809 6,883,216 Tangible book value per share $39.68 $35.55 $36.88 $32.88 $29.12 $27.57 42 Reconciliation of tax-equivalent net interest margin (Non-GAAP) to net interest margin (In Thousands) 2023 2022 2021 2020 2019 2018 Net interest income (9) $103,256 $95,115 $80,827 $70,665 $64,442 $61,208 Divided by average interest-bearing assets 2,492,240 2,469,383 2,260,778 1,758,839 1,386,557 1,346,449 Net interest margin 4.14 % 3.85 % 3.58 % 4.02 % 4.65 % 4.55 % (In Thousands) 2023 2022 2021 2020 2019 2018 Net interest income (9) $103,256 $95,115 $80,827 $70,665 $64,442 $61,208 Plus: reduction in tax expense related to tax-exempt interest income 1,576 939 489 613 722 726 $104,832 $96,054 $81,316 $71,278 $65,164 $61,934 Divided by average interest-bearing assets 2,492,240 2,469,383 2,260,778 1,758,839 1,386,557 1,346,449 Tax-equivalent net interest margin 4.21 % 3.89 % 3.60 % 4.05 % 4.70 % 4.60 % Reconciliation of efficiency ratio exclusive of intangible asset amortization (non-GAAP) to efficiency ratio. (In Thousands) 2023 2022 2021 2020 2019 2018 Net interest income (9) $103,256 $95,115 $80,827 $70,665 $64,442 $61,208 Other operating income 26,375 34,077 52,263 63,328 37,346 32,167 Total revenue 129,631 129,192 133,090 133,993 101,788 93,375 Other operating expense 94,181 88,852 89,196 89,114 76,838 69,800 Less intangible asset amortization 17 25 37 48 60 70 Adjusted other operating expense $94,164 $88,827 $89,159 $89,066 $76,778 $69,730 Efficiency ratio 72.64 % 68.76 % 66.99 % 66.47 % 75.43 % 74.68 % 9 Amount represents net interest income before provision for loan losses. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of the Company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP. RESULTS OF OPERATIONS Income Statement Net Income Our results of operations are dependent to a large degree on our net interest income. We also generate other income primarily through mortgage banking income, purchased receivables products, service charges and fees, and bankcard fees. Our operating expenses consist in large part of salaries and other personnel costs, data processing, occupancy, marketing, and professional services expenses. Interest income and cost of funds, or interest expense, and mortgage banking income are affected significantly by general economic conditions, particularly changes in market interest rates, by government policies and the actions of regulatory authorities, and by competition in our markets. We earned net income of $25.4 million in 2023, compared to net income of $30.7 million in 2022. During these periods, net income per diluted share was $4.49 and $5.27, respectively. The following sections present discussion of the components that make up net income. 43 Net Interest Income / Net Interest Margin Net interest income is the difference between interest income from loan and investment securities portfolios and interest expense on customer deposits and borrowings. Changes in net interest income result from changes in volume and spread, which in turn affect our margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Changes in net interest income are influenced by yields and the level and relative mix of interest-earning assets and interest-bearing liabilities. Net interest income in 2023 was $103.3 million, compared to $95.1 million in 2022. The increase in 2023 as compared to 2022 was primarily the result of increased interest on loans and investments which was only partially offset by an increase in interest expense on deposits and borrowings. Interest income on loans increased $25.8 million in 2023 as compared to 2022 due to an increase in interest rates and higher net average interest-earning asset balances. Interest expense increased $23.5 million in 2023 as compared to the prior year as a result of higher interest rates and higher average interest-bearing deposit balances. During 2023 and 2022, net interest margins were 4.14% and 3.85%, respectively. The increase in net interest margin in 2023 as compared to 2022 is primarily the result of higher yields on earning-assets and higher average portfolio loan balances. 44 The following table sets forth for the periods indicated information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities. Average yields or costs, net interest income, and net interest margin are also presented. Average yields or costs are calculated on a tax-equivalent basis: Years ended December 31, 2023 2022 2021 Average outstanding balance Interest income / expense Average Tax Equivalent Yield / Cost (6) Average outstanding balance Interest income / expense Average Tax Equivalent Yield / Cost (6) Average outstanding balance Interest income / expense Average Tax Equivalent Yield / Cost (6) (In Thousands) Loans (1),(2) $1,643,943 $106,025 6.49 % $1,415,125 $80,549 5.71 % $1,478,318 $76,392 5.18 % Loans held for sale 41,769 2,587 6.19 % 51,537 2,236 4.34 % 101,752 2,849 2.80 % Taxable long-term investments (3) 715,367 18,695 2.73 % 618,782 11,878 1.84 % 369,172 4,918 1.27 % Interest-bearing deposits in other banks (4) 91,161 4,644 5.02 % 383,939 5,665 1.46 % 311,536 447 0.14 % Total interest-earning assets (5) 2,492,240 131,951 5.36 % 2,469,383 100,328 4.10 % 2,260,778 84,606 3.76 % Noninterest-earning assets 198,107 171,625 171,821 Total $2,690,347 $2,641,008 $2,432,599 Interest-bearing demand $809,219 $13,029 1.61 % $701,679 $2,091 0.30 % $575,298 $484 0.08 % Savings deposits 278,951 1,300 0.47 % 344,349 563 0.16 % 323,131 499 0.15 % Money market deposits 250,072 3,200 1.28 % 318,375 785 0.25 % 264,344 418 0.16 % Time deposits 276,144 8,982 3.25 % 169,931 1,046 0.62 % 178,215 1,676 0.94 % Total interest-bearing deposits 1,614,386 26,511 1.64 % 1,534,334 4,485 0.29 % 1,340,988 3,077 0.23 % Borrowings 51,038 2,184 4.24 % 24,623 728 2.92 % 24,993 702 2.79 % Total interest-bearing liabilities 1,665,424 28,695 1.72 % 1,558,957 5,213 0.33 % 1,365,981 3,779 0.28 % Noninterest-bearing demand deposits 749,859 820,547 784,092 Other liabilities 47,820 36,731 43,312 Equity 227,244 224,773 239,214 Total $2,690,347 $2,641,008 $2,432,599 Net interest income $103,256 $95,115 $80,827 Net interest margin 4.21 % 3.89 % 3.60 % Average portfolio loans to average-earnings assets 65.96 % 57.31 % 65.39 % Average portfolio loans to average total deposits 69.53 % 60.09 % 69.57 % Average non-interest deposits to average total deposits 31.72 % 34.84 % 36.90 % Average interest-earning assets to average interest-bearing liabilities 149.65 % 158.40 % 165.51 % 1 Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $4.4 million, $8.5 million and $16.2 million for 2023, 2022 and 2021, respectively. 2 Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loans were $7.1 million, $8.6 million, and $12.3 million in 2023, 2022 and 2021, respectively. 3 Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock. Taxable long-term investments consist of U.S. treasury and government sponsored entities, corporate bonds, collateral loan obligations, municipal securities, marketable equity securities, and Federal Home Loan Bank stock. 4 Consists of interest bearing deposits in other banks and domestic CDs. 5 The Company does not have any fed funds sold or securities purchased with agreements to resell to disclose as part of its total interest-earning assets in the periods presented. 6 Tax-equivalent yield/costs assume a federal tax rate of 21% and a state tax rate of 7.43% for a combined tax rate of 28.43%. 45 The following table sets forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates. Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rate: 2023 compared to 2022 2022 compared to 2021 Increase (decrease) due to Increase (decrease) due to (In Thousands) Volume Rate Total Volume Rate Total Interest Income: Loans $13,975 $11,501 $25,476 ($3,363) $7,520 $4,157 Loans held for sale (480) 831 351 (1,772) 1,159 (613) Taxable long-term investments 2,056 4,761 6,817 4,209 2,751 6,960 Non-taxable long-term investments — — — — — — Interest-bearing deposits in other banks (6,833) 5,812 (1,021) 128 5,090 5,218 Total interest income $8,718 $22,905 $31,623 ($798) $16,520 $15,722 Interest Expense: Interest-bearing demand $269 $10,669 $10,938 $80 $1,527 $1,607 Savings deposits (125) 862 737 50 14 64 Money market deposits (202) 2,617 2,415 58 309 367 Time deposits 1,011 6,925 7,936 (75) (555) (630) Interest-bearing deposits 222 21,804 22,026 309 1,099 1,408 Borrowings 1,027 429 1,456 (10) 36 26 Total interest expense $1,249 $22,233 $23,482 $299 $1,135 $1,434 Provision for Credit Losses The Company adopted ASU 2016-13, Financial Instruments - Credit Losses, effective January 1, 2021. The provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the ACL at an appropriate level under the current expected credit loss methodology ("CECL"). The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to Consolidated Financial Statements included in Part II. Item 8 of this report for detailed discussion regarding ACL methodologies for loans, available for sale debt securities, held to maturity securities, loans held for investment, unfunded commitments, and purchased receivables. The following table presents the major categories of credit loss expense for the periods presented: (In Thousands) 2023 2022 2021 Credit loss expense on loans held for investment $3,394 $972 ($3,779) Credit loss expense on unfunded commitments 448 874 (320) Credit loss expense on available for sale debt securities — — — Credit loss expense on held to maturity securities — — — Credit loss expense on purchased receivables — — — Total credit loss expense $3,842 $1,846 ($4,099) In general the increase in the provision for credit losses in 2023 as compared to 2022 is primarily the result of increased portfolio loans and unfunded commitment balances, and, to a lesser extent, a decrease in management's assumptions for prepayment and curtailment speeds. These increases were only partially offset by a decrease in rate due to improvement in management's forecast of economic factors as of December 31, 2023 compared to December 31, 2022. In general the increase in the provision for credit losses in 2022 as compared to 2021 is primarily the result of increased portfolio loan and unfunded commitment balances, and, to a lesser extent, an increase in projected loss rates. In 2021, there was a reversal of the provision primarily due to a decrease in projected loss rates following the uncertainty of the impacts of the COVID-19 pandemic in 2020 46 and the first half of 2021. The ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration. See the “Loans and Lending Activity” section under “Financial Condition” and Note 5 of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report for further discussion of these decreases and changes in the Company’s ACL. Other Operating Income The following table details the major components of other operating income for the years ended December 31: (In Thousands) 2023 $ Change % Change 2022 $ Change % Change 2021 Other Operating Income Mortgage banking income $12,763 ($8,809) (41) % $21,572 ($20,572) (49) % $42,144 Purchased receivable income 4,482 2,480 124 % 2,002 (257) (11) % 2,259 Bankcard fees 3,862 165 4 % 3,697 308 9 % 3,389 Service charges on deposit accounts 2,044 433 27 % 1,611 314 24 % 1,297 Commercial servicing revenue 554 (1,074) (66) % 1,628 1,322 432 % 306 Gain (loss) on marketable equity securities 120 1,239 111 % (1,119) (1,018) (1,008) % (101) Keyman insurance proceeds — (2,002) NM 2,002 2,002 NM — Gain (loss) on sale of securities — — NM — (67) 100 % 67 Other income 2,550 (134) (5) % 2,684 (218) (8) % 2,902 Total other operating income $26,375 ($7,702) (23) % $34,077 ($18,186) (35) % $52,263 2023 Compared to 2022 The most significant item contributing to the decrease in other operating income in 2023 was a decrease in mortgage banking income, followed by a decrease in keyman insurance proceeds and commercial servicing revenue. Life insurance proceeds were received in 2022 in connections with the death of the Company's former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021. These decreases were partially offset by increases in purchased receivable income, gain on marketable equity securities, service charges on deposit accounts, and bankcard fees. Mortgage banking income consists of gross income from the origination and sale of mortgages as well as mortgage loan servicing fees and is the largest component of other operating income at 48% of total other operating income in 2023 and 63% in 2022. Mortgage banking income decreased in 2023 compared to 2022 mainly due to a decrease in mortgage loans originated and sold which decreased to $376.2 million in 2023 from $585.5 million in 2022. The overall decrease in mortgage originations sold in 2023 as compared to the prior year is primarily the result of the changes in interest rates during the year that led to decreased activity, as well as the fact that the Company retained $146.3 million in mortgage loan originations on its balance sheet in 2023 compared to $34.6 million in 2022. Commercial servicing revenue decreased in 2023 as compared to 2022 primarily due to a smaller increase in the fair value of commercial servicing rights in 2023 as compared to 2022. Purchased receivable income increased in 2023 as compared to 2022 due to higher average balances as customers sold receivables to fund their operating cash needs. Gain on marketable equity securities increased in 2023 as compared to 2022 due to increased fair value on this portfolio. Bankcard fees and service charges on deposit accounts increased in 2023 due an increase in the number of the Company's deposit customers which led to higher transaction volume as compared to 2022. 47 Other Operating Expense The following table details the major components of other operating expense for the years ended December 31: (In Thousands) 2023 $ Change % Change 2022 $ Change % Change 2021 Other Operating Expense Salaries and other personnel expense $61,741 $3,569 6 % $58,172 ($2,240) (4) % $60,412 Data processing expense 9,821 895 10 % 8,926 359 4 % 8,567 Occupancy expense 7,394 479 7 % 6,915 (163) (2) % 7,078 Professional and outside services 3,128 135 5 % 2,993 192 7 % 2,801 Marketing expense 2,929 182 7 % 2,747 6 — % 2,741 Insurance expense 2,519 465 23 % 2,054 461 29 % 1,593 Intangible asset amortization 17 (8) (32) % 25 (12) (32) % 37 OREO (income) expense, net rental income and gains on sale: OREO operating expense 16 (618) (97) % 634 (143) (18) % 777 Impairment on OREO 123 123 100 % — — NM — Rental income on OREO (4) 544 99 % (548) (24) (5) % (524) Losses (gains) on sale of OREO (929) (1,343) 324 % 414 1,099 160 % (685) Subtotal (794) (1,294) (259) % 500 932 216 % (432) Other expenses 7,426 906 14 % 6,520 121 2 % 6,399 Total other operating expense $94,181 $5,329 6 % $88,852 ($344) — % $89,196 2023 Compared to 2022 Other operating expense increased by 6% in 2023 as compared to 2022. The largest increase was in salaries and other personnel expense, primarily related to community banking operations, as the Company expanded its branch network into new markets. Data processing expense, occupancy expense, insurance expense, marketing expense and professional and outside services also increased in 2023 compared to 2022 due to the increase in branch locations, increased customer and transaction volume, increased FDIC insurance costs associated with asset growth, and increased legal and investment management fees. These increases were partially offset by decreases in other real estate owned (“OREO”) expense. OREO expense decreased in 2023 primarily due to gains on sale of OREO properties as compared to 2022 as subsequent proceeds were received related to a government guarantee on an OREO property sold in December 2022. Income Taxes The provision for income taxes decreased $1.5 million or 20%, to $6.2 million in 2023 as compared to 2022. The decrease in 2023 is primarily due to lower pretax income. The Company's effective tax rate decreased to 19.7% in 2023 from 20.1% in 2022, primarily due to an increase in tax exempt income and low income housing tax credits as a percentage of pre-tax income in 2023 compared to 2022. FINANCIAL CONDITION Investment Securities The composition of our investment securities portfolio, which includes securities available for sale, held-to-maturity investments, and marketable equity securities, reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income. The investment securities portfolio also mitigates interest rate and credit risk inherent in the loan portfolio, while providing a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral or through repurchase agreements), and collateral for certain public funds deposits. Investment securities designated as available for sale comprised 93% of the portfolio as of December 31, 2023 and are available to meet liquidity requirements in a contingency situation. 48 Our investment portfolio consists primarily of government sponsored entity securities, corporate securities, collateralized loan obligations, and municipal securities. Investment securities at December 31, 2023 decreased $36.7 million, or 5%, to $687.8 million from $724.5 million at December 31, 2022. The decrease at December 31, 2023 as compared to December 31, 2022 came from investment maturities and calls that were used to fund growth in portfolio loans. The average maturity of the investment portfolio was approximately 2.8 years at December 31, 2023 as compared to approximately 3.3 years at December 31, 2022. Investment securities may be pledged as collateral to secure public deposits or borrowings. At December 31, 2023 and 2022, $180.1 million and $59.3 million in securities were pledged for deposits and borrowings, respectively. 49 The following tables set forth the composition of our investment portfolio at December 31 for the years indicated: (In Thousands) Amortized Cost Fair Value Securities Available for Sale: 2023: U.S. Treasury and government sponsored entities $587,639 $564,125 Municipal Securities 820 816 Corporate Bonds 14,014 13,624 Collateralized Loan Obligations 59,795 59,371 Total $662,268 $637,936 2022: U.S. Treasury and government sponsored entities $634,582 $595,161 Municipal Securities 820 795 Corporate Bonds 24,281 23,644 Collateralized Loan Obligations 59,434 57,429 Total $719,117 $677,029 2021: U.S. Treasury and government sponsored entities $345,514 $341,480 Municipal Securities 820 840 Corporate Bonds 32,721 32,946 Collateralized Loan Obligations 51,431 51,418 Total $430,486 $426,684 Marketable Equity Securities: 2023: Preferred Stock $13,595 $13,152 Total $13,595 $13,152 2022: Preferred Stock $11,303 $10,740 Total $11,303 $10,740 2021: Preferred Stock $7,865 $8,420 Total $7,865 $8,420 Securities Held to Maturity: 2023: Corporate Bonds $36,750 $33,413 Total $36,750 $33,413 2022: Corporate Bonds $36,750 $32,639 Total $36,750 $32,639 2021: Corporate Bonds $20,000 $19,164 Total $20,000 $19,164 50 The following table sets forth the market value, maturities, and weighted average pretax yields of our investment portfolio as of December 31, 2023: Maturity Within Over (In Thousands) 1 Year 1-5 Years 5-10 Years 10 Years Total Securities Available for Sale: U.S. Treasury and government sponsored entities Balance $160,054 $404,071 $— $— $564,125 Weighted average yield (1) 1.14 % 2.05 % — % — % 1.79 % Municipal securities Balance $816 $— $— $— $816 Weighted average yield (1) 2.12 % — % — % — % 2.12 % Corporate bonds Balance $1,997 $11,627 $— $— $13,624 Weighted average yield (1) 3.59 % 4.50 % — % — % 4.37 % Collateralized loan obligations Balance $— $— $34,102 $25,269 $59,371 Weighted average yield (1) — % — % 6.83 % 7.07 % 6.94 % Total Balance $162,867 $415,698 $34,102 $25,269 $637,936 Weighted average yield (1) 1.18 % 2.11 % 6.83 % 7.07 % 2.31 % Securities Held to Maturity Corporate bonds Balance $— $9,637 $23,776 $— $33,413 Weighted average yield (1) — % 5.50 % 5.01 % — % 5.15 % Marketable Equity Securities Preferred Stock Balance $— $— $— $13,153 $13,153 Weighted average yield (1) — % — % — % 6.71 % 6.71 % (1) Weighted average yields have been calculated on an amortized cost basis and not on a tax-equivalent basis. The Company’s investment in marketable equity securities does not have a maturity date but it has been included in the over 10 years column above. Loans and Lending Activities All of our loans and credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness and commitments to us, including the indebtedness of any guarantor. Generally, we are permitted to make loans to one borrower of up to 15% of the unimpaired capital and surplus of the Bank. The legal lending limit for the Bank was $34.5 million at December 31, 2023. At December 31, 2023, the Company had two relationships whose total direct and indirect commitments exceeded $34.5 million; however, no individual direct relationship exceeded the loans-to-one borrower limitation. The Company's loans have grown significantly in recent history, in part due to PPP loans, but over the last four years, core loans have also increased significantly. Management attributes higher growth in core loans in 2023 and 2022 to our ability to attract new customers through our outreach to the community. The Company's "Land and Expand" program was designed to increase both loans and deposits as we attract a broader customer base and convert new PPP customers into full banking relationships. 51 The following table presents growth information for loans and loans excluding PPP loans: Years Ended December 31, (In Thousands) 2023 2022 2021 2020 2019 2018 Five Year Compound Growth Rate Loans $1,789,497 $1,501,785 $1,413,886 $1,444,050 $1,043,371 $984,346 13 % Less: PPP loans 2,761 7,110 118,229 304,587 — — NM Loans, excluding PPP loans $1,786,736 $1,494,675 $1,295,657 $1,139,463 $1,043,371 $984,346 13 % Percent change, Loans excluding PPP loans 20 % 15 % 14 % 9 % 6 % The following table sets forth the composition of our loan portfolio by loan segment as of the dates indicated: December 31, 2023 December 31, 2022 Dollar Amount Percent of Total Dollar Amount Percent of Total (In Thousands) Commercial & industrial loans $411,387 23.0 % $358,128 23.8 % Commercial real estate: Owner occupied properties 366,741 20.5 % 349,973 23.3 % Non-owner occupied and multifamily properties 515,528 28.8 % 482,270 32.2 % Residential real estate: 1-4 family residential properties secured by first liens 203,738 11.4 % 73,381 4.9 % 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 33,996 1.9 % 20,259 1.3 % 1-4 family residential construction loans 30,976 1.7 % 44,000 2.9 % Other construction, land development and raw land loans 148,373 8.3 % 99,182 6.6 % Obligations of states and political subdivisions in the US 30,407 1.7 % 32,539 2.2 % Agricultural production, including commercial fishing 41,007 2.3 % 34,099 2.3 % Consumer loans 6,241 0.3 % 4,335 0.3 % Other loans 1,103 0.1 % 3,619 0.2 % Total portfolio loans $1,789,497 $1,501,785 The following table presents the maturity distribution of our loan portfolio and the rate sensitivity of these loans to changes in interest rates as of December 31, 2023: By Maturity Loans Over One Year By Rate Sensitivity (In Thousands) Within 1 Year 1-5 Years 5-15 Years Over 15 Years Total Fixed Interest Rate Variable Interest Rate Commercial & industrial loans $85,528 $195,408 $130,451 $— $411,387 $99,478 $226,381 Commercial real estate 43,705 159,307 602,763 76,494 882,269 233,720 604,844 Residential real estate 32,210 5,916 33,342 197,242 268,710 82,820 153,680 Other construction 61,415 23,665 50,966 12,327 148,373 50,126 36,832 Consumer and other 2,880 10,192 65,677 9 78,758 41,030 34,848 Total $225,738 $394,488 $883,199 $286,072 $1,789,497 $507,174 $1,056,585 52 Information about industry concentrations: Management utilizes the loan segments included in the tables above within the Company's CECL methodology to assess credit risk. These segments are largely determined by type of loan collateral. The Company also separately monitors concentrations in the loan portfolio based on industries, and these industry concentration are discussed below. 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 oil producers or drilling and exploration companies, and companies who provide oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry. The Company estimates that $96.1 million, or approximately 5% of loans as of December 31, 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 $38.6 million and $51.8 million at December 31, 2023 and 2022, respectively. The portion of the Company's ACL that related to the loans with direct exposure to the oil and gas industry was estimated at $884,000 and $786,000 as of December 31, 2023 and 2022, respectively. The following table details loan balances by loan segment and class of financing receivable for loans with direct oil and gas exposure as of the dates indicated: (In Thousands) December 31, 2023 December 31, 2022 Commercial & industrial loans $77,917 $66,864 Commercial real estate: Owner occupied properties 11,410 9,108 Non-owner occupied and multifamily properties 5,434 6,013 Other loans 1,357 1,431 Total loans $96,118 $83,416 The Company monitors other concentrations within the loan portfolio depending on trends in the current and future estimated economic conditions. At December 31, 2023, the Company had $123.3 million, or 7% of total portfolio loans, in the Healthcare sector; $100.4 million, or 6% of portfolio loans, in the Tourism sector; $84.2 million, or 5% in the Accommodations sector; $75.0 million, or 4% in the Fishing sector; $72.8 million, or 4% in Retail loans; $63.4 million, or 4% of portfolio loans, in the Aviation (non-tourism) sector; and $52.2 million, or 3% in the Restaurants and Breweries sector. The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of December 31, 2023: (In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurants and Breweries Accommodations Total ACL $566 $543 $1,009 $633 $475 $386 $737 $4,349 53 Credit Quality and Nonperforming Assets The following table sets forth information regarding our nonperforming loans and total nonperforming assets: December 31, December 31, (In Thousands) 2023 2022 Nonaccrual loans $6,069 $7,076 Loans 90 days past due and accruing — — Total nonperforming loans $6,069 $7,076 Nonperforming loans guaranteed by government (1,067) (646) Net nonperforming loans $5,002 $6,430 Nonperforming purchased receivables 808 — Net nonperforming assets $5,810 $6,430 Nonperforming loans, net of government guarantees / portfolio loans 0.28 % 0.43 % Nonperforming loans, net of government guarantees / portfolio loans, net of government guarantees 0.30 % 0.46 % Nonperforming assets, net of government guarantees / total assets 0.21 % 0.24 % Nonperforming assets, net of government guarantees / total assets net of government guarantees 0.21 % 0.25 % Adversely classified loans, net of government guarantees $7,057 $7,581 Special mention loans, net of government guarantees $6,580 $4,760 Loans 30-89 days past due and accruing, net of government guarantees /portfolio loans 0.03 % 0.01 % Loans 30-89 days past due and accruing, net of government guarantees / portfolio loans, net of government guarantees 0.03 % 0.01 % Allowance for credit losses / portfolio loans 0.97 % 0.92 % Allowance for credit losses / portfolio loans, net of government guarantees 1.02 % 0.99 % Allowance for credit losses / nonperforming loans, net of government guarantees 345 % 215 % Gross loan charge-offs for the quarter $281 $— Gross loan recoveries for the quarter ($185) ($87) Net loan (recoveries) charge-offs for the quarter $96 ($87) Net loan (recoveries) charge-offs year-to-date ($38) ($1,127) Net loan (recoveries) charge-offs for the quarter / average loans, for the quarter 0.01 % (0.01) % Net loan (recoveries) charge-offs year-to-date / average loans, year-to-date annualized — % (0.08) % The Company’s nonperforming assets, net of government guarantees decreased to $5.8 million at December 31, 2023 as compared to $6.4 million at December 31, 2022. This decrease was mostly due to principal paydowns on nonaccrual loans which were only partially offset by additions to nonaccrual loans in 2023. There was interest income of $656,000 and $2.2 million recognized in net income for 2023 and 2022, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero. The Company held a government guarantee related to the OREO property that was sold in December 2022; however, the value of this guarantee was not included in the Company's financial statements in 2022 due to uncertainty as to the total amount that would be received from the guarantee. The Company received proceeds from the guarantee in the third quarter of 2023 which were recorded as a gain on sale of OREO. 54 The following summarizes OREO activity for the periods indicated: (In Thousands) 2023 2022 2021 Balance, beginning of the year $— $5,638 $7,289 Transfers from loans 273 — 274 Proceeds from the sale of other real estate owned (1,079) (5,224) (2,610) Gain (loss) on sale of other real estate owned, net 929 (414) 685 Impairment on other real estate owned (123) — — Balance, end of year — — 5,638 Government guarantees — — (1,279) Balance, end of year, net of government guarantees $— $— $4,359 The Company made a $1.0 million loan in 2021 to facilitate the sale of OREO in 2021, but did not make any loans to facilitate the sale of OREO in 2022 or 2023. Our underwriting policies and procedures for loans to facilitate the sale of OREO are no different than our standard loan policies and procedures. At December 31, 2023, management had identified potential problem loans of $1.9 million as compared to potential problem loans of $1.6 million at December 31, 2022. Potential problem loans are loans which are currently performing that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, or impaired loans. The increase in potential problem loans at December 31, 2023 from December 31, 2022 was primarily due to the addition of four new potential problem loans in 2023 that were partially offset by paydowns to existing potential problem loans. Allowance for Credit Losses The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to Consolidated Financial Statements included in Part II. Item 8 of this report for detailed discussion regarding the ACL methodology for loans and unfunded commitments. The following tables show the allocation of the ACL and the percent of loans in each category to total loans and the ratio of net loan charge-offs to average loans outstanding by loan segment for the years indicated: 2023 % of Loans (1) Net loan charge-offs (recoveries) to average loans (In Thousands) Amount Commercial & industrial loans $3,438 24 % (0.03) % Commercial real estate: Owner occupied properties 2,867 20 % — % Non-owner occupied and multifamily properties 3,294 29 % — % Residential real estate: 1-4 family residential properties secured by first liens 3,470 11 % 0.04 % 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 551 2 % (0.08) % 1-4 family residential construction loans 191 2 % — % Other construction, land development and raw land loans 3,127 8 % — % Obligations of states and political subdivisions in the US 80 2 % — % Agricultural production, including commercial fishing 168 2 % — % Consumer loans 81 — % 0.39 % Other loans 3 — % — % Total $17,270 100 % — % 1 Represents percentage of this category of loans to total portfolio loans. 55 2022 % of Loans (1) Net loan charge-offs (recoveries) to average loans (In Thousands) Amount Commercial & industrial loans $2,914 25 % (0.26) % Commercial real estate: Owner occupied properties 3,094 23 % (0.02) % Non-owner occupied and multifamily properties 3,615 32 % — % Residential real estate: 1-4 family residential properties secured by first liens 1,413 5 % (0.01) % 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 389 1 % (0.19) % 1-4 family residential construction loans 312 3 % — % Other construction, land development and raw land loans 1,803 7 % — % Obligations of states and political subdivisions in the US 79 2 % — % Agricultural production, including commercial fishing 145 2 % (0.05) % Consumer loans 68 — % (0.02) % Other loans 6 — % — % Total $13,838 100 % (0.08) % 1 Represents percentage of this category of loans to total portfolio loans. The ACL for loans increased to $17.3 million at December 31, 2023 compared to $13.8 million at December 31, 2022 primarily due to an increase in loan balances, net of guarantees, as well as a slight increase in expected future loss rates due to a decrease in management's assumptions about prepayment and curtailment rates. The Company determined that an ACL of $17.3 million, or 0.97% of portfolio loans, is appropriate as of December 31, 2023 based on our analysis of the current credit quality of the portfolio and forecasted economic conditions. 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. The following table sets forth information regarding changes in the ACL for unfunded commitments for the years indicated: (In Thousands) 2023 2022 2021 Balance at beginning of period $1,970 $1,096 $187 Provision for credit losses 448 874 (320) Balance at end of period $2,418 $1,970 $1,096 While management believes that it uses the best information available to determine the ACL, unforeseen market conditions and other events could result in an 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. Purchased Receivables Purchased receivable balances increased at December 31, 2023 to $36.8 million from $20.0 million at December 31, 2022, and year-to-date average purchased receivable balances were $24.8 million and $7.0 million in 2023 and 2022, respectively. Purchased receivable income was $4.5 million and $2.0 million in 2023 and 2022, respectively. 56 The following table sets forth information regarding changes in the purchased receivable ACL for the years indicated: (In Thousands) 2023 2022 2021 Balance at beginning of year $— $— $73 Cumulative effect of adopting ASU 2016-13 — — (73) Charge-offs — — — Recoveries — — — Charge-offs net of recoveries — — — Reserve for (recovery from) purchased receivables — — — Balance at end of year $— $— $— Ratio of net charge-offs (recoveries) to average purchased receivables during the period — % — % — % Deposits Deposits are our primary source of funds. Total deposits increased 4% to $2.49 billion at December 31, 2023 from $2.39 billion at December 31, 2022. Our deposits generally are expected to fluctuate according to the level of our market share, economic conditions, and normal seasonal trends. The following table sets forth the average balances outstanding and average interest rates for each major category of our deposits, for the periods indicated: 2023 2022 2021 Average balance Average rate paid Average balance Average rate paid Average balance Average rate paid (In Thousands) Interest-bearing demand accounts $809,219 1.61 % $701,679 0.30 % $575,298 0.08 % Money market accounts 250,072 1.28 % 318,375 0.25 % 264,344 0.16 % Savings accounts 278,951 0.47 % 344,349 0.16 % 323,131 0.15 % Certificates of deposit 276,144 3.25 % 169,931 0.62 % 178,215 0.94 % Total interest-bearing accounts 1,614,386 1.64 % 1,534,334 0.29 % 1,340,988 0.23 % Noninterest-bearing demand accounts 749,859 820,547 784,092 Total average deposits $2,364,245 $2,354,881 $2,125,080 57 The Company's mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 87% of total deposits at December 31, 2023 and 92% at December 31, 2022. The only deposit category with stated maturity dates is certificates of deposit. At December 31, 2023, we had $331.3 million in certificates of deposit, of which $268.5 million, or 81%, are scheduled to mature in 2024. The Company’s certificates of deposit increased to $331.3 million during 2023 as compared to $192.9 million at December 31, 2022. The aggregate amount of certificates of deposit in amounts of $250,000 or more at December 31, 2023 and 2022, was $142.1 million and $77.5 million, respectively. The following table sets forth the amount outstanding of certificates of deposits in amounts of $250,000 or more by time remaining until maturity and percentage of total deposits as of December 31, 2023: Time Certificates of Deposits of $250,000 or More Percent of Total Deposits (In Thousands) Amount Amounts maturing in: Three months or less $17,007 12 % Over 3 through 6 months 16,576 12 % Over 6 through 12 months 78,637 55 % Over 12 months 29,925 21 % Total $142,145 100 % The Company offers the Certificate of Deposit Account Registry Service® (CDARS®) as a member of Promontory Interfinancial Network, LLCSM (Network). When a Network member places a deposit using CDARS, that certificate of deposit is divided into amounts under the standard FDIC insurance maximum ($250,000) and is allocated among member banks, making the large deposit eligible for FDIC insurance. The Company had $48.1 million CDARS certificates of deposits at December 31, 2023 and $30.2 million CDARS certificates of deposits at December 31, 2022. Uninsured deposits totaled $1.0 billion or 41% of total deposits as of December 31, 2023 compared to $1.1 billion or 46% of total deposits as of December 31, 2022. As interest rates continued to increase in 2023, Northrim took a proactive, targeted approach to increase deposit rates. 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 Company’s assets. At December 31, 2023, our maximum borrowing line from the FHLB was approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements. Based on the Company's current collateral pledged to the FHLB, less outstanding advances, the Company's borrowing line is $348.0 million as of December 31, 2023. The Company has outstanding advances of $13.7 million and $14.1 million as of December 31, 2023 and 2022, respectively, which were originated to match fund low income housing projects that qualify for long term fixed interest rates. These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23% to 3.25%. The Company paid $330,000 and $339,000 in interest on these advances in 2023 and 2022, respectively. There were no additional advances outstanding as of December 31, 2023 and 2022, however, the Company had an average short-term advance of $21.8 million in 2023 compared to an average short-term advance of zero in 2022. The Company took out a $50.0 million short-term advance in the second quarter of 2023 which was paid off in the fourth quarter of 2023. The Company paid $1.2 million in interest expense on the short-term advance in 2023. Federal Reserve Bank : The Federal Reserve Bank of San Francisco (the “Federal Reserve Bank”) is holding $60 million of investment securities as collateral to secure advances made through the discount window as of December 31, 2023. There were no discount window advances outstanding at December 31, 2023 or 2022. The Company paid less than $1,000 in interest in 2023 and 2022 on this agreement. The Federal Reserve Bank is holding $20 million of investment securities as collateral to secure the Company's ability to take advances through the Federal Reserve Bank's Bank Term Funding Program (“BTFP”) as of December 31, 2023. There were no BTFP advances outstanding at December 31, 2023, however, the Company had an average outstanding balance of $5.0 million in 2023. The Company paid $241,000 in interest expense on this BTFP advance in 2023. 58 Other Short and Long-term Borrowings: The Company had no short or long-term borrowings outstanding other than the FHLB advances noted above as of December 31, 2023 or 2022. The Company is subject to provisions under Alaska state law which generally limits the amount of outstanding debt to 35% of total assets or $975.9 million at December 31, 2023 and $929.3 million at December 31, 2022. Junior Subordinated Debentures On December 16, 2005, the Company’s subsidiary, NST2, issued trust preferred securities in the principal amount of $10 million. These securities carried an interest rate of 90-day LIBOR plus 1.37% per annum that was initially set at 5.86% adjusted quarterly until the cessation of LIBOR in 2023. As of December 31, 2023, these securities now carry an interest rate of 90-day CME SOFR plus tenor spread adjustment of 0.26% plus 1.37% per annum, adjusted quarterly. The securities have a maturity date of March 15, 2036, and are callable by the Company on or after March 15, 2011. These securities are treated as Tier 1 capital by the Company’s regulators for capital adequacy calculations. The interest cost to the Company of these securities was $692,000 in 2023. At December 31, 2023, the securities had an interest rate of 7.02%. The Company entered into an interest rate swap in the third quarter of 2017 to hedge the variability in cash flows arising out of its junior subordinated debentures, 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 million of junior subordinated debentures held under NST2 at 3.72% through its maturity date. Net of the impact of the interest rate swap, interest expense on these securities was $379,000 in 2023 and $379,000 in 2022. The Company also had interest expense of $21,000 in 2023 and $9,000 in 2022 on common securities related to junior subordinated debt. Liquidity and Capital Resources 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 2024. Other available sources of liquidity for the bank holding company include the issuance of debt and the issuance of common or preferred stock. As of December 31, 2023, the Company has 10.0 million authorized shares of common stock, of which approximately 5.5 million are issued and outstanding, leaving approximately 4.5 million shares available for issuance. Additionally, the Company has 2.5 million authorized shares of preferred stock available for issuance. 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. The Company had cash and cash equivalents of $118.5 million, or 4% of total assets at December 31, 2023 compared to $259.4 million, or 10% of total assets as of December 31, 2022. The decrease in cash and cash equivalents is primarily due to an increase in loans which is only partially offset by an increase in deposits. The Company had cumulative other comprehensive losses, net of tax, of $16.4 million in 2023, primarily due to unrealized holding losses on available for sale securities due to increases in interest rates. This is a decrease from $29.1 million in 2022. Management does not believe that liquidation of these securities, which would result in realized losses, will occur prior to maturity of these securities. As of December 31, 2023, the weighted average maturity of available for sale securities is 2.8 years compared to 3.3 years at December 31, 2022. At December 31, 2023, $162.9 million available for sale securities mature within one year, $141.3 million mature in 2025, and $196.3 million mature in 2026. Our total unfunded commitments to fund loans and letters of credit at December 31, 2023 were $495.6 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. At December 31, 2023, certificates of deposit totaling $268.5 million and $56.8 million, respectively, contractually mature in 2024 and 2025, and may be withdrawn from the Bank. Similar to loans, we do not expect that these maturing certificates of deposit, or other non-maturity deposits, to be withdrawn from the Bank in a manner that will strain liquidity; however, unforeseen future circumstances or events may cause higher than anticipated withdrawal of deposits or draws of unfunded commitments to fund new loans. Management believes that cash requirements to fund future non-deposit liabilities, including operating lease liabilities, other liabilities, or borrowings as of December 31, 2023, are not material to the Company's liquidity position as of December 31, 2023. 59 The Company has other available sources of liquidity to fund unforeseen liquidity needs. These include borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB. At December 31, 2023, our liquid assets were $575.6 million and our funds available for borrowing under our existing lines of credit were $742.9 million. Additionally, the Company can obtain borrowings under the BTFP as a source of liquidity in order to help assure that banks have the ability to meet the needs of all depositors. The BTFP allows eligible depository institutions to pledge high-quality securities to obtain liquidity and eliminate the need for the financial institution to sell securities quickly in times of stress. Advances are available through the BTFP until March 11, 2024. Given these sources of liquidity and our expectations for customer demands for cash and for our operating cash needs, we believe our sources of liquidity to be sufficient in the foreseeable future. As shown in the Consolidated Statements of Cash Flows included in Part II. Item 8 of this report, net cash provided by operating activities was $38.9 million in 2023 and $78.1 million in 2022, respectively. The primary source of cash provided by operating activities for both periods was positive net income, and in 2022 also included proceeds from the sale of loans held for sale net of proceeds used in originations. In 2023, proceeds from the sale of loans held for sale net of proceeds used in originations decreased as compared to 2022 as refinance and purchase activity slowed. Net cash used by investing activities was $255.1 million in 2023 primarily due to increases in loans and to a lesser extent, purchases of available for sale and marketable equity securities and an increase in purchased receivables. Net cash used by investing activities was $405.6 million in 2022 primarily due to purchases of available for sale and held to maturity securities. Financing activities provided cash of $75.3 million in 2023 and used cash of $59.0 million in 2022. Financing activities provided cash in 2023 due to increases in deposits that were only partially offset by the payment of cash dividends to shareholders and the repurchase of shares of the Company's common stock. Financing activities used cash in 2022 due to a decrease in deposits as wells as payment of cash dividends to shareholders and the repurchase of shares of the Company's common stock. Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market. The following table presents the amount of common shares repurchased and the weighted average price paid per share for the periods indicated: Years Ending: Common Shares Repurchased Weighted Average Price 2023 208,673 $43.34 2022 333,724 $42.42 2021 279,276 $41.30 2020 327,000 $30.51 2019 347,676 $36.15 At December, 31, 2023, there were 76,327 shares available under the previously announced stock repurchase program. However, on January 26, 2024 the Company announced that its Board of Directors authorized the repurchase of up to an additional 110,000 shares of common stock. The Company intends to continue to repurchase our stock from time-to-time depending upon market conditions, but we can make no assurances that we will continue this program or that we will authorize additional shares for repurchase. The table below shows the cumulative effect the repurchase of common shares since the inception of the Company on diluted earnings per share: Years Ending: Diluted EPS as Reported Diluted EPS without Stock Repurchase 2023 $4.49 $3.23 2022 $5.27 $3.92 2021 $6.00 $4.79 2020 $5.11 $4.22 2019 $3.04 $2.59 Regulatory Capital Requirements: 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 60 requirements address both risk-based capital and leverage capital. We believe as of December 31, 2023, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards. The table below illustrates the capital requirements in effect in 2023 for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements. Management intends to maintain capital ratios for the Bank in 2024 exceeding the FDIC’s requirements for the “well-capitalized” classification. The capital ratios for the Company exceed those for the Bank primarily because the $10 million trust preferred securities offering is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our consolidated financial statements. The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital. As a result, the Company has $10 million more in regulatory capital than the Bank at December 31, 2023 and 2022, respectively, 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 December 31, 2023 Total risk-based capital 8.00% 10.00% 12.35% 10.81% Tier 1 risk-based capital 6.00% 8.00% 11.43% 9.88% Common equity tier 1 capital 4.50% 6.50% 10.98% 9.89% Leverage ratio 4.00% 5.00% 8.72% 7.51% See Note 22 of the Consolidated Financial Statements included in Part II. Item 8 of this report for a detailed discussion of the capital ratios. The requirements for "well-capitalized" come from the Prompt Correction Action rules. See Part I. Item 1 Supervision and Regulation. 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 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. Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements in Part II. Item 8 of this report. Not all of these significant accounting policies require management to make critical accounting estimates. Management believes that the following accounting policies would be considered critical under the SEC's definition. The following discussion is intended to supplement, but not duplicate, information provided in Note 1 in the Notes to Consolidated Financial Statements in Part II. Item 8 of this report for these policies. Allowance for Credit Losses Policy : The Company adopted CECL on January 1, 2021. The Company's Executive Loan Management Committee and Asset Liability Committee are both involved in monitoring various aspects of the Company's ACL methodology. The Company's Audit Committee provides board oversight of the ACL process and reviews and approves the ACL methodology on a quarterly basis. CECL is not prescriptive in the methodology used to determine the expected credit loss estimate. Therefore, management has flexibility in selecting the methodology. However, the expected credit losses must be estimated over a financial asset's contractual term, adjusted for prepayments, utilizing quantitative and qualitative factors. The estimate of current expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is the starting point for estimating expected credit losses. Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards, portfolio mix or asset terms, and differences in economic conditions – both current conditions and reasonable and supportable forecasts. When the Company is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset it has estimated expected credit losses for the remaining life after the forecasted period using an approach that reverts to historical credit loss information. Depending on the nature and size of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow (“DCF”) method or a weighted average remaining life method to estimate expected credit losses quantitatively. The Company uses a DCF method for eight of its 11 loan pools, which represent 95% of the amortized cost basis 61 of total loan pools at December 31, 2023. The weighted average remaining life method is used for the remaining three loan pools primarily because loan level data constraints preclude the use of the DCF model. Under the DCF method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD"). The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables. The Company's regression models for PD utilize the Company's actual historical loan level default data. The Company determines a reasonable and supportable forecast and applies that forecast to the regression model to estimate defaults over the forecast period. Management leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the Company's four quarter forecast period. As of December 31, 2023 and 2022, management utilizes and forecasts U.S. unemployment as the sole loss driver for all of the loan pools that utilize the DCF method. The Company's regression models for PD as of these time periods utilize peer historical loan level default data. Peers for this purpose include banks in the United States with total assets between $1 billion and $5 billion whose loan portfolios share certain characteristics with the Company's loan portfolio. Peers differ by loan segment; a bank is included in the peer group for each loan segment under the following circumstances: • The percentage the balance of the loan segment compared to total loans over a five year look back period is within 1.5 standard deviations of the Company's data; • The percentage of total charge offs for the loan segment over a five year look back period is within 1 standard deviation of the Company's data; and • The percentage of total charge offs for the loan segment during the recessionary period from the fourth quarter of 2008 to the fourth quarter of 2012 is within 1 standard deviation of the Company's data. For all periods presented, following the forecast period, the economic variables used to calculate PD revert to a historical average at a constant rate over an eight quarter reversion period. Other assumptions relevant to the discounted cash flow model to derive the quantitative allowance include the LGD, which is the estimate of loss for a defaulted loan, prepayment speeds, and the discount rate applied to future cash flows. The DCF method utilizes the effective interest rate of individual assets to discount the expected credit losses over the contractual term of the loan, adjusted for prepayments. The LGD is the expected loss which would be realized presuming a default has occurred and primarily measures the value of the collateral or other secondary source of repayment related to the collateral. The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses under CECL, which are unchanged as of December 31, 2023: Commercial & industrial - Commercial loans are loans for commercial, corporate and business purposes. The Company’s commercial business loan portfolio is comprised of loans for a variety of purposes and across a variety of industries. These loans include general commercial and industrial loans, loans to purchase capital equipment, and other business loans for working capital and operational purposes. Commercial loans are generally secured by accounts receivable, inventory and other business assets. Also included in commercial loans are our PPP loans originated during 2020 and 2021. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Commercial real estate - This category of loans consists of the following loan types: Owner occupied - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including owner occupied commercial real estate loans primarily secured by commercial office or industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Non-owner occupied and multifamily - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including investment real estate loans that are primarily secured by office and industrial buildings, warehouses or retail buildings where the owner of the building does not occupy the property, non-owner occupied apartment or multifamily residential buildings, and various special purpose properties. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. Generally, these types of loans are thought to involve a greater degree of credit risk than owner occupied commercial real estate as they are more sensitive to adverse economic conditions. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. 62 Residential real estate - This category of loans consists of the following loan types: 1-4 family residential properties secured by first liens - This category of loans includes term loans secured by first liens on residential real estate. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. 1-4 family residential properties secured by junior liens and revolving credit lines secured by 1-4 family first liens - This category of loans includes term loans primarily secured by junior liens on residential real estate and revolving credit lines that are secured by first liens on residential real estate. Home equity revolving lines of credit and home equity term loans are included in this group of loans. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. 1-4 family residential construction - This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of 1-4 family residential properties which will secure the loan. These loans may also be secured by tracts or individual parcels of land on which 1-4 family residential properties are being constructed. The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third-party. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Other construction, land development, and raw land - This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of owner occupied and non-owner occupied commercial properties, and loans secured by raw or improved land. The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third-party. Repayment of land secured loans are dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Agricultural production, including commercial fishing - These loans are for the purpose of financing agricultural production, including growing and storing of crops, and for the purpose of financing fisheries and forestries, including loans to commercial fishermen. These loans may be secured or unsecured, but any loans for these purposes that are secured by real estate are included in a real estate category. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool. Consumer - Loans used for personal use, which may be secured or unsecured, and customer overdrafts. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Obligations of states and political subdivisions in the US - This category of loans includes all loans made to states, counties municipalities, school districts, drainage and sewer districts, and Indian tribes in the U.S. These loans maybe be secured by any type of collateral, including real estate. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool. Other - This category of loans includes all other loans that cannot properly be reported in one of the preceding categories. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool. In addition to the quantitative portion of the ACL derived using either the DCF or weighted average remaining life method, the Company also considers the effects of the following qualitative factors in its calculation of expected losses in the loan portfolio: • Lending strategy, policies, and procedures; • Quality of internal loan review; • Lending management and staff; • Trends in underlying collateral values; • Competition, legal, and regulatory changes; • Economic and business conditions including fluctuations in the price of Alaska North slope crude oil; • Inflation and monetary policy in the United States; • Changes in trends, volume and severity of adversely classified loans, nonaccrual loans, and delinquencies; • Concentration of credit; and • Changes in the nature and volume of the loan portfolio. 63 Management performs a hypothetical sensitivity analysis of our ACL quarterly to understand the impact of a change in a key input on our ACL. As of December 31, 2023, if the four-quarter national unemployment rate forecast had been approximately 7% higher, our ACL for loans would have increased $420,000, or 2%. As of December 31, 2023, if the four-quarter national unemployment rate forecast had been approximately 50% higher, our ACL for loans would have increased $3.7 million, or 21%. This sensitivity analysis includes the impact to both the quantitative and qualitative components of our ACL. Changes in quantitative inputs and qualitative loss factors may not occur in the same direction or magnitude across all segments of our loan portfolio and deterioration in some quantitative inputs and qualitative loss factors may offset improvement in others. This sensitivity analysis does not represent a change to our expectations of the economic environment but provides a hypothetical result to assess the sensitivity of the ACL to a change in a key input. This sensitivity analysis does not incorporate changes to management’s judgment of qualitative loss factors. Valuation of goodwill and other intangibles: Management performs an impairment analysis for the intangible assets with indefinite lives on an annual basis as of December 31. Additionally, goodwill and other intangible assets with indefinite lives are evaluated on an interim basis when events or circumstances indicate impairment potentially exists. The impairment analysis requires management to make subjective judgments. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. There can be no assurance that changes in circumstances, estimates or assumptions may result in additional impairment of all, or some portion of, goodwill or other intangible assets. The Company performed its annual goodwill impairment testing at December 31, 2023 and 2022 in accordance with the policy described in Note 1 to the financial statements included in Part II. Item 8 of this report. At December 31, 2023, the Company performed its annual impairment test by performing a qualitative assessment. Significant positive inputs to the qualitative assessment included the Company’s increasing net income as compared to historical trends; the Company's increasing market share for deposits in our markets; results of regulatory examinations; peer comparisons of the Company's net interest margin; trends in the Company’s cash flows; improvements in the Alaskan economy in 2023; increases in the Company's market share of mortgage originations; and increases in the Company's stock price. Significant negative inputs to the qualitative assessment included the muted pace of growth in the Alaska economy and a decline in home mortgage originations. We believe that the positive inputs to the qualitative assessment noted above outweigh the negative inputs for both of the Company's operating segments, and we therefore concluded that it is more likely than not that the fair value of the Company exceeds its carrying value at December 31, 2023 and that no potential impairment existed at that time. Servicing rights: The Company measures mortgage servicing rights (“MSRs”) and commercial servicing rights (“CSRs”) at fair value on a recurring basis with changes in fair value going through earnings in the period in which the change occurs. Changes in the fair value of MSRs are recorded in mortgage banking income, and changes in the fair value of CSRs are recorded in commercial servicing revenue. Fair value adjustments encompass market-driven valuation changes and the decrease in value that occurs from the passage of time, which are separately reported. Retained servicing rights are measured at fair value as of the date of sale. Initial and subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of servicing rights, the present value of expected net 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. A sensitivity analysis of our servicing rights was performed as of December 31, 2023. See Note 7 to the financial statements included in Part II. Item 8 of this report for the results of this analysis. Other Accounting Policies and Estimates: The Company evaluates its estimates, including those that materially affect the financial statements and are related to investments, mortgage servicing rights, derivative instruments, fair value measurements, and intangible assets on an on-going basis. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company's policies related to these estimates can be found in Note 1 in the Notes to Consolidated Financial Statements in Part II. Item 8 of this report. 64