NORTHRIM BANCORP INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the unaudited consolidated financial statements of Northrim BanCorp, Inc. (the “Company”) and the notes thereto presented elsewhere in this report and with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. 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 wars in Ukraine and the Middle East; financial stress on borrowers (consumers and businesses) as a result of higher rates or an uncertain economic environment; the general condition of, and changes in, the Alaska economy; our ability to maintain or expand our market share or net interest margin; the sufficiency of our 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, 2023, 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 reported Alaska’s seasonally adjusted unemployment rate in May of 2024 was 4.5% compared to the U.S. rate of 4%. The total number of payroll jobs in Alaska, not including uniformed military, increased 2.9% or 9,300 jobs between May of 2023 and May of 2024. According to the DOL, Construction and Health Care had the largest growth in new jobs through May 2024 compared to the prior year. The Construction sector added 2,500 positions for a year over year growth rate of 14.5% in May of 2024. The Health Care sector grew by 1,700 jobs for an annual growth rate of 4.3%. The Oil & Gas sector increased by 9.5% or 700 new direct jobs. Professional and Business Services added 1,100 jobs year over year through May of 2024, up 3.9%. The Government sector grew by 1,200 jobs for 1.5% growth, adding 600 Federal jobs and 600 State and local positions in Alaska. The only sectors to decline between May 2023 and May 2024 were Financial Activities, shrinking 100 positions and Information, down 200 jobs. Alaska’s Gross State Product (“GSP”) in the first quarter of 2024, was estimated to be $69.2 billion in current dollars, according to the Federal Bureau of Economic Analysis ("BEA"). Alaska’s inflation adjusted “real” GSP grew 5.3% in 2023, placing Alaska fourth best of all 50 states. In the first quarter of 2024 Alaska grew at an annualized rate of 2.6%, compared to the average U.S. rate of 1.4%. This ranked Alaska 10 th best of the 50 states for the first quarter of 2024. Alaska’s real GSP improvement in the first quarter of 2024 was aided by gains in the Mining, Oil & Gas; and Transportation and Warehousing sectors. The BEA also calculated Alaska’s seasonally adjusted personal income at $54.1 billion in the first quarter of 2024. This was an annualized improvement of 7% for Alaska, equal to the national average of 7%. The monthly average price of Alaska North Slope (“ANS”) crude oil was in a range between $75.64 and $95.05 in 2023. In the first five months of 2024 the monthly average price has been between $79.64 and $89.05. The Alaska Department of Revenue (“DOR”) calculated ANS crude oil production was 479 thousand barrels per day (“bpd”) in Alaska’s fiscal year ending June 30, 2023. The DOR has forecast production to decline slightly to 468 thousand bpd in Alaska’s fiscal year 2024 and grow to 477 thousand bpd in fiscal year 2025. The DOR projects the number to reach 641 thousand bpd by fiscal year 2034 over the next decade. This is primarily a result of new production coming on line in and around the NPR-A region west of Prudhoe Bay. According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 5.4% in 2023 to $480,272, following a 7.6% increase in 2022. This was the sixth consecutive year of price increases. In the first six months of 2024 the average price continues to increase 4.8% to an average sale of $503,474. The average sales price for single family homes in the Matanuska Susitna Borough rose 4% in 2023 to $397,589, after increasing 9.9% in 2022. This continues a trend of average price increases for more than a decade in the region. In the first six months of 2024 the average sales price increased 3.4% to $410,912, according to the Alaska Multiple Listing Services. These two markets represent where the vast majority of the residential lending activity for Northrim Bank’s (the “Bank”) occurs. However, the Alaska Multiple Listing Services reported a large decrease in the number of units sold in both communities in 2023. There were 2,162 housing units sold in Anchorage in 2023, down 24.1% compared to 2,849 in 2022. In the Matanuska Susitna Borough there were 1,636 homes sold in 2023, compared to 2,103 in 2022, a decrease of 22.2%. In the first six months of 2024 in Anchorage there were 4.2% fewer homes sold then over the same period in 2023. The Matanuska Susitna Borough declined 9.1% in homes sold comparing the first six months of 2023 and 2024. The Board of Governors of the Federal Reserve System kept its benchmark interest rate target 5.25%-5.50% as of December 31, 2023 and as of June 30, 2024. The prime rate of interest has remained consistent at 8.50% as of December 31, 2023 and as of June 30, 2024. 39 Highlights and Summary of Performance - Second Quarter of 2024 The Company reported net income and earnings per diluted share of $9.0 million and $1.62, respectively, for the second quarter of 2024 compared to net income and earnings per diluted share of $5.6 million and $0.98, respectively, for the second quarter of 2023. The Company reported net income and earnings per diluted share of $17.2 million and $3.10, respectively, for the first six months of 2024 compared to net income and earnings per diluted share of $10.4 million and $1.82, respectively, for the first six months of 2023. The increase in net income for both the three and six-month periods ending June 30, 2024 compared to the same periods last year is primarily attributable to an increase in mortgage banking income, higher net interest income, and a lower provision for credit losses. • Net interest income in the second quarter of 2024 increased 8% to $27.1 million compared to $25.1 million in the second quarter of 2023. Net interest income in the first six months of 2024 increased 7% to $53.5 million compared to $50.2 million in the first six months of 2023. • Net interest margin was 4.24% for the second quarter of 2024, a 10 basis point increase from the second quarter of 2023. Net interest margin was 4.20% for the first six months of 2024, a 2 basis point increase from the first six months of 2023. The increase in the second quarter and first six months of 2024 compared to the same periods in 2023 was primarily due higher yields on earning assets, a favorable change in the mix of earning-assets, and an increase in total earning assets which were only partially offset by higher interest costs. • The weighted average interest rate for new loans booked in the second quarter of 2024 was 7.26% compared to 6.93% in the second quarter a year ago. • Loans were $1.88 billion at June 30, 2024, up 5% from December 31, 2023 primarily as a result of commercial, commercial real estate, and consumer mortgage loan growth. • Total deposits were $2.46 billion at June 30, 2024, down 1% from December 31, 2023. Demand deposits decreased 6% at June 30, 2024 from December 31, 2023 and represent 29% of total deposits at June 30, 2024. • The average cost of interest-bearing deposits for the quarter was 2.21% at June 30, 2024, up from 1.56% at June 30, 2023. • Total liquid assets and investments and loans maturing within one year were $526.5 million and our funds available for borrowing under our existing lines of credit were $643.1 million at June 30, 2024. • Mortgage loan originations increased to $181.51 million in the second quarter of 2024, up from $101.73 million in the first quarter of 2024 and $169.42 million in the second quarter a year ago. Mortgage loans funded for sale were $152.34 million in the second quarter of 2024, compared to $84.32 million in the first quarter of 2024 and $113.82 million in the second quarter of 2023. • Placed three graduates from Northrim's Commercial Banking Training Program into full-time positions within the Bank. Other financial measures are shown in the table below: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Return on average assets, annualized 1.31 % 0.85 % 1.25 % 0.81 % Return on average shareholders' equity, annualized 14.84 % 9.85 % 14.35 % 9.30 % Dividend payout ratio 37.62 % 61.54 % 39.38 % 66.07 % Nonperforming assets: Nonperforming assets, net of government guarantees were $5.1 million at June 30, 2024 and $5.8 million at December 31, 2023. Other Real Estate Owned (“OREO”), net of government guarantees was zero at June 30, 2024 and December 31, 2023. Repossessed assets increased to $297,000 as of June 30, 2024 from zero at December 31, 2023. Nonperforming loans, net of government guarantees decreased $255,000 or 5% to $4.8 million as of June 30, 2024 from $5.0 million as of December 31, 2023, primarily due to payoffs and pay downs which were only partially offset by the addition of one commercial loan in the first six months of 2024. $3.1 million, or 64% of nonperforming assets, net of government guarantees at June 30, 2024, are nonaccrual loans related to three commercial relationships. Potential problem assets: Potential problem loans are loans which are currently performing in accordance with contractual terms but that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, or impaired loans. These loans are closely monitored and their performance is reviewed by management on a regular basis. At June 30, 2024, management had identified $2.2 million potential problem loans, up slightly from $1.9 million at December 31, 2023. 40 RESULTS OF OPERATIONS Income Statement Net Income Net income for the second quarter of 2024 increased $3.4 million to $9.0 million as compared to $5.6 million for the same period in 2023. The increase in net income in the second quarter of 2024 as compared to the same quarter a year ago is largely attributable to a $2.0 million increase in mortgage banking income, a $1.9 million increase in net interest income, and a $1.5 million decrease in the provision for credit losses. These changes were only partially offset by a $1.4 million increase in salaries and other personnel expense. Net income for the first six months of 2024 increased $6.8 million to $17.2 million as compared to $10.4 million for the same period in 2023. The increase in net income in the first six months of 2024 as compared to the same period a year ago is largely attributable to a $4.0 million increase in mortgage banking income, a $3.3 million increase in net interest income, and a $1.7 million decrease in the provision for credit losses which were only partially offset by and a $1.4 million increase in salaries and other personnel expense. Net Interest Income/Net Interest Margin Net interest income for the second quarter of 2024 increased 8% or $1.9 million, to $27.1 million as compared to $25.1 million for the second quarter of 2023. The net interest margin increased 10 basis points to 4.24% in the second quarter of 2024 as compared to 4.14% in the second quarter of 2023. Net interest income for the first six months of 2024 increased 7% or $3.3 million, to $53.5 million as compared to $50.2 million for the first six months of 2023. The net interest margin increased 2 basis points to 4.20% in the first six months of 2024 as compared to 4.18% in the first six months of 2023. The increase in net interest income in the second quarter and first six months of 2024 compared to the same periods in 2023 was primarily the result of increased interest on loans which was only partially offset by a decrease in interest income on investments and interest bearing deposits in other banks, as well as an increase in interest expense on interest-bearing deposits. The increase in net interest margin in the second quarter and first six months of 2024 as compared to the same periods of 2023 was primarily due to higher yields on earning assets, a favorable change in the mix of earning-assets, and an increase in total earning assets which were only partially offset by higher interest costs. Changes in net interest margin in the three and six-month period ended June 30, 2024 as compared to the same period in the prior year are detailed below: Three Months Ended June 30, 2024 vs. June 30, 2023 Nonaccrual interest adjustments (0.02) % Interest rates on loans and liabilities and loan fees, all other loans (0.17) % Volume and mix of other interest-earning assets and liabilities 0.29 % Change in net interest margin 0.10 % Six Months Ended June 30, 2024 vs. June 30, 2023 Nonaccrual interest adjustments (0.01) % Interest rates on loans and liabilities and loan fees, all other loans (0.25) % Volume and mix of other interest-earning assets and liabilities 0.28 % Change in net interest margin 0.02 % 41 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, 2024 and 2023. 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/Costs 6 2024 2023 $ % 2024 2023 $ % 2024 2023 Change Interest-bearing deposits in other banks 1 $17,352 $66,058 ($48,706) (74) % $232 $828 ($596) (72) % 5.27 % 4.96 % 0.31 % Taxable long-term investments 2 639,980 727,833 (87,853) (12) % 4,310 4,679 (369) (8) % 2.82 % 2.40 % 0.42 % Loans held for sale 65,102 37,594 27,508 73 % 990 559 431 77 % 6.08 % 5.96 % 0.12 % Loans 3,4 1,845,832 1,603,126 242,706 15 % 31,377 25,754 5,623 22 % 6.87 % 6.48 % 0.39 % Interest-earning assets 5 2,568,266 2,434,611 133,655 5 % 36,909 31,820 5,089 16 % 5.83 % 5.31 % 0.52 % Nonearning assets 204,509 185,342 19,167 10 % Total $2,772,775 $2,619,953 $152,822 6 % Interest-bearing demand $888,633 $765,984 $122,649 16 % $4,357 $2,849 $1,508 53 % 1.97 % 1.49 % 0.48 % Savings deposits 242,594 282,579 (39,985) (14) % 264 326 (62) (19) % 0.44 % 0.46 % (0.02) % Money market deposits 201,025 245,790 (44,765) (18) % 827 813 14 2 % 1.65 % 1.33 % 0.32 % Time deposits 392,761 273,820 118,941 43 % 4,028 2,126 1,902 89 % 4.12 % 3.11 % 1.01 % Total interest-bearing deposits 1,725,013 1,568,173 156,840 10 % 9,476 6,114 3,362 55 % 2.21 % 1.56 % 0.65 % Borrowings 38,390 54,602 (16,212) (30) % 380 564 (184) (33) % 3.92 % 4.11 % (0.19) % Total interest-bearing liabilities 1,763,403 1,622,775 140,628 9 % 9,856 6,678 3,178 48 % 2.25 % 1.65 % 0.60 % Non-interest bearing demand deposits 706,339 735,615 (29,276) (4) % Other liabilities 58,549 34,514 24,035 70 % Equity 244,484 227,049 17,435 8 % Total $2,772,775 $2,619,953 $152,822 6 % Net interest income $27,053 $25,142 $1,911 8 % Net interest margin 4.24 % 4.14 % 0.10 % Average loans to average interest-earning assets 71.87 % 65.85 % Average loans to average total deposits 75.92 % 69.59 % Average non-interest deposits to average total deposits 29.05 % 31.93 % Average interest-earning assets to average interest-bearing liabilities 145.64 % 150.03 % 1 Consists of interest bearing deposits in other banks and domestic CDs. 2 Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock. 3 Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $1.2 million and $1.1 million in the second quarter of 2024 and 2023, respectively. 4 Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were $5.0 million and $8.3 million in the second quarter of 2024 and 2023, respectively . 5 The Company does not have any fed funds sold or securities purchased with agreements to resell to disclose as part of its total interest-earning assets in the periods presented. 6 Tax-equivalent yields/costs assume a federal tax rate of 21% and state tax rate of 7.43% for a combined tax rate of 28.43%. 42 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, 2024 and 2023. 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, 2024 and 2023. (In Thousands) Three Months Ended June 30, 2024 vs. 2023 Increase (decrease) due to Volume Rate Total Interest Income: Short-term investments ($640) $44 ($596) Taxable long-term investments (636) 267 (369) Loans held for sale 419 12 431 Loans 4,032 1,591 5,623 Total interest income $3,175 $1,914 $5,089 Interest Expense: Interest-bearing demand $323 $1,185 $1,508 Savings deposits (43) (19) (62) Money market deposits (165) 179 14 Time deposits 1,088 814 1,902 Interest-bearing deposits 1,203 2,159 3,362 Borrowings (156) (28) (184) Total interest expense $1,047 $2,131 $3,178 43 The following table compares average balances and rates as well as margins on earning assets for the six-month periods ended June 30, 2024 and 2023. 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/Costs 6 2024 2023 $ % 2024 2023 $ % 2024 2023 Change Interest-bearing deposits in other banks 1 $39,457 $98,314 ($58,857) (60) % $1,070 $2,317 ($1,247) (54) % 5.36 % 4.69 % 0.67 % Taxable long-term investments 2 655,458 727,722 (72,264) (10) % 8,830 9,291 (461) (5) % 2.82 % 2.40 % 0.42 % Loans held for sale 48,868 29,294 19,574 67 % 1,490 849 641 76 % 6.10 % 5.80 % 0.30 % Loans 3,4 1,819,629 1,563,847 255,782 16 % 61,327 49,158 12,169 25 % 6.81 % 6.39 % 0.42 % Interest-earning assets 5 2,563,412 2,419,177 144,235 6 % 72,717 61,615 11,102 18 % 5.76 % 5.21 % 0.55 % Nonearning assets 202,819 185,545 17,274 9 % Total $2,766,231 $2,604,722 $161,509 6 % Interest-bearing demand $897,340 $742,356 $154,984 21 % $8,783 $4,876 $3,907 80 % 1.97 % 1.32 % 0.65 % Savings deposits 246,582 291,904 (45,322) (16) % 544 667 (123) (18) % 0.44 % 0.46 % (0.02) % Money market deposits 208,515 269,584 (61,069) (23) % 1,664 1,595 69 4 % 1.60 % 1.19 % 0.41 % Time deposits 376,031 252,030 124,001 49 % 7,665 3,559 4,106 115 % 4.10 % 2.85 % 1.25 % Total interest-bearing deposits 1,728,468 1,555,874 172,594 11 % 18,656 10,697 7,959 74 % 2.17 % 1.39 % 0.78 % Borrowings 31,167 39,567 (8,400) (21) % 561 744 (183) (25) % 3.55 % 3.74 % (0.19) % Total interest-bearing liabilities 1,759,635 1,595,441 164,194 10 % 19,217 11,441 7,776 68 % 2.19 % 1.44 % 0.75 % Non-interest bearing demand deposits 705,736 745,795 (40,059) (5) % Other liabilities 59,478 37,772 21,706 57 % Equity 241,382 225,714 15,668 7 % Total $2,766,231 $2,604,722 $161,509 6 % Net interest income $53,500 $50,174 $3,326 7 % Net interest margin 4.20 % 4.18 % 0.02 % Average loans to average interest-earning assets 70.98 % 64.64 % Average loans to average total deposits 74.75 % 67.94 % Average non-interest deposits to average total deposits 28.99 % 32.40 % Average interest-earning assets to average interest-bearing liabilities 145.68 % 151.63 % 1 Consists of interest bearing deposits in other banks and domestic CDs. 2 Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock. 3 Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $2.2 million and $2.3 million in the first six months of 2024 and 2023, respectively. 4 Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were $5.4 million and $7.6 million in the first six months of 2024 and 2023, respectively . 5 The Company does not have any fed funds sold or securities purchased with agreements to resell to disclose as part of its total interest-earning assets in the periods presented. 6 Tax-equivalent yields/costs assume a federal tax rate of 21% and state tax rate of 7.43% for a combined tax rate of 28.43%. 44 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, 2024 and 2023. 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, 2024 and 2023. (In Thousands) Six Months Ended June 30, 2024 vs. 2023 Increase (decrease) due to Volume Rate Total Interest Income: Short-term investments ($1,534) $287 ($1,247) Taxable long-term investments (978) 517 (461) Loans held for sale 600 41 641 Loans 8,638 3,531 12,169 Total interest income $6,726 $4,376 $11,102 Interest Expense: Interest-bearing demand $649 $3,258 $3,907 Savings deposits (97) (26) (123) Money market deposits (411) 480 69 Time deposits 2,169 1,937 4,106 Interest-bearing deposits 2,310 5,649 7,959 Borrowings (141) (42) (183) Total interest expense $2,169 $5,607 $7,776 45 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 Company's Current Expected Credit Losses (“CECL”) model. The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. The following table presents the major categories of credit loss expense: Three Months Ended June 30, Six Months Ended June 30, (In Thousands) 2024 2023 2024 2023 Credit loss expense on loans held for investment $135 $1,510 $356 $1,769 Credit loss expense on unfunded commitments (255) (103) (327) (2) 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 ($120) $1,407 $29 $1,767 The decrease in the provision for credit losses for the three and six-month periods ending June 30, 2024 as compared to the same periods in 2023 is primarily the result of a lower loan growth. The provision for credit losses on unfunded commitments is negative in all periods is primarily due to seasonal decreases in unfunded commitment balances, and changes in mix of the portfolio. Fluctuations in the provision for credit losses in the future will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration. Other Operating Income Other operating income for the three-month period ended June 30, 2024 increased $2.6 million, or 37%, to $9.6 million as compared to $7.0 million for the same period in 2023, primarily due to a $2.0 million increase in mortgage banking income in the second quarter of 2024 compared to the same quarter a year ago as well as a $224,000 increase in purchased receivable income and a $174,000 increase in the fair value of marketable equity securities. Service charges on deposit accounts and bankcard fees also increased in the second quarter of 2024 as compared to the same period in 2023. The increase in mortgage banking income in the three-month period ended June 30, 2024 as compared to the same period in 2023 was primarily due to increased production volume due to increased home purchase activity. Other operating income for the six-month period ended June 30, 2024 increased $5.5 million, or 47%, to $17.4 million as compared to $11.9 million for the same period in 2023, primarily due to a $4.0 million increase in mortgage banking income as well as a $711,000 increase in the fair value of marketable equity securities and a $592,000 increase in purchased receivable income. Bankcard fees and service charges on deposit accounts also increased in the first six months of 2024 as compared to the same period in 2023. The increase in mortgage banking income in the six-month period ended June 30, 2024 as compared to the same period in 2023 was primarily due to increased production volume due to increased home purchase activity. Other Operating Expense Other operating expense for the second quarter of 2024 increased $1.4 million, or 6%, to $25.2 million as compared to $23.8 million for the same period in 2023, primarily due to a $1.4 million increase in salaries and other personnel expense as well as a $224,000 increase in data processing expense, which was only partially offset by a $243,000 decrease in marketing expense. The increase in salaries and other personnel expense was primarily due to lower deferral of loan origination costs due to lower portfolio loan originations in the first quarter of 2024 compared to the same period in 2023 as well as higher profit sharing expense, which generally increases when net income increases to reflect a higher expected payout to employees. Other operating expense for the six-month period ended June 30, 2024 increased $1.5 million, or 3%, to $48.8 million as compared to $47.3 million for the same period in 2023 is primarily due to a $1.4 million increase in salaries and other personnel expense primarily due to higher profit sharing expense and lower deferral of loan origination costs as well as a $528,000 increase in data processing expense and $267,000 increase in insurance expense, which was only partially offset by a $294,000 decrease in marketing expense and $407,000 decrease in OREO expense due to subsequent proceeds received in the first quarter of 2024 that are related to a government guarantee on an OREO property sold in December 2022. 46 Income Taxes For the second quarter and first six months of 2024, Northrim recorded a higher effective tax rate as compared to the same periods in 2023 as a result of a decrease in tax credits and tax exempt interest income as a percentage of pre-tax income in 2024. In the second quarter of 2024, Northrim recorded $2.5 million in state and federal income tax expense, for an effective tax rate of 21.95% compared to $1.4 million and 19.56% for the same period in 2023. In the first six months of 2024, Northrim recorded $4.8 million in state and federal income tax expense, for an effective tax rate of 21.94% compared to $2.6 million and 19.97% for the same period in 2023. FINANCIAL CONDITION Balance Sheet Overview Investment Securities Investment Securities include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at June 30, 2024 decreased 8% to $634.1 million from $687.8 million at December 31, 2023 primarily due to maturities and calls of available for sale securities during the first six months of 2024. The table below details portfolio investment balances by portfolio investment type for the periods indicated: June 30, 2024 December 31, 2023 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 $525,683 82.9 % $564,125 82.1 % Municipal securities — — % 816 0.1 % Corporate bonds 45,443 7.2 % 50,374 7.3 % Collateralized loan obligations 50,588 8.0 % 59,371 8.6 % Preferred stock 12,381 2.0 % 13,153 1.9 % Total $634,095 $687,839 The average estimated duration of the investment portfolio at June 30, 2024, was approximately 2.5 years. As of June 30, 2024, $111.5 million of available for sale securities with a weighted average yield of 1.02% are scheduled to mature in the next six months, $77.3 million with a weighted average yield of 2.35% are scheduled to mature in six months to one year, and $172.2 million with a weighted average yield of 1.49% are scheduled to mature in the following year, representing a total of $361.0 million or 14% of earning assets that are scheduled to mature in the next 24 months. 47 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, 2024 December 31, 2023 Dollar Amount Percent of Total Dollar Amount Percent of Total (In Thousands) Commercial & industrial loans $415,931 22.1 % $411,387 23.0 % Commercial real estate: Owner occupied properties 382,050 20.4 % 366,741 20.5 % Non-owner occupied and multifamily properties 547,488 29.1 % 515,528 28.8 % Residential real estate: 1-4 family residential properties secured by first liens 222,488 11.9 % 203,738 11.4 % 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 41,500 2.2 % 33,996 1.9 % 1-4 family residential construction loans 29,281 1.6 % 30,976 1.7 % Other construction, land development and raw land loans 152,767 8.1 % 148,373 8.3 % Obligations of states and political subdivisions in the US 29,671 1.6 % 30,407 1.7 % Agricultural production, including commercial fishing 45,079 2.4 % 41,007 2.3 % Consumer loans 6,743 0.4 % 6,241 0.3 % Other loans 2,909 0.2 % 1,103 0.1 % Total loans $1,875,907 $1,789,497 Loans increased by $86.4 million, or 5%, to $1.876 billion at June 30, 2024 from $1.789 billion at December 31, 2023, primarily as a result of increased commercial, commercial real estate, and consumer mortgage loans. Information about industry concentrations The Company defines “direct exposure” to the oil and gas industry as companies that it has identified as significantly reliant upon activity related to the oil and gas industry, such as oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry. The Company estimates that $88.3 million, or approximately 5% of loans as of June 30, 2024 have direct exposure to the oil and gas industry as compared to $96.1 million, or approximately 5% of loans as of December 31, 2023. The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $31.7 million and $38.6 million at June 30, 2024 and December 31, 2023, respectively. The portion of the Company's ACL that related to the loans with direct exposure to the oil and gas industry was estimated at $939,000 as of June 30, 2024 and $884,000 as of December 31, 2023. The following table details loan balances by loan segment and class of financing receivable for loans with direct oil and gas exposure as of the dates indicated: (In Thousands) June 30, 2024 December 31, 2023 Commercial & industrial loans $70,922 $77,917 Commercial real estate: Owner occupied properties 10,902 11,410 Non-owner occupied and multifamily properties 5,135 5,434 Other loans 1,320 1,357 Total $88,279 $96,118 The Company monitors other concentrations within the loan portfolio depending on trends in the current and future estimated economic conditions. At June 30, 2024, the Company had $122.2 million, or 6% of portfolio loans, in the Healthcare sector, $121.1 million, or 6% of portfolio loans, in the Tourism sector, $93.9 million, or 5% of portfolio loans, in the Accommodations sector, $78.4 million, or 4% of portfolio loans, in the Fishing sector, $70.8 million, or 4% of portfolio loans, in the Aviation (non-tourism) sector, $63.9 million, or 3% of portfolio loans, in the Retail sector, and $52.1 million, or 3% in the Restaurant sector. 48 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, 2024: (In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurant Accommodations Total ACL $706 $625 $963 $594 $492 $397 $872 $4,649 49 Credit Quality and Nonperforming Assets The following table sets forth information regarding our nonperforming loans and total nonperforming assets for the periods indicated: June 30, December 31, (In Thousands) 2024 2023 Nonaccrual loans $4,830 $6,069 Loans 90 days past due and accruing 17 — Total nonperforming loans $4,847 $6,069 Nonperforming loans guaranteed by government — (1,067) Net nonperforming loans $4,847 $5,002 Repossessed assets 297 — Nonperforming purchased receivables — 808 Net nonperforming assets $5,144 $5,810 Nonperforming loans, net of government guarantees / portfolio loans 0.26 % 0.28 % Nonperforming loans, net of government guarantees / portfolio loans, net of government guarantees 0.28 % 0.30 % Nonperforming assets, net of government guarantees / total assets 0.18 % 0.21 % Nonperforming assets, net of government guarantees / total assets net of government guarantees 0.19 % 0.21 % Adversely classified loans, net of government guarantees $7,068 $7,057 Special mention loans, net of government guarantees $8,902 $6,580 Loans 30-89 days past due and accruing, net of government guarantees /portfolio loans 0.03 % 0.03 % Loans 30-89 days past due and accruing, net of government guarantees / portfolio loans, net of government guarantees 0.04 % 0.03 % Allowance for credit losses / portfolio loans 0.94 % 0.97 % Allowance for credit losses / portfolio loans, net of government guarantees 1.01 % 1.02 % Allowance for credit losses / nonperforming loans, net of government guarantees 365 % 345 % Gross loan charge-offs for the quarter $— $281 Gross loan recoveries for the quarter ($26) ($185) Net loan (recoveries) charge-offs for the quarter ($26) $96 Net loan (recoveries) charge-offs year-to-date ($68) ($38) Net loan (recoveries) charge-offs for the quarter / average loans, for the quarter — % 0.01 % Net loan (recoveries) charge-offs year-to-date / average loans, year-to-date annualized — % — % 50 Allowance for Credit Losses 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) 2024 2023 2024 2023 Balance at beginning of period $17,533 $14,157 $17,270 $13,838 Charge-offs: Commercial & industrial loans — (49) — (49) Agricultural production, including commercial fishing — — (25) — Consumer loans — — — (14) Total charge-offs — (49) (25) (63) Recoveries: Commercial & industrial loans 17 21 77 86 Residential real estate: 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 4 5 10 12 Agricultural production, including commercial fishing 5 — 5 — Consumer loans — 1 1 3 Total recoveries 26 27 93 101 Net, recoveries and (charge-offs) 26 (22) 68 38 Provision for credit losses 135 1,510 356 1,769 Balance at end of period $17,694 $15,645 $17,694 $15,645 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) 2024 2023 2024 2023 Balance at beginning of period $2,346 $2,071 $2,418 $1,970 (Benefit) provision for credit losses (255) (103) (327) (2) Balance at end of period $2,091 $1,968 $2,091 $1,968 51 The ACL for loans held for investment at June 30, 2024 increased $424,000 from December 31, 2023 primarily due to higher non-government guaranteed loan balances and changes in management's CECL model assumptions. These changes were only partially offset by a decrease in the Company's forecasted future economic drivers and the estimated timing of future cash flows. While management believes that it uses the best information available to determine the ACL, unforeseen market conditions and other events could result in adjustment to the ACL, and net income could be significantly affected if circumstances differed substantially from the assumptions used in making the final determination of the ACL. Deposits Deposits are the Company’s primary source of funds. Total deposits decreased $21.2 million, or 1%, to $2.464 billion as of June 30, 2024 compared to $2.485 billion as of December 31, 2023, primarily due to seasonality. The following table summarizes the Company's composition of deposits as of the periods indicated: June 30, 2024 December 31, 2023 (In thousands) Balance % of total Balance % of total Demand deposits $704,471 29 % $749,683 31 % Interest-bearing demand 906,010 36 % 927,291 37 % Savings deposits 238,156 10 % 255,338 10 % Money market deposits 195,159 8 % 221,492 9 % Time deposits 420,010 17 % 331,251 13 % Total deposits $2,463,806 $2,485,055 The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 83% of total deposits at June 30, 2024 and 87% of total deposits at December 31, 2023. The only deposit category with stated maturity dates is certificates of deposit. At June 30, 2024, the Company had $420.0 million in certificates of deposit as compared to certificates of deposit of $331.3 million at December 31, 2023. At June 30, 2024, $381.9 million, or 91%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $268.5 million, or 81%, of total certificates of deposit at December 31, 2023. The aggregate amount of certificates of deposit in amounts of $250,000 and greater at June 30, 2024 and December 31, 2023, was $196.5 million and $142.1 million, respectively. The following table sets forth the amount outstanding of deposits in amounts of $250,000 and greater by time remaining until maturity and percentage of total deposits as of June 30, 2024: Time Certificates of Deposit of $250,000 or More Percent of Total Deposits (In Thousands) Amount Amounts maturing in: Three months or less $57,601 29 % Over 3 through 6 months 77,895 40 % Over 6 through 12 months 38,249 19 % Over 12 months 22,706 12 % Total $196,451 100 % At June 30, 2024, 71% of total deposits were held in business accounts and 29% of deposit balances were held in consumer accounts. Northrim had approximately 34,000 deposit customers with an average balance of $74,000 as of June 30, 2024. Northrim had 21 customers with balances over $10 million as of June 30, 2024 which accounted for $474.5 million, or 20%, of total deposits. Uninsured deposits totaled approximately $980.0 million or 40% of total deposits as of June 30, 2024 compared to $1.0 billion or 41% of total deposits as of December 31, 2023. Since interest rates began increasing in 2023, Northrim has taken a proactive, targeted approach to increase deposit rates. There was no unusual deposit activity during the first six months of 2024. 52 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, 2024, our maximum borrowing line from the FHLB was approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements. Based on the Company's current collateral pledged to the FHLB, less outstanding advances, the Company's borrowing line is $346.0 million as of June 30, 2024. The Company has outstanding advances of $13.5 million as of June 30, 2024 which were originated to match fund low income housing projects that qualify for long term fixed interest rates. These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23% to 3.25%. Additionally, the Company has a short-term $30.5 million advance from the FHLB outstanding as of June 30, 2024 at an interest rate of 5.56% which resets daily. Federal Reserve Bank: The Federal Reserve Bank of San Francisco (the “Federal Reserve Bank”) is holding $70.0 million of securities as collateral to secure the Company's ability to take advances through the discount window on June 30, 2024. There were no discount window advances outstanding at either June 30, 2024 or December 31, 2023. Other Short-term Borrowings: The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $981.3 million at June 30, 2024 and $975.9 million at December 31, 2023. At June 30, 2024 and December 31, 2023, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity. Long-term Borrowings. The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of June 30, 2024 or December 31, 2023. 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 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 June 30, 2024, 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. 53 The Company had cash and cash equivalents of $54.4 million, or 2% of total assets at June 30, 2024 compared to $118.5 million, or 4% of total assets as of December 31, 2023. The decrease in cash and cash equivalents since the end of 2023 is primarily due to an increase in loans. The Company had other comprehensive income, net of tax, of $2.0 million for the six-month period ending June 30, 2024 primarily due to unrealized holding gains on available for sale securities. Accumulated unrealized losses, net of income taxes on available for sale securities, which are recorded in total shareholders' equity, are $15.2 million as of June 30, 2024. Accumulated unrealized losses, net of income taxes on held to maturity securities, which are not recorded in shareholders' equity, are $2.2 million as of June 30, 2024. Management does not believe that liquidation of these securities, which would result in realized losses, will occur prior to maturity of these securities. As of June 30, 2024, the weighted average maturity of available for sale securities is 2.5 years, compared to 2.8 years at December 31, 2023, and 3.3 years at December 31, 2022. At June 30, 2024, $188.8 million available for sale securities mature within one year, $172.2 million mature within one to two years, and $126.9 million mature within two to three years. Our total unfunded commitments to fund loans and letters of credit at June 30, 2024 were $472.4 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. At June 30, 2024, certificates of deposit totaling $381.9 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. 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, 2024, are not material to the Company's liquidity position as of June 30, 2024. The Company has other available sources of liquidity to fund unforeseen liquidity requirements. These include borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB. At June 30, 2024, our liquid assets, which include investments and loans maturing within a year, were $526.5 million. Our funds available for borrowing under our existing lines of credit based on loans currently pledged and investments available to be pledged as collateral were $643.1 million. Given these sources of liquidity and our expectations for customer demands for cash and for our operating cash needs, we believe our sources of liquidity to be sufficient for the foreseeable future. As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 “Financial Statements” of this report, net cash used by operating activities was $44.0 million for the first six months of 2024, primarily due to cash used in connection with the origination of loans held for sale, which was only partially offset by cash provided by net income and net proceeds from the sale of loans held for sale. Net cash used by investing activities was $21.6 million for the same period, primarily due to an increase in loans which was only partially offset by maturities and calls of available for sale securities. Net cash provided by financing activities in the same period was $1.5 million, primarily due to an increase in borrowings which was only partially offset by decreases in deposits and to a lesser extent by cash dividends paid to shareholder and repurchases of common stock. Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market. The Company repurchased 15,034 shares of its common stock under the Company's previously announced repurchase programs in the first quarter of 2024 and did not repurchase any shares in the second quarter of 2024. At June 30, 2024, there are 110,000 shares remaining under the repurchase program. The Company may elect to continue to repurchase our common stock from time-to-time depending upon market conditions, but we can make no assurances that we will continue this program or that we will authorize additional shares for repurchase. 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, 2024, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards. The table below illustrates the capital requirements in effect for the periods noted for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements. Management intends to maintain capital ratios for the Bank in 2024, exceeding the FDIC’s requirements for the “well-capitalized” classification. The capital ratios for the Company exceed those for the Bank primarily because the $10 million trust preferred securities offering completed in the fourth quarter of 2005 is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our financial statements. The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital. As a result, the Company has $10 million more in regulatory capital than the Bank at June 30, 2024, which explains most of the difference in the capital ratios for the two entities. 54 Minimum Required Capital Well-Capitalized Actual Ratio Company Actual Ratio Bank June 30, 2024 Total risk-based capital 8.00% 10.00% 12.58% 11.19% Tier 1 risk-based capital 6.00% 8.00% 11.68% 10.28% Common equity tier 1 capital 4.50% 6.50% 11.23% 10.28% Leverage ratio 4.00% 5.00% 9.17% 8.07% 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, 2023 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, 2023. 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, 2023. 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, and the valuation of mortgage servicing rights. There have been no material changes to the valuation techniques or assumptions within the models, that affect our estimates during 2024 except as noted below. Allowance for Credit Losses Policy : For loan pools that utilize the discounted cash flow ("DCF") method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD"). The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables. As of December 31, 2023, management used a DCF method for eight of its 11 loan pools, which represented 96% of the amortized cost basis of total loan pools at December 31, 2023. The weighted average remaining life method was used for the remaining three loan pools primarily because loan level data constraints preclude the use of the DCF model. As of December 31, 2023, management utilized and forecasted U.S. unemployment as the sole loss driver for all of the loan pools that utilize the DCF method. The Company's regression models for PD as of these time periods utilize peer historical loan level default data. Peers for this purpose include banks in the United States with total assets between $1 billion and $5 billion whose loan portfolios share certain characteristics with the Company's loan portfolio. Peers differ by loan segment; a bank is included in the peer group for each loan segment under the following circumstances: • The percentage the balance of the loan segment compared to total loans over a five year look back period is within 1.5 standard deviations of the Company's data; • The percentage of total charge offs for the loan segment over a five year look back period is within 1 standard deviation of the Company's data; 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. As of January 1, 2024, management uses a DCF method for seven of its 11 loan pools, which represented 95% of the amortized cost basis of total loan pools at June 30, 2024. The weighted average remaining life method was used for the remaining four loan pools; management changed the consumer pool to the remaining life method primarily because the regression model under the DCF model for this pool fell outside of acceptable levels for certain statistical tests performed by management to determine the appropriateness of model method selections. 55 Additionally, as of January 1, 2024, management utilizes and forecasts both U.S. unemployment and U.S. Gross Domestic Product in a multi-loss driver model for all of the loan pools that utilize the DCF method. The Company's regression models for PD as of January 1, 2024 utilize peer historical loan level default data. Peers for this purpose include banks in the United States with total assets between $1 billion and $5 billion whose loan portfolios share certain characteristics with the Company's loan portfolio. Peers differ by loan segment; a bank is included in the peer group for each loan segment under the following circumstances: • The percentage the balance of the loan segment compared to total loans over a five year look back period is within 0.5 standard deviations of the Company's data, and • The percentage of total charge offs for the loan segment over a five year look back period is within 0.25 standard deviation of the Company's data; 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 0.25 standard deviation of the Company's data. There were no other changes to estimates and assumptions used in the Company's ACL since December 31, 2023. 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 June 30, 2024, if the four-quarter U.S. unemployment rate forecast had been approximately 5% higher and the four-quarter annualized growth rate in the U.S. Gross Domestic Product had been approximately 12% lower, our ACL for loans would have increased $594,000, or 3%. As of June 30, 2024, if the four-quarter national unemployment rate forecast had been approximately 41% higher and the four-quarter annualized growth rate in the U.S. Gross Domestic Product had been approximately 5% higher, which represents management's estimate of long-term mean rates for these economic factors, our ACL for loans would have increased $2.6 million, or 15%. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our assessment of market risk as of June 30, 2024 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2023.