What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-30 compared with 2024-08-01 · 152 added, 172 removed, 390 unchanged (45% of the section changed)

26 unchanged sentences

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;

disease outbreaks;

and our ability to execute our business plan.

10 unchanged sentences

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.

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.

The Alaska Department of Labor (“DOL”) has reported Alaska’s seasonally adjusted unemployment rate in August of 2024 was 4.6% compared to the U.S.

rate of 4.2%.

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;

The total number of payroll jobs in Alaska, not including uniformed military, increased 1.8% or 6,400 jobs between August of 2023 and August of 2024.

According to the DOL, the Construction sector had the largest growth in new jobs through August compared to the prior year.

The Construction sector added 2,600 positions for a year over year growth rate of 12.9% between August of 2023 and 2024.

The larger Health Care sector grew by 2,000 jobs for an annual growth rate of 4.9% over the same period.

The Oil & Gas sector increased by 6.5% or 500 new direct jobs.

Professional and Business Services added 1,000 jobs year over year through August of 2024, up 3.4%.

The Government sector grew by 700 jobs for 0.9% growth, adding 500 Federal jobs and 200 Local government positions in Alaska.

The only sectors to decline between August 2023 and August 2024 were Manufacturing (primarily seafood processing) shrinking 1,300 positions and Information, down 200 jobs.

Alaska’s Gross State Product (“GSP”) in the second quarter of 2024, was estimated to be $69.8 billion in current dollars, according to the Federal Bureau of Economic Analysis ("BEA").

Alaska’s inflation adjusted “real” GSP increased 6.5% in 2023, placing Alaska fifth best of all 50 states.

However, in the second quarter of 2024 Alaska decreased at an annualized rate of 1.1%, compared to the average U.S.

growth rate of 3%.

Alaska’s real GSP decline in the second quarter of 2024 was primarily caused by a slowdown 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.

The BEA also calculated Alaska’s seasonally adjusted personal income at $55.4 billion in the second quarter of 2024.

This was an annualized improvement of 4% for Alaska, compared to the national average of 5.3%.

The monthly average price of Alaska North Slope (“ANS”) crude oil was at an annual high of $89.05 in April of 2024 and averaged $74.06 in September of this year.

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 and declined to 461 thousand bpd in Alaska’s fiscal year 2024.

Starting in fiscal year 2025 it is projected to grow to 477 thousand bpd.

The DOR projects the number to grow rapidly and reach 640 thousand bpd by fiscal year 2033.

This is primarily a result of new production coming on-line in and around the NPR-A region west of Prudhoe Bay.

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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.

In the first nine months of 2024 the average price continues to increase 6.8% to an average sale of $512,815.

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.

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.

In the first nine months of 2024 the average sales price increased 4.6% to $415,709 in the Matanuska Susitna Borough.

These two markets represent where the vast majority of the residential lending activity of Northrim Bank (the “Bank”) occurs.

The Alaska Multiple Listing Services reported a 1.2% decrease in the number of units sold in Anchorage when comparing January to September of 2023 and 2024.

There were 5.4% less homes sold in the Matanuska Susitna Borough for the same nine month time period in 2024 compared to the prior year.

The Board of Governors of the Federal Reserve System lowered its benchmark interest rate target to 4.75%-5.00% as of September 30, 2024 from 5.25%-5.50% as of December 31, 2023.

The prime rate of interest has dropped to 8.00% as of September 30, 2024 compared to 8.50% as of December 31, 2023.

Highlights and Summary of Performance - Third Quarter of 2024

The Company reported net income and earnings per diluted share of $8.8 million and $1.57, respectively, for the third quarter of 2024 compared to net income and earnings per diluted share of $8.4 million and $1.48, respectively, for the third quarter of 2023.

The Company reported net income and earnings per diluted share of $26.0 million and $4.67, respectively, for the first nine months of 2024 compared to net income and earnings per diluted share of $18.8 million and $3.30, respectively, for the first nine months of 2023.

The increase in net income for both the three and nine-month periods ending September 30, 2024 compared to the same periods last year is primarily attributable to an increase in mortgage banking income and higher net interest income, which was only partially offset by an increase in salaries and other personnel expense and an increase in the provision for credit losses.

• Net interest income in the third quarter of 2024 increased 9% to $28.8 million compared to $26.4 million in the third quarter of 2023.

Net interest income in the first nine months of 2024 increased 8% to $82.3 million compared to $76.5 million in the first nine months of 2023.

• Net interest margin was 4.29% for the third quarter of 2024, a 14 basis point increase from the third quarter of 2023.

Net interest margin was 4.23% for the first nine months of 2024, a 6 basis point increase from the first nine months of 2023.

The increase in net interest margin in the third quarter and first nine 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 third quarter of 2024 was 7.24% compared to 7.44% in the third quarter a year ago.

• Loans were $2.01 billion at September 30, 2024, up 12% from December 31, 2023 as a result of growth in nearly all loan segments.

• Total deposits were $2.63 billion at September 30, 2024, up 6% from December 31, 2023.

Demand deposits increased 2% at September 30, 2024 from December 31, 2023 and represent 29% of total deposits at September 30, 2024.

• The average cost of interest-bearing deposits for the quarter was 2.24% at September 30, 2024, up from 1.75% at September 30, 2023.

• Total liquid assets and investments and loans maturing within one year were $1.07 billion and our funds available for borrowing under our existing lines of credit were $641.7 million at September 30, 2024.

• Mortgage loan originations increased to $248.05 million in the third quarter of 2024, up from $153.45 million in the third quarter a year ago.

Mortgage loans funded for sale were $209.96 million in the third quarter of 2024, compared to $131.86 million in the third quarter of 2023.

Other financial measures are shown in the table below:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

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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.

Nonperforming assets, net of government guarantees were $5.3 million at September 30, 2024 and $5.8 million at December 31, 2023.

Other Real Estate Owned (“OREO”), net of government guarantees was zero at September 30, 2024 and December 31, 2023.

Repossessed assets increased to $297,000 as of September 30, 2024 from zero at December 31, 2023.

Nonperforming loans, net of government guarantees decreased $41,000 or 1% to $5.0 million as of September 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 two loans in the first nine months of 2024.

Approximately $3.0 million, or 61% of nonperforming assets, net of government guarantees at September 30, 2024, are nonaccrual loans related to three commercial relationships.

Potential problem assets:

1 unchanged sentence

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.

At September 30, 2024, management had identified $1.5 million potential problem loans, down slightly from $1.9 million at December 31, 2023.

RESULTS OF OPERATIONS

Income Statement

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 income for the third quarter of 2024 increased $451,000 to $8.8 million as compared to $8.4 million for the same period in 2023.

The increase in net income in the third quarter of 2024 as compared to the same quarter a year ago is largely attributable to a $2.6 million increase in mortgage banking income and a $2.5 million increase in net interest income.

These changes were only partially offset by a $873,000 increase in the provision for credit losses, a $1.9 million increase in salaries and other personnel expense, as well as a $786,000 increase in OREO expense due to a gain on sale recorded in the third quarter of 2023 for proceeds received related to a government guarantee on an OREO property sold in December 2022.

Net income for the first nine months of 2024 increased $7.3 million to $26.0 million as compared to $18.8 million for the same period in 2023.

The increase in net income in the first nine months of 2024 as compared to the same period a year ago is largely attributable to a $6.6 million increase in mortgage banking income, a $5.8 million increase in net interest income, and a $865,000 decrease in the provision for credit losses which were only partially offset by and a $3.3 million increase in salaries and other personnel expense, as well as a $557,000 increase in data processing 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 %

Net interest income for the third quarter of 2024 increased 9% or $2.5 million, to $28.8 million as compared to $26.4 million for the third quarter of 2023.

The net interest margin increased 14 basis points to 4.29% in the third quarter of 2024 as compared to 4.15% in the third quarter of 2023.

Net interest income for the first nine months of 2024 increased 8% or $5.8 million, to $82.3 million as compared to $76.5 million for the first nine months of 2023.

The net interest margin increased 6 basis points to 4.23% in the first nine months of 2024 as compared to 4.17% in the first nine months of 2023.

The increase in net interest income in the third quarter and first nine 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 third quarter and first nine 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.

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.

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended September 30, 2024 and 2023.

Average yields or costs are calculated on a tax-equivalent basis.

(Dollars in Thousands) Three Months Ended June 30,

(Dollars in Thousands) Three Months Ended September 30,

Interest income/ Average Tax Equivalent

31 unchanged sentences

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.

Loan fees recognized during the period and included in the yield calculation totaled $1.1 million and $881,000 in the third 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 .

Average nonaccrual loans included in the computation of the average loan balances were $5.0 million and $7.2 million in the third 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%.

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.

The Company did not have any fed funds sold or securities purchased with agreements to resell for the three-month periods ending September 30, 2024 and 2023.

(In Thousands) Three Months Ended September 30, 2024 vs.

Increase (decrease) due to

14 unchanged sentences

Total interest expense $1,114 $1,402 $2,516

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.

The following table compares average balances and rates as well as margins on earning assets for the nine-month periods ended September 30, 2024 and 2023.

Average yields or costs are calculated on a tax-equivalent basis.

(Dollars in Thousands) Six Months Ended June 30,

(Dollars in Thousands) Nine Months Ended September 30,

Interest income/ Average Tax Equivalent

31 unchanged sentences

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.

Loan fees recognized during the period and included in the yield calculation totaled $3.3 million and $3.2 million in the first nine 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 .

Average nonaccrual loans included in the computation of the average loan balances were $5.3 million and $7.4 million in the first nine 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%.

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.

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 nine-month periods ending September 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.

The Company did not have any fed funds sold or securities purchased with agreements to resell for the nine-month periods ending September 30, 2024 and 2023.

(In Thousands) Nine Months Ended September 30, 2024 vs.

Increase (decrease) due to

17 unchanged sentences

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,

The following table presents the major categories of credit loss expense for the three and nine-month periods ended September 30, 2023 and 2024:

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2024 2023 2024 2023

5 unchanged sentences

Total credit loss expense $2,063 $1,190 $2,092 $2,957

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.

The increase in the provision for credit losses for both the three- and nine-month periods ended September 30, 2024 as compared to the same periods in 2023 is primarily the result of a higher loan growth.

The provision for credit losses on unfunded commitments decreased in both the three- and nine-month periods ended September 30, 2024 as compared to the same periods in 2023 primarily due to lower growth in unfunded commitment balances as well as 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 income for the three-month period ended September 30, 2024 increased $3.6 million, or 45%, to $11.6 million as compared to $8.0 million for the same period in 2023, primarily due to a $2.6 million increase in mortgage banking income in the second quarter of 2024 compared to the same quarter a year ago as well as a $564,000 increase in the fair value of marketable equity securities.

Service charges on deposit accounts and bankcard fees also increased in the third quarter of 2024 as compared to the same period in 2023.

The increase in mortgage banking income in the three-month period ended September 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 nine-month period ended September 30, 2024 increased $9.1 million, or 46%, to $29.0 million as compared to $19.9 million for the same period in 2023, primarily due to a $6.6 million increase in mortgage banking income as well as a $1.3 million increase in the fair value of marketable equity securities and a $445,000 increase in purchased receivable income.

Bankcard fees, purchased receivable income, and service charges on deposit accounts also increased in the first nine months of 2024 as compared to the same period in 2023.

The increase in mortgage banking income in the nine-month period ended September 30, 2024 as compared to the same period in 2023 was primarily due to increased production volume due to rebounding 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.

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.

Other operating expense for the third quarter of 2024 increased $3.8 million, or 17%, to $26.7 million as compared to $22.9 million for the same period in 2023, primarily due to a $1.9 million increase in salaries and other personnel expense as well as a $786,000 increase in OREO expense due to subsequent proceeds received in the third quarter of 2023 that are related to a government guarantee on an OREO property sold in December 2022.

The increase in salaries and other personnel expense was primarily due to $1.0 million higher mortgage commissions expense due to higher production in the third quarter of 2024 compared to the same period in 2023 as well as $1.2 million higher profit sharing expense, which generally increases when net income increases to reflect a higher expected payout to employees.

Other operating expense for the nine-month period ended September 30, 2024 increased $5.4 million, or 8%, to $75.6 million as compared to $70.2 million for the same period in 2023 is primarily due to a $3.3 million increase in salaries and other personnel expense primarily due to $1.2 million higher mortgage commissions expense due to higher production and $2.0 million higher profit sharing expense as well as a $557,000 increase in data processing expense, and a $379,000 increase in OREO expense due to subsequent proceeds received in the first quarter of 2024 and third quarter of 2023 that are related to a government guarantee on an OREO property sold in December 2022.

For the third quarter and first nine 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 third quarter of 2024, Northrim recorded $2.8 million in state and federal income tax expense, for an effective tax rate of 24.17% compared to $1.9 million and 18.43% for the same period in 2023.

In the first nine months of 2024, Northrim recorded $7.7 million in state and federal income tax expense, for an effective tax rate of 22.71% compared to $4.5 million and 19.29% for the same period in 2023.

FINANCIAL CONDITION

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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.

Investment Securities include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at September 30, 2024 decreased 14% to $594.9 million from $687.8 million at December 31, 2023 primarily due to maturities and calls of available for sale securities during the first nine months of 2024.

The table below details portfolio investment balances by portfolio investment type for the periods indicated:

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Dollar Amount Percent of Total Dollar Amount Percent of Total

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Total $594,917 $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.

The average estimated duration of the investment portfolio at September 30, 2024, was approximately 2.3 years.

As of September 30, 2024, $105.1 million of available for sale securities with a weighted average yield of 0.61% are scheduled to mature in the next six months, $73.0 million with a weighted average yield of 2.48% are scheduled to mature in six months to one year, and $177.8 million with a weighted average yield of 1.31% are scheduled to mature in the following year, representing a total of $355.9 million or 13% of earning assets that are scheduled to mature in the next 24 months.

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

September 30, 2024 December 31, 2023

Dollar Amount Percent of Total Dollar Amount Percent of Total

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Total loans $2,007,565 $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.

Loans increased by $218.1 million, or 12%, to $2.008 billion at September 30, 2024 from $1.789 billion at December 31, 2023, as a result of increases in nearly all loan segments.

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 Company estimates that $82.0 million, or approximately 4% of loans as of September 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 $29.7 million and $38.6 million at September 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 $882,000 as of September 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

(In Thousands) September 30, 2024 December 31, 2023

Commercial & industrial loans $67,708 $77,917

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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.

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:

At September 30, 2024, the Company had $127.4 million, or 6% of portfolio loans, in the Healthcare sector, $110.4 million, or 5% of portfolio loans, in the Tourism sector, $96.6 million, or 5% of portfolio loans, in the Accommodations sector, $83.6 million, or 4% of portfolio loans, in the Fishing sector, $70.6 million, or 3% of portfolio loans, in the Aviation (non-tourism) sector, $67.7 million, or 3% of portfolio loans, in the Retail sector, and $53.1 million, or 3% in the Restaurant 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 September 30, 2024:

(In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurant Accommodations Total

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

June 30, December 31,

September 30, December 31,

(In Thousands) 2024 2023

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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,

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2024 2023 2024 2023

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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,

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2024 2023 2024 2023

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Balance at end of period $2,416 $2,408 $2,416 $2,408

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.

The ACL for loans held for investment at September 30, 2024 increased $2.3 million from December 31, 2023 primarily due to higher non-government guaranteed loan balances and changes in management's CECL model assumptions.

While management believes that it uses the best information available to determine the ACL, unforeseen market conditions and other events could result in adjustment to the ACL, and net income could be significantly affected if circumstances differed substantially from the assumptions used in making the final determination of the ACL.

Deposits 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.

Total deposits increased $140.5 million, or 6%, to $2.63 billion as of September 30, 2024 compared to $2.49 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

September 30, 2024 December 31, 2023

(In thousands) Balance % of total Balance % of total

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Total deposits $2,625,567 $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 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 September 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:

At September 30, 2024, the Company had $435.9 million in certificates of deposit as compared to certificates of deposit of $331.3 million at December 31, 2023.

At September 30, 2024, $394.7 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 September 30, 2024 and December 31, 2023, was $216.0 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 September 30, 2024:

Time Certificates of Deposit

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Total $216,032 100 %

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.

At September 30, 2024, 73% of total deposits were held in business accounts and 27% of deposit balances were held in consumer accounts.

Northrim had approximately 34,000 deposit customers with an average balance of $48,000 as of September 30, 2024.

Northrim had 22 customers with balances over $10 million as of September 30, 2024 which accounted for $978.4 million, or 38%, of total deposits.

Uninsured deposits totaled approximately $1.12 billion or 43% of total deposits as of September 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.

There was no unusual deposit activity during the first nine months of 2024.

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

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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.

At September 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 $343.8 million as of September 30, 2024.

The Company has outstanding advances of $13.4 million as of September 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.

There were no discount window advances outstanding at either September 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.

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $1.03 billion at September 30, 2024 and $975.9 million at December 31, 2023.

At September 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.

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of September 30, 2024 or December 31, 2023.

Liquidity and Capital Resources

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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.

As of September 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.

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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 $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 Company had cash and cash equivalents of $102.9 million, or 3% of total assets at September 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.

The Company had other comprehensive income, net of tax, of $7.2 million for the nine-month period ending September 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 $7.6 million as of September 30, 2024.

Accumulated unrealized losses, net of income taxes on held to maturity securities, which are not recorded in shareholders' equity, are $1.5 million as of September 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.

As of September 30, 2024, the weighted average maturity of available for sale securities is 2.3 years, compared to 2.8 years at December 31, 2023, and 3.3 years at December 31, 2022.

At September 30, 2024, $178.1 million available for sale securities mature within one year, $177.8 million mature within one to two years, and $112.0 million mature within two to three years.

Our total unfunded commitments to fund loans and letters of credit at September 30, 2024 were $482.5 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.

At September 30, 2024, certificates of deposit totaling $394.7 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.

Management believes that cash requirements to fund future non-deposit and non-borrowing liabilities, including operating lease liabilities and other liabilities, as of September 30, 2024, are not material to the Company's liquidity position as of September 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.

At September 30, 2024, our liquid assets, which include investments and loans maturing within a year, were $1.07 billion.

Our funds available for borrowing under our existing lines of credit based on loans currently pledged and investments available to be pledged as collateral were $641.7 million.

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

As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 “Financial Statements” of this report, net cash 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.

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 $44.2 million for the first nine 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 $100.7 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.

Net cash provided by financing activities in the same period was $129.3 million, primarily due to an increase in deposits which was only partially offset by cash dividends paid to shareholders.

Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market.

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.

At September 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.

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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.

We believe as of September 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.

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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.

As a result, the Company has $10 million more in regulatory capital than the Bank at September 30, 2024, which explains most of the difference in the capital ratios for the two entities.

Minimum Required Capital Well-Capitalized Actual Ratio Company Actual Ratio Bank

June 30, 2024

September 30, 2024

Total risk-based capital 8.00% 10.00% 12.50% 11.15%

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• 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.

As of January 1, 2024, management uses a DCF method for seven of its 11 loan pools, which represented 96% of the amortized cost basis of total loan pools at September 30, 2024.

The weighted average remaining life method was used for the remaining four loan pools;

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Management performs a hypothetical sensitivity analysis of our ACL quarterly to understand the impact of a change in a key input on our ACL.

As of June 30, 2024, if the four-quarter U.S.

As of September 30, 2024, if the four-quarter U.S.

unemployment rate forecast had been approximately 8% 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 41% lower, our ACL for loans would have increased $1.1 million, or 6%.

As of September 30, 2024, if the four-quarter national unemployment rate forecast had been approximately 32% higher and the four-quarter annualized growth rate in the U.S.

Gross Domestic Product had been approximately 10% higher, which represents management's estimate of long-term mean rates for these economic factors, our ACL for loans would have increased $2.3 million, or 12%.

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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.

Our assessment of market risk as of September 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis