NORTHRIM BANCORP INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We have prepared this Management's Discussion and Analysis as an aid to understanding our financial results. It highlights key information as determined by management but may not contain all of the information that is important to you. It should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in Part II. Item 8 of this report. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II. Item 7 of our Annual Report on Form 10-K for fiscal year ended December 31, 2023. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.” Executive Overview Net income increased 46% to $37.0 million or $6.62 per diluted share for the year ended December 31, 2024, from $25.4 million, or $4.49 per diluted share, for the year ended December 31, 2023. The increase in net income is primarily the result of a $7.3 million increase in net income in the Home Mortgage Lending segment, as well as a $4.9 million increase in net income in the Community Banking segment. On October 31, 2024, the Company completed the acquisition of SCF in an all cash transaction valued at approximately $53.9 million. The Company determined that a new Specialty Finance segment is appropriate for the Company upon completion of the acquisition. The Specialty Finance segment also includes Northrim Funding Services, which was previously reported in the Community Banking segment. Net income in the Specialty Finance segment decreased 25% to $1.8 million in 2024 from $2.5 million in 2023, primarily due to $1.1 million in one-time deal related costs. Highlights for the year ended December 31, 2024 are as follows: • Net income in the Community Banking segment increased 19% or $4.9 million, to $30.3 million in 2024 as compared to 2023. This increase was primarily the result of a 7% increase in net interest income due to increased interest income on loans which was only partially offset by higher interest expense on deposits. • Net income in the Home Mortgage Lending segment increased 292%, or $7.3 million, to income of $4.8 million in 2024 from a loss of $2.5 million in 2023 driven by an increase in production volume sold to $609.2 million in 2024 from $376.2 million in 2023. Production volume outside of Alaska increased $85 million in 2024 compared to 2023, while production in Alaska increased $148 million in 2024 compared to 2023. Additionally, interest income on home mortgages held for investment increased in 2024 due to increased average balances. • The net interest margin increased to 4.28% in 2024 from 4.14% in 2023 mostly due to an increase in average yields on interest earning assets in 2024 compared to 2023 as a result of higher interest rates, as well as an increase in the mix of earning assets which includes a higher percentage of loans in 2024 versus 2023. These factors were only partially offset by an increase in the cost of interest-bearing liabilities. • Loans increased 19% to $2.13 billion at December 31, 2024 compared to $1.79 billion at December 31, 2023, and deposits increased 8% to $2.68 billion at December 31, 2024 compared to $2.49 billion at December 31, 2023. • Nonperforming loans, net of government guarantees, increased to $7.5 million at the end of 2024 compared to $5.0 million at the end of 2023, while total adversely classified loans, net of government guarantees at December 31, 2024 increased to $9.6 million from $7.1 million at December 31, 2023. The Allowance for Credit Losses (“ACL”) totaled 1.03% of total portfolio loans at December 31, 2024, compared to 0.97% at December 31, 2023. The ACL as a percentage of total portfolio loans, net of government guarantees was 1.10% at December 31, 2024 compared to 1.02% at December 31, 2023. 39 • The aggregate cash dividends paid by the Company in 2024 rose 1% to $13.8 million from $13.6 million paid in 2023. The Company paid cash dividends of $2.46 per share in 2024 and $2.40 per share in 2023. • Total shareholders' equity was $267.1 million as of December 31, 2024, up 14% from $234.7 million a year ago. Shareholders' equity was positively impacted by the fair value of the available for sales securities portfolio which increased $9.4 million in 2024 as compared to 2023. The Company continued to maintain strong regulatory capital ratios with Tier 1 Capital to Risk Adjusted Assets of 9.76% at December 31, 2024. Trends in Miscellaneous Financial Data (1) Years Ended December 31, (In thousands, except per share data and shares outstanding amounts) 2024 2023 2022 2021 2020 2019 Five Year Compound Growth Rate (Unaudited) Net interest income $113,183 $103,256 $95,115 $80,827 $70,665 $64,442 12 % Provision (benefit) for credit losses 3,293 3,842 1,846 (4,099) 2,432 (1,175) NM Other operating income 42,041 26,375 34,077 52,263 63,328 37,346 2 % Compensation expense, RML acquisition payments — — — — — 468 NM Other operating expense 104,937 94,181 88,852 89,196 89,114 76,370 7 % Income before provision for income taxes 46,994 31,608 38,494 47,993 42,447 26,125 12 % Provision for income taxes 10,023 6,214 7,753 10,476 9,559 5,434 13 % Net income $36,971 $25,394 $30,741 $37,517 $32,888 $20,691 12 % Year End Balance Sheet Assets $3,041,869 $2,807,497 $2,674,318 $2,724,719 $2,121,798 $1,643,996 13 % Loans 2,129,263 1,789,497 1,501,785 1,413,886 1,444,050 1,043,371 15 % Deposits 2,680,189 2,485,055 2,387,211 2,421,631 1,824,981 1,372,351 14 % Shareholders' equity 267,116 234,718 218,629 237,817 221,575 207,117 5 % Common shares outstanding 5,518,210 5,513,459 5,700,728 6,014,813 6,251,004 6,558,809 (3) % Average Balance Sheet Assets $2,861,012 $2,690,347 $2,641,008 $2,432,599 $1,936,047 $1,555,707 13 % Earning assets 2,647,615 2,492,240 2,469,383 2,260,778 1,758,839 1,386,557 14 % Loans 1,910,156 1,643,943 1,415,125 1,478,318 1,339,908 1,010,098 14 % Deposits 2,520,449 2,364,245 2,354,881 2,125,080 1,638,216 1,276,407 15 % Shareholders' equity 251,499 227,244 224,773 239,214 211,721 208,602 4 % Basic common shares outstanding 5,502,797 5,601,471 5,765,088 6,180,801 6,354,687 6,708,622 (4) % Diluted common shares outstanding 5,583,983 5,661,460 5,829,412 6,249,313 6,431,367 6,808,209 (4) % Per Common Share Data Basic earnings $6.72 $4.53 $5.33 $6.07 $5.18 $3.08 17 % Diluted earnings $6.62 $4.49 $5.27 $6.00 $5.11 $3.04 17 % Book value per share $48.41 $42.57 $38.35 $39.54 $35.45 $31.58 9 % Tangible book value per share (2) $39.17 $39.68 $35.55 $36.88 $32.88 $29.12 6 % Cash dividends per share $2.46 $2.40 $1.82 $1.50 $1.38 $1.26 14 % 40 Years Ended December 31, (In thousands, except per share data and shares outstanding amounts) 2024 2023 2022 2021 2020 2019 Five Year Compound Growth Rate (Unaudited) Performance Ratios Return on average assets 1.29 % 0.94 % 1.16 % 1.54 % 1.70 % 1.33 % (1) % Return on average equity 14.70 % 11.17 % 13.68 % 15.68 % 15.53 % 9.92 % 8 % Equity/assets 8.78 % 8.36 % 8.18 % 8.73 % 10.44 % 12.60 % (7) % Tangible common equity/tangible assets (3) 7.23 % 7.84 % 7.62 % 8.19 % 9.76 % 11.73 % (9) % Net interest margin 4.28 % 4.14 % 3.85 % 3.58 % 4.02 % 4.65 % (2) % Net interest margin (tax equivalent) (4) 4.33 % 4.21 % 3.89 % 3.60 % 4.05 % 4.70 % (2) % Non-interest income/total revenue 27.08 % 20.35 % 26.38 % 39.27 % 47.26 % 36.69 % (6) % Efficiency ratio (5) 67.60 % 72.64 % 68.76 % 66.99 % 66.47 % 75.43 % (2) % Dividend payout ratio 36.63 % 53.59 % 34.17 % 25.02 % 26.66 % 40.79 % (2) % Asset Quality Nonperforming loans, net of government guarantees $7,533 $5,002 $6,430 $10,672 $10,048 $13,951 (12) % Nonperforming assets, net of government guarantees 11,598 5,810 6,430 15,031 16,289 19,946 (10) % Nonperforming loans, net of government guarantees/portfolio loans 0.35 % 0.28 % 0.43 % 0.75 % 0.70 % 1.34 % (24) % Net charge-offs (recoveries)/average loans (0.01) % — % (0.08) % 0.07 % 0.03 % (0.07) % (32) % Allowance for credit losses/portfolio loans 1.03 % 0.97 % 0.92 % 0.83 % 1.46 % 1.83 % (11) % Nonperforming assets, net of government guarantees/assets 0.38 % 0.21 % 0.24 % 0.55 % 0.77 % 1.21 % (21) % Other Data Effective tax rate 21 % 20 % 20 % 22 % 23 % 21 % — % Number of banking offices (6) 20 20 19 18 17 16 5 % Community Banking employees (FTE) 329 325 329 315 305 304 2 % Home Mortgage Lending employees (FTE) 142 140 133 130 126 120 3 % Specialty Finance employees (FTE) 32 7 7 6 7 7 36 % Total number of employees (FTE) 503 472 469 451 438 431 3 % 1 These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with Part II Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report. 2 Tangible book value per share is a non-GAAP ratio defined as shareholders’ equity, less intangible assets, divided by common shares outstanding. Management believes that tangible book value is a useful measurement of the value of the Company’s equity because it excludes the effect of intangible assets on the Company’s equity. See reconciliation to book value per share, the most comparable GAAP measurement below. 3 Tangible common equity to tangible assets is a non-GAAP ratio that represents total equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. Management believes this ratio is important as it has received more attention over the past several years from stock analysts and regulators. The most comparable GAAP measure of shareholders' equity to total assets is calculated by dividing total shareholders' equity by total assets. See reconciliation to shareholders' equity to total assets, the most comparable GAAP measurement below. 41 4 Tax-equivalent net interest margin is a non-GAAP performance measurement in which interest income on non-taxable investments and loans is presented on a tax-equivalent basis using a combined federal and state statutory rate of 28.43%. Management believes that tax-equivalent net interest margin is a useful financial measure because it enables investors to evaluate net interest margin excluding tax expense in order to monitor our effectiveness in growing higher interest yielding assets and managing our costs of interest bearing liabilities over time on a fully tax equivalent basis. See reconciliation to net interest margin, the most comparable GAAP measurement below. 5 In managing our business, we review the efficiency ratio exclusive of intangible asset amortization, which is a non-GAAP performance measurement. Management believes that this is a useful financial measurement because we believe this presentation provides investors with a more accurate picture of our operating efficiency. The efficiency ratio is calculated by dividing other operating expense, exclusive of intangible asset amortization, by the sum of net interest income and other operating income. Other companies may define or calculate this data differently. For additional information see the "Other Operating Expense" section in Part II. Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report. See reconciliation to efficiency ratio, the most comparable GAAP measurement below. 6 Number of banking offices does not include RML, NFS, or SCF locations. 2024 number of banking offices includes 20 full service branches. 2023 number of banking offices includes 19 full service branches and one loan production office. 2022 number of banking offices includes 18 full service branches and one loan production office. 2021 number of banking offices includes 17 full service branches and one loan production office. 2020 number of banking offices includes 16 full service branches and one loan production office. Reconciliation of Selected Non-GAAP Financial Data to GAAP Financial Measures These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report. Reconciliation of total shareholders' equity to tangible common shareholders’ equity (Non-GAAP) and total assets to tangible assets: (In Thousands) 2024 2023 2022 2021 2020 2019 Total shareholders' equity $267,116 $234,718 $218,629 $237,817 $221,575 $207,117 Total assets 3,041,869 2,807,497 2,674,318 2,724,719 2,121,798 1,643,996 Total shareholders' equity to total assets ratio 8.78 % 8.36 % 8.18 % 8.73 % 10.44 % 12.60 % (In Thousands) 2024 2023 2022 2021 2020 2019 Total shareholders' equity $267,116 $234,718 $218,629 $237,817 $221,575 $207,117 Less: goodwill and other intangible assets, net 50,968 15,967 15,984 16,009 16,046 16,094 Tangible common shareholders' equity $216,148 $218,751 $202,645 $221,808 $205,529 $191,023 Total assets $3,041,869 $2,807,497 $2,674,318 $2,724,719 $2,121,798 $1,643,996 Less: goodwill and other intangible assets, net 50,968 15,967 15,984 16,009 16,046 16,094 Tangible assets $2,990,901 $2,791,530 $2,658,334 $2,708,710 $2,105,752 $1,627,902 Tangible common equity to tangible assets ratio 7.23 % 7.84 % 7.62 % 8.19 % 9.76 % 11.73 % Reconciliation of tangible book value per share (Non-GAAP) to book value per share (In thousands, except per share data) 2024 2023 2022 2021 2020 2019 Total shareholders' equity $267,116 $234,718 $218,629 $237,817 $221,575 $207,117 Divided by common shares outstanding 5,518,210 5,513,459 5,700,728 6,014,813 6,251,004 6,558,809 Book value per share $48.41 $42.57 $38.35 $39.54 $35.45 $31.58 42 (In thousands, except per share data) 2024 2023 2022 2021 2020 2019 Total shareholders' equity $267,116 $234,718 $218,629 $237,817 $221,575 $207,117 Less: goodwill and intangible assets, net 50,968 15,967 15,984 16,009 16,046 16,094 Tangible book value $216,148 $218,751 $202,645 $221,808 $205,529 $191,023 Divided by common shares outstanding 5,518,210 5,513,459 5,700,728 6,014,813 6,251,004 6,558,809 Tangible book value per share $39.17 $39.68 $35.55 $36.88 $32.88 $29.12 Reconciliation of tax-equivalent net interest margin (Non-GAAP) to net interest margin (In Thousands) 2024 2023 2022 2021 2020 2019 Net interest income (9) $113,183 $103,256 $95,115 $80,827 $70,665 $64,442 Divided by average interest-bearing assets 2,647,615 2,492,240 2,469,383 2,260,778 1,758,839 1,386,557 Net interest margin 4.28 % 4.14 % 3.85 % 3.58 % 4.02 % 4.65 % (In Thousands) 2024 2023 2022 2021 2020 2019 Net interest income (9) $113,183 $103,256 $95,115 $80,827 $70,665 $64,442 Plus: reduction in tax expense related to tax-exempt interest income 1,521 1,576 939 489 613 722 $114,704 $104,832 $96,054 $81,316 $71,278 $65,164 Divided by average interest-bearing assets 2,647,610 2,492,240 2,469,383 2,260,778 1,758,839 1,386,557 Tax-equivalent net interest margin 4.33 % 4.21 % 3.89 % 3.60 % 4.05 % 4.70 % Reconciliation of efficiency ratio exclusive of intangible asset amortization (non-GAAP) to efficiency ratio. (In Thousands) 2024 2023 2022 2021 2020 2019 Net interest income (9) $113,183 $103,256 $95,115 $80,827 $70,665 $64,442 Other operating income 42,041 26,375 34,077 52,263 63,328 37,346 Total revenue 155,224 129,631 129,192 133,090 133,993 101,788 Other operating expense 104,937 94,181 88,852 89,196 89,114 76,838 Less intangible asset amortization — 17 25 37 48 60 Adjusted other operating expense $104,937 $94,164 $88,827 $89,159 $89,066 $76,778 Efficiency ratio 67.60 % 72.64 % 68.76 % 66.99 % 66.47 % 75.43 % 9 Amount represents net interest income before provision for credit losses. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of the Company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP. 43 RESULTS OF OPERATIONS Income Statement Net Income Our results of operations are dependent to a large degree on our net interest income. We also generate other income primarily through mortgage banking income, purchased receivables products, service charges and fees, and bankcard fees. Our operating expenses consist in large part of salaries and other personnel costs, data processing, occupancy, marketing, and professional services expenses. Interest income and cost of funds, or interest expense, and mortgage banking income are affected significantly by general economic conditions, particularly changes in market interest rates, by government policies and the actions of regulatory authorities, and by competition in our markets. We earned net income of $37.0 million in 2024, compared to net income of $25.4 million in 2023. During these periods, net income per diluted share was $6.62 and $4.49, respectively. The following sections present discussion of the components that make up net income. Net Interest Income / Net Interest Margin Net interest income is the difference between interest income from loan and investment securities portfolios and interest expense on customer deposits and borrowings. Changes in net interest income result from changes in volume and spread, which in turn affect our margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Changes in net interest income are influenced by yields and the level and relative mix of interest-earning assets and interest-bearing liabilities. Net interest income in 2024 was $113.2 million, compared to $103.3 million in 2023. The increase in 2024 as compared to 2023 was primarily the result of increased interest on loans which was only partially offset by decreases of interest income on available for sale securities and deposits in other banks, as well as an increase in interest expense on deposits. Interest income on loans increased $26.1 million in 2024 as compared to 2023 due to an increase in interest rates and higher net average interest-earning asset balances. Interest expense increased $12.0 million in 2024 as compared to the prior year as a result of higher interest rates and higher average interest-bearing deposit balances. During 2024 and 2023, net interest margins were 4.28% and 4.14%, respectively. The increase in net interest margin in 2024 as compared to 2023 is primarily the result of higher yields on earning-assets and higher average portfolio loan balances. 44 The following table sets forth for the periods indicated information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities. Average yields or costs, net interest income, and net interest margin are also presented. Average yields or costs are calculated on a tax-equivalent basis: Years ended December 31, 2024 2023 2022 Average outstanding balance Interest income / expense Average Tax Equivalent Yield / Cost (6) Average outstanding balance Interest income / expense Average Tax Equivalent Yield / Cost (6) Average outstanding balance Interest income / expense Average Tax Equivalent Yield / Cost (6) (In Thousands) Loans (1),(2) $1,910,156 $130,554 6.87 % $1,643,943 $106,025 6.49 % $1,415,125 $80,549 5.71 % Loans held for sale 68,790 4,185 6.08 % 41,769 2,587 6.19 % 51,537 2,236 4.34 % Taxable long-term investments (3) 623,756 16,838 2.82 % 715,367 18,695 2.73 % 618,782 11,878 1.84 % Interest-bearing deposits in other banks (4) 44,913 2,342 5.09 % 91,161 4,644 5.02 % 383,939 5,665 1.46 % Total interest-earning assets (5) 2,647,615 153,919 5.86 % 2,492,240 131,951 5.36 % 2,469,383 100,328 4.10 % Noninterest-earning assets 213,397 198,107 171,625 Total $2,861,012 $2,690,347 $2,641,008 Interest-bearing demand $949,105 $18,739 1.97 % $809,219 $13,029 1.61 % $701,679 $2,091 0.30 % Savings deposits 245,300 1,205 0.49 % 278,951 1,300 0.47 % 344,349 563 0.16 % Money market deposits 204,081 3,341 1.64 % 250,072 3,200 1.28 % 318,375 785 0.25 % Time deposits 403,800 16,062 3.98 % 276,144 8,982 3.25 % 169,931 1,046 0.62 % Total interest-bearing deposits 1,802,286 39,347 2.18 % 1,614,386 26,511 1.64 % 1,534,334 4,485 0.29 % Borrowings 33,799 1,389 3.81 % 51,038 2,184 4.24 % 24,623 728 2.92 % Total interest-bearing liabilities 1,836,085 40,736 2.21 % 1,665,424 28,695 1.72 % 1,558,957 5,213 0.33 % Noninterest-bearing demand deposits 718,163 749,859 820,547 Other liabilities 55,265 47,820 36,731 Equity 251,499 227,244 224,773 Total $2,861,012 $2,690,347 $2,641,008 Net interest income $113,183 $103,256 $95,115 Net interest margin 4.33 % 4.21 % 3.89 % Average portfolio loans to average-earnings assets 72.15 % 65.96 % 57.31 % Average portfolio loans to average total deposits 75.79 % 69.53 % 60.09 % Average non-interest deposits to average total deposits 28.49 % 31.72 % 34.84 % Average interest-earning assets to average interest-bearing liabilities 144.20 % 149.65 % 158.40 % 1 Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $4.5 million, $4.4 million and $8.5 million for 2024, 2023 and 2022, respectively. 2 Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loans were $5.4 million, $7.1 million, and $8.6 million in 2024, 2023 and 2022, respectively. 3 Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock. Taxable long-term investments consist of U.S. treasury and government sponsored entities, corporate bonds, collateral loan obligations, municipal securities, marketable equity securities, and Federal Home Loan Bank stock. 4 Consists of interest bearing deposits in other banks and domestic CDs. 5 The Company does not have any fed funds sold or securities purchased with agreements to resell to disclose as part of its total interest-earning assets in the periods presented. 6 Tax-equivalent yield/costs assume a federal tax rate of 21% and a state tax rate of 7.43% for a combined tax rate of 28.43%. 45 The following table sets forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the periods indicated. Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rate: 2024 compared to 2023 2023 compared to 2022 Increase (decrease) due to Increase (decrease) due to (In Thousands) Volume Rate Total Volume Rate Total Interest Income: Loans $18,015 $6,514 $24,529 $13,975 $11,501 $25,476 Loans held for sale 1,643 (45) 1,598 (480) 831 351 Taxable long-term investments (2,501) 644 (1,857) 2,056 4,761 6,817 Interest-bearing deposits in other banks (2,365) 63 (2,302) (6,833) 5,812 (1,021) Total interest income $14,792 $7,176 $21,968 $8,718 $22,905 $31,623 Interest Expense: Interest-bearing demand $602 $5,108 $5,710 $269 $10,669 $10,938 Savings deposits (163) 68 (95) (125) 862 737 Money market deposits (654) 795 141 (202) 2,617 2,415 Time deposits 4,777 2,303 7,080 1,011 6,925 7,936 Interest-bearing deposits 2,531 10,305 12,836 222 21,804 22,026 Borrowings (612) (183) (795) 1,027 429 1,456 Total interest expense $1,919 $10,122 $12,041 $1,249 $22,233 $23,482 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 ACL at an appropriate level under the current expected credit loss methodology (“CECL”). The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to Consolidated Financial Statements included in Part II. Item 8 of this report for detailed discussion regarding ACL methodologies for loans, available for sale debt securities, held to maturity securities, loans held for investment, unfunded commitments, and purchased receivables. The following table presents the major categories of credit loss expense for the periods presented: (In Thousands) 2024 2023 2022 Provision for credit loss expense on loans held for investment $3,276 $3,394 $972 Provision for credit loss (benefit) expense on unfunded commitments (108) 448 874 Provision for credit loss expense on available for sale debt securities — — — Provision for credit loss expense on held to maturity securities — — — Provision for credit loss expense on purchased receivables 125 — — Total credit loss expense $3,293 $3,842 $1,846 The provision for credit losses on loans held for investment remained relatively consistent in 2024 compared to 2023 due to continued growth in the portfolio and the fact that forecasted economic conditions remain stable between the two periods. The decrease in the provision for credit losses on unfunded commitments in 2024 compared to 2023 in primarily due to a change in the mix of unfunded commitments. In general the increase in the provision for credit losses in 2023 as compared to 2022 is primarily the result of increased portfolio loan and unfunded commitment balances, and, to a lesser extent, a decrease in management's assumptions for prepayment and curtailment speeds. These increases were only partially offset by a decrease in rate due to improvement in management's forecast of economic factors as of December 31, 2023 compared to December 31, 2022. The ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration. 46 See the “Loans and Lending Activity” section under “Financial Condition” and Note 6 of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report for further discussion of these decreases and changes in the Company’s ACL. Other Operating Income The following table details the major components of other operating income for the years ended December 31: (In Thousands) 2024 $ Change % Change 2023 $ Change % Change 2022 Other Operating Income Mortgage banking income $24,002 $11,239 88 % $12,763 ($8,809) (41) % $21,572 Purchased receivable income 7,146 2,664 59 % 4,482 2,480 124 % 2,002 Bankcard fees 4,366 504 13 % 3,862 165 4 % 3,697 Service charges on deposit accounts 2,348 304 15 % 2,044 433 27 % 1,611 Interest rate swap income 540 479 785 % 61 (96) (61) % 157 Commercial servicing revenue 486 (68) (12) % 554 (1,074) (66) % 1,628 Gain (loss) on marketable equity securities 465 345 (288) % 120 1,239 111 % (1,119) Gain (loss) on sale of securities 112 112 100 % — — NM — Keyman insurance proceeds — — NM — (2,002) NM 2,002 Other income 2,576 87 3 % 2,489 (38) (2) % 2,527 Total other operating income $42,041 $15,666 59 % $26,375 ($7,702) (23) % $34,077 2024 Compared to 2023 The most significant item contributing to the increase in other operating income in 2024 was an increase in mortgage banking income, followed by an increase in purchased receivable income. Bankcard fees, service charges on deposit accounts, interest rate swap income, gain on marketable equity securities, and gain on sale of securities also increased. These increases were partially offset by a decrease in commercial servicing revenue. Mortgage banking income consists of gross income from the origination and sale of mortgages as well as mortgage loan servicing fees and is the largest component of other operating income at 57% of total other operating income in 2024 and 48% in 2023. Mortgage banking income increased in 2024 compared to 2023 mainly due to an increase in mortgage loans originated and sold which increased to $609.2 million in 2024 from $376.2 million in 2023. Approximately one third of the overall increase in mortgage originations sold in 2024 as compared to 2023 is from outside of Alaska and the two thirds is from production in the state of Alaska. Purchased receivable income increased in 2024 as compared to 2023 primarily due to the acquisition of SCF in October 2024. Purchased receivable income from operations at Northrim Funding Services remained relatively consistent with the prior year at $4.4 million. Bankcard fees and service charges on deposit accounts increased in 2024 due an increase in the number of the Company's deposit customers which led to higher transaction volume as compared to 2023, as well as an increase in some transactional fees. Gain on marketable equity securities increased in 2024 as compared to 2023 due to increased fair value on this portfolio. Gain on sale of securities increased in 2024 as compared to 2023 due to the sale of marketable equity securities in 2024. Commercial servicing revenue decreased in 2024 as compared to 2023 primarily due to a decrease in commercial loan servicing balances. 47 Other Operating Expense The following table details the major components of other operating expense for the years ended December 31: (In Thousands) 2024 $ Change % Change 2023 $ Change % Change 2022 Other Operating Expense Salaries and other personnel expense $67,847 $6,106 10 % $61,741 $3,569 6 % $58,172 Data processing expense 10,986 1,165 12 % 9,821 895 10 % 8,926 Occupancy expense 7,609 215 3 % 7,394 479 7 % 6,915 Professional and outside services 4,351 1,223 39 % 3,128 135 5 % 2,993 Marketing expense 3,028 99 3 % 2,929 182 7 % 2,747 Insurance expense 2,961 442 18 % 2,519 465 23 % 2,054 Intangible asset amortization — (17) (100) % 17 (8) (32) % 25 OREO (income) expense, net rental income and gains on sale: OREO operating expense 7 (9) (56) % 16 (618) (97) % 634 Impairment on OREO — (123) (100) % 123 123 100 % — Rental income on OREO — 4 100 % (4) 544 99 % (548) Losses (gains) on sale of OREO (392) 537 58 % (929) (1,343) 324 % 414 Subtotal (385) 409 (52) % (794) (1,294) 259 % 500 Other expenses 8,540 1,114 15 % 7,426 906 14 % 6,520 Total other operating expense $104,937 $10,756 11 % $94,181 $5,329 6 % $88,852 2024 Compared to 2023 Other operating expense increased by 11% in 2024 as compared to 2023. The largest increase was in salaries and other personnel expense. Salaries and other personnel expense increased $3.1 million in the Home Mortgage Lending segment due to increased mortgage production which resulted in higher loan officer commissions. Salaries and other personnel expense increased $2.1 million in the Community Banking segment primarily due to higher profit share expense, which generally increases when net income increases to reflect a higher payout to employees. Data processing expense, occupancy expense, insurance expense, marketing expense and professional and outside services also increased in 2024 compared to 2023 due to the increase in branch locations, increased customer and transaction volume, increased FDIC insurance costs associated with asset growth, and increased professional and outside services related to the acquisition of SCF. Other real estate owned (“OREO”) expense, net of rental income and gains on sale also increased in 2024 primarily due to smaller gains on sale of OREO properties as compared to 2023 as subsequent proceeds were received related to a government guarantee on an OREO property sold in December 2022. Income Taxes The provision for income taxes increased $3.8 million or 61%, to $10.0 million in 2024 as compared to 2023. The increase in 2024 is primarily due to higher pretax income. The Company's effective tax rate increased to 21.3% in 2024 from 19.7% in 2023, primarily due to a decrease in tax exempt income and low income housing tax credits as a percentage of pre-tax income in 2024 compared to 2023. 48 FINANCIAL CONDITION Investment Securities The composition of our investment securities portfolio, which includes securities available for sale, held-to-maturity investments, and marketable equity securities, reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income. The investment securities portfolio also mitigates credit risk inherent in the loan portfolio, while providing a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral or through repurchase agreements), and collateral for certain public funds deposits. Investment securities designated as available for sale comprised 91% of the portfolio as of December 31, 2024 and are available to meet liquidity requirements in a contingency situation. Our investment portfolio consists primarily of government sponsored entity securities, corporate securities, and collateralized loan obligations. Investment securities at December 31, 2024 decreased $163.8 million, or 24%, to $524.1 million from $687.8 million at December 31, 2023. The decrease at December 31, 2024 as compared to December 31, 2023 came from investment maturities and calls that were used to fund growth in portfolio loans. The average maturity of the investment portfolio was approximately 2.4 years at December 31, 2024 as compared to approximately 2.8 years at December 31, 2023. Investment securities may be pledged as collateral to secure public deposits or borrowings. At December 31, 2024 and 2023, $177.4 million and $180.1 million in securities were pledged for deposits and borrowings, respectively. 49 The following tables set forth the composition of our investment portfolio at December 31 for the years indicated: (In Thousands) Amortized Cost Fair Value Securities Available for Sale: 2024: U.S. Treasury and government sponsored entities $444,370 $432,931 Corporate Bonds 9,009 8,795 Collateralized Loan Obligations 36,827 36,891 Total $490,206 $478,617 2023: U.S. Treasury and government sponsored entities $587,639 $564,125 Municipal Securities 820 816 Corporate Bonds 14,014 13,624 Collateralized Loan Obligations 59,795 59,371 Total $662,268 $637,936 2022: U.S. Treasury and government sponsored entities $634,582 $595,161 Municipal Securities 820 795 Corporate Bonds 24,281 23,644 Collateralized Loan Obligations 59,434 57,429 Total $719,117 $677,029 Marketable Equity Securities: 2024: Preferred Stock $8,696 $8,719 Total $8,696 $8,719 2023: Preferred Stock $13,595 $13,152 Total $13,595 $13,152 2022: Preferred Stock $11,303 $10,740 Total $11,303 $10,740 Securities Held to Maturity: 2024: Corporate Bonds $36,750 $35,750 Total $36,750 $35,750 2023: Corporate Bonds $36,750 $33,413 Total $36,750 $33,413 2022: Corporate Bonds $36,750 $32,639 Total $36,750 $32,639 50 The following table sets forth the market value, maturities, and weighted average pretax yields of our investment portfolio as of December 31, 2024: Maturity Within Over (In Thousands) 1 Year 1-5 Years 5-10 Years 10 Years Total Securities Available for Sale: U.S. Treasury and government sponsored entities Balance $129,175 $303,756 $— $— $432,931 Weighted average yield (1) 1.81 % 2.22 % — % — % 2.10 % Corporate bonds Balance $4,008 $4,787 $— $— $8,795 Weighted average yield (1) 5.91 % 1.50 % — % — % 3.46 % Collateralized loan obligations Balance $— $— $22,859 $14,032 $36,891 Weighted average yield (1) — % — % 6.26 % 6.38 % 6.30 % Total Balance $133,183 $308,543 $22,859 $14,032 $478,617 Weighted average yield (1) 1.94 % 2.21 % 6.26 % 6.38 % 2.44 % Securities Held to Maturity Corporate bonds Balance $— $9,977 $25,773 $— $35,750 Weighted average yield (1) — % 5.50 % 5.01 % — % 5.15 % Marketable Equity Securities Preferred Stock Balance $— $— $— $8,719 $8,719 Weighted average yield (1) — % — % — % 6.55 % 6.55 % (1) Weighted average yields have been calculated on an amortized cost basis and not on a tax-equivalent basis. The Company’s investment in marketable equity securities does not have a maturity date but it has been included in the over 10 years column above. Loans and Lending Activities All of our loans and credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness and commitments to us, including the indebtedness of any guarantor. Generally, we are permitted to make loans to one borrower of up to 15% of the unimpaired capital and surplus of the Bank. The legal lending limit for the Bank was $37.0 million at December 31, 2024. At December 31, 2024, the Company had one relationship whose total direct and indirect commitments exceeded $37.0 million; however, no individual direct relationship exceeded the loans-to-one borrower limitation. The Company's loans have grown significantly in recent years. Management attributes higher growth in loans in 2024 and 2023 to our ability to attract new customers through our outreach to the community. The Company's “Land and Expand” program was designed to increase both loans and deposits as we attract a broader customer base and convert new customers into full banking relationships. 51 The following table presents growth information for loans and loans excluding Paycheck Protection Program (“PPP”) loans: Years Ended December 31, (In Thousands) 2024 2023 2022 2021 2020 2019 Five Year Compound Growth Rate Loans $2,129,263 $1,789,497 $1,501,785 $1,413,886 $1,444,050 $1,043,371 15 % Less: PPP loans 935 2,761 7,110 118,229 304,587 — NM Loans, excluding PPP loans $2,128,328 $1,786,736 $1,494,675 $1,295,657 $1,139,463 $1,043,371 15 % Percent change, Loans excluding PPP loans 19 % 20 % 15 % 14 % 9 % The following table sets forth the composition of our loan portfolio by loan segment as of the dates indicated: December 31, 2024 December 31, 2023 Dollar Amount Percent of Total Dollar Amount Percent of Total (In Thousands) Commercial & industrial loans $437,922 20.6 % $411,387 23.0 % Commercial real estate: Owner occupied properties 418,092 19.6 % 366,741 20.5 % Non-owner occupied and multifamily properties 615,662 28.8 % 515,528 28.8 % Residential real estate: 1-4 family residential properties secured by first liens 270,966 12.7 % 203,738 11.4 % 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 49,160 2.3 % 33,996 1.9 % 1-4 family residential construction loans 39,516 1.9 % 30,976 1.7 % Other construction, land development and raw land loans 212,561 10.0 % 148,373 8.3 % Obligations of states and political subdivisions in the US 29,471 1.4 % 30,407 1.7 % Agricultural production, including commercial fishing 45,840 2.2 % 41,007 2.3 % Consumer loans 7,638 0.4 % 6,241 0.3 % Other loans 2,435 0.1 % 1,103 0.1 % Total portfolio loans $2,129,263 $1,789,497 The following table presents the maturity distribution of our loan portfolio and the rate sensitivity of these loans to changes in interest rates as of December 31, 2024: By Maturity Loans Over One Year By Rate Sensitivity (In Thousands) Within 1 Year 1-5 Years 5-15 Years Over 15 Years Total Fixed Interest Rate Variable Interest Rate Commercial & industrial loans $104,167 $193,215 $140,540 $— $437,922 $88,668 $245,087 Commercial real estate 48,541 214,268 722,091 48,854 1,033,754 239,163 746,050 Residential real estate 40,748 7,240 48,304 263,350 359,642 129,289 189,605 Other construction 87,468 59,484 53,660 11,949 212,561 57,365 67,728 Consumer and other 4,690 10,242 70,446 6 85,384 43,042 37,652 Total $285,614 $484,449 $1,035,041 $324,159 $2,129,263 $557,527 $1,286,122 52 Information about industry concentrations: Management utilizes the loan segments included in the tables above within the Company's CECL methodology to assess credit risk. These segments are largely determined by type of loan collateral. The Company also separately monitors concentrations in the loan portfolio based on industries, and these industry concentration are discussed below. The Company defines "direct exposure" to the oil and gas industry as companies that it has identified as significantly reliant upon activity related to the oil and gas industry, such as oil producers or drilling and exploration companies, and companies who provide oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry. The Company estimates that $99.7 million, or approximately 5% of loans as of December 31, 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 $45.8 million and $38.6 million at December 31, 2024 and 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 $1.1 million and $884,000 as of December 31, 2024 and 2023, respectively. The following table details loan balances by loan segment and class of financing receivable for loans with direct oil and gas exposure as of the dates indicated: (In Thousands) December 31, 2024 December 31, 2023 Commercial & industrial loans $87,935 $77,917 Commercial real estate: Owner occupied properties 5,611 11,410 Non-owner occupied and multifamily properties 4,828 5,434 Other loans 1,282 1,357 Total loans $99,656 $96,118 The Company monitors other concentrations within the loan portfolio depending on trends in the current and future estimated economic conditions. At December 31, 2024, the Company had $138.0 million, or 6% of total portfolio loans, in the Healthcare sector; $117.0 million, or 5% of portfolio loans, in the Tourism sector; $104.3 million, or 5% in the Accommodations sector; $87.4 million, or 4% in Retail loans; $84.6 million, or 4% of portfolio loans, in the Aviation (non-tourism) sector; $76.5 million, or 4% in the Fishing sector; and $55.1 million, or 3% in the Restaurants and Breweries sector. The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of December 31, 2024: (In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurants and Breweries Accommodations Total ACL $686 $694 $1,034 $837 $398 $441 $969 $5,059 53 Credit Quality and Nonperforming Assets The following table sets forth information regarding our nonperforming loans and total nonperforming assets for the periods indicated: December 31, December 31, (In Thousands) 2024 2023 Nonaccrual loans $7,516 $6,069 Loans 90 days past due and accruing 17 — Total nonperforming loans $7,533 $6,069 Nonperforming loans guaranteed by government — (1,067) Net nonperforming loans $7,533 $5,002 Nonperforming purchased receivables 3,768 808 Net nonperforming assets $11,598 $5,810 Nonperforming loans, net of government guarantees / portfolio loans 0.35 % 0.28 % Nonperforming loans, net of government guarantees / portfolio loans, net of government guarantees 0.38 % 0.30 % Nonperforming assets, net of government guarantees / total assets 0.38 % 0.21 % Nonperforming assets, net of government guarantees / total assets net of government guarantees 0.40 % 0.21 % Adversely classified loans, net of government guarantees $9,636 $7,057 Special mention loans, net of government guarantees $19,769 $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 0.03 % 0.03 % Allowance for credit losses - loans / portfolio loans 1.03 % 0.97 % Allowance for credit losses - loans / portfolio loans, net of government guarantees 1.10 % 1.02 % Allowance for credit losses - loans / nonperforming loans, net of government guarantees 292 % 345 % Allowance for credit losses - purchased receivables / purchased receivables 4.69 % — % Allowance for credit losses - purchased receivables / nonperforming purchased receivables 96.84 % — % Gross loan charge-offs for the quarter $149 $281 Gross loan recoveries for the quarter ($200) ($185) Net loan (recoveries) charge-offs for the quarter ($51) $96 Net loan (recoveries) charge-offs year-to-date ($215) ($38) Net loan (recoveries) charge-offs for the quarter / average loans, for the quarter 0.00 % 0.01 % Net loan (recoveries) charge-offs year-to-date / average loans, year-to-date annualized (0.01) % 0.00 % The Company’s nonperforming assets, net of government guarantees increased to $11.6 million at December 31, 2024 as compared to $5.8 million at December 31, 2023. This increase was mostly due to the addition of an SCF nonaccrual loan and an SCF purchased receivable relationship, which were only partially offset by paydowns to nonaccrual loans in 2024. There was interest income of $241,000 and $656,000 recognized in net income for 2024 and 2023, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero. The Company held a government guarantee related to the OREO property that was sold in December 2022; however, the value of this guarantee was not included in the Company's financial statements in 2022 due to uncertainty as to the total amount that would be received from the guarantee. The Company received proceeds from the guarantee in the third quarter of 2023 and first quarter of 2024 which were recorded as a gain on sale of OREO. 54 The following summarizes OREO activity for the periods indicated: (In Thousands) 2024 2023 2022 Balance, beginning of the year $— $— $5,638 Transfers from loans — 273 — Proceeds from the sale of other real estate owned (392) (1,079) (5,224) Gain (loss) on sale of other real estate owned, net 392 929 (414) Impairment on other real estate owned — (123) — Balance, end of year — — — Government guarantees — — — Balance, end of year, net of government guarantees $— $— $— The Company did not make any loans to facilitate the sale of OREO in 2024, 2023, or 2022. Our underwriting policies and procedures for loans to facilitate the sale of OREO are no different than our standard loan policies and procedures. At December 31, 2024, management had identified potential problem loans of $1.6 million as compared to potential problem loans of $1.9 million at December 31, 2023. Potential problem loans are loans which are currently performing that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, or impaired loans. The decrease in potential problem loans at December 31, 2024 from December 31, 2023 was primarily due to paydowns to existing potential problem loans in 2024 that were partially offset by the addition of two new potential problem loans. Allowance for Credit Losses The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to Consolidated Financial Statements included in Part II. Item 8 of this report for detailed discussion regarding the ACL methodology for loans and unfunded commitments. The following tables show the allocation of the ACL and the percent of loans in each category to total loans and the ratio of net loan charge-offs to average loans outstanding by loan segment for the years indicated: 2024 % of Loans (1) Net loan charge-offs (recoveries) to average loans (In Thousands) Amount Commercial & industrial loans $5,800 22 % (0.05) % Commercial real estate: Owner occupied properties 2,944 20 % — % Non-owner occupied and multifamily properties 3,967 29 % — % Residential real estate: 1-4 family residential properties secured by first liens 4,364 13 % — % 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 775 2 % (0.05) % 1-4 family residential construction loans 230 2 % — % Other construction, land development and raw land loans 3,589 10 % — % Obligations of states and political subdivisions in the US 106 1 % — % Agricultural production, including commercial fishing 169 2 % 0.04 % Consumer loans 71 — % 0.01 % Other loans 5 — % — % Total $22,020 100 % (0.01) % 1 Represents percentage of this category of loans to total portfolio loans. 55 2023 % of Loans (1) Net loan charge-offs (recoveries) to average loans (In Thousands) Amount Commercial & industrial loans $3,438 24 % (0.03) % Commercial real estate: — Owner occupied properties 2,867 20 % — % Non-owner occupied and multifamily properties 3,294 29 % — % Residential real estate: 1-4 family residential properties secured by first liens 3,470 11 % 0.04 % 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 551 2 % (0.08) % 1-4 family residential construction loans 191 2 % — % Other construction, land development and raw land loans 3,127 8 % — % Obligations of states and political subdivisions in the US 80 2 % — % Agricultural production, including commercial fishing 168 2 % — % Consumer loans 81 — % 0.39 % Other loans 3 — % — % Total $17,270 101 % — % 1 Represents percentage of this category of loans to total portfolio loans. The ACL for loans increased to $22.0 million at December 31, 2024 compared to $17.3 million at December 31, 2023 primarily due to an increase in loan balances, net of guarantees. The Company determined that an ACL of $22.0 million, or 1.03% of portfolio loans, is appropriate as of December 31, 2024 based on our analysis of the current credit quality of the portfolio and forecasted economic conditions. The ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration. The following table sets forth information regarding changes in the ACL for unfunded commitments for the years indicated: (In Thousands) 2024 2023 2022 Balance at beginning of period $2,418 $1,970 $1,096 Provision for credit losses (108) 448 874 Balance at end of period $2,310 $2,418 $1,970 While management believes that it uses the best information available to determine the ACL, unforeseen market conditions and other events could result in an adjustment to the ACL, and net income could be significantly affected if circumstances differed substantially from the assumptions used in making the final determination of the ACL. Purchased Receivables Purchased receivable balances increased at December 31, 2024 to $74.1 million from $36.8 million at December 31, 2023, and year-to-date average purchased receivable balances were $38.7 million and $24.8 million in 2024 and 2023, respectively. Purchased receivable income was $7.1 million and $4.5 million in 2024 and 2023, respectively. The increase in purchased receivable balances at December 31, 2024 and the increase in purchased receivable income as compared to the prior year is primarily due to the acquisition of SCF on October 31, 2024. 56 The following table sets forth information regarding changes in the purchased receivable ACL for the years indicated: (In Thousands) 2024 2023 2022 Balance at beginning of year $— $— $— Impact from acquisition of Sallyport Commercial Finance, LLC 3,524 — — Charge-offs — — — Recoveries — — — Charge-offs net of recoveries — — — Reserve for (recovery from) purchased receivables 125 — — Balance at end of year $3,649 $— $— Ratio of net charge-offs (recoveries) to average purchased receivables during the period — % — % — % Deposits Deposits are our primary source of funds. Total deposits increased 8% to $2.68 billion at December 31, 2024 from $2.49 billion at December 31, 2023. Our deposits generally are expected to fluctuate according to the level of our market share, economic conditions, and normal seasonal trends. The following table sets forth the average balances outstanding and average interest rates for each major category of our deposits, for the periods indicated: 2024 2023 2022 Average balance Average rate paid Average balance Average rate paid Average balance Average rate paid (In Thousands) Interest-bearing demand accounts $949,105 1.97 % $809,219 1.61 % $701,679 0.30 % Money market accounts 204,081 1.64 % 250,072 1.28 % 318,375 0.25 % Savings accounts 245,300 0.49 % 278,951 0.47 % 344,349 0.16 % Certificates of deposit 403,800 3.98 % 276,144 3.25 % 169,931 0.62 % Total interest-bearing accounts 1,802,286 2.18 % 1,614,386 1.64 % 1,534,334 0.29 % Noninterest-bearing demand accounts 718,163 749,859 820,547 Total average deposits $2,520,449 $2,364,245 $2,354,881 57 The Company's mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 84% of total deposits at December 31, 2024 and 87% at December 31, 2023. The only deposit category with stated maturity dates is certificates of deposit. At December 31, 2024, we had $418.4 million in certificates of deposit, of which $369.7 million, or 88%, are scheduled to mature in 2025. The Company’s certificates of deposit increased to $418.4 million during 2024 as compared to $331.3 million at December 31, 2023. The aggregate amount of certificates of deposit in amounts of $250,000 or more at December 31, 2024 and 2023, was $217.1 million and $142.1 million, respectively. The following table sets forth the amount outstanding of certificates of deposits in amounts of $250,000 or more by time remaining until maturity and percentage of total deposits as of December 31, 2024: Time Certificates of Deposits of $250,000 or More Percent of Total Deposits (In Thousands) Amount Amounts maturing in: Three months or less $57,252 26 % Over 3 through 6 months 80,462 38 % Over 6 through 12 months 46,064 21 % Over 12 months 33,296 15 % Total $217,074 100 % The Company offers the Certificate of Deposit Account Registry Service® (CDARS®) as a member of IntraFi® Network SM (Network). When a Network member places a deposit using CDARS, that certificate of deposit is divided into amounts under the standard FDIC insurance maximum ($250,000) and is allocated among member banks, making the large deposit eligible for FDIC insurance. The Company had $49.2 million CDARS certificates of deposits at December 31, 2024 and $48.1 million CDARS certificates of deposits at December 31, 2023. Uninsured deposits totaled $1.1 billion or 40% of total deposits as of December 31, 2024 compared to $1.0 billion or 41% of total deposits as of December 31, 2023. As interest rates continued to increase in 2024, Northrim took a proactive, targeted approach to increase deposit rates and retain deposit customers. Borrowings FHLB: The Bank is a member of the Federal Home Loan Bank of Des Moines (the “FHLB”). As a member, the Bank is eligible to obtain advances from the FHLB. FHLB advances are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Company’s assets. At December 31, 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 $331.1 million as of December 31, 2024. The Company has outstanding advances of $13.2 million and $13.7 million as of December 31, 2024 and 2023, respectively, which were originated to match fund low income housing projects that qualify for long term fixed interest rates. These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23% to 3.25%. The Company paid $389,000 and $330,000 in interest on these advances in 2024 and 2023, respectively. Additionally, the Company has a short-term $9.8 million advance from the FHLB outstanding as of December 31, 2024 at an interest rate of 4.62% which resets daily. There were no additional advances outstanding as of December 31, 2023. The Company had an average short-term FHLB advance of $9.8 million in 2024 compared to an average short-term FHLB advance of $21.8 million in 2023. The Company took out a $50.0 million short-term advance in the second quarter of 2023 which was paid off in the fourth quarter of 2023. The Company paid $528,000 and $1.2 million in interest expense on short-term advances in 2024 and 2023, respectively. Federal Reserve Bank : The Federal Reserve Bank of San Francisco (the “Federal Reserve Bank”) is holding $70 million of investment securities as collateral to secure advances made through the discount window as of December 31, 2024. There were no discount window advances outstanding at December 31, 2024 or 2023. The Company paid less than $1,000 in interest in 2024 and 2023 on this agreement. The Federal Reserve Bank is not holding any investment securities as collateral to secure the Company's ability to take advances through the Federal Reserve Bank's Bank Term Funding Program (“BTFP”) as of December 31, 2024. There were no BTFP advances outstanding at December 31, 2024, however, the Company had an average 58 outstanding balance of $5.0 million in 2023. The Company paid $241,000 in interest expense on this BTFP advance in 2023. The Federal Reserve Bank ended the BTFP on March 11, 2024. Other Short and Long-term Borrowings: The Company had no short or long-term borrowings outstanding other than the FHLB advances noted above as of December 31, 2024 or 2023. The Company is subject to provisions under Alaska state law which generally limits the amount of outstanding debt to 35% of total assets or $1.1 billion at December 31, 2024 and $975.9 million at December 31, 2023. Junior Subordinated Debentures On December 16, 2005, the Company’s subsidiary, NST2, issued trust preferred securities in the principal amount of $10 million. These securities carried an interest rate of 90-day LIBOR plus 1.37% per annum that was initially set at 5.86% adjusted quarterly until the cessation of LIBOR in 2023. As of December 31, 2024, these securities now carry an interest rate of 90-day CME SOFR plus tenor spread adjustment of 0.26% plus 1.37% per annum, adjusted quarterly. The securities have a maturity date of March 15, 2036, and are callable by the Company on or after March 15, 2011. These securities are treated as Tier 1 capital by the Company’s regulators for capital adequacy calculations. The interest cost to the Company on these securities was $717,000 in 2024 and $693,000 in 2023. At December 31, 2024, the securities had an interest rate of 5.99%. The Company entered into an interest rate swap in the third quarter of 2017 to hedge the variability in cash flows arising out of its junior subordinated debentures, by swapping the cash flows with an interest rate swap which receives floating and pays fixed. The Company has designated this interest rate swap as a hedging instrument. The interest rate swap effectively fixes the Company's interest payments on the $10 million of junior subordinated debentures held under NST2 at 3.72% through its maturity date. Net of the impact of the interest rate swap, interest expense on these securities was $381,000 in 2024 and $379,000 in 2023. The Company also had interest expense of $22,000 in 2024 and $21,000 in 2023 on common securities related to junior subordinated debt. Liquidity and Capital Resources The Company is a single bank holding company and its primary ongoing source of liquidity is from dividends received from the Bank. Such dividends arise from the cash flow and earnings of the Bank. Banking regulations and regulatory authorities may limit the amount of, or require the Bank to obtain certain approvals before paying, dividends to the Company. Given that the Bank currently meets and the Bank anticipates that it will continue to meet, all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards, the Company expects to continue to receive dividends from the Bank during 2025. Other available sources of liquidity for the bank holding company include the issuance of debt and the issuance of common or preferred stock. As of December 31, 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. The Company had cash and cash equivalents of $62.7 million, or 2% of total assets at December 31, 2024 compared to $118.5 million, or 4% of total assets as of December 31, 2023. The decrease in cash and cash equivalents is primarily due to an increase in loans, the acquisition of SCF, and the repayment of debt. These uses of cash were only partially offset by an increase in deposits and the maturity available for sale investments, net of purchases in 2024. The Company had cumulative other comprehensive losses, net of tax, of $7.0 million in 2024, primarily due to unrealized holding losses on available for sale securities due to increases in interest rates. This is a decrease from $16.4 million in 2023. Management does not believe that liquidation of these securities, which would result in realized losses, will occur prior to maturity of these securities. As of December 31, 2024, the weighted average maturity of available for sale securities is 2.4 years compared to 2.8 years at December 31, 2023. At December 31, 2024, $133.2 million available for sale securities mature within one year, $189.3 million mature in 2026, and $79.4 million mature in 2027. Our total unfunded commitments to fund loans and letters of credit at December 31, 2024 were $529.5 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. At December 31, 2024, certificates of deposit totaling $369.7 million and $36.4 million, respectively, contractually mature in 2025 and 2026, 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, 59 unforeseen future circumstances or events may cause higher than anticipated withdrawal of deposits or draws of unfunded commitments to fund new loans. Management believes that cash requirements to fund future non-deposit liabilities, including operating lease liabilities, other liabilities, or borrowings as of December 31, 2024, are not material to the Company's liquidity position as of December 31, 2024. The Company has other available sources of liquidity to fund unforeseen liquidity needs. These include borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB. At December 31, 2024, our liquid assets, which include investments and loans maturing within a year, were $1.01 billion. Our funds available for borrowing under our existing lines of credit were $566.8 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 in the foreseeable future. As shown in the Consolidated Statements of Cash Flows included in Part II. Item 8 of this report, net cash used by operating activities was $8.7 million in 2024 and net cash provided by operating activities was $38.8 million in 2023. In 2024, net cash was used primarily in connection with origination of loans held for sale, which was only partially offset by net income and net proceeds from the sale of loans held for sale. In 2023, proceeds from the sale of loans held for sale net of proceeds used in originations, as well as net income were largely the source of net cash provided. Net cash used by investing activities was $197.6 million in 2024 primarily due to an increase in loans and the acquisition of SCF. These uses of cash were only partially offset by proceeds from maturities and sales of investment securities. Net cash used by investing activities was $254.9 million in 2023 primarily due to increases in loans and to a lesser extent, purchases of available for sale and held to maturity securities and an increase in purchased receivables. Financing activities provided cash of $150.6 million in 2024 and $75.3 million in 2023, respectively. Financing activities provided cash in 2024 due to increases in deposits that were only partially offset by the repayment of borrowings and the payment of cash dividends to shareholders. Financing activities provided cash in 2023 due to increases in deposits that were only partially offset by the payment of cash dividends to shareholders and the repurchase of shares of the Company's common stock. Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market. The following table presents the amount of common shares repurchased and the weighted average price paid per share for the periods indicated: Years Ending: Common Shares Repurchased Weighted Average Price 2024 15,034 $52.46 2023 208,673 $43.34 2022 333,724 $42.42 2021 279,276 $41.30 2020 327,000 $30.51 At December, 31, 2024, there were 110,000 shares available under the previously announced stock repurchase program, which lapsed on December 31, 2024, leaving zero shares currently available for repurchase. The Company may continue to repurchase its stock from time-to-time depending upon market conditions, but we can make no assurances that we will continue this program and the Board of Directors has not presently authorized any repurchases of its common stock for 2025. The table below shows the cumulative effect the repurchase of common shares since the inception of the Company on diluted earnings per share: Years Ending: Diluted EPS as Reported Diluted EPS without Stock Repurchase 2024 $6.62 $4.67 2023 $4.49 $3.23 2022 $5.27 $3.92 2021 $6.00 $4.79 2020 $5.11 $4.22 60 Regulatory Capital Requirements: We are subject to minimum capital requirements. Federal banking agencies have adopted regulations establishing minimum requirements for the capital adequacy of banks and bank holding companies. The requirements address both risk-based capital and leverage capital. We believe as of December 31, 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 in 2024 for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements. Management intends to maintain capital ratios for the Bank in 2025 exceeding the FDIC’s requirements for the “well-capitalized” classification. The capital ratios for the Company exceed those for the Bank primarily because the $10 million trust preferred securities offering is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our consolidated financial statements. The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital. As a result, the Company has $10 million more in regulatory capital than the Bank at December 31, 2024 and 2023, respectively, which explains most of the difference in the capital ratios for the two entities. Minimum Required Capital Well-Capitalized Actual Ratio Company Actual Ratio Bank December 31, 2024 Total risk-based capital 8.00% 10.00% 10.94% 10.37% Tier 1 risk-based capital 6.00% 8.00% 9.76% 9.20% Common equity tier 1 capital 4.50% 6.50% 9.36% 9.20% Leverage ratio 4.00% 5.00% 7.68% 7.24% See Note 23 of the Consolidated Financial Statements included in Part II. Item 8 of this report for a detailed discussion of the capital ratios. The requirements for "well-capitalized" come from the Prompt Correction Action rules. See Part I. Item 1 Supervision and Regulation. These rules apply to the Bank but not to the Company. Under the rules of the Federal Reserve Bank, a bank holding company such as the Company is generally defined to be "well capitalized" if its Tier 1 risk-based capital ratio is 8.0% or more and its total risk-based capital ratio is 10.0% or more. Critical Accounting Policies The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments as a result of the need to make "critical accounting estimates", which are estimates that involve estimation uncertainty that has had or is reasonably likely to have a material impact on the Company's financial condition or results of operations. Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements in Part II. Item 8 of this report. Not all of these significant accounting policies require management to make critical accounting estimates. Management believes that the following accounting policies would be considered critical under the SEC's definition. The following discussion is intended to supplement, but not duplicate, information provided in Note 1 in the Notes to Consolidated Financial Statements in Part II. Item 8 of this report for these policies. Allowance for Credit Losses Policy : The Company's Executive Loan Management Committee and Asset Liability Committee are both involved in monitoring various aspects of the Company's ACL methodology. The Executive Loan Management Committee reviews and approves significant assumptions used in model at least annually. The Company's Audit Committee provides board oversight of the ACL process and reviews and approves the ACL methodology on a quarterly basis. CECL is not prescriptive in the methodology used to determine the expected credit loss estimate. Therefore, management has flexibility in selecting the methodology. However, the expected credit losses must be estimated over a financial asset's contractual term, adjusted for prepayments, utilizing quantitative and qualitative factors. The estimate of current expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is the starting point for estimating expected credit losses. Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards, portfolio mix or asset terms, and differences in economic conditions – both current conditions and reasonable and supportable forecasts. When the Company is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset it has estimated expected credit losses for the remaining life after the forecasted period using an approach that reverts to historical credit loss information. 61 Depending on the nature and size of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow (“DCF”) method or a weighted average remaining life method to estimate expected credit losses quantitatively. In 2024, the Company uses a DCF method for seven of its 11 loan pools, which represent 96% of the amortized cost basis of total loan pools at December 31, 2024. Prior to 2024, the Company used a DCF method for eight of its 11 loan pools. The weighted average remaining life method is used for the remaining loan pools primarily because loan level data constraints preclude the use of the DCF model. Under the DCF method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default (“PD”) and loss given default (“LGD”). The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables. The Company's regression models for PD utilize peer historical loan level default data. The Company determines a reasonable and supportable forecast and applies that forecast to the regression model to estimate defaults over the forecast period. Management leverages economic projections from the Federal Reserve to inform its loss driver forecasts over the Company's four quarter forecast period. As of December 31, 2024, management utilizes and forecasts U.S. unemployment and U.S. gross domestic product as the loss drivers for all of the loan pools that utilize the DCF method. The Company added U.S. gross domestic product as a loss driver in 2024 because we determined that there is better model fit using this multi-factor model. The Company's regression models for PD as of December 31, 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; the Company refined the peer groups in 2024 in order to add more precision to the model. A bank is included in the peer group for each loan segment in 2024 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; • The percentage of total charge offs for the loan segment over a five year look back period is within 0.25 standard deviations 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 deviations of the Company's data. 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 December 31, 2023 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 in 2023 under the following circumstances: • The percentage the balance of the loan segment compared to total loans over a five year look back period is within 1.5 standard deviations of the Company's data; • The percentage of total charge offs for the loan segment over a five year look back period is within 1 standard deviation of the Company's data; and • The percentage of total charge offs for the loan segment during the recessionary period from the fourth quarter of 2008 to the fourth quarter of 2012 is within 1 standard deviation of the Company's data. For all periods presented, following the forecast period, the economic variables used to calculate PD revert to a historical average at a constant rate over an eight quarter reversion period. Other assumptions relevant to the discounted cash flow model to derive the quantitative allowance include the LGD, which is the estimate of loss for a defaulted loan, prepayment speeds, and the discount rate applied to future cash flows. The DCF method utilizes the effective interest rate of individual assets to discount the expected credit losses over the contractual term of the loan, adjusted for prepayments. The LGD is the expected loss which would be realized presuming a default has occurred and primarily measures the value of the collateral or other secondary source of repayment related to the collateral. The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses under CECL, which are unchanged as of December 31, 2024 and December 31, 2023: Commercial & industrial - Commercial loans are loans for commercial, corporate and business purposes. The Company’s commercial business loan portfolio is comprised of loans for a variety of purposes and across a variety of industries. These loans include general commercial and industrial loans, loans to purchase capital equipment, and other business loans for working capital and operational purposes. Commercial loans are generally secured by accounts receivable, inventory and other business assets. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. 62 Commercial real estate - This category of loans consists of the following loan types: Owner occupied - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including owner occupied commercial real estate loans primarily secured by commercial office or industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Non-owner occupied and multifamily - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including investment real estate loans that are primarily secured by office and industrial buildings, warehouses or retail buildings where the owner of the building does not occupy the property, non-owner occupied apartment or multifamily residential buildings, and various special purpose properties. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. Generally, these types of loans are thought to involve a greater degree of credit risk than owner occupied commercial real estate as they are more sensitive to adverse economic conditions. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Residential real estate - This category of loans consists of the following loan types: 1-4 family residential properties secured by first liens - This category of loans includes term loans secured by first liens on residential real estate. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. 1-4 family residential properties secured by junior liens and revolving credit lines secured by 1-4 family first liens - This category of loans includes term loans primarily secured by junior liens on residential real estate and revolving credit lines that are secured by first liens on residential real estate. Home equity revolving lines of credit and home equity term loans are included in this group of loans. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. 1-4 family residential construction - This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of 1-4 family residential properties which will secure the loan. These loans may also be secured by tracts or individual parcels of land on which 1-4 family residential properties are being constructed. The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third-party. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Other construction, land development, and raw land - This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of owner occupied and non-owner occupied commercial properties, and loans secured by raw or improved land. The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third-party. Repayment of land secured loans are dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Agricultural production, including commercial fishing - These loans are for the purpose of financing agricultural production, including growing and storing of crops, and for the purpose of financing fisheries and forestries, including loans to commercial fishermen. These loans may be secured or unsecured, but any loans for these purposes that are secured by real estate are included in a real estate category. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool. Consumer - Loans used for personal use, which may be secured or unsecured, and customer overdrafts. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool. Obligations of states and political subdivisions in the US - This category of loans includes all loans made to states, counties municipalities, school districts, drainage and sewer districts, and Indian tribes in the U.S. These loans maybe be secured by any type of collateral, including real estate. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool. Other - This category of loans includes all other loans that cannot properly be reported in one of the preceding categories. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool. 63 In addition to the quantitative portion of the ACL derived using either the DCF or weighted average remaining life method, the Company also considers the effects of the following qualitative factors in its calculation of expected losses in the loan portfolio: • Lending strategy, policies, and procedures; • Quality of internal loan review; • Lending management and staff; • Trends in underlying collateral values; • Competition, legal, and regulatory changes; • Economic and business conditions including fluctuations in the price of Alaska North slope crude oil; • Inflation and monetary policy in the United States; • Changes in trends, volume and severity of adversely classified loans, nonaccrual loans, and delinquencies; • Concentration of credit; and • Changes in the nature and volume of the loan portfolio. Management performs a hypothetical sensitivity analysis of our ACL quarterly to understand the impact of a change in a key input on our ACL. As of December 31, 2024, management utilized the Federal Reserve's median forecasts of national unemployment and national gross domestic product. If the four-quarter national unemployment rate forecast had been approximately 10% higher and the four-quarter national gross domestic product forecast been 42% lower, which represents the Federal Reserve's more conservative forecasts, our ACL for loans would have increased $1.4 million, or 7%. As of December 31, 2024, if the four-quarter national unemployment rate forecast had been approximately 35% higher and the four-quarter national gross domestic product forecast been 4% higher, which represent forecasts at approximately the historical mean, our ACL for loans would have increased $2.7 million, or 13%. 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 key inputs. This sensitivity analysis does not incorporate changes to management’s judgment of qualitative loss factors. Valuation of goodwill and other intangibles: Management performs an impairment analysis for the intangible assets with indefinite lives at each reportable segment on an annual basis as of December 31. Additionally, goodwill and other intangible assets with indefinite lives are evaluated on an interim basis when events or circumstances indicate impairment potentially exists. The impairment analysis requires management to make subjective judgments. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. There can be no assurance that changes in circumstances, estimates or assumptions may result in additional impairment of all, or some portion of, goodwill or other intangible assets. The Company performed its annual goodwill impairment testing at December 31, 2024 and 2023 in accordance with the policy described in Note 1 to the financial statements included in Part II. Item 8 of this report. At December 31, 2024, the Company performed its annual impairment test by performing a qualitative assessment. Significant positive inputs to the qualitative assessment included the Company’s increasing net income as compared to historical trends; the Company's increasing market share for deposits in our markets; results of regulatory examinations; peer comparisons of the Company's net interest margin; trends in the Company’s cash flows; improvements in the Alaskan economy in 2024; increases in the Company's market share of mortgage originations; increases in purchased receivable income following the acquisition of SCF, and increases in the Company's stock price. Significant negative inputs to the qualitative assessment included the muted pace of growth in the Alaska economy and a decline in home mortgage originations compared to historical activity. We believe that the positive inputs to the qualitative assessment noted above outweigh the negative inputs for all of the Company's operating segments, and we therefore concluded that it is more likely than not that the fair value of the Company exceeds its carrying value at December 31, 2024 and that no potential impairment existed at that time. Servicing rights: The Company measures mortgage servicing rights (“MSRs”) and commercial servicing rights (“CSRs”) at fair value on a recurring basis with changes in fair value going through earnings in the period in which the change occurs. Changes in the fair value of MSRs are recorded in mortgage banking income, and changes in the fair value of CSRs are recorded in commercial servicing revenue. Fair value adjustments encompass market-driven valuation changes and the decrease in value that occurs from the passage of time, which are separately reported. Retained servicing rights are measured at fair value as of the date of sale. Initial and subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of servicing rights, the present value of expected net future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates and ancillary fee income net of servicing costs. 64 A sensitivity analysis of our servicing rights was performed as of December 31, 2024. See Note 8 to the financial statements included in Part II. Item 8 of this report for the results of this analysis. Other Accounting Policies and Estimates: The Company evaluates its estimates, including those that materially affect the financial statements and are related to investments, derivative instruments, fair value measurements, and intangible assets on an on-going basis. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company's policies related to these estimates can be found in Note 1 in the Notes to Consolidated Financial Statements in Part II. Item 8 of this report.