What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-04 compared with 2020-05-05 · 280 added, 190 removed, 364 unchanged (56% of the section changed)

13 unchanged sentences

These risks and uncertainties include:

the uncertainties relating to the impact of COVID-19 on the Company's business, operations and employees;

the uncertainties relating to the impact of COVID-19 on the Company's credit quality, business, operations and employees;

the availability and terms of funding from government sources related to COVID-19;

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and our ability to execute our business plan.

Further, actual results may be affected by competition on price

and other factors with other financial institutions;

Further, actual results may be affected by competition on price and other factors with other financial institutions;

customer acceptance of new products and services;

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However, on October 16, 2019 the FASB voted to delay ASU 2016-13 for Smaller Reporting Companies.

In addition, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed by the President of the United States that included an option for entities to delay the implementation of ASU 2016-13 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020.

The Company has elected Small Reporting Company status, which changes the effective date for ASU 2016-13 for the Company to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2022.

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However, we have the option to early adopt CECL as of either January 1, 2021, or January 1, 2022.

Based on our loan portfolio composition at March 31, 2020, and the Company's current economic forecast, had we elected to early adopt CECL as of March 31, 2020, we estimate the impact of adoption to be an overall decrease in our allowance for credit losses ("ACL") for loans between $6.0 million and $7.0 million.

Based on our loan portfolio composition at June 30, 2020, and the Company's current economic forecast, had we elected to early adopt CECL as of June 30, 2020, we estimate the impact of adoption to be an overall decrease in our allowance for credit losses ("ACL") for loans between $5.0 million and $6.0 million.

The reduction reflects an expected decrease for all loan segments given their short contractual maturities.

The Company does not hold a material amount of residential mortgage loans with long or indeterminate maturities as of March 31, 2020.

The Company does not hold a material amount of residential mortgage loans with long or indeterminate maturities as of June 30, 2020.

In most instances the Company believes that the ACL for these types of loans would lead to an increase in the ACL.

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Update on Economic Conditions

The Alaska economy continued positive improvements throughout 2019 and into the beginning of 2020.

The most recent macro-economic indicators showed a healthy economy that was growing and adding jobs.

However, a new paradigm arose from the COVID-19 virus that is expected to bring an end to positive growth.

National and local economies have been significantly altered from government rules implemented to help slow the spread of the virus around the country.

These impacts have only begun to take effect in the latter half of the first quarter of the year.

The Alaska State Department of Labor reported growth of 1,300 jobs in February of 2020 compared to February of 2019.

This is an increase of 0.4% year-over-year.

October of 2018 was the first month of year-over-year increase in employment since September of 2015.

After 37 months of year-over-year declines, Alaska now had 14 consecutive months of year-over-year job increases prior to the impacts from COVID-19.

According to the Alaska State Department of Labor, Oil and Gas led the February 2020 year-over-year growth with a positive 500 jobs for a 5% growth rate.

Health Care also grew by 500 jobs over the prior year, which is an increase of 1.3% for the larger direct employment sector.

The Construction industry has grown by 400 jobs or 2.9% during the same 12 month period.

Tourism helped boost Leisure & Hospitality employment by 300 jobs or 1%.

The largest decline was 500 government jobs.

State jobs decreased by 400, local government jobs declined by 200, while federal government jobs grew by 100.

This was primarily a response to state budget cuts.

The other two major sectors to shrink were Manufacturing (primarily seafood processing) down 300 jobs or -2.5% and Information Services down 200 jobs or -3.7%.

Alaska’s seasonally adjusted gross state product (“GSP”) was $55.4 billion in the third quarter of 2019, according to the U.S.

Bureau of Economic Analysis (“BEA”) in a report released on January 10, 2020.

Alaska’s GSP increased 1.8% annualized in the first quarter of 2019, 4.1% in the second quarter, and 2.4% in the third quarter.

Alaska’s real GSP increased by 0.7% in 2018.

Alaska’s personal income grew 3.7% in 2019 according to a report by the BEA.

Total income from all sources in Alaska grew from $43.8 billion in 2018 to $45.4 billion in 2019.

The increase in 2019 was mostly driven by an improvement in wages.

Personal income from wages rose $1.03 billion, government transfer receipts were up $406 million and dividends, interest and rents increased by $177 million in 2019.

Management believes that the 2019 gains in GSP and personal income have primarily been a result of billions of dollars in investment by the oil and gas sector and record years in tourism.

Job growth had been positive for over a year after three years of a mild recession.

Unfortunately, with the economic issues resulting from the COVID-19 virus we expect these improvements to end.

A decline in tourist numbers and significantly lower oil prices are expected to change this growth pattern.

This is further evidenced by the spike in weekly initial unemployment claims in Alaska to 14,600 the week of March 28, 2020 and 12,007 the week of April 4, 2020 according to a news release from the State of Alaska Department of Labor on April 17, 2010.

For the prior year period ending March 31, 2019 the initial unemployment insurance claims were 891 and the week of April 6, 2019 they were 992.

Additionally, ConocoPhillips has announced that they will be reducing capital spending in Alaska by roughly $400 million, or 25%, in 2020 as compared to their previous plans.

Average monthly Alaska North Slope (“ANS”) crude oil prices ranged between approximately $60 and $80 in 2018 and 2019.

This helped increase industry investment and employment after a difficult period of prices averaging between approximately $30 and $60 from 2015 to 2017.

However, in the first quarter of 2020 prices began to fall rapidly in response to lower demand from COVID-19 quarantining and over production in the Middle East and Russia.

In January of 2020, ANS prices averaged $65.48 and fell to $54.48 in February.

The March 2020 monthly average was only $33.21.

The ANS spot price at the end of the quarter March 31, 2020 was $23.18.

Alaska’s crude oil production averaged 511,800 barrels per day (“bpd”) in fiscal year (“FY”) 2019.

This was a decrease of 4.2% compared to the previous year end.

Total output declined 1.2% to 534,000 bpd in FY 2018.

The State Department of Revenue forecasted production on the North Slope to decline 0.6% in FY 2020, though this forecast was made prior to COVID-19 impacts.

Alaska’s home mortgage delinquency and foreclosure levels continue to be better than most of the nation.

According to the Mortgage Bankers Association, Alaska’s foreclosure rate was 0.63% at the end of 2019.

The comparable national average rate was 0.78% at the end of the year.

The national survey reported that the percentage of mortgage loans more than 30 days delinquent in Alaska was 2.85% at the end of 2019, compared to 4.07% for the entire country.

The Federal Open Market Committee ("FOMC") cut the target federal funds rate 150 basis points from a range of 1.50%-1.75% to 0-0.25% in March of 2020.

At a press conference on March 15, 2020 Chairman Powell stated that the FOMC would maintain the rate at this low level until they are confident that the economy has weathered recent events and is on track to achieve employment and price stability goals.

The COVID-19 pandemic has disrupted economies all around the world.

In Alaska, the tourism and hospitality industries have been most affected with job losses.

Oil prices dropped precipitously at the beginning of the pandemic, but have rebounded recently to healthier levels.

The government’s fiscal and monetary response has been far reaching.

This has greatly eased the short run impacts of the virus for most of the Company’s customers.

The State of Alaska Department of Labor reported that a year and a half of positive job growth came to an abrupt end in April of 2020.

The seasonally adjusted unemployment rate jumped from 5.6% in March to 13.5% in April.

This moderated slightly to 12.6% in May.

The comparable U.S.

rate peaked at 14.7% in April and decreased to 13.3% in May, according to the State of Alaska Department of Labor.

In Alaska, every major job sector reported declines year-over-year (“YoY”) in May 2020 according to the State of Alaska Department of Labor.

Leisure and Hospitality was the most severely impacted, declining 39.7% for a loss of 15,300 jobs in Alaska in May 2020.

Also in Alaska, government declined by 7,400 jobs or 9.1%, primarily due to a loss of 6,200 local government jobs.

State government declined by 1,000 jobs and Federal government by only 200 jobs.

Other major sectors to decline in Alaska YoY in May of 2020 were:

Health Care -2,900;

Transportation, Warehousing and Utilities -2,700;

Retail Trade -2,600;

and Construction -2,400.

Oil prices have been fluctuating significantly in 2020 as the global economy reacts to the COVID-19 pandemic.

Average monthly Alaska North Slope (“ANS”) crude oil prices began the year averaging $65.48 for the month of January.

The virus concerns began to have an effect when monthly ANS prices declined to $54.48 in February and $33.21 in March.

In the second quarter of 2020, ANS prices hit a monthly low of $16.54 in April and increased to $28.21 in May.

The ANS price improved throughout June and averaged $41.78.

Trillions of dollars in federal assistance programs have helped mitigate some of the negative impacts of the COVID-19 pandemic in the short run.

The Fed Funds rate was decreased 1.5% in March.

This helped reduce borrowers’ interest expense dramatically.

The Federal Reserve is buying corporate bonds, lending to state and municipal governments, and even aiding foreign central banks of our allies to help stabilize global markets.

The Fed is adding liquidity to the system to ensure credit markets don’t freeze up.

Small Business Administration ("SBA") Paycheck Protection Program ("PPP") and the Economic Injury Disaster loan program have provided hundreds of billions of dollars to businesses around the country.

The Federal Reserve’s Main Street Lending Program is also now available to help businesses weather current economic disruptions.

Direct grants to states from the CARES Act provided approximately $1.25 billion to Alaska.

An increase of $600 in weekly unemployment insurance benefits helped millions of people out of work maintain cash flow.

A moratorium on housing foreclosures, coupled with widespread payment forbearance arrangements, has kept Americans in their homes.

Alaska’s seasonally adjusted gross state product ("GSP") was $54 billion in the first quarter of 2020, according to the U.S.

Bureau of Economic Analysis ("BEA") in a report released on July 7, 2020.

Alaska’s real GSP decreased 4% annualized for the quarter.

The BEA reported real GSP decreased in all 50 states in the first quarter of 2020 and averaged a decline of 5% for the nation.

Alaska’s performance was above average, placing it 13th best of the 50 U.S.

states for the quarter.

This is following positive growth in Alaska in 2019 of 2.5%, compared to U.S.

growth of 2.3% last year.

The largest sectors of decline in GSP in Alaska in the first quarter of 2020 were Health Care, Accommodation and food services, and Government.

Alaska’s personal income grew 3.7% in 2019 according to a report by the Federal Bureau of Economic Analysis.

Total income from all sources in Alaska grew from $44.4 billion at the end of 2018 to $46.1 billion in the first quarter of 2020.

Most of the increase came from over $1 billion in improvement of wages in 2019.

The first quarter of 2020 was an annualized growth rate of 1.3% in Alaska.

Alaska’s delinquency and foreclosure levels continue to be better than most of the nation.

According to the Mortgage Bankers Association, Alaska’s foreclosure rate was 0.60% at the end of the first quarter 2020.

That compares to 0.63% at the end of 2019.

The comparable national average rate was 0.73% in the first quarter of 2020 and 0.78% at the end of 2019.

The national survey reported that the percentage of delinquent mortgage loans in Alaska was 3.23% in the first quarter of 2020.

This compares to 2.85% at the end of 2019.

The delinquency rate for the entire country was higher at 4% in the first quarter of 2020 and 4.07% at the end of 2019.

COVID-19 Issues:

Industry Exposure:

Northrim has identified various industries that may be adversely impacted by the COVID-19 pandemic and a significant decline in oil prices.

Though the industries affected may change through the progression of the pandemic, the following sectors, with the Northrim Bank's (the "Bank") exposure as a percent of the total loan portfolio as of March 31, 2020 are being impacted:

Northrim has identified various industries that may be adversely impacted by the COVID-19 pandemic and the significant decline in oil prices.

Though the industries affected may change through the progression of the pandemic, the following sectors for which the Company has exposure, as a percent of the total loan portfolio as of June 30, 2020 are being impacted:

Tourism (4%), Oil and Gas (5%), Aviation (non-tourism) (4%), Healthcare (4%), Accommodations (2%), Retail (2%) and Restaurants (2%).

Loan Accommodations:

The Company has implemented several forms of assistance to help our customers in the event that they experience financial hardship as a result of COVID-19 in addition to our participation in Payroll Protection Program ("PPP") lending.

The Company's exposure as a percent of the total loan portfolio excluding SBA PPP loans as of June 30, 2020 are:

Tourism (6%), Oil and Gas (6%), Aviation (non-tourism) (5%), Healthcare (5%), Accommodations (3%), Retail (2%) and Restaurants (2%).

Customer Accommodations:

The Company has proactively implemented several forms of assistance to help our customers in the event that they experience financial hardship as a result of COVID-19 in addition to our participation in PPP lending.

These accommodations include interest only and deferral options on loan payments, as well as the waiver of various fees related to loans, deposits and other services.

As of March 31, 2020, the Company has not made a material number of loan accommodations and only began to see requests for changes near the end of the quarter.

The PPP administered by the U.S.

Small Business Administration ("SBA") under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") has provided some relief on requests to modify loans.

The PPP administered by the SBA under the CARES Act has provided some relief on requests to modify loans.

As of June 30, 2020, the Company has made the following loan modifications due to the impacts of COVID-19:

Loan Modifications due to COVID-19

(Dollars in thousands)

Interest Only

Full Payment Deferral

Portfolio loans

Number of modifications

Consumer loans represent 1% of total loan modifications identified above.

Loan Loss Reserve:

Although several of the Company’s asset quality metrics improved over the first quarter, management determined it is appropriate to increase its loan loss reserves through the addition of $2.1 million in loan loss provisions for the quarter ended March 31, 2020.

This compares to a $750,000 provision for loan losses in the first quarter a year ago.

The increased provision is the result of growth in the loan portfolio, an increase in specific impairment, and an increase in qualitative factors based on management's assessment of increased risks in our loan portfolio primarily associated with the COVID-19 pandemic and the reduction in oil prices compared to the prior year.

To protect the well-being of our staff and customers, Northrim has dedicated resources for a majority of employees to work from home.

To facilitate the move, we allocated excess computers and VOIP system phones to staff resulting in no significant increase in data processing expenses.

The Company booked a loan loss provision of $404,000 for the quarter ended June 30, 2020.

This compares to a $300,000 provision for loan losses in the second quarter a year ago.

The increased provision is the result of growth in the loan portfolio and an increase in qualitative factors based on management's assessment of increased risks in our loan portfolio primarily associated with the COVID-19 pandemic and the reduction in oil prices compared to the prior year.

Credit Quality:

Net adversely classified loans improved to $15.7 million at June 30, 2020, as compared to $22.3 million at December 31, 2019.

Net loan chargeoffs were $768,000 in the second quarter of 2020, compared to net loan recoveries of $9,000 in the second quarter of 2019.

Branch Operations:

All but one branch remained open throughout the second quarter.

Branch lobbies were available by appointment from March 23 to June 17.

All but one branch was fully reopened on June 17 with a number of customers and employee safety measures implemented.

Growth and Paycheck Protection Program:

Northrim’s asset base increased during the quarter ended March 31, 2020, due primarily to normal loan growth, much of which related to the funding of loans that were in the pipeline as of December 31, 2019.

Through May 4, 2020,the Company received SBA approval to originate approximately 1,600 loans totaling $324 million in PPP loans, and we have approximately 800 loans totaling $55 million in the PPP loan pipeline.

The Company has been approved for, and intends to utilize the Federal Reserve Bank's newly created Paycheck Protection Program Liquidity Facility to fund PPP loans.

The Company’s asset base increased during the quarter ended June 30, 2020, due primarily to loans originated under the SBA's PPP.

Through June 30, 2020,the Company had funded approximately 2,500 PPP loans totaling $353.5 million to both existing and new customers.

The deadline for PPP loan applications to the SBA has been extended to August 8, 2020.

The Company is continuing to accept new PPP applications based on this extended deadline and is assisting small businesses with other borrowing options a they become available.

According to the SBA, the Company originated more SBA PPP loans in the State of Alaska than any other financial institution, funding 23% of the number and 28% of the value of all Alaska PPP loans for the period ending June 30, 2020.

The Company initially utilized the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") to fund PPP loans but has since repaid those funds in full and has funded the SBA PPP loans through core deposits and maturity of long-term investments.

Capital Management:

At March 31, 2020, the Company’s and the Bank’s capital ratios were well in excess of all regulatory requirements.

As of March 31, 2020, the Company had suspended its previously announced stock repurchasing activity.

Highlights and Summary of Performance - First Quarter of 2020

The Company reported net income and diluted earnings per share of $1.0 million and $0.16, respectively, for the first quarter of 2020 compared to net income and diluted earnings per share of $4.3 million and $0.62, respectively, for the first quarter of 2019 .

The decrease in net income in the first quarter of 2020 compared to the same quarter last year is primarily due to an increase in the provision for loan losses, an increase in other operating expense, and a decrease in other operating income.

Total revenue in the first quarter of 2020, which includes net interest income plus other operating income, decreased 5% to $22.1 million from $23.3 million in the first quarter a year ago, primarily due to a $1.4 million decrease in gain (loss) on marketable equity securities that was only partially offset by a $367,000 increase in mortgage banking income.

Net interest income decreased slightly in the first quarter of 2020 compared to the same period in 2019 mainly due to a lower net yields on earning assets due to lower interest rates that was only partially offset by an increase in average earning asset balances.

Net interest margin decreased to 4.32% in the first quarter of 2020 as compared to 4.83% in the first quarter a year ago.

The Company repurchased 192,709 shares of its common stock in the first quarter of 2020 at an average price of $32.74, leaving 134,291 shares available under the previously announced stock repurchase authorization.

The Company paid cash dividends of $0.34 per common share in the first quarter of 2020, up 13% from $0.30 in the first quarter of 2019.

At June 30, 2020, the Company’s and the Bank’s capital ratios were well in excess of all regulatory requirements.

As previously announced, the Company suspended its previously announced stock repurchasing activity effective March 26, 2020.

Highlights and Summary of Performance - Second Quarter of 2020

The Company reported net income and diluted earnings per share of $9.9 million and $1.52, respectively, for the second quarter of 2020 compared to net income and diluted earnings per share of $4.3 million and $0.62, respectively, for the second quarter of 2019 .

The Company reported net income and diluted earnings per share of $10.9 million and $1.68, respectively, for the first six months of 2020 compared to net income and diluted earnings per share of $8.6 million and $1.24, respectively, for the same period in 2019 .

The increase in net income in the second quarter of 2020 compared to the same quarter last year is primarily due to an increase in mortgage banking income.

Total revenue in the second quarter of 2020, which includes net interest income plus other operating income, increased 37% to $35.0 million from $25.5 million in the second quarter a year ago, primarily due to a $9.3 million increase in mortgage banking income.

Net interest income increased 9% to $17.5 million in the second quarter of 2020 compared to the same period in 2019 mainly due to increased loans and loans held for sale balances.

Net interest margin decreased to 3.98% in the second quarter of 2020 as compared to 4.71% in the second quarter a year ago primarily due to lower interest rates.

The Company paid cash dividends of $0.34 per common share in the second quarter of 2020, up 13% from $0.30 in the second quarter of 2019.

Other financial measures are shown in the table below:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Return on average assets

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Nonperforming assets:

Nonperforming assets, net of government guarantees at March 31, 2020 decreased $386,000, or 2% to $19.6 million as compared to $19.9 million at December 31, 2019 .

OREO, net of government guarantees, increased $162,000 to $5.9 million at March 31, 2020 as compared to $5.8 million at December 31, 2019 due to the transfer of one loan to OREO during the period.

Nonperforming loans, net of government guarantees decreased $548,000 during the first three months of 2020 as compared to December 31, 2019, as paydowns exceeded additions in the first three months of 2020.

$11.2 million, or 53% are nonaccrual loans related to ten commercial relationships.

Two of these relationships, which totaled $5.2 million at the end of the first quarter of 2020, are businesses in the medical industry.

Nonperforming assets, net of government guarantees at June 30, 2020 increased $855,000, or 4% to $20.8 million as compared to $19.9 million at December 31, 2019 .

OREO, net of government guarantees, increased $162,000 to $5.9 million at June 30, 2020 as compared to $5.8 million at December 31, 2019 due to the transfer of one loan to OREO during the period.

Nonperforming loans, net of government guarantees decreased $1.2 million during the first six months of 2020 as compared to December 31, 2019, as paydowns and chargeoffs exceeded additions in the first six months of 2020.

$10.4 million, or 50% of nonperforming assets are nonaccrual loans and nonperforming purchased receivables related to five commercial relationships.

Two of these relationships, which totaled $5.8 million at the end of the second quarter of 2020, are businesses in the medical industry.

While it is too early to determine the effect that the COVID-19 pandemic will ultimately have on our non-performing assets, based on the current trajectory, significant increases may occur in subsequent quarters.

The following table summarizes nonperforming activity for the three-month periods ending March 31, 2020 and 2019 :

The following table summarizes nonperforming activity for the three-month periods ending June 30, 2020 and 2019 :

(In Thousands)

Balance at December 31, 2019

Balance at March 31, 2020

Additions this quarter

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Sales this quarter

Balance at March 31, 2020

Balance at June 30, 2020

Commercial loans

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Repossessed assets

Nonperforming purchased receivables

Other real estate owned guaranteed

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(In Thousands)

Balance at December 31, 2018

Balance at March 31, 2019

Additions this quarter

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Sales this quarter

Balance at March 31, 2019

Balance at June 30, 2019

Commercial loans

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Consumer loans

Non-performing loans guaranteed by government

Total non-performing loans

Nonperforming loans guaranteed by government

Total nonperforming loans

Other real estate owned

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by government

Total non-performing assets,

Total nonperforming assets,

net of government guarantees

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These loans are closely monitored and their performance is reviewed by management on a regular basis.

At March 31, 2020 , management had identified potential problem loans of $4.5 million as compared to potential problem loans of $9.0 million at December 31, 2019 .

The decrease in potential problem loans from December 31, 2019 to March 31, 2020 is primarily the result of $3.0 million in paydowns and the addition of a government guarantee on one loan totaling $1.5 million.

One commercial relationship totaling $423,000 as of December 31, 2019, net of government guarantees, was transferred to nonaccrual status, and there was one new potential problem loan during the first quarter of 2020 totaling $337,000.

At June 30, 2020 , management had identified potential problem loans of $3.6 million as compared to potential problem loans of $9.0 million at December 31, 2019 .

The decrease in potential problem loans from December 31, 2019 to June 30, 2020 is primarily the result of $3.1 million in paydowns and the addition of a government guarantee on one loan totaling $1.4 million.

Troubled debt restructurings (“TDRs”):

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Interest on TDRs will be accrued at the restructured rates when it is anticipated that no loss of original principal will occur, and the interest can be collected, which is generally after a period of six months.

The Company had $4.4 million in loans classified as TDRs that were performing and $8.2 million in TDRs included in nonaccrual loans at March 31, 2020 for a total of approximately $12.6 million .

There are $3.0 million in government guarantees associated with TDRs, so total TDRs, net of government guarantees,

total $9.6 million at March 31, 2020 .

The Company had $2.9 million in loans classified as TDRs that were performing and $7.7 million in TDRs included in nonaccrual loans at June 30, 2020 for a total of approximately

$10.6 million .

There are $1.9 million in government guarantees associated with TDRs, so total TDRs, net of government guarantees, total $8.7 million at June 30, 2020 .

At December 31, 2019 there were $1.4 million in loans classified as TDRs that were performing and $8.7 million in TDRs included in nonaccrual loans for a total of $10.1 million.

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Income Statement

Net income for the first quarter of 2020 decreased $3.3 million, or 76%, to $1.0 million as compared to $4.3 million for the same period in 2019 .

The decrease in net income in the first quarter of 2020 compared to the first quarter of 2019 is primarily due to an increase in the provision for loan losses, an increase in other operating expense primarily in salaries and other personnel expense and OREO (income) expense, net of rental income, and a decrease in other operating income which is primarily attributable to a decrease in gain (loss) on marketable equity securities.

Net income for the second quarter of 2020 increased $5.6 million, or 132%, to $9.9 million as compared to $4.3 million for the same period in 2019 .

Net income for the first half of 2020 increased $2.4 million, or 28%, to $10.9 million compared to $8.6 million for the first half of 2019.

The increase in net income in both periods is primarily due to an increase in mortgage banking income.

Net Interest Income/Net Interest Margin

Net interest income for the first quarter of 2020 decreased $79,000, or less than 1%, to $15.7 million as compared to $15.8 million for the first quarter of 2019 .

Net interest margin decreased 51 basis points to 4.32% in the first quarter of 2020 as compared to 4.83% in the first quarter of 2019.

The decrease in net interest income in the first quarter of 2020 compared to the first quarter of 2019 was primarily the result of higher interest expense on deposits and borrowings, which was only partially offset by higher interest income on loans and deposits in other banks.

Changes in net interest margin in the three months ended March 31, 2020 as compared to the same period in the prior year are detailed below:

Three Months Ended March 31, 2020 vs.

March 31, 2019

Net interest income for the second quarter of 2020 increased $1.5 million, or 9%, to $17.5 million as compared to $16.0 million for the second quarter of 2019 .

Net interest margin decreased 73 basis points to 3.98% in the second quarter of 2020 as compared to 4.71% in the second quarter of 2019.

Net interest income for the first half of 2020 increased $1.4 million, or 4%, to $33.1 million as compared to $31.7 million for the first half of 2019.

Net interest margin decreased 63 basis points to 4.14% in the first half of 2020 as compared to 4.77% in the first half of 2019.

The increase in net interest income in the second quarter and first six months of 2020 compared to the same periods of 2019 was primarily the result of higher interest income on loans and loans held for sale due to increased balances.

The decrease in net interest margin in the second quarter and the first half of 2020 as compared to the same periods a year ago was primarily the result of the reduction in short-term interest rates in the first quarter of 2020 and the impact of the SBA PPP loans on the resulting yields in the loan portfolio.

Changes in net interest margin in the three and six months ended June 30, 2020 as compared to the same period in the prior year are detailed below:

Three Months Ended June 30, 2020 vs.

June 30, 2019

Nonaccrual interest adjustments

Impact of SBA Paycheck Protection Program loans

Interest rates and loan fees

1 unchanged sentence

Change in net interest margin

Six Months Ended June 30, 2020 vs.

June 30, 2019

Nonaccrual interest adjustments

Impact of SBA Paycheck Protection Program loans

Interest rates and loan fees

Volume and mix of interest-earning assets

Change in net interest margin

Components of Net Interest Margin

The following table compares average balances and rates as well as net tax equivalent margins on earning assets for the three-month periods ended March 31, 2020 and 2019 :

The following table compares average balances and rates as well as net tax equivalent margins on earning assets for the three-month periods ended June 30, 2020 and 2019 :

(Dollars in Thousands)

Three Months Ended March 31,

Three Months Ended June 30,

Interest income/

Average Balances

Average Yields/Costs

Loans held for sale

Short-term investments 3

Long-term investments 4

Total investments

Interest-earning assets

Nonearning assets

Interest-bearing demand

Savings deposits

Money market deposits

Time deposits

Total interest-bearing deposits

Total interest-bearing liabilities

Demand deposits and other noninterest-bearing liabilities

Net interest income

Net interest margin

Average loans to average interest-earning assets

Average loans to average total deposits

Average non-interest deposits to average total deposits

Average interest-earning assets to average interest-bearing liabilities

1 Interest income includes loan fees.

Loan fees recognized during the period and included in the yield calculation totaled $2.0 million and $766,000 in the second quarter of 2020 and 2019 , respectively.

2 Nonaccrual loans are included with a zero effective yield.

Average nonaccrual loans included in the computation of the average loan balances were $14.6 million and $18.5 million in the second quarter of 2020 and 2019 , respectively .

3 Consists of interest bearing deposits in other banks.

4 Consists of investment debt securities available for sale, equity securities, investment securities held to maturity, and investment in Federal Home Loan Bank stock.

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, 2020 and 2019 .

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:

(In Thousands)

Three Months Ended June 30, 2020 vs.

Increase (decrease) due to

Interest Income:

Loans held for sale

Short-term investments

Long-term investments

Total interest income

Interest Expense:

Interest-bearing deposits

Total interest expense

The following table compares average balances and rates as well as net tax equivalent margins on earning assets for the six-month periods ended June 30, 2020 and 2019 :

(Dollars in Thousands)

Six Months Ended June 30,

Interest income/

Average Balances

Tax Equivalent

Average Yields/Costs

Loans held for sale

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1 Interest income includes loan fees.

Loan fees recognized during the period and included in the yield calculation totaled $847,000 and $819,000 in the first quarter of 2020 and 2019 , respectively.

Loan fees recognized during the period and included in the yield calculation totaled $2.9 million and $1.6 million in the first six months of 2020 and 2019 , respectively.

2 Nonaccrual loans are included with a zero effective yield.

Average nonaccrual loans included in the computation of the average loan balances were $15.0 million and $16.1 million in the first quarter of 2020 and 2019 , respectively .

Average nonaccrual loans included in the computation of the average loan balances were $14.7 million and $17.0 million in the first six months of 2020 and 2019 , respectively .

3 Consists of interest bearing deposits in other banks.

4 Consists of investment debt securities available for sale, equity securities, investment securities held to maturity, and investment in Federal Home Loan Bank stock.

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, 2020 and 2019 .

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:

(In Thousands)

Three Months Ended March 31, 2020 vs.

Six Months Ended June 30, 2020 vs.

Increase (decrease) due to

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Provision for Loan Losses

The provision for loan losses increased to $2.1 million for the first quarter of 2020 compared to $750,000 in the first quarter of 2019 due to the growth in loan balances, an increase in specific impairment, and an increase in qualitative factors based on management's assessment of increased risks in our loan portfolio primarily associated with the COVID-19 pandemic and the reduction in oil prices compared to the prior year.

These increases were only partially offset by decreases in nonaccrual and adversely classified loans in the first quarter of 2020.

The ratio of the Allowance to total nonperforming loans, net of government guarantees was 157% at March 31, 2020 and 137% at December 31, 2019.

The provision for loan losses increased to $404,000 for the second quarter of 2020 compared to $300,000 in the second quarter of 2019 due to an increase in qualitative factors based on management's assessment of increased risks in our loan portfolio primarily associated with the COVID-19 pandemic and the reduction in oil prices compared to the prior year.

The ratio of the Allowance to total nonperforming loans, net of government guarantees was 162% at June 30, 2020 and 137% at December 31, 2019.

The provision for loan losses was $2.5 million for the first half of 2020 as compared to $1.1 million for the first six months of 2019.

Similar to the second quarter of 2020 compared to the second quarter of 2019, the increase is mostly due to an increase in the qualitative factors based on management's assessment of increased risks in our loan portfolio primarily associated with the COVID-19 pandemic and the reduction in oil prices compared to the prior year.

See "Analysis of Allowance for Loan Losses" under the "Financial Condition-Balance Sheet Overview" and Note 5 of the Notes to Consolidated Financial Statements included in Item 1 of this report for more information on changes in the Company's Allowance.

Other Operating Income

Other operating income for the three-month period ended March 31, 2020 , decreased $1.1 million , or 15%, to $6.4 million as compared to $7.5 million the same period in 2019 , primarily due to the $1.4 million decrease in gain (loss) on marketable equity securities in the first quarter of 2020 compared to the same quarter in 2019.

This decrease was only partially offset by a $367,000 increase in mortgage banking income in the three months ended March 31, 2020 as compared to the same period in 2019.

Net realized gains on mortgage loans sold increased $1.7 million in the first quarter of 2020 as compared to the first quarter of 2019 primarily due to increased volume driven by lower interest rates and the resulting refinance activity.

However, this increase in revenue was largely offset by a decrease in the fair value of mortgage loan commitments which decreased $901,000 in the three-month period ended March 31, 2020 as compared to the same period in 2019 due to lower pricing in the secondary market for home mortgages hit by an abnormally large volume of refinance activity.

The increase in gains on sale was also partially offset by a decrease in the fair value of mortgage servicing rights, which decreased mortgage banking income by $930,000 during the first quarter of 2020.

Other operating income for the three-month period ended June 30, 2020 , increased $8.0 million , or 83%, to $17.5 million as compared to $9.6 million the same period in 2019 , primarily due to the $9.3 million increase in mortgage banking income in the second quarter of 2020 compared to the same quarter in 2019.

This increase in mortgage banking income in the three months ended June 30, 2020 as compared to the same period in 2019 was primarily due to increased refinance activity due to changes in the mortgage interest rates.

The increase in mortgage banking income in the second quarter of 2020 was only partially offset by a decrease of $717,000 in interest rate swap income, as well as a smaller decrease in purchased receivable income, due to customers reportedly using PPP funds instead of selling receivables, and a decrease in service charges on deposit accounts due to customer accommodations related to the impacts of COVID19 as compared to the second quarter of 2019.

Other Operating Expense

Other operating expense for the first quarter of 2020 increased $1.7 million , or 10% , to $18.8 million as compared to the same period in 2019 primarily due to a $954,000, or 8%, increase in the salaries and other personnel expense primarily due to a $583,000 increase in employee commissions related to the increase in production volume in the Home Mortgage Lending segment and a $293,000, or 4% increase in salary expense primarily due to annual salary increases.

Additionally, OREO expense, net of rental income and gains on sale increased $284,000 in the first quarter of 2020 compared to the same period in 2019 due to lower gains on the sale of OREO.

The provision for income taxes for the first quarter of 2020 decreased $917,000 , or 79% , as compared to the same period in 2019 primarily due to the decrease in pretax income.

The effective tax rate decreased to 19% in the three-month period ending March 31, 2020 as compared to 21% in both the three-month periods ending March 31, 2019 due to less tax-exempt income and fewer estimated tax credits as a percentage of pre-tax income in 2020 as compared to 2019.

Other operating expense for the second quarter of 2020 increased $2.9 million , or 14% , to $22.7 million as compared to the same period in 2019 primarily due to higher salaries and other personnel expense related to mortgage banking operations, which fluctuate with production volumes, as well as higher data processing costs in the community banking segment due to charges for additional products and services.

The provision for income taxes for the second quarter of 2020 increased $868,000 , or 76% , as compared to the same period in 2019 .

The provision for income taxes in the first half of 2020 decreased $49,000, or 2%, as compared to the first half of 2019.

The increase in the three-month period ending June 30, 2020 as compared to the same period in 2019 was primarily due to the increase in pretax income.

The effective tax rate decreased to 17% in the three and six-month periods ending June 30, 2020 as compared to 21% in both the three and six-month periods ending June 30, 2019 primarily due to the reversal of a $454,000 accrual for a potential increase in tax expense related to an audit that was performed in 2018 by the State of Alaska for tax years 2014-2016.

The Company appealed the State of Alaska's decision on this matter and reversed this accrual in the second quarter of 2020 because the Company believes that it is more likely than not that the court will rule in the Company's favor.

FINANCIAL CONDITION

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Portfolio Investments

Portfolio investments at March 31, 2020 decreased 3%, or $7.5 million, to $276.6 million from $284.1 million at December 31, 2019 as proceeds from sales, maturities, and security calls were used for loan fundings in the first three months of 2020.

Portfolio investments at June 30, 2020 decreased 26%, or $74.0 million, to $210.1 million from $284.1 million at December 31, 2019 as proceeds from sales, maturities, and security calls were used for loan fundings in the first six months of 2020.

The table below details portfolio investment balances by portfolio investment type:

March 31, 2020

June 30, 2020

December 31, 2019

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However, it also involves greater risks, including greater exposure to changes in local economic conditions, than certain other types of lending.

Portfolio loans increased by $38.5 million, or 4%, to $1.082 billion at March 31, 2020 from $1.043 billion at December 31, 2019 , primarily as a result of increased commercial, real estate construction other, and real estate term owner occupied loans.

These increases were partially offset by decreases in real estate construction one-to-four family loans and consumer loans in the first three months of 2020.

Real estate construction one-to-four family loans, which are mostly residential housing construction loans decreased slightly to 3% of portfolio loans at March 31, 2020 compared to 4% at December 31, 2019 .

Portfolio loans increased by $389.8 million, or 37%, to $1.433 billion at June 30, 2020 from $1.043 billion at December 31, 2019 , primarily as a result of increased commercial loans due to the Company's participation in the SBA PPP.

PPP loans are included in commercial loans in the table below and totaled $353.5 million at June 30, 2020 and zero at December 31, 2019.

As shown in the table below, real estate construction one-to-four family, real estate term owner occupied and real estate term non-owner occupied loans also increased in the first six months of 2020.These increases were partially offset by smaller decreases in consumer loans and real estate term other loans in the first six months of 2020.

Real estate construction one-to-four family loans, which are mostly residential housing construction loans decreased slightly to 3% of portfolio loans at June 30, 2020 compared to 4% at December 31, 2019 .

The following table details loan balances by loan type as of the dates indicated:

March 31, 2020

June 30, 2020

December 31, 2019

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net of origination costs

The above table includes $353.5 million SBA PPP loans within the Commercial loan segment.

Additionally, unearned origination fee, net of origination costs includes $9.8 million associated with SBA PPP loans.

Information about loans directly exposed to the oil and gas industry

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 $86.9 million, or approximately 8% of loans as of March 31, 2020 have direct exposure to the oil and gas industry as compared to $79.2 million, or approximately 8% of loans as of December 31, 2019 .

The Company has no loans to oil producers or exploration companies as of March 31, 2020 or December 31, 2019, but the totals noted include a loan related to construction of an oil rig.

The balance of this loan was $13.0 million and $14.2 million at March 31, 2020 and December 31, 2019 , respectively, and is classified as an AQR pass loan in both periods.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $37.9 million and $31.1 million at March 31, 2020 and December 31, 2019 , respectively.

The portion of the Company's Allowance that related to the loans with direct exposure to the oil and gas industry was estimated at $1.7 million as of March 31, 2020 and $1.6 million as of December 31, 2019 .

The Company estimates that $70.2 million, or approximately 5% of loans as of June 30, 2020 have direct exposure to the oil and gas industry as compared to $79.2 million, or approximately 8% of loans as of December 31, 2019 .

The Company has no loans to oil producers or exploration companies as of June 30, 2020 or December 31, 2019, but the totals noted include a loan related to construction of an oil rig.

The balance of this loan was $7.7 million and $14.2 million at June 30, 2020 and December 31, 2019 , respectively, and is classified as an Asset Quality Rating ("AQR") system pass loan in both periods.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $51.9 million and $31.1 million at June 30, 2020 and December 31, 2019 , respectively.

The portion of the Company's Allowance that related to the loans with direct exposure to the oil and gas industry was estimated at $1.3 million as of June 30, 2020 and $1.6 million as of December 31, 2019 .

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:

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Consumer other

March 31, 2020

June 30, 2020

AQR Special Mention

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Supplemental information about significant COVID-19 exposure on directly impacted industries

In addition, at March 31, 2020, the Company had $63.7 million, or 6% of portfolio loans, in the tourism sector, $56.9 million, or 5% of portfolio loans, in the aviation (non-tourism) sector, $45.2 million, or 4% of total loans, in the healthcare sector,

$19.5 million, or 2%, in retail loans and $18.0 million, or 2% in the restaurant sector, and $36.4 million, or 3% in the accommodations sector.

The portion of the Company's Allowance that related to the loans with with exposure to these industries is estimated at the following amounts as of March 31, 2020:

In addition, at June 30, 2020, the Company had $63.4 million, or 4% of portfolio loans, in the tourism sector, $56.0 million, or 5% of portfolio loans, in the aviation (non-tourism) sector, $51.5 million, or 4% of total loans, in the healthcare sector, $23.9 million, or 2%, in retail loans and $23.5 million, or 2% in the restaurant sector, and $34.4 million, or 2% in the accommodations sector.

The portion of the Company's Allowance that related to the loans with exposure to these industries is estimated at the following amounts as of June 30, 2020:

(In Thousands)

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After division of the loan portfolio into segments, the Company then further disaggregates each of the segments into classes.

The Company has a total of five classes, which are based off of the Company's loan risk grading system known as the Asset Quality Rating (“AQR”) system.

The Company has a total of five classes, which are based off of the Company's loan risk grading system known as the AQR system.

The risk ratings are discussed in Note 5 to the Consolidated Financial Statements included in Item 1 of this report.

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Some factors that management considers in determining the qualitative adjustment to the general reserve include our concentration of large borrowers;

national and local economic trends;

national and local economic trends,including impacts related to COVID-19;

general business conditions;

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The unallocated component is reviewed periodically based on trends in credit losses and overall economic conditions.

At March 31, 2020 and December 31, 2019 , the unallocated allowance as a percentage of the total Allowance was 7% and 10% , respectively.

At June 30, 2020 and December 31, 2019 , the unallocated allowance as a percentage of the total Allowance was 10% and 11% , respectively.

The following table sets forth information regarding changes in the Allowance for the periods indicated:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(In Thousands)

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Deposits are the Company’s primary source of funds.

Total deposits increased $23.1 million , or 2% , to $1.395 billion as of March 31, 2020 compared to $1.372 billion as of December 31, 2019 .

Total deposits increased $365.0 million , or 27% , to $1.737 billion as of June 30, 2020 compared to $1.372 billion as of December 31, 2019 .

This increase is primarily due to funding PPP loans, but is also due to new client relationships as a result of the Company's significant PPP efforts during the second quarter of 2020.

The following table summarizes the Company's composition of deposits as of the periods indicated:

March 31, 2020

June 30, 2020

December 31, 2019

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Total deposits

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 88% of total deposits at March 31, 2020 and December 31, 2019 , respectively.

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 90% of total deposits at June 30, 2020 and 88% of total deposits at December 31, 2019 .

The only deposit category with stated maturity dates is certificates of deposit.

At March 31, 2020 , the Company had $173.3 million in certificates of deposit as compared to certificates of deposit of $164.5 million at December 31, 2019 .

At March 31, 2020 , $111.7 million, or 64%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $90.5 million, or 55%, of total certificates of deposit at December 31, 2019 .

The aggregate amount of certificates of deposit in amounts of $100,000 and greater at March 31, 2020 and December 31, 2019 , was $128.2 million and $118.9 million, respectively.

The following table sets forth the amount outstanding of deposits in amounts of $100,000 and greater by time remaining until maturity and percentage of total deposits as of March 31, 2020 :

At June 30, 2020 , the Company had $179.5 million in certificates of deposit as compared to certificates of deposit of $164.5 million at December 31, 2019 .

At June 30, 2020 , $130.8 million, or 73%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $90.5 million, or 55%, of total certificates of deposit at December 31, 2019 .

The aggregate amount of certificates of deposit in amounts of $100,000 and greater at June 30, 2020 and December 31, 2019 , was $134.6 million and $118.9 million, respectively.

The following table sets forth the amount outstanding of deposits in amounts of $100,000 and greater by time remaining until maturity and percentage of total deposits as of June 30, 2020 :

Time Certificates of Deposit

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Over 12 months

There were no depositors with deposits representing 10% or more of total deposits at March 31, 2020 or December 31, 2019 .

There were no depositors with deposits representing 10% or more of total deposits at June 30, 2020 or December 31, 2019 .

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 March 31, 2020 , our maximum borrowing line from the FHLB was $754.8 million , approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $8.9 million as of March 31, 2020 which were originated to match fund low income housing projects that qualify for long term fixed interest rates.

At June 30, 2020 , our maximum borrowing line from the FHLB was $901.1 million , approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $11.8 million as of June 30, 2020 which were originated to match fund low income housing projects that qualify for long term fixed interest rates.

The first advance is a $2.0 million FHLB Community Investment Program advance which was originated on March 22, 2013.

It has an eighteen year term with a 30 year amortization period, which mirrors the term of the term real estate loan made to the borrower, and a fixed rate of 3.12%.

It has an 18 year term with a 30 year amortization period, which mirrors the term of the term real estate loan made to the borrower, and a fixed rate of 3.12%.

The second advance is a $2.2 million FHLB Community Investment Cash Advance Program advance that was originated in the second quarter of 2016.

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This advance has a 20 year term with a 30 year amortization period and a fixed interest rate of 2.69%, which mirrors the term of the loan made to the borrower.

The last advance is a $769,000 FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2019.

The fourth advance is a $769,000 FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2019.

This advance has a 20 year term with a 30 year amortization period and a fixed interest rate of 2.69%, which mirrors the term of the loan made to the borrower.

The fifth advance is a $2.2 million FHLB Community Investment Cash Advance Program advance that was originated in the second quarter of 2020.

This advance has a 18 year term with a 30 year amortization period and a fixed interest rate of 1.63%, which mirrors the term of the loan made to the borrower.

The last advance is a $762,000 FHLB Community Investment Cash Advance Program advance that was originated in the second quarter of 2020.

This advance has a 18 year term with a 16.8 year amortization period and a fixed interest rate of 1.23%, which mirrors the term of the loan made to the borrower.

All of these FHLB advances are included in borrowings.

Additionally, the Company had overnight advances of $25 million and zero as of March 31, 2020 and December 31, 2019, respectively.

The overnight advance as of March 31, 2020 is due on April 1, 2020 and has a fixed interest rate of 0.36%.

Federal Reserve Bank:

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $78.3 million of loans as collateral to secure advances made through the discount window on March 31, 2020 .

There were $3 million and zero in discount window advances outstanding at March 31, 2020 or December 31, 2019 , respectively.

The $3 million advance outstanding as of March 31, 2020 is due on April 1, 2020 and has a fixed interest rate of 0.25%.

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $86.9 million of loans as collateral to secure advances made through the discount window on June 30, 2020 .

There were no discount window advances outstanding at June 30, 2020 or December 31, 2019 , respectively.

The Company utilized the Federal Reserve Bank's PPPLF to fund SBA PPP loans during the second quarter of 2020, but has repaid those funds in full.

This advance had an interest rate of 0.35%.

The average balance outstanding of PPPLF was $45.2 million and $22.6 million during the three and six-month periods ending June 30, 2020, respectively.

Other Short-term Borrowings:

Securities sold under agreements to repurchase were zero for March 31, 2020 and December 31, 2019 , respectively.

The average balance outstanding of securities sold under agreements to repurchase during the three-month periods ending March 31, 2020 and 2019 was zero and $33.9 million, respectively.

The maximum outstanding at any month-end was zero and $34.6 million, respectively, during the same three-month periods ending March 31, 2020 and 2019 .

The securities sold under agreements to repurchase are were by the FHLB under the Company’s control.

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 15% of total assets or $251.6 million at March 31, 2020 and $244.7 million at December 31, 2019 .

Securities sold under agreements to repurchase were zero for June 30, 2020 and December 31, 2019 , respectively.

The average balance outstanding of securities sold under agreements to repurchase during the three-month periods ending June 30, 2020 and 2019 was zero and $26.8 million, respectively, and zero and $30.3 million, respectively, in the six-month periods ending June 30, 2020 and 2019.

The maximum outstanding at any month-end was zero and $36.6 million, respectively, during the same three and six-month periods ending June 30, 2020 and 2019 .

The securities sold under agreements to repurchase were held by the FHLB under the Company’s control.

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 15% of total assets or $300.4 million at June 30, 2020 and $244.7 million at December 31, 2019 .

As of April 7, 2020, the State of Alaska increased this limit to 35% of total assets.

At March 31, 2020 and December 31, 2019 , the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

At June 30, 2020 and December 31, 2019 , 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 March 31, 2020 or December 31, 2019 .

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of June 30, 2020 or December 31, 2019 .

Liquidity and Capital Resources

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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.

Our total unfunded commitments to fund loans and letters of credit at March 31, 2020 were $ 321.2 million.

Our total unfunded commitments to fund loans and letters of credit at June 30, 2020 were $ 335.4 million.

We do not expect that all of these loans are likely to be fully drawn upon at any one time.

Additionally, as noted above, our total deposits at March 31, 2020 were $1.395 billion .

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 $16.9 million for the first three months of 2020, primarily due to cash provided by proceeds from the sale of loans held for sale being more than offset by cash used in connection with the origination of loans held for sale.

Net cash used by investing activities was $35.3 million for the same period, primarily due to increases in loans and purchases of available for sale securities.

These uses of cash were only partially offset by proceeds from the maturity of securities available for sale.

Net cash provided by financing activities in the same period was $42.6 million , primarily due to increases in borrowings and deposits that was only partially offset by a decrease in securities sold under repurchase agreements, the repurchase of common stock, and cash dividends paid to shareholders.

Additionally, as noted above, our total deposits at June 30, 2020 were $1.737 billion .

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 $46.6 million for the first six months of 2020, primarily due to cash provided by proceeds from the sale of loans held for sale being more than offset by cash used in connection with the origination of loans held for sale.

Net cash used by investing activities was $316.6 million for the same period, primarily due to increases in loans, in particular PPP loans.

This use of cash was only partially offset by proceeds from the maturity of securities available for sale.

Net cash provided by financing activities in the same period was $357.2 million , primarily due to increases in deposits largely due to funding PPP loans that was done via deposit into customer accounts.

This increase was only partially offset by the repurchase of common stock and cash dividends paid to shareholders.

The sources by which we meet the liquidity needs of our customers are current assets and borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB.

At March 31, 2020 , our funds available for borrowing under our existing lines of credit were $ 793.4 million .

As customers withdraw funds from deposit accounts that were obtained from the Company via PPP loans, the Company may need to borrow funds to meet an immediate liquidity need.

At June 30, 2020 , our funds available for borrowing under our existing lines of credit were $ 964.9 million .

Additionally, the Company can obtain additional nonrecourse borrowings under the Federal Reserve Bank's newly created PPPLF as a source of additional liquidity in order to meet liquidity needs created by the origination of PPP loans without excessive usage of the Company's other existing liquidity sources.

The Company had $239.2 million in PPP loans eligible to be pledged for the PPPLF program as of June 30, 2020.

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 to fund our ongoing operating activities and our anticipated capital requirements for at least 12 months.

As discussed in Note 15 of this Form 10-Q, subsequent to March 31, 2020 and as of May 4, 2020, the Company has originated $324 million in PPP loans and has an additional $55 million in the PPP loan pipeline.

As of May 4, 2020, the Company has incurred $104 million term, nonrecourse borrowings under the Federal Reserve Bank's newly created the Paycheck Protection Program Lending Facility as a source of additional liquidity in order to fund PPP loans without excessive usage of the Company's other existing liquidity sources.

The Company has pledged $104 million in PPP loans as collateral for these borrowings.

The Company issued zero shares of its common stock in the first three months of 2020 and repurchased 192,709 shares of its common stock under the Company's previously announced repurchase program.

At March 31, 2020 , the Company had 6,366,100 shares of its common stock outstanding.

The Company issued 1,946 shares of its common stock in the first six months of 2020 and repurchased 192,709 shares of its common stock under the Company's previously announced repurchase program.

The Company suspended its stock repurchase activities on March 26, 2020.

At June 30, 2020 , the Company had 6,368,046 shares of its common stock outstanding.

Capital Requirements and Ratios

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The requirements address both risk-based capital and leverage capital.

We believe as of March 31, 2020 , that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

We believe as of June 30, 2020 , 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 capital ratios for the Company exceed those for the Bank primarily because the $10 million trust preferred securities offering completed in the fourth quarter of 2005 is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our financial statements.

The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its

As a result, the Company has $10 million more in regulatory capital than the Bank at both March 31, 2020 and December 31, 2019 , which explains most of the difference in the capital ratios for the two entities.

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 both June 30, 2020 and December 31, 2019 , which explains most of the difference in the capital ratios for the two entities.

Minimum Required Capital

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Actual Ratio Bank

March 31, 2020

June 31, 2020

Total risk-based capital

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We apply the same credit standards to these commitments as in all of our lending activities and include these commitments in our lending risk evaluations.

As of March 31, 2020 and December 31, 2019 , the Company’s commitments to extend credit and to provide letters of credit which are not reflected on its balance sheet amounted to $321.2 million and $301.9 million, respectively.

Additionally, the Company had commitments to originate loans held for sale of $197.9 million and $48.8 million, as of March 31, 2020 and December 31, 2019 , respectively.

As of June 30, 2020 and December 31, 2019 , the Company’s commitments to extend credit and to provide letters of credit which are not reflected on its balance sheet amounted to $335.4 million and $301.9 million, respectively.

Additionally, the Company had commitments to originate loans held for sale of $206.3 million and $48.8 million, as of June 30, 2020 and December 31, 2019 , respectively.

Since many of the commitments are expected to expire without being drawn upon, these total commitment amounts do not necessarily represent future cash requirements.

The Company has established reserves of $159,000 and $152,000 at March 31, 2020 and December 31, 2019 respectively, for losses related to these commitments that are recorded in other liabilities on the consolidated balance sheet.

The Company has established reserves of $167,000 and $152,000 at June 30, 2020 and December 31, 2019 respectively, for losses related to these commitments that are recorded in other liabilities on the consolidated balance sheet.

Capital Expenditures and Commitments

The Company has capital commitments related to planned improvements to the Company's corporate office building.

At March 31, 2020 the Company considers these commitments to be immaterial.

The Company has capital commitments related to improvements to the Company's corporate office building.

At June 30, 2020 the Company considers these commitments to be immaterial.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our assessment of market risk as of March 31, 2020 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, 2019 .

Our assessment of market risk as of June 30, 2020 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, 2019 .

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