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Item 1A. Risk Factors

2021-03-05 compared with 2020-03-06 · 241 added, 123 removed, 175 unchanged (68% of the section changed)

An investment in the Company’s common stock is subject to risks inherent to the Company’s business.

The material risks and uncertainties that management believes affect the Company are described below.

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If this were to happen, the value of the Company’s common stock could decline significantly, and you could lose all or part of your investment.

Risk Factors Summary

An investment in the Company's common stock is subject to risks inherent to the Company's business.

Such risks, including those set forth in the summary of material risks in this Part I.

should be carefully considered before purchasing our securities.

COVID-19 Pandemic Risk Factors

• The COVID-19 pandemic has materially impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions that have been taken, and may in the future be imposed, by governmental authorities in response to the pandemic.

Operational, Strategic and Business Risk Factors

• Current economic conditions in the State of Alaska pose challenges for us and could adversely affect our financial condition and results of operations.

• Our concentration of operations in the Anchorage, Matanuska-Susitna Valley, Fairbanks and Southeast areas of Alaska makes us more sensitive to downturns in those areas.

• Our information systems or those of our third-party vendors may be subject to an interruption or breach in security, including as a result of cyber-attacks.

• A failure in or breach of the Company's operational systems, information systems, or infrastructure, or those of the Company's third-party vendors and other service providers, may result in financial losses, or loss of customers.

• Our business is highly reliant on third party vendors.

• We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.

• Residential mortgage lending is a market sector that experiences significant volatility and is influenced by many factors beyond our control.

• If we do not comply with the agreements governing servicing of loans, if these agreements change materially, or if others allege non-compliance, our business and results of operations may be harmed.

• Certain hedging strategies that we use to manage interest rate risk may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.

• Our loan loss allowance may not be adequate to cover future loan losses, which may adversely affect our earnings.

• We have a significant concentration in real estate lending.

A downturn in real estate within our markets would have a negative impact on our results of operations.

• Real estate values may decrease leading to additional and greater than anticipated loan charge-offs and valuation writedowns on our other real estate owned (“OREO”) properties.

• We conduct substantially all of our operations through Northrim Bank, our banking subsidiary;

our ability to pay dividends, repurchase our shares, or to repay our indebtedness depends upon liquid assets held by the holding company and the results of operations of our subsidiaries and their ability to pay dividends.

• There can be no assurance that the Company will continue to declare cash dividends or repurchase stock.

• We may be unable to attract and retain key employees and personnel.

• Liquidity risk could impair our ability to fund operations and jeopardize our financial conditions.

• A failure of a significant number of our borrowers, guarantors and related parties to perform in accordance with the terms of their loans would have an adverse impact on our results of operations.

Regulatory, Legislative and Legal Risk Factors

• We operate in a highly regulated environment and changes of or increases in banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.

• We are subject to more stringent capital and liquidity requirements which may adversely affect our net income and future growth.

• Changes in the FRB’s monetary or fiscal policies could adversely affect our results of operations and financial condition.

• Changes in market interest rates could adversely impact the Company.

• Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Anti-Money Laundering Act of 2020, Real Estate Settlement Procedures Act, Truth-in-Lending Act or other laws and regulations could result in fines, sanctions or other adverse consequences.

Accounting, Tax and Financial Risk Factors

• Changes in income tax laws and interpretations, or in accounting standards, could materially affect our financial condition or results of operations.

• Uncertainty about the continuing availability of the London Inter-Bank Offered Rate ("LIBOR") may adversely affect our business.

General Economic and Market Risk Factors

• Natural disasters and adverse weather could negatively affect real estate property values and Bank operations.

• The soundness of other financial institutions could adversely affect us.

• The financial services business is intensely competitive and our success will depend on our ability to compete effectively.

• We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so could materially adversely affect our performance.

• Social, political, and economic instability, unrest, and other circumstances beyond our control could adversely affect our business operations.

• Climate change, severe weather, natural disasters, and other external events could significantly impact our business.

We attempt to mitigate the foregoing risks.

However, if we are unable to effectively manage the impact of these and other risks, our financial condition, results of operations, our ability to make distributions to our shareholders, or the market price of our common stock could be materially impacted.

COVID-19 Pandemic Risks

The COVID-19 pandemic has materially impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions that have been taken, and may in the future be imposed, by governmental authorities in response to the pandemic.

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic.

On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency.

The COVID-19 pandemic has caused significant economic dislocation in the United

States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home.

This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment.

The national unemployment rate peaked in April 2020 at 14.8%, before declining to a still-elevated level at 6.7% in December 2020, according to the National Bureau of Economic Research.

In addition, stock markets have experienced significant volatility in value and, in particular, bank stocks have declined in value.

Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief.

While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have resulted in material decreases in oil and gas prices, disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.

In addition, the timing, availability and efficacy of the COVID-19 vaccines remains uncertain.

These developments as a consequence of the COVID-19 pandemic are materially impacting our business and the businesses of our customers and are expected to have a material adverse effect on our financial results for 2021.

If these effects continue for a prolonged period or result in sustained economic stress or recession, such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, loan funding, operations, interest rate risk, and human capital, as described in more detail below.

• Credit Risk

Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrower’s business.

Concern about the spread of COVID-19 has caused and is likely to continue to cause volatility in oil and gas prices, business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments.

In addition, the responses of the government that have been, and may in the future be imposed in response to the pandemic, including stimulus programs could adversely impact lending demand.

If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure.

The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers.

Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure.

In addition, we have unfunded commitments to extend credit to customers.

During the current challenging economic environment, our customers are more dependent on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity.

Furthermore, in an effort to support our communities during the pandemic, we are participating in the PPP program under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default.

If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at lower interest rates as compared to the loans to customers that we would have otherwise extended credit.

• Strategic Risk

Our success may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various responses of governmental and nongovernmental authorities.

In recent months, the COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets.

Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19.

For example, in our markets, state and local governments previously acted to temporarily close or restrict the operations of most businesses.

The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in loan originations.

• Operational Risk

Current and future restrictions on our customers' and employees’ access to our branches and other facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations.

We rely on business processes and branch activity that largely depend on people and technology, including access to information technology

systems as well as information, applications, payment systems and other services provided by third parties.

In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible.

Further, technology in employees’ homes may not be as robust as in our offices and could cause the connectivity, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices.

The continuation of these work-from-home measures also introduces additional operational risk, and scammers attempting to capitalize on the pandemic have amplified cyber threats including increased phishing, malware, and other cybersecurity attacks.

Future consequences from the pandemic could impair our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.

Moreover, we rely on many third parties in our business operations, including appraisers of the real property collateral, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses.

In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services.

For example, loan origination could be delayed due to the limited availability of real estate appraisers for the collateral.

Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, mortgage and UCC filings in those counties.

If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

• Liquidity Risk

Liquidity is essential to our business.

An inability to raise funds through deposits, borrowings and other sources could have a substantial negative effect on our liquidity and severely constrain our financial flexibility.

Our primary source of funding is deposits gathered through our network of branch offices.

Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or the economy in general.

During the COVID-19 outbreak, our deposits have increased significantly, primarily due to the Company’s PPP efforts during the second and third quarter of 2020.

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.

Our ability to borrow could be impaired by factors that are not specific to us or our region, such as a disruption in the financial markets, including those caused by COVID-19, or negative views and expectations about the prospects for the financial services industry and unstable credit markets.

• Interest Rate Risk

Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19.

In response to the COVID-19 outbreak, the Federal Reserve reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and on January 27, 2021, the Federal Reserve maintained the benchmark fed funds rate to the same target range.

The yields on 10 and 30-year treasury notes have declined to historic lows.

A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies.

Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets.

Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole.

Any future development, including the timing, availability and efficacy of the COVID-19 vaccines, will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic.

Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

In addition, the effects could have a material impact on our results of operations and heighten many of our known risks described in this Part I, Section 1A “Risk Factors”.

Operational, Strategic and Business Risks

Current economic conditions in the State of Alaska pose challenges for us and could adversely affect our financial condition and results of operations.

We are operating in an uncertain economic environment.

The decrease in the price of oil which began in 2014 has led to a significant deficit in the budget for the State of Alaska, which has been partially alleviated by legislative action in 2018 that now allows for the use of a portion of State's investment income from the Alaska Permanent Fund to help fund the state budget.

The decrease in the price of oil which began in 2014 has led to a significant deficit in the budget for the State of Alaska, which was partially alleviated by legislative action in 2018 that now allows for the use of a portion of State's investment income from the Alaska Permanent Fund to help fund the state budget.

However, we believe that this has solved only part of Alaska's structural finance problem.

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The majority of our lending has been with Alaska businesses and individuals.

At December 31, 2019 , approximately 70% of the Bank’s loans are secured by real estate and 3% are unsecured.

At December 31, 2020, approximately 21% of the Bank's loans are PPP loans which are 100% guaranteed by the SBA.

Of the remaining loan portfolio, excluding PPP loans, approximately 73% of loans are secured by real estate and 2% are unsecured.

Approximately 25% are for general commercial uses, including professional, retail, and small businesses, and are secured by non-real estate assets.

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however, prolonged or acute fluctuations could have a material and adverse impact upon our financial condition and results of operation.

Changes in market interest rates could adversely impact the Company.

Our earnings are impacted by changing interest rates.

Changes in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loans and securities, and rates paid on deposits and borrowings.

These impacts may negatively impact our ability to attract deposits, make loans, and achieve satisfactory interest rate spreads, which could adversely affect our financial condition or results of operations.

In particular, increases in interest rates will likely reduce RML’s revenues by reducing the market for refinancings, as well as the demand for RML’s other residential loan products.

Additionally, increases in interest rates may impact our borrowers' ability to make loan payments, particularly in our commercial loan portfolio.

Interest rates may be affected by many factors beyond our control, including general and economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities.

Since December 2015, the FRB has increased short-term interest rates nine times.

However, the FRB reduced interest rates three times in 2019.

While we expect the FRB to hold short-term interest rates stable in 2020, market volatility in interest rates can be difficult to predict, as unexpected interest rate changes may result in a sudden impact while anticipated changes in interest rates generally impact the mortgage rate market prior to the actual rate change.

Exposure to interest rate risk is managed by monitoring the repricing frequency of our rate-sensitive assets and rate-sensitive liabilities over any given period.

Although we believe the current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates could potentially have an adverse effect on our business, financial condition and results of operations.

We operate in a highly regulated environment and changes of or increases in banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.

We are subject to extensive regulation, supervision and examination by federal and state banking authorities.

In addition, as a publicly-traded company, we are subject to regulation by the SEC and NASDAQ.

Any change in applicable regulations or federal or state legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on us and our operations.

Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions on our operations.

Additional legislation and regulations that could significantly affect our authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations.

Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to our reputation, all of which could adversely affect our business, financial condition or results of operations.

In that regard, the Dodd-Frank Act was enacted in July 2010.

Among other provisions, the Dodd-Frank Act created the Consumer Financial Protection Bureau with broad powers to regulate consumer financial products such as credit cards and mortgages, created a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, has resulted in new capital requirements from federal banking agencies, placed new limits on electronic debt card interchange fees, and requires

banking regulators, the SEC and national stock exchanges to adopt significant new corporate governance and executive compensation reforms.

Certain provisions of these new rules have phase-in periods, including a 2.5% conservation buffer, which began to be phased-in in 2016 and took full effect on January 1, 2019.

Further, regulators have significant discretion and authority to prevent or remedy practices that they deem to be unsafe or unsound, or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties.

These powers have been utilized more frequently in recent years due to the serious national economic conditions that faced the financial system in late 2008 and early 2009.

The exercise of regulatory authority may have a negative impact on our financial condition and results of operations.

Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S.

federal government and its agencies, including the FRB.

We cannot accurately predict the full effects of recent or future legislation or the various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets and on the Company.

The terms and costs of these activities could materially and adversely affect our business, financial condition, results of operations and the trading price of our common stock.

We are subject to more stringent capital and liquidity requirements which may adversely affect our net income and future growth.

In July 2013, the FRB and the FDIC announced the new capital rules, which apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies.

As described in further detail above in “Item 1 Business - Supervision and Regulation” these rules created increased capital requirements for United States depository institutions and their holding companies.

These rules include risk-based and leverage capital ratio requirements, which became effective on January 1, 2015.

These rules also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds.

These revisions also became effective January 1, 2015.

Our failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.

Our information systems or those of our third-party vendors may be subject to an interruption or breach in security, including as a result of cyber attacks.

The Company’s technologies, systems, networks and software, and those of other financial institutions have been, and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us.

attempts to sophisticated and targeted measures directed at us.

These cybersecurity threats and attacks may include, but are not limited to, breaches, unauthorized access, misuse, malicious code, computer viruses and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service or other events.

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These communications may appear to be legitimate messages sent by the Bank or other businesses, but direct recipients to fake websites operated by the sender of the e-mail or request that the recipient send a password or other confidential information via e-mail or download a program.

Despite our efforts to mitigate these threats through product improvements, use of encryption and

authentication technology to secure online transmission of confidential consumer information, and customer and employee education, such attempted frauds against us or our merchants and our third party service providers remain a serious issue.

Despite our efforts to mitigate these threats through product improvements, use of encryption and authentication technology to secure online transmission of confidential consumer information, and customer and employee education, such attempted frauds against us or our merchants and our third-party service providers remain a serious issue.

The pervasiveness of cyber security incidents in general and the risks of cyber-crime are complex and continue to evolve.

In light of several recent high-profile data breaches involving customer personal and financial information, we believe the potential impact of a cyber security incident involving the Company, any exposure to consumer losses and the cost of technology investments to improve security could cause customer and/or Bank losses, damage to our brand, and increase our costs.

In addition, due to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes.

The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk.

In light of several recent high-profile data breaches at other companies involving customer personal and financial information, we believe the potential impact of a cyber security incident involving the Company, any exposure to consumer losses and the cost of technology investments to improve security could cause customer and/or Bank losses, damage to our brand, and increase our costs.

Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.

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These types of information and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of many of our customers.

These third parties with which the Company does business or that facilitate our business activities, including exchanges, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including breakdowns or failures of their own systems or capacity constraints.

These third parties with which the Company does business or that facilitate our business

activities, including exchanges, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including breakdowns or failures of their own systems or capacity constraints.

Although the Company has implemented safeguards and business continuity plans, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our business and our customers, resulting in financial losses or loss of customers.

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In addition, hedging strategies rely on assumptions and projections regarding assets and general market factors.

If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that would adversely impact our financial condition and results of operations.

If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately

mitigate the impact of changes in interest rates, we may incur losses that would adversely impact our financial condition and results of operations.

Our loan loss allowance may not be adequate to cover future loan losses, which may adversely affect our earnings.

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A downturn in real estate within our markets would have a negative impact on our results of operations.

Approximately 70% of the Bank’s loan portfolio at December 31, 2019 consisted of loans secured by commercial and residential real estate located in Alaska.

Approximately 73% of the Bank’s loan portfolio, excluding PPP loans, at December 31, 2020 consisted of loans secured by commercial and residential real estate located in Alaska.

Additionally, all of the Company's loans held for sale are secured by residential real estate.

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Additionally, if real estate values decline, the value of real estate collateral securing our loans could be significantly reduced.

any of these effects continue or become more pronounced, loan losses will increase more than we expect and our financial condition and results of operations would be adversely impacted.

If any of these effects continue or become more pronounced, loan losses will increase more than we expect and our financial condition and results of operations would be adversely impacted.

Further, approximately 36% of the Bank’s loan portfolio at December 31, 2020 consisted of commercial real estate loans.

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Consequently, an adverse development with respect to one commercial loan or one credit relationship exposes us to significantly greater risk of loss compared to an adverse development with respect to a consumer loan.

The credit quality of these loans may deteriorate more than expected which may result in losses that exceed the estimates that are currently included in our loan loss allowance, which could adversely affect our financial conditions and results of operations.

Real estate values may decrease leading to additional and greater than anticipated loan charge-offs and valuation writedowns on our other real estate owned (“OREO”) properties.

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Further writedowns on OREO or an inability to sell OREO properties could have a material adverse effect on our results of operations and financial condition.

Natural disasters and adverse weather could negatively affect real estate property values and Bank operations.

Real estate and real estate property values play an important role for the Bank in several ways.

The Bank owns or leases many real estate properties in connection with its operations, located in Anchorage, Juneau, Fairbanks, the Matanuska-Susitna Valley, Ketchikan, Sitka, and the Kenai Peninsula.

Real estate is also utilized as collateral for many of our loans.

A natural disaster could cause property values to fall, which could require the Bank to record an impairment on its financial statements.

A natural disaster could also impact collateral values, which would increase our exposure to loan defaults.

Our business operations could also suffer to the extent the Bank cannot utilize its branch network due to a natural disaster or other weather-related damage.

Epidemics, climate change, severe weather, natural disasters, and other external events could significantly impact our business.

Public health or similar issues, such as epidemics or pandemics, including the current outbreak of novel coronavirus (“2019-nCoV”), for which the World Health Organization declared a global emergency on January 30, 2020, may result in health or other government authorities requiring the closure of our branch offices and the offices or other businesses of our customers and could significantly disrupt our operations and the operations of our customers.

The extent of the adverse impact that any expansion of the current 2019-nCoV outbreak could have on the economy and on us cannot be predicted at this time.

In addition, severe weather events of increasing strength and frequency due to climate change cannot be predicted and may be exacerbated by global climate change, natural disasters, including volcanic eruptions and earthquakes, and other adverse external events could have a significant impact on our ability to conduct business or upon third parties who perform operational services for us.

In addition, there is continuing uncertainty over demand for oil and gas in part due to regulatory changes from climate change related policies.

Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue, or cause us to incur additional expenses.

Although management has established disaster recovery policies and procedures, there can be no assurance of the effectiveness of such policies and procedures, and the occurrence of any such event could have a material adverse effect on our business, financial condition and results of operations.

Changes in the FRB’s monetary or fiscal policies could adversely affect our results of operations and financial condition.

Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies.

The FRB has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession.

The FRB affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject.

Since December 2015, the FRB has increased short-term interest rates nine times.

However, the FRB reduced interest rates three times in 2019.

While we expect the FRB to hold short-term interest rates stable in 2020, we cannot predict the nature or impact of future changes in monetary and fiscal policies.

Changes in income tax laws and interpretations, or in accounting standards, could materially affect our financial condition or results of operations.

Further changes in income tax laws could be enacted, or interpretations of existing income tax laws could change, causing an adverse effect on our financial condition or results of operations.

Similarly, our accounting policies and methods are fundamental to how we report our financial condition and results of operations.

Some of these policies require the use of estimates and assumptions that may affect the value of our assets, liabilities, and financial results.

Periodically, new accounting standards are issued or existing standards are revised, changing the methods for preparing our financial statements.

These changes are not within our control and may significantly impact our financial condition and results of operations.

Changes in accounting standards may require us to increase our Allowance for Loan Losses and could materially impact our financial statements.

From time to time, the Financial Accounting Standards Board (the "FASB") and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements.

These changes can materially impact how we record and report our financial condition and results of operations.

For example, in June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”) which changes, among other things, the way companies must record expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, available for sale and held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date.

ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis.

This differs from current US GAAP which is based on incurred losses inherent in the loan portfolio and moves to a current estimate of all expected credit losses based on relevant information about past events including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount.

However, on October 16, 2019 the FASB voted to delay ASU 2016-13 for Smaller Reporting Companies, which will change the effective date for the Company to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2022.

Based on our loan portfolio composition at December 31, 2019, we currently estimate that the impact of this standard would result in an overall decrease in our allowance for loan losses;

however, given that this standard will not apply to the Company until late 2022, the ultimate effect of this standard will depend on the size and composition of our loan portfolio, the loan portfolio’s credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions.

The actual impact on the Company’s consolidated financial position and results of operations upon adoption cannot be determined at this time;

in the event that our loan portfolio, the credit quality of the loan portfolio or economic conditions change materially prior to adoption of the standard the implementation of this standard and may result in an increase in the allowance for loan losses as compared to current levels.

We conduct substantially all of our operations through Northrim Bank, our banking subsidiary;

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Our net income depends primarily upon the Bank’s net interest income, which is the income that remains after deducting from total income generated by earning assets the expense attributable to the acquisition of the funds required to support earning assets (primarily interest paid on deposits and borrowings).

The amount of interest income is dependent on many factors including

the volume of earning assets, the general level of interest rates, the dynamics of changes in interest rates and the levels of nonperforming loans.

The amount of interest income is dependent on many factors including the volume of earning assets, the general level of interest rates, the dynamics of changes in interest rates and the levels of nonperforming loans.

All of those factors affect the Bank’s ability to pay dividends to the Company.

In 2016, a requirement to have a capital conservation buffer started to be phased in and this requirement, which went into full effect on January 1, 2019 could adversely affect the Bank's ability to pay dividends.

On January 1, 2019, a requirement to have a capital conservation buffer went into full effect and could adversely affect the Bank's ability to pay dividends.

Various statutory provisions restrict the amount of dividends the Bank can pay to us without regulatory approval.

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It is also possible that, depending upon the financial condition of the Bank and other factors, regulatory authorities could conclude that payment of dividends or other payments, including payments to us, is an unsafe or unsound practice and impose restrictions or prohibit such payments.

It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if prospective rate of earnings retention is consistent with the organization’s current and expected future capital needs, asset quality and overall financial condition.

It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if the prospective rate of earnings retention is consistent with the organization’s current and expected future capital needs, asset quality and overall financial condition.

The policy provides that bank holding companies should not maintain a level of cash dividends that undermines a bank holding company’s ability to serve as a source of strength to its banking subsidiaries.

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During 2020, the Company repurchased 327,000 shares of common stock at an average price of $30.51 per share under its previously announced share repurchase program.

On January 27, 2020, the Board authorized the repurchase of up to an additional 327,000 shares of common stock.

On February 1, 2021, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 313,000 shares of common stock.

The Company also paid cash dividends of $1.38 per diluted share in 2020.

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A reduction in or elimination of our dividend payments and/or stock repurchases could have a negative effect on our stock price.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships.

As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.

Many of these transactions expose us to credit risk in the event of default of our counterparty or client.

In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure.

There can be no assurance that any such losses would not materially and adversely affect our results of operations.

The financial services business is intensely competitive and our success will depend on our ability to compete effectively.

The financial services business in our market areas is highly competitive.

It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers.

We face competition both in attracting deposits and in originating loans.

We compete for loans principally through the pricing of interest rates and loan fees and the efficiency and quality of services.

Increasing levels of competition in the banking and financial services industries may reduce our market share or cause the prices charged for our services to fall.

Improvements in technology, communications, and the internet have intensified competition.

As a result, our competitive position could be weakened, which could adversely affect our financial condition and results of operations.

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so could materially adversely affect our performance.

We are a community bank, and our reputation is one of the most valuable components of our business.

As such, we strive to conduct our business in a manner that enhances our reputation.

This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates.

If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results could be materially adversely affected.

We may be unable to attract and retain key employees and personnel.

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While we maintain keyman life insurance on the lives of Messrs.

Schierhorn, Martin, and Ballard in the amounts of $2 million each, we may not be able to timely replace Mr.

Schierhorn, Martin, and Ballard in the amounts of $2.4 million, $2 million, and $2 million, respectively, we may not be able to timely replace Mr.

Schierhorn, Mr.

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These policies and procedures, however, may not prevent unexpected losses that could materially affect our financial condition and results of operations.

Uncertainty about the continuing availability of the London Inter-Bank Offered Rate ("LIBOR") may adversely affect our business.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the LIBOR announced that after December 31, 2021 it would no longer compel banks to submit the rates required to calculate LIBOR.

With this announcement there is uncertainty about the continued availability of LIBOR after 2021.

If LIBOR ceases to be available or the methods of calculating LIBOR change from the current methods, financial products with interest rates tied to LIBOR may be adversely affected.

Even if LIBOR remains available it is uncertain whether it will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.

We have loans, derivative contracts, and other financial instruments, including debentures related to our trust preferred securities, with rates that are either directly or indirectly tied to LIBOR.

If any of the foregoing were to occur, the interest rates on these instruments, as well as the revenue and expenses associated

with the same, may be adversely affected.

Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act or other laws and regulations could result in fines, sanctions or other adverse consequences.

Regulatory, Legislative and Legal Risks

We operate in a highly regulated environment and changes of or increases in banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.

We are subject to extensive regulation, supervision and examination by federal and state banking authorities.

In addition, as a publicly-traded company, we are subject to regulation by the SEC and NASDAQ.

Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions on our operations.

In that regard, the Dodd-Frank Act was enacted in July 2010.

Among other provisions, the Dodd-Frank Act created the CFPB with broad powers to regulate consumer financial products such as credit cards and mortgages, created a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, has resulted in new capital requirements from federal banking agencies, placed new limits on electronic debit card interchange fees, and requires banking regulators, the SEC and national stock exchanges to adopt significant new corporate governance and executive compensation reforms.

Certain provisions of these new rules have phase-in periods, including a 2.5% conservation buffer, which began to be phased-in in 2016 and took full effect on January 1, 2019.

These powers have been utilized more frequently in recent years due to the serious national economic conditions that faced the financial system in late 2008 and early 2009.

The exercise of regulatory authority may have a negative impact on our financial condition and results of operations.

Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S.

federal government and its agencies, including the FRB.

The terms and costs of these activities could materially and adversely affect our business, financial condition, results of operations and the trading price of our common stock.

We are subject to more stringent capital and liquidity requirements which may adversely affect our net income and future growth.

As described in further detail above in “Part I.

Item 1 Business - Supervision and Regulation” these rules created increased capital requirements for United States depository institutions and their holding companies.

These rules include risk-based and leverage capital ratio requirements, which became effective on January 1, 2015.

These revisions also became effective January 1, 2015.

Our failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.

Changes in the FRB’s monetary or fiscal policies could adversely affect our results of operations and financial condition.

Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies.

Since December 2015, the FRB has increased short-term interest rates nine times.

However, the FRB reduced interest rates in 2019 and 2020 and announced its target to keep federal funds rate near zero percent in January 2021.

While we expect the FRB to hold short-term interest rates stable in 2021, we cannot predict the nature or impact of future changes in monetary and fiscal policies.

Changes in market interest rates could adversely impact the Company.

Our earnings are impacted by changing interest rates.

Changes in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loans and securities, and rates paid on deposits and borrowings.

In particular, increases in interest rates will likely reduce RML’s revenues by reducing the market for refinancings, as well as the demand for RML’s other residential loan products.

Additionally, increases in interest rates may impact our borrowers' ability to make loan payments, particularly in our commercial loan portfolio.

Interest rates may be affected by many factors beyond our control, including general and economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities.

Since December 2015, the FRB has increased short-term interest rates nine times.

However, the FRB reduced interest rates in 2019 and 2020 and announced its target to keep the federal funds rate near zero percent in January 2021.

While we expect the FRB to hold short-term interest rates stable in 2021, market volatility in interest rates can be difficult to predict, as unexpected interest rate changes may result in a sudden impact while anticipated changes in interest rates generally impact the mortgage rate market prior to the actual rate change.

Exposure to interest rate risk is managed by monitoring the repricing frequency of our rate-sensitive assets and rate-sensitive liabilities over any given period.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Anti-Money Laundering Act of 2020, Real Estate Settlement Procedures Act, Truth-in-Lending Act or other laws and regulations could result in fines, sanctions or other adverse consequences.

Financial institutions are required under the USA PATRIOT Act and Bank Secrecy Act to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities.

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however, it is possible for such safeguards to fail or prove deficient during the implementation phase to avoid non-compliance with such laws.

Accounting, Tax and Financial Risks