What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-03-05 compared with 2020-03-06 · 540 added, 587 removed, 1506 unchanged (43% of the section changed)

15 unchanged sentences

We have audited the accompanying consolidated balance sheets of Northrim BanCorp, Inc.

and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are

being made only in accordance with authorizations of management and directors of the company;

expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses

As described in Notes 1 and 6 to the consolidated financial statements, the Company’s allowance for loan losses balance was $21.1 million at December 31, 2020.

The allowance for loan losses is management’s best estimate of probable losses inherent in its loan portfolio and is based on historical loss experience by loan segment and class with adjustments for current events and conditions.

These factors include, among others, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, specific credit risks, industry concentrations, and unidentified losses inherent in the current loan portfolio.

We identified management’s asset quality ratings of loans, determination of qualitative factors, including the estimation of the unallocated general valuation allowance component of the allowance for loan losses, which is based on general economic conditions and other qualitative risk factors both internal and external to the Company, both of which are used in the allowance for loan losses calculation, as a critical audit matter.

The Company uses credit quality indicators, including internally determined asset quality risk ratings, to stratify loans into pools and to estimate inherent loss rates for each of the loan pools, which are used in the calculation of the allowance for loan losses.

Determination of the asset quality ratings involves significant management judgement.

The unallocated general valuation allowance portion of the allowance for loan losses is used to estimate losses and is based on management’s evaluation of various factors that are not captured in the historical credit loss factors utilized in the asset quality risk rating-based component or on the specific impairment component.

Such factors include uncertainties in identifying triggering events that directly correlate to subsequent loss rates, uncertainties in economic conditions, risk factors that have not yet manifested themselves in loss allocation factors, and historical loss experience data that may not precisely correspond to the current portfolio.

In addition, the unallocated reserve may fluctuate based upon the direction of various risk indicators, such as the risk as to current economic conditions, the level and trend of charge offs or recoveries, and the risk of heightened imprecision or inconsistency of appraisals used in estimating real estate values.

Auditing management’s judgments regarding the determination of asset quality ratings and unallocated general valuation allowance portion of the allowance for loan losses involved a high degree of subjectivity.

The primary procedures we performed to address the critical audit matters included:

• Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for loan losses, including controls over the accuracy of asset quality ratings of loans and the determination of the qualitative factors, including the unallocated general valuation allowance component of the allowance for loan losses.

• Testing a risk-based targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in accordance with its policies, and that the asset quality ratings for the loans are reasonable.

• Obtaining management’s analysis and supporting documentation related to the qualitative factors, including the unallocated general valuation allowance, and testing whether the general economic conditions and other qualitative risk factors both internal and external to the Company used in the calculation of the allowance for loan losses are in accordance with the Company’s policies and are supported by the analysis provided by management.

• Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for loan losses, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, application of the loan asset quality ratings determined by management and used in the calculation, application of the qualitative factors, including the unallocated general valuation allowance determined by management and used in the calculation, and recalculation of the allowance for loan losses balance.

• Performing an independent sensitivity analysis to evaluate the reasonableness of the qualitative factors, including the unallocated general valuation allowance used by management to account for inherent losses that are not captured in the calculation of the allowance for loan losses based on historical loss rates alone.

/s/ Moss Adams LLP

Portland, Oregon

Everett, Washington

March 5, 2021

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December 31, 2020 and 2019

2020 December 31,

(In Thousands, Except Share Data)

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Interest bearing deposits in other banks 92,661 74,906

Investment securities available for sale

Investment securities available for sale, at fair value 247,633 276,138

Marketable equity securities 9,052 7,945

Investment securities held to maturity 10,000 —

Total portfolio investments 266,685 284,083

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Loans held for sale 146,178 67,834

Loans 1,444,050 1,043,371

Allowance for loan losses ( 21,136 ) ( 19,088 )

Net loans 1,422,914 1,024,283

Purchased receivables, net 13,922 24,373

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Premises and equipment, net 38,102 38,422

Operating lease right-of-use asset

Operating lease right-of-use assets 12,440 14,306

Goodwill 15,017 15,017

Other intangible assets, net 1,029 1,077

Other assets 68,488 58,076

Total assets $ 2,121,798 $ 1,643,996

Demand $ 643,825 $ 451,896

Interest-bearing demand 459,095 320,264

Savings 308,725 229,918

Money market 237,705 205,801

Certificates of deposit less than $250,000 92,047 90,702

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Total deposits 1,824,981 1,372,351

Securities sold under repurchase agreements

Borrowings 14,817 8,891

Junior subordinated debentures 10,310 10,310

Operating lease liability

Operating lease liabilities 12,378 14,229

Other liabilities 37,737 31,098

Total liabilities 1,900,223 1,436,879

COMMITMENTS AND CONTINGENTCIES (NOTE 20)

COMMITMENTS AND CONTINGENCIES (NOTE 20)

SHAREHOLDERS' EQUITY

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Retained earnings 173,498 149,615

Accumulated other comprehensive income (loss), net of tax

Accumulated other comprehensive income, net of tax 18 431

Total shareholders' equity 221,575 207,117

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(In Thousands, Except Share and Per Share Data) 2020 2019 2018

Interest Income

Interest and Dividend Income

Interest and fees on loans and loans held for sale $ 71,091 $ 62,150 $ 57,542

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Interest on investment securities held to maturity 18 — —

Dividends on Federal Home Loan Bank stock 84 76 64

Interest on deposits in other banks 225 846 742

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Net Interest Income 70,665 64,442 61,208

(Benefit) provision for loan losses

Net Interest Income After (Benefit) Provision for Loan Losses

Provision (benefit) for loan losses 2,432 ( 1,175 ) ( 500 )

Net Interest Income After Provision (Benefit) for Loan Losses 68,233 65,617 61,708

Other Operating Income

Mortgage banking income 52,635 24,201 20,844

Purchased receivable income

Bankcard fees 2,837 2,976 2,811

Purchased receivable income 2,650 3,271 3,255

Service charges on deposit accounts 1,102 1,557 1,508

Gain (loss) on marketable equity securities

Interest rate swap income 949 964 84

Commercial servicing revenue 527 624 1,422

Gain on sale of securities

Gain on sale of Northrim Benefits Group

Employee benefit plan income

Gain on sale of marketable equity securities, net 98 — —

Unrealized gain (loss) on marketable equity securities 61 911 ( 625 )

Gain on sale of investment securities available for sale, net — 23 —

Other income 2,469 2,819 2,868

Total Other Operating Income 63,328 37,346 32,167

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Insurance expense 1,228 557 862

Compensation expense - RML acquisition payments

Intangible asset amortization expense 48 60 70

Compensation expense - RML acquisition payments — 468 —

Impairment of equity method investment — — 804

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Provision for income taxes 9,559 5,434 4,071

Net income attributable to the noncontrolling interest

Net Income Attributable to Northrim BanCorp, Inc.

Net Income $ 32,888 $ 20,691 $ 20,004

Earnings Per Share, Basic $ 5.18 $ 3.08 $ 2.91

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(In Thousands) 2020 2019 2018

Net income $ 32,888 $ 20,691 $ 20,004

Other comprehensive income (loss), net of tax:

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Unrealized holding (losses) gains arising during the period ( 1,201 ) ( 1,142 ) 423

Income tax (expense) benefit related to unrealized gains and losses

Other comprehensive income (loss), net of tax

Income tax benefit (expense) related to unrealized gains and losses 377 ( 757 ) 210

Other comprehensive (loss) income, net of tax ( 413 ) 951 ( 59 )

Comprehensive income $ 32,475 $ 21,642 $ 19,945

comprehensive income attributable to the noncontrolling interest

Comprehensive income attributable to Northrim BanCorp, Inc.

See notes to consolidated financial statements

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Years Ended December 31, 2020, 2019, and 2018

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Non-controlling Interest

Number of Shares

Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total

Number of Shares Par Value

(In Thousands)

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Repurchase of common stock ( 16 ) ( 16 ) ( 478 ) — — ( 494 )

Distributions to noncontrolling interest

Other comprehensive income, net of tax

Reclassification for remeasuring of deferred tax asset related to investment securities

Net income attributable to the noncontrolling interest

Net income attributable to Northrim BanCorp, Inc.

Other comprehensive loss, net of tax — — — — ( 59 ) ( 59 )

Cumulative effect of adoption of accounting principles related to premium amortization of investment securities — — — ( 62 ) — ( 62 )

Reclassification for cumulative effect of adoption of accounting principles related to fair value measurement of equity securities — — — 191 ( 191 ) —

Net income — — — 20,004 — 20,004

Balance at December 31, 2018 6,883 $ 6,883 $ 62,132 $ 137,452 ($ 520 ) $ 205,947

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Repurchase of common stock ( 348 ) ( 348 ) ( 12,221 ) — — ( 12,569 )

Other comprehensive loss, net of tax

Cumulative effect of adoption of accounting principles related to premium amortization of investment securities

Reclassification for cumulative effect of adoption of accounting principles related to fair value measurement of equity securities

Net income attributable to Northrim BanCorp, Inc.

Other comprehensive income, net of tax — — — — 951 951

Net income — — — 20,691 — 20,691

Balance at December 31, 2019 6,559 $ 6,559 $ 50,512 $ 149,615 $ 431 $ 207,117

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Repurchase of common stock ( 327 ) ( 327 ) ( 9,649 ) — — ( 9,976 )

Other comprehensive income, net of tax

Net income attributable to Northrim BanCorp, Inc.

Other comprehensive (loss), net of tax — — — — ( 413 ) ( 413 )

Cumulative effect of adoption of accounting principles related to equity compensation expense — — 139 ( 139 ) — —

Net income — — — 32,888 — 32,888

Balance at December 31, 2020 6,251 $ 6,251 $ 41,808 $ 173,498 $ 18 $ 221,575

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Operating Activities:

Net income $ 32,888 $ 20,691 $ 20,004

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

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Loss on sale of premises and equipment 22 — 2

Gain on sale of Northrim Benefits Group

Depreciation and amortization of premises and equipment and intangible assets

Depreciation and amortization of premises 3,147 2,986 2,283

Amortization of software 1,104 1,019 911

Intangible asset amortization 48 60 70

Amortization of investment security premium, net of discount accretion 19 ( 15 ) 199

Change in fair value of marketable equity securities

Deferred tax expense (benefit)

Unrealized (gain) loss on marketable equity securities ( 61 ) ( 911 ) 625

Deferred tax expense 555 711 3,014

Stock-based compensation 943 832 816

Deferral of loan fees and costs, net

(Benefit) provision for loan losses

(Benefit) reserve for purchased receivables

Originations of home mortgage servicing rights carried at fair value

Deferral of loan fees and amortization, net of costs 6,650 598 331

Provision (benefit) for loan losses 2,432 ( 1,175 ) ( 500 )

Benefit for purchased receivables ( 21 ) ( 96 ) ( 10 )

Additions to home mortgage servicing rights carried at fair value ( 4,824 ) ( 3,707 ) ( 3,641 )

Change in fair value of home mortgage servicing rights carried at fair value 5,526 2,608 125

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Gain on sale of other real estate owned ( 391 ) ( 380 ) ( 3 )

Impairment on other real estate owned

Impairment on equity method investment — — 804

Net changes in assets and liabilities:

Decrease (increase) in accrued interest receivable

Decrease (increase) in other assets

(Increase) decrease in accrued interest receivable ( 3,467 ) 305 ( 432 )

(Increase) decrease in other assets ( 15,096 ) 6,395 ( 2,512 )

Increase (decrease) in other liabilities 12,415 2,411 ( 5,233 )

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Purchases of FHLB stock ( 5,931 ) ( 880 ) —

Purchases of investment securities held to maturity ( 10,000 ) — —

Proceeds from sales/calls/maturities of securities available for sale 189,323 130,482 122,644

Proceeds from calls/maturities of marketable equity securities

Proceeds from calls/maturities of securities held to maturity

Proceeds from sales of marketable equity securities 601 229 783

Proceeds from redemption of FHLB stock 5,518 843 14

(Increase) decrease in purchased receivables, net

(Increase) decrease in loans, net

Decrease (increase) in purchased receivables, net 10,472 ( 9,871 ) 7,835

Increase in loans, net ( 408,365 ) ( 58,879 ) ( 31,852 )

Proceeds from sale of other real estate owned 797 1,299 1,522

Proceeds from the sale of Northrim Benefits Group

Investment in other real estate owned — — ( 144 )

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Repayments of borrowings ( 104,684 ) ( 167 ) ( 121 )

Distributions to noncontrolling interest

Repayment of junior subordinated debentures

Proceeds from the issuance of common stock 84 73 243

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The Company has an equity investment in PWA through its wholly owned subsidiary, Northrim Investment Services Company ("NISC"), and the Company has an equity investment in Homestate through RML.

The Company also owned a 50.1% ownership interest in Northrim Benefits Group, LLC ("NBG") from 2005 until the Company sold all of its interest in the assets of NBG in August of 2017.

Method of Accounting:

Use of Estimates:

The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States and prevailing practices within the banking industry.

4 unchanged sentences

The Company consolidates affiliates in which we have a controlling interest.

The accompanying consolidated financial statements include the accounts of the Company, the Bank, RML, NBG (through August 2017), and Northrim Investment Services Company (“NISC”).

The accompanying consolidated financial statements include the accounts of the Company, the Bank, RML, and NISC.

Significant intercompany balances have been eliminated in consolidation.

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Operating Segments:

Public enterprises are required to report certain information about their operating segments in a complete set of financial statements to shareholders.

The basis for determining the Company's operating segments is the manner in which management operates the business.

Management has identified two primary business segments;

In accordance with ASC 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("CODM"), or decision making group, in deciding how to allocate resources and in assessing performance.

The Company uses the "management approach" in determining reportable operating segments.

The management approach considers the internal organization and reporting used the by the Company's CODM for making operating decisions and assessing performance as the source for determining the Company's reportable segments.

Management, including the CODM, review operating results by the revenue of different services.

For the year ended December 31, 2020 and 2019, the Company has two operating business lines;

Community Banking and Home Mortgage Lending.

Information about the Company's operating segments is included in Note 27 of the Notes to the Company's Consolidated Financial Statements included in Part II.

Item 8 of this report.

Reclassifications:

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Marketable securities are stated at fair value.

Changes in fair value are included in "Gain (loss) on marketable equity securities" in our Consolidated Statements of Income.

Changes in fair value are included in "Unrealized gain (loss) on marketable equity securities" in our Consolidated Statements of Income.

Investment Securities:

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Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value of the security is below the carrying value primarily due to changes in interest rates and there has not been significant deterioration in the financial condition of the issuer.

The Company does not intend to sell, nor is it more likely than not that it will be required to sell, securities whose market value is less than carrying value.

Because it is more likely than not that the Company will hold these investments until a market price recovery or maturity, these investments are not considered other than temporarily impaired.

Other factors that may be considered in determining whether a decline in the value is "other than temporary" include the financial condition, capital strength, and near-term prospects of the issuer;

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Loans are carried at their principal amount outstanding, net of charge-offs, unamortized fees, and direct loan origination costs.

Loan origination fees received in excess of direct origination costs are deferred and accreted to interest income using a method approximating the level-yield method over the life of the loan.

Loan origination fees received in excess of direct origination costs are deferred and accreted to interest income using the interest method in accordance with ASC 310 over the life of the loan.

Loan balances are charged-off to the Allowance when management believes that collection of principal is unlikely.

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These projects are generally valued as if complete, with an appropriate allowance for cost of completion, including contingencies developed from external sources such as vendors, engineers, and contractors.

The Company classifies fair value measurements using observable inputs, such as external appraisals, as level 2 valuations in the fair value hierarchy, and fair value measurements with unobservable inputs, such as in-house evaluations, as level 3 valuations in the fair value hierarchy.

The Company classifies fair value measurements on loans as level 3 valuations in the fair value hierarchy because of their use of unobservable inputs..

When the fair value measurement of the impaired loan is less than the recorded amount of the loan, an impairment is recognized by recording a charge-off to the Allowance or by designating a specific reserve in accordance with GAAP.

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For the purpose of estimating the Allowance, as of December 31, 2018, the Company evaluated the credit quality of purchased non-credit-impaired loans separately from loans that were originated by the Company and applied different qualitative factors to these loans.

For the purpose of estimating the Allowance as of December 31, 2019, the Company evaluated the credit quality of purchased non-credit-impaired loans together with loans that were originated by the Company.

For the purpose of estimating the subsequent to December 31, 2018, the Company evaluated the credit quality of purchased non-credit-impaired loans together with loans that were originated by the Company.

Purchased non-credit-impaired loans that have been identified as impaired subsequent to the merger are included in the Company's normal process for reporting impaired loans and calculation of a specific valuation allowance.

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The Company has identified the following segments:

commercial, real estate construction one-to-four family,

real estate construction other, real estate term owner occupied, real estate term non-owner occupied, real estate term other, consumer loans secured by 1 st deeds of trust, and other consumer loans.

commercial, real estate construction one-to-four family, real estate construction other, real estate term owner occupied, real estate term non-owner occupied, real estate

term other, consumer loans secured by 1 st deeds of trust, and other consumer loans.

Then the Company further disaggregates each segment into the following classes, which are also known as asset quality ratings:

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In addition, the unallocated reserve may fluctuate based upon the direction of various risk indicators.

Examples of such factors include the risk as to current and prospective economic conditions, the level and trend of charge offs or recoveries, and the risk of heightened imprecision or inconsistency of appraisals used in estimating real estate values.

Examples of such factors include the risk as to current economic conditions, the level and trend of charge offs or recoveries, and the risk of heightened imprecision or inconsistency of appraisals used in estimating real estate values.

Although this allocation process may not accurately predict credit losses by loan type or in aggregate, the total allowance for credit losses is available to absorb losses that may arise from any loan type or category.

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Purchased software is carried at amortized cost and is amortized using the straight-line method over its estimated useful life or the term of the agreement.

Also included in other assets is the net deferred tax asset, bank owned life insurance, accrued interest receivable, taxes receivable, rate lock derivatives, and the Company’s equity method investments.

The Company performs an impairment analysis on it's equity method investments when events or circumstances indicate impairment potentially exists.

Also included in other assets is the net deferred tax asset, bank owned life insurance carried at cash surrender value, net of premium charges, accrued interest receivable, taxes receivable, rate lock derivatives, and the Company’s equity method investments.The

Company performs an impairment analysis on it's equity method investments when events or circumstances indicate impairment potentially exists.

The Company records all derivatives on the Consolidated Balance Sheets at fair value.

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We minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate.

For derivative instruments executed with the same counterparty under a master netting arrangement, we do not offset fair value amounts of interest rate swaps in liability positions with the ones in asset positions.

For further detail, see Note 21.

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Advertising, promotion, and marketing costs are expensed as incurred.

The Company reported total expenses in these areas of $2.4 million , $2.3 million , and $2.6 million for each of the periods ending December 31, 2019 , 2018 , and 2017 , respectively.

The Company reported total expenses in these areas of $ 2.3 million, $ 2.4 million, and $ 2.3 million for each of the years ending December 31, 2020, 2019, and 2018, respectively.

Stock Incentive Plans:

The Company accounts for its stock incentive plans using a fair-value-based method of accounting for stock-based employee compensation plans.

The Company has elected the modified prospective method for recognition of compensation cost associated with stock-based employee compensation awards.

The Company amortizes stock-based compensation expense over the vesting period of each award.

The Company has stock-based employee compensation plans as more fully discussed in Note 23, Stock-Based Compensation.

Compensation cost is recognized for stock options and restricted stock units issued to employees based on the fair value of these awards at the date of grant.

A Black Scholes model is utilized to estimate the fair value of stock options, while the market price for the Company's common stock at the date of grant issued is utilized for restricted stock awards.

The Company recognizes compensation expense over the vesting period of each award.

The Company's accounting policy changed during the year ended December 31, 2020 and now recognizes forfeitures as they occur.

Income Taxes:

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Potentially dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive.

There were no anti-dilutive shares outstanding related to options to acquire common stock in 2019 or 2017.

Anti-dilutive shares outstanding related to options to acquire common stock for the year ended December 31, 2018 totaled 44,721 .

Anti-dilutive shares outstanding related to options to acquire common stock for the year ended December 31, 2020 totaled 45,062 and for the year ended December 31, 2018 totaled 44,721 .

There were no anti-dilutive shares outstanding related to options to acquire common stock in 2019.

Information used to calculate earnings per share was as follows:

(In Thousands) 2020 2019 2018

Net income attributable to Northrim BanCorp, Inc.

Net income $ 32,888 $ 20,691 $ 20,004

Basic weighted average common shares outstanding 6,355 6,709 6,878

Dilutive effect of potential common shares from awards granted under equity incentive program 76 99 104

Total 6,431 6,808 6,982

Earnings per common share

Basic $ 5.18 $ 3.08 $ 2.91

Diluted $ 5.11 $ 3.04 $ 2.86

Comprehensive Income:

10 unchanged sentences

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

At December 31, 2019 and 2018 , the Company had $513.3 million and $451.8 million , respectively, in commercial and construction loans in Alaska.

At December 31, 2020 and 2019, the Company had $ 898.8 million and $ 513.3 million, respectively, in commercial and construction loans.

At December 31, 2020, commercial loans included $ 310.5 million in Payment Protection Program ("PPP") loans administered by the U.S.

Small Business Administration ("SBA").

Additionally, the Company continues to have a concentration in large borrowing relationships.

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Valuation is generated from model-based techniques that use significant assumptions not observable in the market, or inputs that require significant management judgment or estimation, some of which may be internally developed.

Error Corrections:

Recognition of commercial servicing rights

In 2018, the Company recorded for the first time in other operating income the fair value of its commercial loan servicing portfolio of $1.0 million .

This revenue is included in the "Commercial servicing revenue" line item in the Company's Consolidated Statement of Income.

In previous years, the Company accounted for revenue from commercial servicing activities on a cash basis.

Management evaluated the materiality of this error from qualitative and quantitative perspectives and concluded that the error was immaterial to the prior period financial statements taken as a whole.

Consequently, the financial statements for the period ended

December 31, 2018, include the cumulative impact of the correction of the error, and prior period financial statements have not been restated.

The error correction increased total assets and net income by $737,000 after the impact of accounting for a provision for income taxes and covered the period from March 31, 2001 to December 31, 2018.

The change did not affect cash flows from operating, investing, or financing activities in the Consolidated Statement of Cash Flows.

Occupancy expense

In 2018, the Company performed a review of it's premises and equipment assets as part of it's tax planning process related to the Tax Cuts and Jobs Act of 2017 that was enacted in December of 2017.

During this review, the Company identified that $2.6 million of land was misclassified as buildings in 2008.

This misclassification resulted in the recognition of $670,000 in depreciation expense between September 30, 2008 and June 30, 2018.

Consequently, the financial statements for the period ended December 31, 2018, include the cumulative impact of the correction of the error, and prior period financial statements have not been restated.

The error correction increased total assets and net income by $480,000 after the impact of accounting for a provision for income taxes and covered the period from September 30, 2008 to December 31, 2018.

The change did not affect cash flows from operating, investing, or financing activities in the Consolidated Statement of Cash Flows.

Recent Accounting Pronouncements

Accounting pronouncements implemented in 2020

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”).

ASU 2016-02 requires lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance.

This update also introduces new disclosure requirements for leasing arrangements.

In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements ("ASU 2018-11") to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02.

Specifically, under the amendments in ASU 2018-11:

(1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met.

The Company adopted ASU 2016-02 on January 1, 2019, utilizing the modified retrospective approach provided under the transition option in ASU 2018-11 for leases that exist on, or are entered into, after the adoption date.

Accordingly, ASU 2016-02 has not been applied to comparative periods included in the Company's financial statements.

The Company also elected certain relief options offered in ASU 2016-02 and ASU 2018-11, including the practical expedient on not separating lease components from nonlease components for all operating leases and instead to account for them as a single lease component and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less).

The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets.

The Company has several lease agreements, such as branch locations, which were considered operating leases prior to the adoption of ASU 2016-02, and therefore, were not recognized on the Company’s consolidated statements of condition.

The Company recognized these lease agreements on the consolidated balance sheets as a $15.9 million right-of-use asset and a $15.9 million lease liability upon adoption of ASU 2016-02 on January 1, 2019.

The adoption of ASU 2016-02 did not have a material impact on the Company’s consolidated statements of income.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”).

ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including allowing entities to elect an accounting policy to account for forfeitures as they occur by reversing compensation expense when the award is forfeited instead of estimating future forfeitures that will occur when recognizing compensation expense related to share-based payment awards.

The Company elected to account for forfeitures as they occur in accordance with the guidance in ASU 2016-09 on January 1, 2020, which resulted in a $ 139,000 decrease in beginning retained earnings through a cumulative-effect adjustment.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (“ASU 2017-04”).

ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.

The Company adopted ASU 2017-04 on January 1, 2020.

The adoption of ASU 2017-04 did not have a material impact on the Company’s consolidated financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”).

ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits.

The Company adopted ASU 2018-13 on January 1, 2020.

The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial position or results of operations.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04").

ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

The expedients and exceptions provided by ASU 2020-04 do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.

The Company adopted ASU 2020-04 as of March 31, 2020.

The adoption of ASU 2020-04 did not have a material impact on the Company’s consolidated financial position or results of operations because no contract modifications have been made to date.

Accounting pronouncements to be implemented in future periods

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”).

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13” or "CECL").

ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.

For loans and held-to-maturity debt securities, ASU 2016-13 requires a current expected credit loss ("CECL") measurement to estimate the allowance for credit losses ("ACL") for the remaining estimated life of the financial asset (including off-balance sheet credit exposures) using historical experience, current conditions, and reasonable and supportable forecasts.

Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.

ASU 2016-13 eliminates the existing guidance for purchased credit impaired loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination.

In addition, ASU 2016-13 modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit.

ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's loan portfolio.

These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.

ASU 2016-13 is effective for the Company for fiscal years,

and interim periods within those fiscal years, beginning on or after December 15, 2019, and must be applied prospectively.

In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

ASU 2016-13 is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2019, and must be applied prospectively.

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

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.

Our implementation process includes loss forecasting model development, evaluation of technical accounting topics, updates to our allowance documentation, reporting processes and related internal controls, and overall operational readiness for our adoption of the ASU 2016-13, which will continue until adoption, including parallel runs for CECL alongside our current allowance process.

We are in the process of developing, validating, and implementing models used to estimate credit losses under CECL.

We have completed substantially all of our loss forecasting models, and we expect to complete the validation process for our loan models during 2020.

Our current planned approach for estimating expected life-time credit losses for loans and debt securities includes the following key components:

An initial loss forecast period of one year for all loan portfolio segments and classes of financing receivables and off-balance-sheet credit exposures.

This period reflects management’s expectation of losses based on forward-looking economic scenarios over that time.

A historical loss forecast period covering the remaining contractual life, adjusted for prepayments, by segment and class of financing receivables based on the change in key historical economic variables during representative historical expansionary and recessionary periods.

A reversion period of up to two years connecting the initial loss forecast to the historical loss forecast based on economic conditions at the measurement date.

Utilization of discounted cash flow ("DCF") methods to measure credit impairment for loans modified in a troubled debt restructuring, unless they are collateral dependent and measured at the fair value of collateral.

The DCF methods would obtain estimated life-time credit losses using the conceptual components described above.

For debt securities classified as available-for-sale or held-to-maturity, we plan to utilize the DCF methods to measure the ACL, which will incorporate expected credit losses using the conceptual components described above.

Early application was permitted for specified periods.

The Company early adopted ASU 2016-13 on January 1, 2021 after finalizing data and model validation and our internal governance framework.

The guidance was applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at January 1, 2021.

However, certain provisions of the guidance are only required to be applied on a prospective basis.

CECL is not prescriptive in the methodology used to determine the expected credit loss estimate.

Therefore, management has flexibility in selecting the methodology.

The expected credit losses must be estimated over a financial asset's contractual term, adjusted for prepayments utilizing quantitative and qualitative factors.

There are also specific considerations

for purchased credit-deteriorated, troubled debt restructured, and collateral dependent loans.

CECL also applies to the reserve for unfunded commitments.

The combination of the current expected credit loss, qualitative factors, collateral dependent, troubled debt restructuring, purchased credit deteriorated, and the reserve for unfunded commitments represent the allowance for credit losses ("ACL").

The estimate of expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

Historical loss experience is the starting point for estimating expected credit losses.

Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics – e.g.

underwriting standards, portfolio mix or asset terms, and differences in economic conditions – both current conditions and reasonable and supportable forecasts.

When the Company is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset, it has estimated expected credit losses for the remaining life using an approach that reverts to historical credit loss information.

The Company utilizes complex models to obtain reasonable and supportable forecasts;

most of the models calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD").

The PD measures the probability that a loan will default within a given time horizon and primarily measures the adequacy of the debtor's cash flow as the primary source of repayment of the loan.

The LGD is the expected loss which would be realized presuming a default has occurred and primarily measures the value of the collateral or other secondary source of repayment related to the collateral.

The ACL is measured on a collective (pool) basis when similar characteristics exist.

The Company has selected models at the portfolio level using a risk-based approach, with larger, more complex portfolios having more complex models.

For ACL calculation purposes, management considered the financial and economic environment at the time of assessment and different economic scenarios that differed in the levels of severity and sensitivity to the ACL results.

Management determined the use of a third-party baseline economic forecast was reasonable and supportable as it is from a credible subject matter experts and institution.

In this baseline scenario, the probability that the economy will perform better than this consensus is equal to the probability that it will perform worse.

Loss factors from the models, prepayment speeds, and qualitative factors are inputs into the Company's CECL accounting application.

Once this information is aggregated, the Company uses two methods to calculate the current expected credit loss:

1) the discounted cash flow ("DCF") method, which is used for approximately 97 % of all loans and the reserve for unfunded commitments and 2) a weighted average remaining life method for the remainder of the loan portfolio where loan level data constraints preclude the use of the DCF method.

The DCF method utilizes the effective interest rate of individual assets to discount the expected credit losses adjusted for prepayments.

The difference in the net present value and the amortized cost of the asset will result in the required allowance.

The weighted average remaining life method uses the exposure at default, along with the expected credit losses adjusted for prepayments to calculate the required allowance.

Adoption of CECL as of January 1, 2021 resulted in an allowance for loan losses of $ 16.6 million, which is a $ 4.5 million decrease in the allowance under the incurred loss model as of December 31, 2020.

This decrease will increase the Company's total shareholder's equity by $ 3.2 million.

Adoption of CECL as of January 1, 2021 resulted in a reserve for unfunded commitments of $ 1.4 million, which is a $ 1.2 million increase in the reserve under the incurred loss model as of December 31, 2020.

This increase will decrease the Company's total shareholder's equity by $ 880,000 .

We will recognize an ACL for available-for-sale and held-to-maturity debt securities.

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Based on the credit quality of our existing debt securities portfolio, we do not expect the ACL for held-to-maturity and available-for-sale debt securities to be significant.

As of December 31, 2019, the Company does not hold any debt securities classified as held-to-maturity.

The ultimate effect of CECL on our ACL will depend on the size and composition of our loan and investment portfolios, the portfolios' credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions.

At adoption, we will have a cumulative-effect adjustment to retained earnings for our change in the ACL.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (“ASU 2017-04”).

ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.

ASU 2017-04 is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2019, and must be applied on a prospective basis.

The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”).

ASU 2018-13 is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2019.

The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial position or results of operations.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”).

ASU 2019-04 clarifies and improves areas of guidance related to the recently issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and

recognition and measurement of financial instruments (ASU 2016-01).

The amendments generally have the same effective dates as their related standards.

If already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective for fiscal years beginning after December 15, 2019 and the amendments of ASU 2017-12 are effective as of the beginning of the Company's next annual reporting period;

early adoption is permitted.

The Company previously adopted both ASU 2017-12 and ASU 2016-01 and does not expect that the amendments of ASU 2019-04 will have a material impact on the Company’s consolidated financial position or results of operations.

The Company is continuing to evaluate the impact of ASU 2016-13 and will consider the amendments of ASU 2019-04 as part of that process.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326) (“ASU 2019-05”).

ASU 2019-05 provides entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments.

ASU 2019-05 is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2019.

The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial position or results of operations.

As of December 31, 2020, the Company holds one newly issued debt security that is classified as held-to-maturity.

NOTE 2 – Cash and Due from Banks

The Company is required to maintain a $2.4 million minimum average daily balance with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank") for purposes of settling financial transactions and charges for Federal Reserve Bank services.

The Company is also required to maintain cash balances or deposits with the Federal Reserve Bank sufficient to meet its statutory reserve requirements.

The average reserve requirement for the maintenance period, which included December 31, 2019 , was $0 .

The Company is required to maintain cash balances or deposits with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank") sufficient to meet its statutory reserve requirements and for purposes of settling financial transactions and charges for Federal Reserve Bank services.

The average reserve requirement for the maintenance period, which included December 31, 2020, was zero .

The Company is required to maintain a $ 250,000 balance with a correspondent bank for outsourced servicing of ATMs.

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Other interest bearing deposits at other institutions 38,040 26,670

Total $ 92,661 $ 74,906

NOTE 4 - Investment Securities

The carrying values and approximate fair values of investment securities at the periods indicated are presented below:

(In Thousands)

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

(In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

December 31, 2020

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Total securities available for sale $ 245,871 $ 1,956 ($ 194 ) $ 247,633

Securities held to maturity

Corporate bonds $ 10,000 $ — $ — $ 10,000

Total securities held to maturity $ 10,000 $ — $ — $ 10,000

December 31, 2019

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Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2020 and 2019, were as follows:

Less Than 12 Months

More Than 12 Months

(In Thousands)

Unrealized Losses

Less Than 12 Months More Than 12 Months Total

(In Thousands) Fair

Value Unrealized Losses Fair

Value Unrealized Losses

Securities Available for Sale

Treasury and government sponsored entities $ 31,270 ($ 47 ) $ — $ — $ 31,270 ($ 47 )

Corporate bonds 3,198 ( 5 ) — — 3,198 ( 5 )

Collateralized loan obligations 23,670 ( 118 ) 2,967 ( 24 ) 26,637 ( 142 )

Total $ 58,138 ($ 170 ) $ 2,967 ($ 24 ) $ 61,105 ($ 194 )

Securities Available for Sale

Treasury and government sponsored entities $ 39,797 ($ 33 ) $ 2,996 ($ 4 ) $ 42,793 ($ 37 )

Corporate bonds

Mortgage-backed securities

Collateralized loan obligations 14,972 ( 17 ) 7,951 ( 40 ) 22,923 ( 57 )

Total $ 54,769 ($ 50 ) $ 10,947 ($ 44 ) $ 65,716 ($ 94 )

The unrealized losses on investments in both periods were caused by changes in interest rates.

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The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment.

The Company does not intend to sell, nor is it more likely than not that it will be required to sell, securities whose market value is less than carrying value.

Because it is more likely than not that the Company will hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

At December 31, 2020 and 2019, $ 77.9 million and $ 30.6 million in securities were pledged for deposits and borrowings, respectively.

The amortized cost and fair values of debt securities at December 31, 2019 , are distributed by contractual maturity as shown below.

The amortized cost and fair values of available for sale and held to maturity debt securities at December 31, 2020, are distributed by contractual maturity as shown below.

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

(In Thousands)

Amortized Cost

Weighted Average Yield

(In Thousands) Amortized Cost Fair Value Weighted Average Yield

Treasury and government sponsored entities

Within 1 year $ 44,044 $ 44,601 2.06 %

1-5 years 129,274 130,000 0.82 %

Total $ 173,318 $ 174,601 1.14 %

Corporate bonds

Within 1 year $ 2,241 $ 2,257 1.23 %

1-5 years 27,710 28,235 1.36 %

5-10 years 10,000 10,000 5.00 %

Total $ 39,951 $ 40,492 2.26 %

Collateralized loan obligations

5-10 years $ 8,783 $ 8,720 1.70 %

Over 10 years 32,999 32,964 1.60 %

Total $ 41,782 $ 41,684 1.62 %

Municipal securities

Within 1 year

1-5 years 820 856 2.14 %

Total $ 820 $ 856 2.14 %

The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the years ending December 31, 2020, 2019, and 2018, respectively, are as follows:

(In Thousands)

(In Thousands) Proceeds Gross Gains Gross Losses

Available for sale securities $ — $ — $ —

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Treasury and government sponsored entities $ 3,396 $ 4,170 $ 3,682

Other 1,354 2,282 1,532

Total taxable interest income $ 4,750 $ 6,452 $ 5,214

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Total tax-exempt interest income $ 82 $ 120 $ 267

Total $ 4,832 $ 6,572 $ 5,481

NOTE 5 - Loans and Credit Quality

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An asset classified "doubtful" has all the weaknesses inherent in one that is classified "substandard-8" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

The loan has substandard characteristics, and available information suggests that it is unlikely that the loan will be repaid in its entirety.

The loan has substandard characteristics, and available

information suggests that it is unlikely that the loan will be repaid in its entirety.

Cash flow is insufficient to service debt.

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If the current material adverse trends continue, it is unlikely the borrower will have the ability to meet the terms of the loan agreement.

It may be difficult to predict the exact amount of loss, but the probability of some loss is greater

It may be difficult to predict the exact amount of loss, but the probability of some loss is greater than 50%.

Loans are to be placed on non-accrual status when any portion is classified as doubtful.

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The composition of the loan portfolio as of the periods indicated is as follows:

(In Thousands)

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deeds of trust

Consumer other

(In Thousands) Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deeds of trust Consumer other Total

December 31, 2020

AQR Pass $ 765,952 $ 37,380 $ 80,315 $ 153,607 $ 291,382 $ 43,290 $ 15,441 $ 21,963 $ 1,409,330

AQR Special Mention 6,241 385 — 3,028 17,097 2,154 — — 28,905

AQR Substandard 6,378 702 — 6,962 595 1,176 144 106 16,063

AQR Doubtful 1,487 — — — — — — — 1,487

Subtotal $ 780,058 $ 38,467 $ 80,315 $ 163,597 $ 309,074 $ 46,620 $ 15,585 $ 22,069 $ 1,455,785

Unearned origination fees, net of origination costs ( 11,735 )

Total loans $ 1,444,050

December 31, 2019

AQR Pass $ 394,107 $ 34,132 $ 61,808 $ 129,959 $ 295,482 $ 38,771 $ 15,860 $ 24,464 $ 994,583

AQR Special Mention 2,279 3,337 — 3,828 17,478 2,559 179 — 29,660

AQR Substandard 16,304 1,349 — 5,104 — 1,176 159 121 24,213

Subtotal $ 412,690 $ 38,818 $ 61,808 $ 138,891 $ 312,960 $ 42,506 $ 16,198 $ 24,585 $ 1,048,456

Unearned origination fees, net of origination costs ( 5,085 )

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

Total loans $ 1,043,371

The above table includes $ 310.5 million in PPP loans administered by the SBA within the Commercial loan segment as of December 31, 2020.

Additionally, unearned origination fees, net of origination costs includes $ 5.9 million associated with SBA PPP loans as of December 31, 2020.

At December 31, 2020, approximately 73 % of the Company’s loans, excluding PPP loans, are secured by real estate and 2 % are unsecured.

Approximately 25 % are for general commercial uses, including professional, retail, and small businesses.

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Nonaccrual loans net of government guarantees totaled $ 9.6 million and $ 14.0 million at December 31, 2020 and December 31, 2019, respectively.

Interest income which would have been earned on nonaccrual loans for 2019 , 2018 , and 2017 amounted to $1.3 million , $1.3 million , and $1.4 million , respectively.

Interest income which would have been earned on nonaccrual loans for 2020, 2019, and 2018 amounted to $ 856,000 , $ 1.3 million, and $ 1.3 million, respectively.

Additionally, the Company recognized interest income of $ 924,000 , $ 301,000 , and $ 159,000 in 2020, 2019, and 2018, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero.

Nonaccrual loans at the periods indicated, by segment are presented below:

(In Thousands)

90 Days Past Due

(In Thousands) 30-59 Days

Past Due 60-89 Days

Past Due Greater Than

90 Days Past Due Current Total

December 31, 2020

Commercial $ 48 $ 229 $ 3,673 $ 1,626 $ 5,576

Real estate construction one-to-four family — — 702 — 702

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December 31, 2019

Commercial $ 270 $ 385 $ 2,862 $ 5,636 $ 9,153

Real estate construction one-to-four family — — 1,349 — 1,349

Real estate term owner occupied 1,641 — 623 1,225 3,489

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Past Due Loans

There were zero past due loans greater than 90 days and still accruing interest at December 31, 2019 and 2018 , respectively.

There was one past due loan greater than 90 days and still accruing interest at December 31, 2020 and no past due loans greater than 90 days and still accruing interest at December 31, 2019.

Past due loans and nonaccrual loans at the periods indicated are presented below by loan class:

(In Thousands)

(In Thousands) 30-59 Days

Accruing 60-89 Days

Accruing Greater Than

Accruing Total Past

Due Nonaccrual Current Total

December 31, 2020

Commercial $ 387 $ — $ — $ 387 $ 5,576 $ 774,095 $ 780,058

Real estate construction one-to-four family — — — — 702 37,765 38,467

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Consumer other 18 — — 18 106 21,945 22,069

Subtotal $ 888 $ — $ 449 $ 1,337 $ 11,120 $ 1,443,328 $ 1,455,785

Unearned origination fees, net of origination costs ( 11,735 )

Total $ 1,444,050

December 31, 2019

Commercial $ 270 $ — $ — $ 270 $ 9,153 $ 403,267 $ 412,690

Real estate construction one-to-four family — — — — 1,349 37,469 38,818

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Consumer other 150 — — 150 121 24,314 24,585

Subtotal $ 1,534 $ — $ — $ 1,534 $ 15,356 $ 1,031,566 $ 1,048,456

Unearned origination fees, net of origination costs ( 5,085 )

Total $ 1,043,371

Impaired Loans

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The following table presents information about impaired loans by class for the years ended December 31, 2020 and 2019:

(In Thousands)

Recorded Investment

Unpaid Principal Balance

Related Allowance

(In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance

December 31, 2020

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Commercial - AQR substandard $ 6,299 $ 6,979 $—

Commercial - AQR doubtful 1,179 1,308 —

Real estate construction one-to-four family - AQR substandard 702 702 —

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Real estate term non-owner occupied - AQR pass 176 176 —

Real estate term non-owner occupied - AQR substandard 595 595 —

Real estate term other - AQR pass 291 291 —

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Consumer other - AQR substandard 82 87 —

Subtotal $ 17,720 $ 18,619 $—

With an allowance recorded

Commercial - AQR substandard

Commercial - AQR doubtful $ 308 $ 308 $ 13

Subtotal $ 308 $ 308 $ 13

Commercial - AQR substandard $ 6,299 $ 6,979 $ —

Commercial - AQR doubtful 1,487 1,616 13

Real estate construction one-to-four family - AQR substandard 702 702 —

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Real estate term non-owner occupied - AQR pass 176 176 —

Real estate term non-owner occupied - AQR substandard 595 595 —

Real estate term other - AQR pass 291 291 —

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Consumer other - AQR substandard 82 87 —

(In Thousands)

Recorded Investment

Unpaid Principal Balance

Related Allowance

Total $ 18,028 $ 18,927 $ 13

(In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance

December 31, 2019

With no related allowance recorded

Commercial - AQR pass

Commercial - AQR special mention

Commercial - AQR substandard $ 15,517 $ 15,582 $—

Real estate construction one-to-four family - AQR substandard 1,349 1,349 —

Real estate term owner occupied - AQR substandard 5,104 5,104 —

Real estate term non-owner occupied - AQR pass 178 178 —

Real estate term non-owner occupied - AQR substandard

Real estate term other - AQR pass 417 417 —

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Consumer secured by 1st deeds of trust - AQR substandard 159 163 —

Consumer other - AQR substandard 90 94 —

Subtotal $ 24,112 $ 24,185 $—

With an allowance recorded

Commercial - AQR substandard $ 561 $ 561 $ 17

Commercial - AQR pass

Commercial - AQR special mention

Subtotal $ 561 $ 561 $ 17

Commercial - AQR substandard $ 16,078 $ 16,143 $ 17

Real estate construction one-to-four family - AQR substandard 1,349 1,349 —

Real estate term owner-occupied - AQR substandard 5,104 5,104 —

Real estate term non-owner occupied - AQR pass 178 178 —

Real estate term non-owner occupied - AQR substandard

Real estate term other - AQR pass 417 417 —

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Consumer secured by 1st deeds of trust - AQR substandard 159 163 —

Consumer other - AQR substandard 90 94 —

Total $ 24,673 $ 24,746 $ 17

The unpaid principal balance included in the table above represents the recorded investment at the dates indicated, plus amounts charged-off for book purposes.

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Year Ended December 31, 2020 2019

(In Thousands)

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

(In Thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized

With no related allowance recorded

Commercial - AQR pass $ — $ — $ 532 $ 35

Commercial - AQR special mention

Commercial - AQR substandard 9,111 139 16,892 405

Commercial - AQR doubtful 433 — — —

Real estate construction one-to-four family - AQR substandard 781 — 1,933 —

Real estate term owner occupied - AQR special mention

Real estate term owner occupied - AQR substandard 6,739 125 5,747 113

Real estate term non-owner occupied - AQR pass 177 10 251 19

Real estate term non-owner occupied - AQR special mention

Real estate term non-owner occupied - AQR substandard 385 19 230 —

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Consumer secured by 1st deeds of trust - AQR substandard 148 3 202 7

Consumer secured by 1st deeds of trust - AQR loss 33 — — —

Consumer other - AQR substandard 86 — 70 —

Subtotal $ 19,562 $ 325 $ 27,477 $ 623

With an allowance recorded

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Consumer secured by 1st deeds of trust - AQR substandard — — 72 —

Subtotal $ 1,420 $ 8 $ 918 $ —

Commercial - AQR pass $ — $ — $ 532 $ 35

Commercial - AQR special mention

Commercial - AQR substandard 10,454 147 17,575 405

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Real estate construction one-to-four family - AQR substandard 781 — 1,933 —

Real estate term owner-occupied - AQR special mention

Real estate term owner-occupied - AQR substandard 6,739 125 5,747 113

Real estate term non-owner occupied - AQR pass 177 10 251 19

Real estate term non-owner occupied - AQR special mention

Real estate term non-owner occupied - AQR substandard 385 19 230 —

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Consumer secured by 1st deeds of trust - AQR substandard 148 3 274 7

Consumer secured by 1st deeds of trust - AQR loss 33 — — —

Consumer other - AQR substandard 86 — 70 —

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The average recorded investment was $ 34.7 million, and interest income recognized on impaired loans was $ 847,000 for the year ended December 31, 2018.

Purchased Credit Impaired Loans

The Company acquired eighteen purchased credit impaired loans from Alaska Pacific on April 1, 2014 subject to the requirements of FASB ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality .

This group of loans consists primarily of commercial and commercial real estate loans, and unlike a pool of consumer mortgages, it is not practicable for the Company to analyze the accretable yield of these loans.

As such, the Company has elected the cost recovery method of income recognition for these loans, and thus no accretable difference has been identified for these loans.

At the acquisition date, April 1, 2014, the fair value of this group of loans was $3.9 million .

The carrying value of these loans as of December 31, 2019 and 2018 was $201,000 and $235,000 , respectively.

Troubled Debt Restructurings

Loans classified as TDRs totaled $10.1 million and $14.8 million at December 31, 2019 and December 31, 2018 , respectively.

Loans classified as TDRs totaled $ 7.9 million and $ 10.1 million at December 31, 2020 and 2019, respectively.

A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession of some kind.

The provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency.

The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019.

The Company has elected to adopt these provisions of the CARES Act.

As of December 301 2020, the Company has made the following types of loan modifications related to COVID-19, which are not classified as TDRs with principal balance outstanding of:

(Dollars in thousands) Interest Only Full Payment Deferral Total

Portfolio loans $ 43,379 $ 22,165 $ 65,544

Number of modifications 23 11 34

The Company has granted a variety of concessions to borrowers in the form of loan modifications.

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The following table presents the breakout between newly restructured loans that occurred during 2020 and restructured loans that occurred prior to 2020 that are still included in portfolio loans.

Accrual Status

Nonaccrual Status

Total Modifications

As discussed above, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019.

The below disclosed restructurings were not related to COVID-19 modifications:

Accrual Status Nonaccrual Status Total Modifications

(In Thousands)

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Commercial - AQR substandard $ 1,590 $ 161 $ 1,751

Real estate owner occupied - AQR substandard

Subtotal $ 1,590 $ 161 $ 1,751

Existing Troubled Debt Restructurings 765 5,344 6,109

Total $ 2,355 $ 5,505 $ 7,860

The following tables present newly restructured loans that occurred during 2020 and 2019, by concession (terms modified):

December 31, 2020

(In Thousands)

Number of Contracts

Rate Modification

Term Modification

Payment Modification

Combination Modification

Total Modifications

(In Thousands) Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications

Pre-Modification Outstanding Recorded Investment:

Commercial - AQR substandard 2 $ — $ 3,249 $ 164 $ — $ 3,413

Real estate term owner occupied - AQR substandard

Total 2 $ — $ 3,249 $ 164 $ — $ 3,413

Post-Modification Outstanding Recorded Investment:

Commercial - AQR substandard 2 $ — $ 1,590 $ 161 $ — $ 1,751

Real estate term owner occupied - AQR substandard

Total 2 $ — $ 1,590 $ 161 $ — $ 1,751

December 31, 2019

(In Thousands)

Number of Contracts

Rate Modification

Term Modification

Payment Modification

Combination Modification

Total Modifications

(In Thousands) Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications

Pre-Modification Outstanding Recorded Investment:

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Real estate term owner occupied - AQR substandard 1 — — 192 — 192

Total 7 $ — $ — $ 701 $ 2,585 $ 3,286

Post-Modification Outstanding Recorded Investment:

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Real estate term owner occupied - AQR substandard 1 — — 182 — 182

Total 7 $ — $ — $ 590 $ 2,561 $ 3,151

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in TDRs at December 31, 2020.

There were $64,000 of charge-offs in 2019 on loans that were later classified as a TDR and there were $1.3 million of charge-offs in 2018 on loans that were later classified as a TDR in 2018.

There were zero charge-offs in 2020 on loans that were later classified as a TDR and there were $ 64,000 of charge-offs in 2019 on loans that were later classified as a TDR in 2019.

All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the Allowance.

There was no TDR with specific impairment at December 31, 2019 and one at December 31, 2018 , respectively.

There was one TDR with specific impairment at December 31, 2020 and none at December 31, 2019, respectively.

There were no loans that were restructured during 2020 or 2019, that also subsequently defaulted within the first twelve months of restructure in those same periods.

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December 31, 2018

Number of Contracts

Recorded Investment

Number of Contracts Recorded Investment

(In Thousands)

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Real estate term owner occupied - AQR substandard 2 1,694

Total 6 $ 2,860

Loans to Related Parties

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Balance, beginning of the year $ 309 $ — $ —

Loans made — 309 —

Repayments 92 — —

Balance, end of year $ 217 $ 309 $ —

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The following table details activity in the Allowance for the periods indicated:

(In Thousands)

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deed of trust

Consumer other

Balance, beginning of period $ 6,604 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079 $ 19,088

Charge-Offs ( 1,021 ) — — ( 85 ) — — — ( 15 ) — ( 1,121 )

Recoveries 710 — — — — 2 — 25 — 737

Provision (benefit) 1,680 36 162 522 ( 47 ) 106 ( 9 ) ( 46 ) 28 2,432

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Balance, beginning of period $ 5,660 $ 675 $ 1,275 $ 2,027 $ 5,799 $ 716 $ 306 $ 426 $ 2,635 $ 19,519

Charge-Offs ( 195 ) — — — — — ( 4 ) ( 18 ) — ( 217 )

Recoveries 908 — — — — 28 — 25 — 961

Provision (benefit) 231 ( 32 ) ( 258 ) 161 ( 619 ) ( 73 ) ( 32 ) 3 ( 556 ) ( 1,175 )

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Balance, beginning of period $ 6,172 $ 629 $ 1,566 $ 2,194 $ 6,043 $ 725 $ 315 $ 307 $ 3,510 $ 21,461

Charge-Offs ( 1,716 ) — — — — ( 28 ) ( 143 ) ( 39 ) — ( 1,926 )

Recoveries 442 — — — 3 12 27 — 484

Provision (benefit) 762 46 ( 291 ) ( 167 ) ( 244 ) 16 122 131 ( 875 ) ( 500 )

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The following is a detail of the recorded investment, including unearned origination fees, net of origination costs, in the loan portfolio, segregated by amounts evaluated individually or collectively in the Allowance at the periods indicated:

(In Thousands)

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deed of trust

Consumer other

December 31, 2020

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The following represents the balance of the Allowance for the periods indicated segregated by segment and class:

(In Thousands)

Real estate construction 1-4 family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deeds of trust

Consumer other

(In Thousands) Total Commercial Real estate construction 1-4 family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deeds of trust Consumer other Unallocated

December 31, 2020

Individually evaluated for impairment

AQR Substandard

AQR Doubtful $ 13 $ 13 $ — $ — $ — $ — $ — $ — $ — $ —

Collectively evaluated for impairment:

AQR Pass 18,626 7,801 672 1,179 2,573 5,001 742 261 397 —

AQR Special Mention 384 156 7 — 52 132 37 — — —

AQR Substandard 6 3 — — — — — — 3 —

Unallocated 2,107 — — — — — — — — 2,107

$ 21,136 $ 7,973 $ 679 $ 1,179 $ 2,625 $ 5,133 $ 779 $ 261 $ 400 $ 2,107

December 31, 2019

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Collectively evaluated for impairment:

AQR Pass 16,399 6,514 588 1,017 2,125 4,829 629 266 431 —

AQR Special Mention 579 64 55 — 63 351 42 4 — —

AQR Substandard 14 9 — — — — — — 5 —

Unallocated 2,079 — — — — — — — — 2,079

$ 19,088 $ 6,604 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079

NOTE 7 - Purchased Receivables

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The policies are reviewed and approved annually by the Board of Directors.

Purchased receivables are carried at their principal amount outstanding, net of a reserve for anticipated losses that have not yet been identified, and have a maturity of less than one year.

Purchased receivables are carried at their principal amount outstanding, net of a reserve for inherent losses that have not yet been identified, and have a maturity of less than one year .

Purchased receivable balances are charged against this reserve when management believes that collection of principal is unlikely.

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Reserve for purchased receivable losses ( 73 ) ( 94 )

Total $ 13,922 $ 24,373

The following table sets forth information regarding changes in the purchased receivable reserve for the periods indicated:

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At December 31, 2020 and 2019, the Company held $ 7.3 million and $ 7.0 million, respectively, as OREO.

The following table details net operating expense related to OREO for the years indicated:

The following table details net operating (income) expense related to OREO for the years indicated:

Years Ended December 31,

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Gains on sale of OREO ( 391 ) ( 380 ) ( 3 )

Total ($ 242 ) ($ 193 ) $ 258

NOTE 9 - Premises and Equipment

The following summarizes the components of premises and equipment at December 31 for the years indicated:

(In Thousands)

Furniture and equipment

Tenant improvements

(In Thousands) Useful Life 2020 2019

Land $ 5,137 $ 5,137

Furniture and equipment 3 - 7 years

13,157 11,778

Tenant improvements 2 - 15 years

Buildings 39 years 37,618 36,205

Total Premises and Equipment 65,094 62,281

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Related Party Transactions:

The Company made $49,000 in payments to related parties for design consultation for Bank branches for the year ended December 31, 2018 and no payments to related parties in 2019 or 2017.

The Company made no payments to related parties in 2020 or 2019 and $ 49,000 in payments to related parties for design consultation for Bank branches for the year ended December 31, 2018.

NOTE 10 - Servicing Rights

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Due to changes in model inputs of assumptions (1)

( 2,701 ) ( 1,313 ) 591

( 2,825 ) ( 1,295 ) ( 716 )

Carrying value, December 31 $ 11,218 $ 11,920 $ 10,821

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(2) Represents changes due to collection/realization of expected cash flows over time.

The following table details information related to our serviced mortgage loan portfolio as of December 31, 2019 and 2018 :

(In Thousands)

December 31, 2019

December 31, 2018

The following table details information related to our serviced mortgage loan portfolio:

(In Thousands) December 31, 2020 December 31, 2019

Balance of mortgage loans serviced for others $ 683,117 $ 659,048

MSR as a percentage of serviced loans 1.64 % 1.81 %

The Company recognized servicing fees of $2.4 million , $1.9 million , and $1.3 million during 2019 , 2018 , and 2017 , respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

The Company recognized servicing fees of $ 2.7 million, $ 2.4 million, and $ 1.9 million during 2020, 2019, and 2018, respectively, which includes contractually specified servicing fees and ancillary fees are included in "Mortgage banking income" as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the key assumptions used in measuring the fair value of mortgage servicing rights as of December 31, 2020 and 2019:

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Key economic assumptions and the sensitivity of the current fair value for mortgage servicing rights to immediate adverse changes in those assumptions at December 31, 2020 and 2019 were as follows:

(In Thousands)

December 31, 2019

December 31, 2018

(In Thousands) December 31, 2020 December 31, 2019

Aggregate portfolio principal balance $ 683,117 $ 659,048

Weighted average rate of note 3.62 % 3.90 %

December 31, 2019

1.0% Adverse Rate Change

2.0% Adverse Rate Change

December 31, 2020 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change

Conditional prepayment rate 13.05 % 26.11 % 38.97 %

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Commercial servicing rights

The Company recorded a commercial servicing right asset ("CSR") for the first time in 2018.

Refer to the "Error Corrections" section in footnote 1 of the Notes to the Consolidated Financial Statements for additional information regarding this adjustment.

The CSR has a carrying value of $1.2 million and $1.0 million at December 31, 2019 and 2018 , respectively, and total commercial loans serviced for others were $252.9 million and $239.5 million at December 31, 2019 and 2018 , respectively.

assumptions used in measuring the fair value of CSRs as of December 31, 2019 and 2018 include a conditional prepayment rate of 12.25% and 12.72% and a discount rate of 11.70% and 11.49% , respectively.

Commercial servicing right assets ("CSRs") have a carrying value of $ 1.3 million and $ 1.2 million at December 31, 2020 and 2019, respectively, and total commercial loans serviced for others were $ 274.6 million and $ 252.9 million at December 31, 2020 and 2019, respectively.

Key assumptions used in measuring the fair value of CSRs as of December 31, 2020 and 2019 include a conditional prepayment rate of 9.66 % and 12.25 % and a discount rate of 9.46 % and 11.70 %, respectively.

NOTE 11 - Goodwill and Intangible Assets

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Intangible assets:

Goodwill $ 15,017 $ 15,017

Core deposit intangible 79 127

Trade name intangible 950 950

Goodwill and Other Intangible Assets:

Goodwill as of December 31, 2019 and 2018 includes $6.9 million related to the Company's acquisition of branch locations from Bank of America in 1998.

In 2007, the Company recorded $1.8 million of goodwill and $1.3 million of core deposit intangible ("CDI") as part of the acquisition of Alaska First Bank & Trust, N.A.

(“Alaska First”) stock.

The Company amortized the CDI related to the Alaska First acquisition over its estimated useful life.

On April 1, 2014, the Company recorded $623,000 of CDI as part of the acquisition of Alaska Pacific.

The Company is amortizing the CDI related to the Alaska Pacific acquisition over its estimated useful life of ten years using an accelerated method.

Accumulated amortization related to the Alaska Pacific CDI was $495,000 , $435,000 and $365,000 at December 31, 2019 , 2018 , and 2017 , respectively.

Lastly, on December 1, 2014 the Company recorded goodwill and a trade name intangible as part of the acquisition of RML.

As of December 31, 2019 and 2018, the Company has $7.5 million of goodwill and $950,000 of trade name intangible recorded related to this transaction.

These assets have indefinite useful lives and are not amortized.

The Company performed its annual goodwill impairment testing at December 31, 2019 and 2018 in accordance with the policy described in Note 1 to the financial statements.

At December 31, 2019, the Company performed its annual impairment test using a qualitative assessment.

Significant positive inputs to the qualitative assessment included the Company’s increasing net income as compared to historical trends, the Company's stable budget-to-actual results of operations;

results of regulatory examinations;

peer comparisons of the Company's net interest margin;

trends in the Company’s cash flows;

improvements in the Alaskan economy in 2019;

increases in the volume of mortgage originations in Alaska;

and increases in the Company's stock price.

Significant negative inputs to the qualitative assessment included the continued lower level of oil prices and the muted pace of growth in the Alaska economy.

We believe that the positive inputs to the qualitative assessment noted above outweigh the negative inputs for both of the Company's operating segments, and we therefore concluded that it is more likely than not that the fair value of the Company exceeds its carrying value at December 31, 2019 and that no potential impairment existed at that time.

Total $ 16,046 $ 16,094

The Company performed goodwill impairment testing at March 31, 2020, December 31, 2020 and December 31, 2019 in accordance with the policy described in Note 1 to the financial statements.

The Company's policy dictates that the Company will perform interim impairment testing when a triggering event occurs.

The Company performed the interim impairment test as of March 31, 2020 using a discounted cash flow approach.

The estimated fair value of each of the Company's segments exceeded its carrying value as of March 31, 2020, and management therefore concluded that no impairment existed at that time.

At December 31, 2020, the Company performed its annual impairment test using a quantitative assessment.

The Company estimated the fair value of the Company using two valuation methodologies including a control premium approach and a discounted cash flow approach.

We then compared the estimated fair value of each segment to the carrying value at December 31, 2020 and concluded that no impairment existed at that time.

The Company recorded amortization expense of its intangible assets of $ 48,000 , $ 60,000 , and $ 70,000 for the years ended December 31, 2020, 2019, and 2018, respectively.

Accumulated amortization for intangible assets was $5.9 million at December 31, 2019 and 2018 , respectively.

Accumulated amortization for intangible assets was $ 6.0 million and $ 5.9 million at December 31, 2020 and 2019.

The future amortization expense required on these assets is as follows:

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NOTE 12 – Leases

We adopted ASU 2016-02 using the modified retrospective approach with an effective date as of January 1, 2019.

We adopted ASU 2016-02 Leases (Topic 842) ("ASU 2016-02") using the modified retrospective approach with an effective date as of January 1, 2019.

Prior year financial statements were not recast under the new standard and, therefore, those amounts are not presented below.

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Management has recognized these renewal options as part of its ROU asset and lease liabilities when management is reasonably certain to exercise these options.

Whether or not management is reasonably certain to exercise such an option is determined based on facts and circumstances for each individual lease.

Whether or not management is reasonably certain to exercise such

an option is determined based on facts and circumstances for each individual lease.

However, if a renewal option is offered at below market terms, management considers the exercise of that option to be reasonably certain for the purposes of calculating its ROU assets and lease liabilities.

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As of December 31, 2020, the Company has operating lease ROU assets of $ 12.4 million and operating lease liabilities of $ 12.4 million.

As of December 31, 2019, the Company has operating lease ROU assets of $ 14.3 million and operating lease liabilities of $ 14.2 million.

The Company does not have any agreements that are classified as finance leases.

2 unchanged sentences

Operating lease cost (1)

$ 2,819 $ 2,704

Short term lease cost (1)

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The table below reconciles the remaining undiscounted cash flows for the next five years for each twelve-month period presented and the total of the subsequent remaining years to the operating lease liabilities recorded on the balance sheet:

(In Thousands)

Operating Leases

(In Thousands) Operating Leases

Thereafter 4,875

Total minimum lease payments $ 15,161

6 unchanged sentences

Investment in Low Income Housing Partnerships $ 24,142 $ 27,841

Deferred taxes, net

Taxes receivable

Bank owned life insurance

Accrued interest receivable 7,979 4,512

Interest rate swaps not designated as hedging instruments 7,387 2,950

Bank owned life insurance, net 6,520 6,393

Taxes receivable 4,083 1,429

Interest rate lock commitments 4,034 810

Software 3,905 4,590

Equity method investments 2,462 2,232

Prepaid expenses 2,404 1,649

Repossessed assets

Deferred taxes, net 1,980 2,535

Commercial servicing rights 1,310 1,214

Interest rate lock commitments

Interest rate swaps not designated as hedging instruments

Interest rate swaps designated as hedging instruments

Repossessed assets 231 231

Other assets 2,051 1,690

Total $ 68,488 $ 58,076

Equity Method Investments:

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The Company expects to fund its remaining $ 9.9 million in commitments on these investments through 2030.

(In Thousands)

Date of original commitment

Years over which tax benefits are earned

Original commitment amount

life to date contributions

Remaining commitment amount

Centerline XXII

Centerline XXXIII

September 2006

December 2006

December 2012

R4 - Coronado

R4 - Coronado II

R4 - Duke Apartments

November 2019

(In Thousands) Date of original commitment Years over which tax benefits are earned Original commitment amount Less:

life to date contributions Remaining commitment amount

USA 57 December 2006 15 3,000 ( 3,000 ) —

WNC December 2012 16 2,500 ( 2,500 ) —

R4 - Coronado March 2013 17 10,729 ( 10,616 ) 113

R4 - MVV May 2014 17 8,528 ( 8,328 ) 200

R4 - PJ33 June 2016 17 6,835 ( 6,512 ) 323

R4 - Coronado II July 2019 17 7,282 ( 1,665 ) 5,617

R4 - Duke Apartments November 2019 17 3,985 ( 372 ) 3,613

Total $ 42,859 ($ 32,993 ) $ 9,866

NOTE 14 - Deposits

1 unchanged sentence

(In Thousands)

2021 $ 128,970

Thereafter 1,794

Total $ 175,631

The Company offers the Certificate of Deposit Account Registry Service® (CDARS®) and Insured Cash Sweep® (ICS®) service as a member of Promontory Interfinancial Network, LLCSM (Network).

2 unchanged sentences

In addition to customer deposit placement, the CDARS and ICS service also allows placement of the Bank's own investment dollars.

The Company had $1.2 million CDARS certificates of deposits and $44.4 million ICS deposits at December 31, 2019 and no CDARS certificates of deposits or ICS deposits at December 31, 2018 .

At December 31, 2019 and 2018 , the Company did not hold any certificates of deposit from a public entity collateralized by letters of credit issued by the FHLB.

At December 31, 2019 and 2018 , the Company did not have any securities pledged to collateralize certificates of deposit from a public entity.

The Company had $ 9.4 million CDARS certificates of deposits and $ 86.5 million ICS deposits at December 31, 2020 and $ 1.2 million CDARS certificates of deposits and $ 44.5 million ICS deposits at December 31, 2019.

At December 31, 2020 and 2019, the Company held $ 4.6 million and $ 1.6 million, in deposits for related parties, including directors, executive officers, and their affiliates.

7 unchanged sentences

Certificates of deposit less than $250,000 1,409 951 228

Total $ 5,279 $ 4,961 $ 2,307

NOTE 15 - Borrowings

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The Company has outstanding FHLB advances of $ 14.8 million and $ 8.9 million as of December 31, 2020 and 2019, respectively, which were originated to match fund low income housing projects that qualify for long-term fixed interest rates.

The first advance is a $1.9 million FHLB Community Investment Program advance which was originated on March 22, 2013.

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 $2.1 million FHLB Community Investment Cash Advance Program advance that was originated in the second quarter of 2016.

This advance has a 20 year term with a 30 year amortization period, which mirrors the term of the loan made to the borrower, and a fixed interest rate of 2.61% .

The third advance is a $3.0 million FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2017.

This advance has a 20 year term with a 30 year amortization period and a fixed interest rate of 3.25% , which mirrors the term of the loan made to the borrower.

The fourth advance is a $1.0 million 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 last 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.

All of these FHLB advances are included in borrowings.

These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23 % to 3.25 %.

The Federal Reserve Bank is holding $ 79.5 million of loans as collateral to secure available borrowing lines through the discount window of $ 46.4 million at December 31, 2020.

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The Company paid less than $ 1,000 in interest in 2020 and 2019 on this agreement.

The Company is subject to provisions under Alaska state law, which generally limit the amount of the Bank's outstanding debt to 15% of total assets or $244.7 million and $222.6 million at December 31, 2019 and 2018, respectively.

Securities sold under agreements to repurchase were zero and $34.3 million , respectively, for December 31, 2019 and 2018 .

The Company was paying an average rate of 0.00% and 0.17% on these agreements at December 31, 2019 and 2018 , respectively.

The average balance outstanding of securities sold under agreement to repurchase during 2019 and 2018 was $15.2 million and $29.9 million , respectively, and the maximum outstanding at any month-end was $36.6 million and $36.5 million , respectively, during the same time periods.

The securities sold under agreement to repurchase are held by the FHLB under the Company’s control.

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 as of June 30, 2020.

This advance had an interest rate of 0.35%.

The Company is subject to provisions under Alaska state law, which generally limit the amount of the Bank's outstanding debt to 35 % of total assets or $ 736.0 million at December 31, 2020 and 15 % of total assets $ 244.7 million at December 31, 2019.

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

The average balance outstanding of securities sold under agreement to repurchase during 2020 and 2019 was zero and $ 15.2 million, respectively, and the maximum outstanding at any month-end was zero and $ 36.6 million, respectively, during the same time periods.

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

The future principal payments that are required on the Company’s borrowings as of December 31, 2020, are as follows:

(In Thousands)

Thereafter 12,800

Total $ 14,817

The Company recognized interest expense of $ 387,000 , $ 291,000 , and $ 273,000 on borrowings and securities sold under repurchase agreements in 2020, 2019, and 2018, respectively.

1 unchanged sentence

NOTE 16 - Junior Subordinated Debentures

In May of 2003, the Company formed a wholly-owned Delaware statutory business trust subsidiary, Northrim Capital Trust 1 (the “Trust”), which issued $8 million of guaranteed undivided beneficial interests in the Company’s Junior Subordinated Deferrable Interest Debentures (“Trust Preferred Securities”).

These debentures qualified as Tier 1 capital under Federal Reserve Board guidelines.

All of the common securities of the Trust were owned by the Company.

The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by the Trust to purchase $8.2 million of junior subordinated debentures of the Company.

The Trust was not consolidated in the Company’s financial statements in accordance with GAAP;

therefore, the Company recorded its investment in the Trust as another asset and the subordinated debentures as a liability.

The debentures, which represent the sole asset of the Trust, accrued and paid distributions quarterly at a variable rate of 90 -day LIBOR plus 3.15% per annum, adjusted quarterly, of the stated liquidation value of $1,000 per capital security.

The interest cost to the Company on these debentures was zero , zero , and $219,000 in 2019 , 2018 , and 2017 , respectively.

The Company entered into contractual arrangements which, taken collectively, fully and unconditionally guaranteed payment of:

(i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities;

(ii) the redemption price with respect to any Trust Preferred Securities called for redemption by the Trust;

and (iii) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of the Trust.

The Trust Preferred Securities were mandatorily redeemable upon maturity of the debentures on May 15, 2033 , or upon earlier redemption as provided in the indenture.

The Company redeemed the debentures purchased by the Trust in whole, on August 15, 2017 .

As specified in the indenture, the redemption price was the principal amount and all accrued but unpaid interest.

In December of 2005, the Company formed a wholly-owned Connecticut statutory business trust subsidiary, Northrim Statutory Trust 2 (the “Trust 2”), which issued $ 10 million of guaranteed undivided beneficial interests in the Company’s Junior Subordinated Deferrable Interest Debentures (“Trust Preferred Securities 2”).

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The following table shows changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2020, 2019, and 2018:

(In Thousands)

Unrealized gains (losses) on securities available for sale

Unrealized gains (losses) on derivatives and hedging

(In Thousands) Unrealized gains (losses) on securities available for sale Unrealized gains (losses) on derivatives and hedging Total

Balance at December 31, 2017 ($ 454 ) $ 184 ($ 270 )

Other comprehensive income (loss), net of tax expense of $ 210

Reclassification for remeasuring of deferred tax asset related to investment securities

( 482 ) 423 ( 59 )

Reclassification for cumulative effect of adoption of accounting principles related to fair value measurement of equity securities ( 191 ) — ( 191 )

Balance at December 31, 2018 ($ 1,127 ) $ 607 ($ 520 )

Other comprehensive income (loss), net of tax benefit of $( 757 )

Reclassification for cumulative effect of adoption of accounting principles related to fair value measurement of equity securities

2,092 ( 1,141 ) 951

Balance at December 31, 2019 $ 965 ($ 534 ) $ 431

Other comprehensive income (loss), net of tax expense of $ 1,600

294 ( 707 ) ( 413 )

Balance at December 31, 2020 $ 1,259 ($ 1,241 ) $ 18

1 unchanged sentence

The Company's revenue is included in net interest income and other operating income on its Consolidated Statements of Income.

ASU 2014-09, which amends Topic 606 in the Accounting Standards Codification ("ASC"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.

Topic 606 in the Accounting Standards Codification ("Topic 606") includes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.

The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our ongoing revenue-generating transactions are not subject to Topic 606, including revenue associated with financial instruments, including revenue from loans and securities.

In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, purchased receivable income, financial guarantees, and derivatives are also not in scope of the new guidance.

The majority of our ongoing revenue-generating transactions are not subject to Topic 606, including revenue associated with financial instruments and revenue from loans and securities.

In addition, certain noninterest income streams such as fees associated with MSRs, purchased receivable income, financial guarantees, and derivatives are also not in scope of the guidance.

Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant services income, and commissions from the sales of mutual funds and other investments.

1 unchanged sentence

Substantially all of the Company’s non-interest revenue is generated from contracts with customers.

Non-interest revenue streams in-scope of Topic 606 are discussed below.

Noninterest revenue streams in-scope of Topic 606 are discussed below.

Bankcard fees

7 unchanged sentences

Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed.

Payments for service charges on deposit accounts are primarily received immediately or in the following month through a direct charge to customers’ accounts.

Payments for service

charges on deposit accounts are primarily received immediately or in the following month through a direct charge to customers’ accounts.

Other operating income consists of other recurring revenue streams such as merchant services income, commissions from sales of mutual funds and other investments, safety deposit box rental fees, bank check and other check fees, unrealized gains and losses on marketable securities, and other miscellaneous revenue streams.

12 unchanged sentences

The following presents other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2020, 2019 and 2018:

(In Thousands)

(In Thousands) December 31,

Other operating income 2020 2019 2018

2 unchanged sentences

Service charges on deposit accounts 1,102 1,557 1,508

Other 1,528 1,664 1,592

Other operating income (in-scope of Topic 606) $ 5,467 $ 6,197 $ 5,911

3 unchanged sentences

Gains on the sale of OREO properties were $ 391,000 , $ 380,000 , and $ 3,000 for the years ended December 31, 2020, 2019, and 2018, respectively.

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset).

A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer.

The Company’s other operating revenue streams are largely based on transactional activity, or standard month-end revenue accruals.

Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized.

The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances.

As of December 31, 2019 , 2018 and 2017 , the Company did not have any significant contract balances.

Contract Acquisition Costs

An entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered.

The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission).

The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less.

Upon adoption of ASU 2014-09, the Company did not capitalize any contract acquisition costs.

NOTE 19 - Employee Benefit Plans

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These expenses are included in "Salaries and other personnel expense" in the Consolidated Statements of Income.

At December 31, 2019 and 2018 , the balance of the accrued liability for this plan was included in "Other liabilities" and totaled $2.1 million and $2.2 million , respectively.

At December 31,

2020 and 2019, the balance of the accrued liability for this plan was included in "Other liabilities" and totaled $ 2.1 million and $ 2.1 million, respectively.

RML has established a Supplemental Executive Retirement Plan ("SERP"), under which RML has agreed to make payment to certain key executives, based on contributions made by RML to the plan and a variable rate of return.

5 unchanged sentences

Northrim Bank's net liability under this plan is dependent upon market gains and losses on assets held in the plan.

Northrim Bank recognized an increase in its liability of $36,000 in 2019, an increase in its liability of $52,000 in 2018, and a decrease in its liability of $140,000 in 2017.

Northrim Bank recognized an increase in its liability of $ 78,000 in 2020, an increase in its liability of $ 36,000 in 2019, and an increase in its liability of $ 52,000 in 2018.

These changes are included in "Salaries and other personnel expense" in the Consolidated Statements of Income.

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The Compensation Committee approved management’s recommendation based upon the calculated payout under the Profit Sharing Plan’s methodology resulting in aggregate payouts of $ 3.7 million, $ 2.9 million, and $ 1.3 million for 2020, 2019, and 2018, respectively.

Information concerning the calculation of employee payments under the Profit Sharing Plan is set forth under the heading “Performance Based Annual Payment” in the Company’s definitive proxy statement for the 2020 Annual Shareholders’ Meeting and is incorporated into this report by reference.

NOTE 20 - Commitments and Contingencies

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Mortgage loans sold to investors may be sold with servicing rights released, for which the Company makes only standard legal representations and warranties as to meeting certain underwriting and collateral documentation standards.

In the past two years, the Company has had to repurchase one loan due to deficiencies in underwriting or loan documentation and has not realized significant losses related to these loans.

In the past two years, the Company has had to repurchase one loan due to deficiencies in underwriting or loan documentation and has not realized significant losses related to this loans.

Management believes that any liabilities that may result from such recourse provisions are not significant.

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Capital Expenditures and Commitments:

At December 31, 2019 , the Company has capital commitments related to the planned improvements to the Company’s corporate office building.

At December 31, 2020, the Company has capital commitments related to the planned improvements of two of the Company’s existing branches, as well as a new branch location.

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

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Similarly, the Company could be required to settle its obligations under the agreement if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels.

The Company pledged $4.7 million and $296,000 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements as of December 31, 2019 and 2018 , respectively.

The Company had interest rate swaps with an aggregate notional amount of $94.4 million and $16.0 million at December 31, 2019 and December 31, 2018 , respectively.

At December 31, 2019 , the notional amount of interest rate swaps is made up of eight variable to fixed rate swaps to commercial loan customers totaling $47.2 million , and eight fixed to variable rate swap with a counterparty totaling $47.2 million .

Changes in fair value from these sixteen interest rate swaps offset each other in 2019 and 2018 .

The Company pledged $ 10.7 million and $ 4.7 million in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements as of December 31, 2020 and 2019, respectively.

The Company had interest rate swaps with an aggregate notional amount of $ 196.0 million and $ 94.4 million at December 31, 2020 and 2019, respectively.

At December 31, 2020, the notional amount of interest rate swaps is made up of sixteen variable to fixed rate swaps to commercial loan customers totaling $ 98.0 million, and sixteen fixed to variable rate swap with a counterparty totaling $ 98.0 million.

Changes in fair value from these thirty-two interest rate swaps offset each other in 2020 and 2019.

The Company recognized $ 949,000 , $ 964,000 , and $ 84,000 in fee income related to interest rate swaps in 2020 and 2019, and 2018, respectively.

1 unchanged sentence

None of these interest rate swaps are designated as hedging instruments.

The Company entered into an interest rate swap in the third quarter of 2017 to hedge the variability in cash flows arising out of its junior subordinated debentures, which is floating rate debt, by swapping the cash flows with an interest rate swap which receives floating and pays fixed.

The Company has an interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures, which is floating rate debt, by swapping the cash flows with an interest rate swap which receives floating and pays fixed.

The Company has designated this interest rate swap as a hedging instrument.

2 unchanged sentences

This rate was 1.59 % as of December 31, 2020.

The Company pledged $1.3 million and $400,000 in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of December 31, 2019 and 2018 , respectively.

The Company pledged $ 2.9 million and $ 1.3 million in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of December 31, 2020 and 2019, respectively.

Changes in the fair value of this interest rate swap are reported in other comprehensive income.

The unrealized loss on this interest rate swap was $534,000 and unrealized gain was $607,000 as of December 31, 2019 and 2018 , respectively.

The unrealized loss on this interest rate swap was $ 1.7 million and $ 534,000 as of December 31, 2020 and 2019, respectively.

Interest rate swaps related to home mortgage lending activities

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None of these home mortgage lending derivatives are designated as hedging instruments.

The following table presents the fair value of derivatives not designated as hedging instruments at December 31, 2019 and December 31, 2018 :

(In Thousands)

Asset Derivatives

December 31, 2019

December 31, 2018

Balance Sheet Location

Interest rate swaps

Interest rate lock commitments

(In Thousands)

Liability Derivatives

December 31, 2019

December 31, 2018

Balance Sheet Location

Interest rate swaps

Other liabilities

Retail interest rate contracts

Other liabilities

The following table presents the income (losses) of derivatives not designated as hedging instruments at December 31, 2019 and December 31, 2018 :

(In Thousands)

Income Statement Location

December 31, 2019

December 31, 2018

Retail interest rate contracts

Mortgage banking income

Interest rate lock commitments

Mortgage banking income

The following table presents the fair value of derivatives not designated as hedging instruments:

(In Thousands) Asset Derivatives

December 31, 2020 December 31, 2019

Balance Sheet Location Fair Value Fair Value

Interest rate swaps Other assets $ 7,387 $ 2,950

Interest rate lock commitments Other assets 4,034 810

Total $ 11,421 $ 3,760

(In Thousands) Liability Derivatives

December 31, 2020 December 31, 2019

Balance Sheet Location Fair Value Fair Value

Interest rate swaps Other liabilities $ 7,387 $ 2,950

Retail interest rate contracts Other liabilities 880 71

Total $ 8,267 $ 3,021

The following table presents the net gains (losses) of derivatives not designated as hedging instruments:

(In Thousands) Income Statement Location December 31, 2020 December 31, 2019

Retail interest rate contracts Mortgage banking income ($ 7,980 ) ($ 922 )

Interest rate lock commitments Mortgage banking income 3,062 ( 170 )

Total ($ 4,918 ) ($ 1,092 )

Our derivative transactions with counterparties under International Swaps and Derivative Association master agreements that include “right of set-off” provisions.

2 unchanged sentences

The following table summarizes the derivatives that have a right of offset as of December 31, 2020 and 2019:

December 31, 2019

Gross amounts not offset in the Statement of Financial Position

(In Thousands)

Gross amounts of recognized assets and liabilities

Gross amounts offset in the Statement of Financial Position

Net amounts of assets and liabilities presented in the Statement of Financial Position

Financial Instruments

Collateral Posted

December 31, 2020 Gross amounts not offset in the Statement of Financial Position

(In Thousands) Gross amounts of recognized assets and liabilities Gross amounts offset in the Statement of Financial Position Net amounts of assets and liabilities presented in the Statement of Financial Position Financial Instruments Collateral Posted Net Amount

Asset Derivatives

3 unchanged sentences

Retail interest rate contracts 880 — 880 — — 880

December 31, 2018

Gross amounts not offset in the Statement of Financial Position

(In Thousands)

Gross amounts of recognized assets and liabilities

Gross amounts offset in the Statement of Financial Position

Net amounts of assets and liabilities presented in the Statement of Financial Position

Financial Instruments

Collateral Posted

December 31, 2019 Gross amounts not offset in the Statement of Financial Position

Asset Derivatives

7 unchanged sentences

Federal and State regulations place certain limitations on the payment of dividends by the Company.

In April 2019, the Company’s Board of Directors approved a plan whereby it would periodically repurchase for cash up to approximately 5% of its shares of common stock in the open market.

At December, 31, 2019 , there were 0 shares available under the stock repurchase program.

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

In January 2020, the Company’s Board of Directors approved a plan whereby it would periodically repurchase for cash up to approximately 5 % of its shares of common stock in the open market.

At December, 31, 2020, there were no shares available under the stock repurchase program.

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

The Company intends to continue to repurchase its stock from time to time depending upon market conditions.

1 unchanged sentence

During 2020, 2019 and 2018, 327,000 , 347,676 and 15,468 shares were repurchased, respectively.

During 2020 through March 5, the Company has repurchased 98,605 shares.

NOTE 23 - Stock-Based Compensation

4 unchanged sentences

Under the 2020 Plan and previous plans, certain key employees have been granted the option to purchase set amounts of common stock at the market price on the day the option was granted.

Optionees, at their own discretion, may cover the cost of exercise through the exchange at the then fair value of already owned shares of the Company’s stock.

Optionees, at their own discretion, may pay cash to cover the cost of exercise, may cover the cost of exercise through the exchange at the then fair value of already owned shares of the Company’s stock, or they may cover the cost of exercise through net settlement of a portion of the stock options exercised in satisfaction of the exercise price and applicable tax withholding requirements.

The two latter options are referred to as cashless stock option exercises.

Options are granted for a 10 -year period and vest on a pro-rata basis over the initial three years from the grant date.

8 unchanged sentences

Stock Options:

2020 2019 2018

Grant date fair value $ 6.55 $ 5.34 $ 7.69

Expected life of options

Expected life of options 8 years 8 years 8 years

Risk-free interest rate 0.79 % 1.74 % 3.01 %

2 unchanged sentences

The following table summarizes stock option activity during 2020:

Number of Shares

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life, in Years

Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life, in Years

Outstanding at January 1, 2020 158,620 $ 30.45

Granted 20,173 32.09

Forfeited — —

Exercised — —

Outstanding at December 31, 2020 178,793 $ 30.64 6.29

3 unchanged sentences

The total intrinsic value of options outstanding and exercisable as of December 31, 2020, 2019, and 2018 was $ 682,000 , $ 1.1 million, and $ 646,000 , respectively.

The total intrinsic value of options exercised for the years ended December 31, 2019 , 2018 , and 2017 was $203,000 , $383,000 , and $631,000 , respectively.

The Company allows stock options to be exercised through cash or cashless transactions.

Cashless stock option exercises require a portion of the options exercised to be net settled in satisfaction of the exercise price and applicable tax withholding requirements.

In 2019 , 2018 , and 2017 the Company received cash of zero , $195,000 , and $69,000 , respectively, for cash stock option exercises.

In 2019 , 2018 , and 2017 the Company net settled $282,000 , $193,000 , and $954,000 respectively, for cashless stock option exercises.

The Company withheld $317,000 , $227,000 , and $1.1 million to pay for stock option exercises or income taxes that resulted from the exercise of stock options in 2019 , 2018 , and 2017 , respectively.

The total intrinsic value of options exercised for the years ended December 31, 2020, 2019, and 2018 was zero , $ 203,000 , and $ 383,000 , respectively.

As noted above, the Company allows stock options to be exercised through cash or cashless transactions.

In 2020, 2019, and 2018 the Company received cash of zero , zero , and $ 195,000 , respectively, for cash stock option exercises.

In 2020, 2019, and 2018 the Company net settled zero , $ 282,000 , and $ 193,000 respectively, for cashless stock option exercises.

The Company withheld zero , $ 317,000 , and $ 227,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options in 2020, 2019, and 2018, respectively.

For the years ended December 31, 2020, 2019 and 2018, the Company recognized $ 148,000 , $ 143,000 , and $ 183,000 , respectively, in stock option compensation expense as a component of "Salaries and other personnel expense".

As of December 31, 2019 , there was approximately $276,000 of total unrecognized compensation expense related to non-vested options, which is expected to be recognized over the weighted-average vesting period of 2.2 years.

December 31, 2020, there was approximately $ 258,000 of total unrecognized compensation expense related to non-vested options, which is expected to be recognized over the weighted-average vesting period of 2.2 years.

Restricted Stock Units:

3 unchanged sentences

The following table summarizes restricted stock unit activity during 2020:

Number of Shares

Weighted Average Grant Date Fair Value

Weighted Average Remaining Contractual Life, in Years

Number of Shares Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Life, in Years

Outstanding at January 1, 2020 71,952 $ 34.16

Granted 22,709 32.09

Dividend equivalents awarded 3,688 27.65

Vested ( 25,532 ) 29.75

Forfeited — —

Outstanding at December 31, 2020 72,817 $ 33.33 2.21

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The capital ratios for the Company exceed those for the Bank primarily because the $ 10 million trust preferred securities offerings that the Company completed in the fourth quarter of 2005 are included in the Company’s capital for regulatory purposes although they are accounted for as a liability in its financial statements.

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

As a result, the Company has $10 million more in regulatory capital than the Bank at December 31, 2019 and 2018 , respectively, which explains most of the difference in the capital ratios for the two entities.

The trust preferred securities are not included in the Bank's capital ratios.

Northrim BanCorp, Inc.

Adequately-Capitalized

Well-Capitalized

(In Thousands)

Actual Adequately-Capitalized Well-Capitalized

(In Thousands) Amount Ratio Amount Ratio Amount Ratio

As of December 31, 2020:

Common equity tier 1 capital (to risk-weighted assets)

Total Capital (to risk-weighted assets)

Tier I Capital (to risk-weighted assets)

Tier I Capital (to average assets)

Common equity tier 1 capital (to risk-weighted assets) $ 205,717 13.75 % $ 67,326 ≥ 4.5 % NA NA

Total Capital (to risk-weighted assets) $ 234,363 15.46 % $ 121,275 ≥ 8 % NA NA

Tier I Capital (to risk-weighted assets) $ 215,380 14.20 % $ 91,006 ≥ 6 % NA NA

Tier I Capital (to average assets) $ 215,380 10.25 % $ 84,051 ≥ 4 % NA NA

As of December 31, 2019:

Common equity tier 1 capital (to risk-weighted assets)

Total Capital (to risk-weighted assets)

Tier I Capital (to risk-weighted assets)

Tier I Capital (to average assets)

Northrim Bank

Adequately-Capitalized

Well-Capitalized

(In Thousands)

Common equity tier 1 capital (to risk-weighted assets) $ 190,807 13.69 % $ 62,720 ≥ 4.5 % NA NA

Total Capital (to risk-weighted assets) $ 217,912 15.63 % $ 111,535 ≥ 8 % NA NA

Tier I Capital (to risk-weighted assets) $ 200,465 14.38 % $ 83,643 ≥ 6 % NA NA

Tier I Capital (to average assets) $ 200,465 12.41 % $ 64,614 ≥ 4 % NA NA

Northrim Bank Actual Adequately-Capitalized Well-Capitalized

(In Thousands) Amount Ratio Amount Ratio Amount Ratio

As of December 31, 2020:

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An institution that does not meet the conservation buffer requirement will be subject to restrictions on certain activities including payment of dividends, stock repurchases, and discretionary bonuses to executive officers.

Management believes, as of December 31, 2020, that the Company and Bank meet all conservation buffer requirements to which they are subject.

NOTE 25 - Income Taxes

At December 31, 2019 and 2018 , the Company had $1.4 million and $8.2 million in total taxes receivable, respectively, included in "Other assets" in the Consolidated Balance Sheets.

The Company realized $2.7 million , $2.8 million , and $3.5 million in tax credits related to its investments in low income housing tax credit partnerships for 2019 , 2018 , and 2017 respectively.

Components of the provision for income taxes are as follows:

(In Thousands)

Current Tax Expense (Benefit)

Deferred Expense (Benefit)

Total Expense

(In Thousands) Current Tax Expense (Benefit) Deferred Expense (Benefit) Total Expense

Federal $ 3,607 $ 371 $ 3,978

State 1,891 184 2,075

Amortization of investment in low income housing tax credit partnerships 3,506 — 3,506

Total $ 9,004 $ 555 $ 9,559

Federal $ 1,078 $ 476 $ 1,554

State 977 235 1,212

Amortization of investment in low income housing tax credit partnerships 2,668 — 2,668

Total $ 4,723 $ 711 $ 5,434

Federal ($ 1,549 ) $ 2,017 $ 468

State ( 85 ) 997 912

Amortization of investment in low income housing tax credit partnerships 2,691 — 2,691

Total $ 1,057 $ 3,014 $ 4,071

The actual expense for 2020, 2019, and 2018, differs from the “expected” tax expense (computed by applying the U.S.

Federal Statutory Tax Rate of 21% for the years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017 ) as follows:

Federal Statutory Tax Rate of 21% for the years ended December 31, 2020, 2019 and 2018) as follows:

(In Thousands) 2020 2019 2018

5 unchanged sentences

Revaluation of deferred tax assets — — ( 470 )

Other ( 1,076 ) ( 656 ) ( 798 )

Total $ 9,559 $ 5,434 $ 4,071

The components of the net deferred tax asset are as follows:

2 unchanged sentences

Allowance for loan losses $ 5,772 $ 5,190 $ 5,313

Loan fees, net of costs

Other real estate owned 69 58 160

3 unchanged sentences

Fair market value adjustment on certificates of deposit 76 100 123

Unrealized loss on available for sale investment securities, net

Operating lease liability

Operating lease liabilities 3,519 4,045 —

Other 2,330 1,866 1,069

Total Deferred Tax Asset $ 13,470 $ 13,010 $ 8,300

4 unchanged sentences

FHLB stock repurchase and dividends ( 30 ) ( 174 ) ( 178 )

Operating lease right-of-use asset

Operating lease right-of-use assets ( 3,537 ) ( 4,067 ) —

Loan fees, net of costs ( 635 ) 741 818

Unrealized loss on available for sale investment securities, net ( 187 ) ( 384 ) 270

Other ( 483 ) ( 389 ) ( 379 )

Total Deferred Tax Liability ($ 11,490 ) ($ 10,475 ) ($ 5,054 )

5 unchanged sentences

As of December 31, 2020, the Company had no unrecognized tax benefits.

In 2020 the Company reversed an accrual of $ 454,000 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 has 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.

In 2019 the Company reversed an accrual of $ 250,000 related to interest and penalties that was recognized in 2018.

There were no interest and penalties recognized in 2017 .

The tax years subject to examination by federal taxing authorities are the years ending December 31, 2020, 2019, 2018, and 2017.

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In order to determine the fair value of MSRs and CSRs, the present value of net expected future cash flows is estimated.

Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates, and ancillary fee income net of servicing costs.

Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations,

delinquency rates, and ancillary fee income net of servicing costs.

The model assumptions are also compared to publicly filed information from several large MSR holders, as available.

31 unchanged sentences

Estimated fair values as of the periods indicated are as follows:

December 31, 2019

December 31, 2018

(In Thousands)

Carrying Amount

December 31, 2020 December 31, 2019

(In Thousands) Carrying Amount Fair Value Carrying Amount Fair Value

Financial assets:

9 unchanged sentences

Level 3 inputs:

Investment securities held to maturity 10,000 10,000 — —

Loans and loans held for sale 1,590,229 1,560,357 1,111,205 1,095,031

5 unchanged sentences

Level 2 inputs:

Securities sold under repurchase agreements

Deposits $ 1,824,981 $ 1,826,990 $ 1,372,351 $ 1,373,647

Borrowings 14,817 15,538 8,891 9,216

Accrued interest payable 65 65 23 23

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The following table sets forth the balances as of the periods indicated of assets measured at fair value on a recurring basis:

(In Thousands)

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

(In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)

December 31, 2020

7 unchanged sentences

Total marketable equity securities $ 9,052 $ 9,052 $ — $ —

Corporate bonds $ 10,000 $ — $ — $ 10,000

Total held to maturity securities $ 10,000 $ — $ — $ 10,000

Interest rate swaps $ 7,387 $ — $ 7,387 $ —

24 unchanged sentences

The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2020 and 2019:

(In Thousands)

Beginning balance

Change included in earnings

Purchases and issuances

Sales and settlements

Ending balance

(In Thousands) Beginning balance Change included in earnings Purchases and issuances Sales and settlements Ending balance

December 31, 2020

Investment securities held to maturity $ — $ — $ 10,000 $ — $ 10,000

Interest rate lock commitments 810 ( 5,680 ) 49,186 ( 40,282 ) 4,034

1 unchanged sentence

Commercial servicing rights 1,214 ( 99 ) 195 — 1,310

Total $ 13,944 ($ 11,305 ) $ 64,205 ($ 40,282 ) $ 26,562

December 31, 2019

2 unchanged sentences

Commercial servicing rights 1,030 6 178 — 1,214

Total $ 12,829 ($ 4,544 ) $ 19,789 ($ 14,130 ) $ 13,944

During 2020 and 2019, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis, except for certain assets as shown in the following table.

For loans measured for impairment, the Company classifies fair value measurements using observable inputs, such as external appraisals, as Level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as Level 3 valuations in the fair value hierarchy.

(In Thousands)

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

(In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)

December 31, 2020

Loans measured for impairment $ 308 $ — $ — $ 308

Total $ 308 $ — $ — $ 308

December 31, 2019

Loans measured for impairment $ 561 $ — $ — $ 561

Other assets - equity method investment

Total $ 561 $ — $ — $ 561

The following table presents the (income) losses resulting from nonrecurring fair value adjustments for the periods ended December 31, 2020, 2019 and 2018, respectively:

1 unchanged sentence

Loans measured for impairment ($ 4 ) $ 3 ($ 952 )

Other real estate owned

Other operating expense - impairment on equity method investment — — 804

2 unchanged sentences

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value at December 31, 2020 and 2019:

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average or Rate Range

Financial Instrument Valuation Technique Unobservable Input Weighted Average or Rate Range

December 31, 2020

Loans measured for impairment

In-house valuation of collateral

Discount rate

Interest rate lock commitment

External pricing model

Pull through rate

Mortgage servicing rights

Discounted cash flow

Constant prepayment rate

9.11% - 10.67%

Loans measured for impairment In-house valuation of collateral Discount rate 30 %

Interest rate lock commitment External pricing model Pull through rate 90.65 %

Mortgage servicing rights Discounted cash flow Constant prepayment rate 7.77 % - 13.17 %

Discount rate 7.75 %

8.51% - 8.66%

Commercial servicing rights

Discounted cash flow

Constant prepayment rate

7.64% - 15.67%

Commercial servicing rights Discounted cash flow Constant prepayment rate 7.38 % - 9.94 %

Discount rate 9.46 %

December 31, 2019

Loans measured for impairment

In-house valuation of collateral

Discount rate

Discounted cash flow

Discount rate

8.25% - 8.50%

Interest rate lock commitment

External pricing model

Pull through rate

Mortgage servicing rights

Discounted cash flow

Constant prepayment rate

7.62% - 9.87%

Loans measured for impairment In-house valuation of collateral Discount rate 25 %

Interest rate lock commitment External pricing model Pull through rate 92.65 %

Mortgage servicing rights Discounted cash flow Constant prepayment rate 9.11 % - 9.87 %

Discount rate 8.51 % - 10.47 %

9.93% - 10.47%

Commercial servicing rights

Discounted cash flow

Constant prepayment rate

7.64% - 15.67%

Commercial servicing rights Discounted cash flow Constant prepayment rate 7.64 % - 15.67 %

Discount rate 11.70 %

7 unchanged sentences

December 31, 2020

(In Thousands)

Community Banking

Home Mortgage Lending

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 73,435 $ 3,281 $ 76,716

1 unchanged sentence

Net interest income 67,647 3,018 70,665

Benefit for loan losses

Provision for loan losses 2,432 — 2,432

Other operating income 10,693 52,635 63,328

Compensation expense, RML acquisition payments

Other operating expense 57,614 31,500 89,114

1 unchanged sentence

Provision for income taxes 2,694 6,865 9,559

Net income $ 15,600 $ 17,288 $ 32,888

Total assets $ 1,935,871 $ 185,927 $ 2,121,798

Loans held for sale $ — $ 146,178 $ 146,178

December 31, 2019

(In Thousands)

Community Banking

Home Mortgage Lending

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 67,770 $ 2,313 $ 70,083

7 unchanged sentences

Provision for income taxes 4,408 1,026 5,434

Net income $ 18,125 $ 2,566 $ 20,691

Total assets $ 1,540,869 $ 103,127 $ 1,643,996

Loans held for sale $ — $ 67,834 $ 67,834

December 31, 2018

(In Thousands)

Community Banking

Home Mortgage Lending

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 62,097 $ 2,080 $ 64,177

3 unchanged sentences

Other operating income 11,323 20,844 32,167

Compensation expense, RML acquisition payments

Other operating expense 49,956 19,844 69,800

1 unchanged sentence

Provision for income taxes 3,361 710 4,071

net income attributable to the noncontrolling interest

Net income attributable to Northrim BanCorp, Inc.

Net income $ 18,233 $ 1,771 $ 20,004

Total assets $ 1,443,745 $ 59,243 $ 1,502,988

Loans held for sale $ — $ 34,710 $ 34,710

8 unchanged sentences

Taxes receivable, net 1,973 —

Other assets 497 6

Total Assets $ 234,048 $ 218,370

Junior subordinated debentures $ 10,310 $ 10,310

2 unchanged sentences

Shareholders' Equity

Common stock 6,251 6,559

Additional paid-in capital 41,808 50,512

Retained earnings 173,498 149,615

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income 18 431

Total Shareholders' Equity 221,575 207,117

1 unchanged sentence

Statements of Income for Years Ended:

2020 2019 2018

(In Thousands)

3 unchanged sentences

Income (loss) on marketable equity securities 61 911 ( 625 )

Other income 108 44 5

Total Income $ 34,512 $ 22,488 $ 20,911

Interest expense 385 389 389

3 unchanged sentences

Benefit from income taxes ( 1,509 ) ( 760 ) ( 2,006 )

Net Income $ 32,888 $ 20,691 $ 20,004

Statements of Cash Flows for Years Ended:

2020 2019 2018

(In Thousands)

Operating Activities:

Net income $ 32,888 $ 20,691 $ 20,004

Adjustments to Reconcile Net Income to Net Cash:

Gain on sale of securities, net ( 98 ) — —

Equity in undistributed earnings from subsidiaries ( 33,744 ) ( 20,897 ) ( 20,920 )

6 unchanged sentences

Proceeds from sales/calls/maturities of marketable equity securities 503 229 783

Investment in Northrim Bank, NISC, NCT1 & NST2

Investment in Northrim Bank, NISC & NST2 21,423 19,488 17,877

Net Cash Provided by Investing Activities 20,374 19,717 15,660

1 unchanged sentence

Dividends paid to shareholders ( 8,844 ) ( 8,512 ) ( 7,064 )

Proceeds from issuance of common stock and excess tax benefits

Proceeds from issuance of common stock 84 73 243

Repurchase of common stock ( 9,976 ) ( 12,569 ) ( 494 )

4 unchanged sentences

NOTE 29 - Quarterly Results of Operations (Unaudited)

2019 Quarter Ended

2020 Quarter Ended Dec.

30 June 30 March 31

(In Thousands Except Per Share Amounts)

4 unchanged sentences

Other operating income 17,732 21,628 17,535 6,433

Other operating expense 24,147 23,506 22,674 18,787

Income before provision for income taxes 13,408 15,849 11,914 1,276

Provision for income taxes 3,308 3,994 2,014 243

Net income $ 10,100 $ 11,855 $ 9,900 $ 1,033

Earnings per share, basic $ 1.62 $ 1.87 $ 1.54 $ 0.16

Earnings per share, diluted $ 1.59 $ 1.84 $ 1.52 $ 0.16

2019 Quarter Ended Dec.

30 June 30 March 31

(In Thousands Except Per Share Amounts)

Total interest income $ 18,062 $ 17,837 $ 17,306 $ 16,878

Total interest expense 1,652 1,531 1,349 1,109

Net interest income 16,410 16,306 15,957 15,769

(Benefit) provision for loan losses ( 150 ) ( 2,075 ) 300 750

Other operating income 9,735 10,509 9,569 7,533

Compensation expense, RML acquisition payments 468 — — —

2 unchanged sentences

Provision for income taxes 1,100 2,028 1,146 1,160

Net income $ 4,580 $ 7,538 $ 4,261 $ 4,312

Earnings per share, basic $ 0.70 $ 1.13 $ 0.62 $ 0.63

Earnings per share, diluted $ 0.69 $ 1.11 $ 0.62 $ 0.62

2018 Quarter Ended

2018 Quarter Ended Dec.

30 June 30 March 31

(In Thousands Except Per Share Amounts)

4 unchanged sentences

Other operating income 7,718 8,673 8,314 7,462

Compensation expense, RML acquisition payments

Other operating expense 18,300 18,099 16,606 16,795

1 unchanged sentence

Provision for income taxes 907 1,129 1,167 868

Net income attributable to the noncontrolling interest

Net income attributable to Northrim Bancorp, Inc.

Net income $ 4,848 $ 5,264 $ 5,830 $ 4,062

Earnings per share, basic $ 0.70 $ 0.77 $ 0.85 $ 0.59

2 unchanged sentences

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-K

Item 8. Financial Statements and Supplementary Data