NORTHRIM BANCORP INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following report, audited consolidated financial statements and the notes thereto are set forth in this Annual Report on Form 10-K on the pages indicated: Report of Independent Registered Public Accounting Firm 66 Consolidated Balance Sheets at December 31, 20 20 and 20 19 69 For the Years Ended December 2020, 2019 and 2018: Consolidated Statements of Income 70 Consolidated Statements of Comprehensive Income 71 Consolidated Statements of Changes in Shareholders’ Equity 72 Consolidated Statements of Cash Flows 73 Notes to the Consolidated Financial Statements 75 65 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Northrim BanCorp, Inc. and Subsidiaries Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Northrim BanCorp, Inc. 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). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. 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 66 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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. 67 • 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 Everett, Washington March 5, 2021 We have served as the Company’s auditor since 2010. 68 CONSOLIDATED FINANCIAL STATEMENTS NORTHRIM BANCORP, INC. Consolidated Balance Sheets December 31, 2020 and 2019 December 31, 2020 December 31, 2019 (In Thousands, Except Share Data) ASSETS Cash and due from banks $ 23,304 $ 20,518 Interest bearing deposits in other banks 92,661 74,906 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 Investment in Federal Home Loan Bank stock 2,551 2,138 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 Mortgage servicing rights, at fair value 11,218 11,920 Other real estate owned, net 7,289 7,043 Premises and equipment, net 38,102 38,422 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 LIABILITIES Deposits: 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 Certificates of deposit $250,000 and greater 83,584 73,770 Total deposits 1,824,981 1,372,351 Borrowings 14,817 8,891 Junior subordinated debentures 10,310 10,310 Operating lease liabilities 12,378 14,229 Other liabilities 37,737 31,098 Total liabilities 1,900,223 1,436,879 COMMITMENTS AND CONTINGENCIES (NOTE 20) SHAREHOLDERS' EQUITY Preferred stock, $ 1 par value, 2,500,000 shares authorized, none issued or outstanding — — Common stock, $ 1 par value, 10,000,000 shares authorized, 6,251,004 and 6,558,809 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively 6,251 6,559 Additional paid-in capital 41,808 50,512 Retained earnings 173,498 149,615 Accumulated other comprehensive income, net of tax 18 431 Total shareholders' equity 221,575 207,117 Total liabilities and shareholders' equity $ 2,121,798 $ 1,643,996 See notes to consolidated financial statements 69 NORTHRIM BANCORP, INC. Consolidated Statements of Income Years Ended December 31, 2020, 2019, and 2018 (In Thousands, Except Share and Per Share Data) 2020 2019 2018 Interest and Dividend Income Interest and fees on loans and loans held for sale $ 71,091 $ 62,150 $ 57,542 Interest on investment securities available for sale 4,832 6,572 5,481 Dividends on marketable equity securities 466 439 348 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 Total Interest Income 76,716 70,083 64,177 Interest Expense Interest expense on deposits 5,279 4,961 2,307 Interest expense on securities sold under agreements to repurchase — 40 50 Interest expense on borrowings 387 251 223 Interest expense on junior subordinated debentures 385 389 389 Total Interest Expense 6,051 5,641 2,969 Net Interest Income 70,665 64,442 61,208 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 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 Interest rate swap income 949 964 84 Commercial servicing revenue 527 624 1,422 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 Other Operating Expense Salaries and other personnel expense 61,137 51,317 44,650 Data processing expense 7,668 7,128 6,035 Occupancy expense 6,624 6,607 6,136 Professional and outside services 3,157 2,531 2,453 Marketing expense 2,320 2,373 2,318 Insurance expense 1,228 557 862 Intangible asset amortization expense 48 60 70 Compensation expense - RML acquisition payments — 468 — Impairment of equity method investment — — 804 OREO (income) expense, net of rental income and gains on sale ( 242 ) ( 193 ) 258 Other operating expense 7,174 5,990 6,214 Total Other Operating Expense 89,114 76,838 69,800 Income Before Provision for Income Taxes 42,447 26,125 24,075 Provision for income taxes 9,559 5,434 4,071 Net Income $ 32,888 $ 20,691 $ 20,004 Earnings Per Share, Basic $ 5.18 $ 3.08 $ 2.91 Earnings Per Share, Diluted $ 5.11 $ 3.04 $ 2.86 Weighted Average Shares Outstanding, Basic 6,354,687 6,708,622 6,877,573 Weighted Average Shares Outstanding, Diluted 6,431,367 6,808,209 6,981,557 See notes to consolidated financial statements 70 NORTHRIM BANCORP, INC. Consolidated Statements of Comprehensive Income Years Ended December 31, 2020, 2019, and 2018 2010 (In Thousands) 2020 2019 2018 Net income $ 32,888 $ 20,691 $ 20,004 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized holding gains (losses) arising during the period $ 411 $ 2,866 ($ 692 ) Reclassification of net gains included in net income (net of tax expense of $ — , $ 7 , and $ — in 2020, 2019, and 2018, respectively) — ( 16 ) — Derivatives and hedging activities: Unrealized holding (losses) gains arising during the period ( 1,201 ) ( 1,142 ) 423 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 See notes to consolidated financial statements 71 NORTHRIM BANCORP, INC. Consolidated Statements of Changes in Shareholders’ Equity Years Ended December 31, 2020, 2019, and 2018 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Number of Shares Par Value (In Thousands) Balance at January 1, 2018 6,872 $ 6,872 $ 61,793 $ 124,407 ($ 270 ) $ 192,802 Cash dividend declared — — — ( 7,088 ) — ( 7,088 ) Stock-based compensation expense — — 816 — — 816 Exercise of stock options and vesting of restricted stock units, net 27 27 1 — — 28 Repurchase of common stock ( 16 ) ( 16 ) ( 478 ) — — ( 494 ) 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 Cash dividend declared — — — ( 8,528 ) — ( 8,528 ) Stock-based compensation expense — — 832 — — 832 Exercise of stock options and vesting of restricted stock units, net 24 24 ( 231 ) — — ( 207 ) Repurchase of common stock ( 348 ) ( 348 ) ( 12,221 ) — — ( 12,569 ) 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 Cash dividend declared — — — ( 8,866 ) — ( 8,866 ) Stock-based compensation expense — — 943 — — 943 Exercise of stock options and vesting of restricted stock units, net 19 19 ( 137 ) — — ( 118 ) Repurchase of common stock ( 327 ) ( 327 ) ( 9,649 ) — — ( 9,976 ) 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 See notes to consolidated financial statements 72 NORTHRIM BANCORP, INC. Consolidated Statements of Cash Flows Years Ended December 31, 2020, 2019, and 2018 (In Thousands) 2020 2019 2018 Operating Activities: Net income $ 32,888 $ 20,691 $ 20,004 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Gain on sale of securities, net ( 98 ) ( 23 ) — Loss on sale of premises and equipment 22 — 2 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 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 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 Change in fair value of commercial servicing rights carried at fair value 99 ( 6 ) ( 972 ) Gain on sale of loans ( 46,258 ) ( 19,813 ) ( 14,822 ) Proceeds from the sale of loans held for sale 1,263,325 670,986 551,607 Origination of loans held for sale ( 1,295,411 ) ( 684,297 ) ( 527,516 ) Gain on sale of other real estate owned ( 391 ) ( 380 ) ( 3 ) Impairment on equity method investment — — 804 Net changes in assets and liabilities: (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 ) Net Cash (Used) Provided by Operating Activities ( 36,454 ) ( 821 ) 25,150 Investing Activities: Investment in securities: Purchases of investment securities available for sale ( 160,423 ) ( 132,104 ) ( 88,139 ) Purchases of marketable equity securities ( 1,552 ) — ( 2,992 ) 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 sales of marketable equity securities 601 229 783 Proceeds from redemption of FHLB stock 5,518 843 14 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 Investment in other real estate owned — — ( 144 ) Purchases of software ( 416 ) ( 721 ) ( 517 ) Proceeds from sales of premises and equipment — — 3 Purchases of premises and equipment ( 2,849 ) ( 2,318 ) ( 3,511 ) Net Cash (Used) Provided by Investing Activities ( 382,825 ) ( 71,920 ) 5,646 Financing Activities: Increase (decrease) in deposits 452,630 144,263 ( 30,195 ) (Decrease) increase in securities sold under repurchase agreements — ( 34,278 ) 6,532 Proceeds from borrowings 110,610 1,817 — Repayments of borrowings ( 104,684 ) ( 167 ) ( 121 ) Proceeds from the issuance of common stock 84 73 243 Repurchase of common stock ( 9,976 ) ( 12,569 ) ( 494 ) Cash dividends paid ( 8,844 ) ( 8,512 ) ( 7,064 ) Net Cash Provided (Used) by Financing Activities 439,820 90,627 ( 31,099 ) Net Change in Cash and Cash Equivalents 20,541 17,886 ( 303 ) Cash and Cash Equivalents at Beginning of Year 95,424 77,538 77,841 Cash and Cash Equivalents at End of Year $ 115,965 $ 95,424 $ 77,538 73 Supplemental Information: Income taxes paid $ 7,790 $ 1,658 $ 1,766 Interest paid $ 6,009 $ 5,640 $ 2,971 Noncash commitments to invest in Low Income Housing Tax Credit Partnerships $ — $ 11,267 $ — Transfer of loans to other real estate owned $ 652 $ — $ 686 Non-cash lease liability arising from obtaining right of use assets $ 370 $ 1,234 $— Cash dividends declared but not paid $ 98 $ 89 $ 72 See notes to consolidated financial statements 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Summary of Significant Accounting Policies Nature of Operations: Northrim BanCorp, Inc. (the “Company”), is a publicly traded bank holding company headquartered in Anchorage, Alaska that is primarily engaged in the delivery of business and personal banking services through its wholly-owned banking subsidiary, Northrim Bank ("the Bank"). The Bank also engages in retail mortgage origination services through its wholly-owned subsidiary, Residential Mortgage Holding Company, LLC (“RML”). Additionally, the Bank through its wholly-owned subsidiary, Northrim Funding Services ("NFS"), operates a factoring division in Bellevue, Washington. Related companies include Pacific Wealth Advisors, LLC (“PWA”) and Homestate Mortgage Company, LLC ("Homestate"). 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. 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. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income, gains, expenses, and losses during the reporting periods. Actual results could differ from those estimates. Significant estimates include the allowance for loan losses (“Allowance”), valuation of goodwill and other intangibles, valuation of other real estate owned (“OREO”), valuation of mortgage servicing rights, and fair value disclosures. Consolidation: 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, and NISC. Significant intercompany balances have been eliminated in consolidation. As of December 31, 2020, the Company had one wholly-owned business trust subsidiary, Northrim Statutory Trust 2 ("Trust 2") that was formed to issue trust preferred securities and related common securities of Trust 2. The Company has not consolidated the accounts of Trust 2 in its consolidated financial statements in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB”) ASC 810, Consolidation (“ASC 810”). As a result, the junior subordinated debentures issued by the Company to Trust 2 are reflected on the Company’s consolidated balance sheet as junior subordinated debentures. The Company has determined that PWA and Homestate are not variable interest entities and therefore, the Company does not consolidate the balance sheets and income statements of PWA or Homestate into its financial statements. The Company's investments in PWA and Homestate are accounted for as equity method investments. Results of PWA and Homestate are included in "Other income" in our Consolidated Statements of Income. Investments in associated companies are presented on a one-line basis in the caption “Other assets” in our Consolidated Balance Sheets. Operating 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: Certain reclassifications have been made to prior year amounts to maintain consistency with the current year with no impact on net income or total shareholders’ equity. Subsequent Events: The Company has evaluated events and transactions subsequent to December 31, 2020 for potential recognition or disclosure. Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with other banks, federal funds sold, and securities with original maturities of less than 90 days at acquisition. 75 Marketable Securities: Marketable securities are equity investments excluding those accounted for under the equity method of accounting or those that result in consolidation of the investee. Marketable securities are stated at fair value. Changes in fair value are included in "Unrealized gain (loss) on marketable equity securities" in our Consolidated Statements of Income. Investment Securities: Securities available for sale are stated at fair value with unrealized holding gains and losses, net of tax, excluded from earnings and reported as a separate component of other comprehensive income, unless an unrealized loss is deemed other than temporary. Gains and losses on available for sale securities sold are determined on a specific identification basis. Held to maturity securities are stated at cost, adjusted for amortization of premium and accretion of discount on a level-yield basis. The Company has the ability and intent to hold these securities to maturity. The Company amortizes purchase premiums for callable debt securities to the earliest call date. A decline in the market value of any available for sale or held to maturity security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. Unrealized investment securities losses are evaluated at least quarterly on a specific identification basis to determine whether such declines in value should be considered "other than temporary" and therefore be subject to immediate loss recognition in income. 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. 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; actions of commercial banks or other lenders relative to the continued extension of credit facilities to the issuer of the security; recommendations of investment advisors or market analysts; and ratings by recognized rating agencies. Federal Home Loan Bank Stock: The Company’s investment in Federal Home Loan Bank of Des Moines (“FHLB”) stock is carried at par value because the shares can only be redeemed with the FHLB at par. The Company is required to maintain a minimum level of investment in FHLB stock based on the Company’s total Bank assets and outstanding advances. FHLB stock is carried at cost and is subject to recoverability testing at least annually. Loans held for sale: The Company designates loans held for sale as either carried at fair value or the lower of cost or fair value at origination. Loans held for sale include residential mortgage loans that have been originated for sale in the secondary market. Related gains or losses on the sale of these loans are recognized in mortgage banking income. Loans: 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 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. Interest income on loans is accrued and recognized on the principal amount outstanding except for loans in a nonaccrual status. All classes of loans are placed on nonaccrual when management believes doubt exists as to the collectability of the interest or principal. Cash payments received on nonaccrual loans are directly applied to the principal balance. Generally, a loan may be returned to accrual status when the delinquent principal and interest is brought current in accordance with the terms of the loan agreement and certain ongoing performance criteria have been met. Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms. The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, unless the loan is collateral dependent, in which case the impairment is measured by using the fair value of the loan’s collateral. Nonperforming loans greater than $ 50,000 are individually evaluated for impairment based upon the borrower’s overall financial condition, resources, and payment record, and the prospects for support from any financially responsible guarantors. The Company uses either in-house evaluations or external appraisals to estimate the fair value of collateral-dependent impaired loans as of each reporting date. The Company’s determination of which method to use is based upon several factors. The Company takes into account compliance with legal and regulatory guidelines, the amount of the loan, the estimated value of the collateral, the location and type of collateral to be valued, and how critical the timing of completion of the analysis is to the assessment of value. Those factors are balanced with the level of internal expertise, internal experience, and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers, and equipment specialists. 76 The Company uses external appraisals to estimate fair value for projects that are not fully constructed as of the date of valuation. 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 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. The Company’s policy is to record cash payments received on impaired loans that are not also nonaccrual loans in the same manner that cash payments are applied to performing loans. A loan is classified as a troubled debt restructuring ("TDR") when a borrower is experiencing financial difficulties that lead to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. These concessions may include interest rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses. Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a period of at least six months to demonstrate that the borrower can meet the restructured terms. If the borrower's performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan. Interest on TDRs will be accrued at the restructured rates when it is anticipated that no loss of original principal will occur, and the interest can be collected, which is generally after a period of six months. Acquired Loans: Loans are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date. Purchased loans are evaluated upon acquisition and classified as either purchased credit impaired or purchased non-credit-impaired. Purchased credit impaired loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. Purchased credit impaired loans were individually evaluated for credit impairment at acquisition using expected future cash flows or the estimated value of underlying collateral. A purchased credit impaired loan will be removed from impaired loans only if the loan is sold, foreclosed, or assets are received in full satisfaction of the loan, and it will be removed from impaired loans at its carrying value. If an individual loan is removed, the difference between its relative carrying amount and its cash, fair value of the collateral, or other assets received will be recognized in other income immediately as a gain and would not affect the effective yield used to recognize the accretable yield on purchased credit impaired loans. The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference. The nonaccretable difference represents our estimate of the credit losses expected to occur and was considered in determining the fair value of the purchased credit impaired loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected at purchase date in excess of fair value are adjusted through an increase to the accretable yield on a prospective basis. The purchased credit impaired loans are and will continue to be subject to the Company’s internal and external credit review and monitoring. If credit deterioration is experienced subsequent to the initial acquisition fair value amount, such deterioration will be measured, and a charge-off will be recorded. For purchased non-credit-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the estimated life of the loans. 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 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. Allowance for Loan Losses: The Allowance for Loan Losses is management’s best estimate of probable losses inherent in its loan portfolio as of the balance sheet date. The Allowance methodology is based on historical loss experience by loan segment and class with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the Allowance for probable loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including levels of and trends related to past due and nonaccrual loans, net charge-offs or recoveries, and other factors. 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 77 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: pass (grades 1-6), special mention (grade 7), substandard (grade 8), doubtful (grade 9), and loss (grade 10). The level of the Allowance reflects management’s continuing evaluation of 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. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the Allowance is dependent upon a variety of factors beyond the Company’s control including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classification. The Company’s Allowance consists of three elements: (1) specific valuation allowances based on probable losses on specific loans, (2) general valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted as necessary to reflect the impact of current conditions, and (3) unallocated general valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the Company. The specific valuation allowance is an allocated allowance for impaired loans. This analysis is based upon a specific analysis for each impaired loan that is collateral dependent, including appraisals and in-house evaluations on loans secured by real property, management’s assessment of the current market, recent payment history, and an evaluation of other sources of repayment. The Company obtains appraisals on real and personal property that secure its loans during the loan origination process in accordance with regulatory guidance and its loan policy. The Company then estimates a general allocated allowance for all other loans that were not impaired as of the balance sheet date using a formula-based approach that includes average historical loss factors that are adjusted for quantitative and qualitative factors. After the portfolio has been disaggregated into segments and classes, the Company calculates a general reserve for each segment and class based on the average five year loss history for each segment and class. This general reserve is then adjusted for qualitative factors, by segment and class. Qualitative factors are based on management’s assessment of current trends that may cause losses inherent in the current loan portfolio to differ significantly from historical losses. Some factors that management considers in determining the qualitative adjustment to the general reserve include our concentration of large borrowers; national and local economic trends; general business conditions; economic, political, and industry specific factors that affect resource development in Alaska; underwriting policies and standards; trends in local real estate markets; effects of various political activities; peer group data; and internal factors such as underwriting policies and expertise of the Company’s employees. The unallocated general valuation portion of the Allowance is based on several factors, including the level of the Allowance as compared to total loans and nonperforming loans in light of current economic conditions. This portion of the Allowance is based upon management’s evaluation of various factors that are not directly measured in the determination of the allocated portions of the Allowance and it is deemed “unallocated” because it is not allocated to any segment or class of the loan portfolio. This portion of the Allowance provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component or in the specific impairment component of the Allowance and acknowledges the inherent imprecision of all loss prediction models. 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. 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. Based on our methodology and its components, management believes the resulting Allowance is adequate and appropriate for the risk identified in the Company's loan portfolio. While management believes that it uses the best information available to determine the Allowance, unforeseen market conditions and other events could result in adjustment to the Allowance, and net income could be significantly affected if circumstances differed substantially from the assumptions used in making the final determination. Our banking regulators, as an integral part of their examination process, periodically review the Company's Allowance. Our regulators may require the Company to recognize additions to the Allowance based on their judgments related to information available to them at the time of their examinations. 78 Reserve for Unfunded Loan Commitments and Letters of Credit: The Company maintains a separate reserve for losses related to unfunded loan commitments and letters of credit. The determination of the adequacy of the reserve is based on periodic evaluations of the unfunded credit facilities including assessment of historical losses and current economic conditions. The allowance for unfunded loan commitments and letters of credit is included in other liabilities on the Consolidated Balance Sheets, with changes to the balance charged against other operating expense. Purchased Receivables: The Bank, through NFS, purchases accounts receivable from its customers. The purchased receivables are carried at their principal amount outstanding, net of a reserve for anticipated losses that have not yet been identified. Fees charged to the customer are earned while the balances of the purchases are outstanding, which is typically less than one year . The Company maintains a separate reserve for losses related to purchased receivable assets. The determination of the adequacy of the reserve is based on periodic evaluations of purchased receivable assets including an assessment of historical losses and current economic conditions. The reserve for purchased receivable assets is included in the balance of these accounts on a net basis on the consolidated balance sheets, with changes to the balance charged against other operating expense. Other Real Estate Owned: Other real estate owned ("OREO") represents properties acquired through foreclosure or its equivalent. Prior to foreclosure, the carrying value is adjusted to the fair value, less cost to sell, of the real estate to be acquired by an adjustment to the Allowance. Management’s evaluation of fair value is based on appraisals or discounted cash flows of anticipated sales. After foreclosure, any subsequent reduction in the carrying value is charged against earnings. Operating expenses associated with OREO are charged to earnings in the period they are incurred. Operating expenses associated with OREO are recorded net of rental income and gain on sales associated with OREO. Premises and Equipment: Premises and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization expense for financial reporting purposes is computed using the straight-line method based upon the shorter of the lease term or the estimated useful lives of the assets that vary according to the asset type and include; furniture and equipment ranging between 3 and 7 years, leasehold improvements ranging between 2 and 15 years, and buildings at 39 years. Maintenance and repairs are charged to current operations, while renewals and betterments are capitalized. Long-lived assets such as premises and equipment are reviewed for impairment at least annually or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision, or that the carrying amount of the long-lived asset may not be fully recoverable. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. Goodwill and Other Intangible Assets: Intangible assets are comprised of goodwill and other intangibles acquired in business combinations. Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective useful lives, and are also reviewed for impairment. Amortization of intangible assets is included in other operating expense in the Consolidated Statements of Income. The Company performs a goodwill impairment analysis at the segment level on an annual basis. Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists. Low Income Housing Tax Credit Partnerships: The Company earns a return on its investments in these partnerships in the form of tax credits and deductions that flow through to it as a limited partner. The Company amortizes these investments in tax expense over the period during which tax benefits are received. Servicing Rights: Mortgage and commercial servicing rights associated with loans originated and sold, where servicing is retained, are measured at fair value and changes in fair value are reported through earnings. Changes in the fair value of servicing rights occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputs and assumptions. Under the fair value method, servicing rights are carried on the balance sheet at fair value and the changes in fair value are reported in earnings in other operating income in the period in which the change occurs. Fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of servicing rights, the present value of 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. For mortgage servicing rights ("MSRs"), the model assumptions are also compared to publicly filed information from several large MSR holders, as available. Other Assets: Other assets include purchased software and prepaid expenses. 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 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 79 Company performs an impairment analysis on it's equity method investments when events or circumstances indicate impairment potentially exists. Derivatives: The Company records all derivatives on the Consolidated Balance Sheets at fair value. The accounting for change in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate the derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Interest rate swaps that are designated as a cash flow hedge and satisfy the hedge accounting requirements involve the receipt of variable amounts from a counter-party in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives which are designed as cash flow hedges and satisfy hedge accounting requirements, the effective portion of changes in the fair value of the derivative is recorded in accumulated other comprehensive income (loss). The fair value of the Company's derivatives is determined using discounted cash flow analysis using observable market based inputs. The Company considers all free-standing derivatives not designated in a hedging relationship as economic hedges and recognizes these derivatives as either assets or liabilities in the balance sheet. These assets and liabilities are measured at fair value, and changes in fair value are recorded in earnings. By using derivatives, the Company is exposed to counterparty credit risk, which is the risk that counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, our counterparty credit risk is equal to the amount reported as a derivative asset on our balance sheet, net of cash collateral received. 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 interest rate swaps in asset positions. For further detail, see Note 21. Transfers or sales of financial assets: For transfers of entire financial assets or a participating interest in an entire financial asset recorded as sales, we recognize and initially measure at fair value all assets obtained and liabilities incurred. We record a gain or loss in other operating income for the difference between the carrying amount and the fair value of the assets sold. Fair values are based on quoted market prices, quoted market prices for similar assets, or if market prices are not available, then the fair value is estimated using discounted cash flow analysis with assumptions for credit losses, prepayments and discount rates that are corroborated by and verified against market observable data, where possible. Advertising: Advertising, promotion, and marketing costs are expensed as incurred. 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 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: The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Our policy is to recognize interest and penalties on unrecognized tax benefits in “Other operating expense" in the Consolidated Statements of Income. Earnings Per Share: Earnings per share is calculated using the weighted average number of shares and dilutive common stock equivalents outstanding during the period. Stock options and restricted stock units, as described in Note 23, are considered to be common stock equivalents. Potentially dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. 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. 80 Information used to calculate earnings per share was as follows: (In Thousands) 2020 2019 2018 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: Comprehensive income consists of net income, net unrealized gains (losses) on securities available for sale after the tax effect, and net unrealized gains (losses) on derivative and hedging activities. Concentrations: Substantially all of the Company’s business is derived from the Anchorage, Matanuska-Susitna Valley, Fairbanks, Kenai Peninsula, and Southeast areas of Alaska. As such, the Company’s growth and operations depend upon the economic conditions of Alaska and these specific markets. These areas rely primarily upon the natural resources industries, particularly oil production, as well as tourism, government and U.S. military spending for their economic success. A significant majority of the unrestricted revenues of the Alaska state government are currently funded through various taxes and royalties on the oil industry. The Company’s business is and will remain sensitive to economic factors that relate to these industries and local and regional business conditions. As a result, local or regional economic downturns, or downturns that disproportionately affect one or more of the key industries in regions served by the Company, may have a more pronounced effect upon its business than they might on an institution that is less geographically concentrated. The extent of the future impact of these events on economic and business conditions cannot be predicted; 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, 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. At December 31, 2020, 43 % of the Company’s loan portfolio is attributable to 35 large borrowing relationships. The Company has additional unfunded commitments to these borrowers of $ 137.9 million at December 31, 2020. Fair Value Measurements: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies. In accordance with GAAP, the Company groups its assets and liabilities measured at fair value into the following three levels: • Level 1 : Valuation is based upon quoted prices for identical instruments traded in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value. • Level 2 : Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. • Level 3 : 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. 81 Recent Accounting Pronouncements Accounting pronouncements implemented in 2020 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” 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. 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 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 portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. 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. 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 82 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. The ACL on available-for-sale debt securities will be subject to a limitation based on the fair value of the debt securities. 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, 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 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 . 83 The Company is required to maintain a $ 250,000 balance with a correspondent bank for outsourced servicing of ATMs. The Company is required to maintain a $ 100,000 and $ 2.8 million balance with a correspondent bank to collateralize the initial margin and the fair value exposure of one of its interest rate swaps, respectively. NOTE 3 - Interest Bearing Deposits in Other Banks All interest bearing deposits in other banks have a maturity of one year or less. Balances at December 31 for the respective years are as follows: (In Thousands) 2020 2019 Interest bearing deposits at Federal Reserve Bank $ 54,488 $ 48,200 Interest bearing deposits at FHLB 133 36 Other interest bearing deposits at other institutions 38,040 26,670 Total $ 92,661 $ 74,906 84 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 Fair Value December 31, 2020 Securities available for sale U.S. Treasury and government sponsored entities $ 173,318 $ 1,330 ($ 47 ) $ 174,601 Municipal securities 820 36 — 856 Corporate bonds 29,951 546 ( 5 ) 30,492 Collateralized loan obligations 41,782 44 ( 142 ) 41,684 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 Securities available for sale U.S. Treasury and government sponsored entities $ 210,756 $ 1,133 ($ 37 ) $ 211,852 Municipal securities 3,288 9 — 3,297 Corporate bonds 34,764 302 — 35,066 Collateralized loan obligations 25,980 — ( 57 ) 25,923 Total securities available for sale $ 274,788 $ 1,444 ($ 94 ) $ 276,138 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 Total (In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses 2020 Securities Available for Sale U.S. 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 ) 2019 Securities Available for Sale U.S. Treasury and government sponsored entities $ 39,797 ($ 33 ) $ 2,996 ($ 4 ) $ 42,793 ($ 37 ) 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. At December 31, 2020 and 2019, there were 12 and 8 available for sale securities in an unrealized loss position, respectively, that have been in a loss position for less than twelve months. There were 1 and 3 securities with unrealized losses at December 31, 2020 and 2019, respectively, that have been at a loss position for more than twelve months. 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. 85 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 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 Fair Value Weighted Average Yield U.S. 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 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) Proceeds Gross Gains Gross Losses 2020 Available for sale securities $ — $ — $ — 2019 Available for sale securities $ 4,219 $ 23 $ — 2018 Available for sale securities $ — $ — $ — A summary of interest income for the years ending December 31, 2020, 2019, and 2018 on available for sale investment securities is as follows: (In Thousands) 2020 2019 2018 U.S. 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 Municipal securities $ 82 $ 120 $ 267 Total tax-exempt interest income $ 82 $ 120 $ 267 Total $ 4,832 $ 6,572 $ 5,481 86 NOTE 5 - Loans and Credit Quality As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends in past due and nonaccrual loans, gross and net charge-offs, and movement in loan balances within the risk classifications. The Company utilizes a loan risk grading system called the Asset Quality Rating (“AQR”) system to assign a risk classification to each of its loans. The risk classification is a dual rating system that contemplates both probability of default and risk of loss given default. Loans are graded on a scale of 1 to 10 and, loans graded 1 – 6 are considered “pass” grade loans. A description of the general characteristics of the AQR risk classifications are as follows: Pass grade loans – 1 through 6: The borrower demonstrates sufficient cash flow to fund debt service, including acceptable profit margins, cash flows, liquidity and other balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The company has competent management with an acceptable track record. The category does not include loans with undue or unwarranted credit risks that constitute identifiable weaknesses. Special Mention – 7: A "special mention" credit has weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of either the repayment prospects for the asset or the Bank's credit position at some future date. Special mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Loans are currently protected, but are weak due to negative trends in the balance sheet and income statement. Current cash flow may be insufficient to meet debt service, with prospects that the condition may not be temporary. Profitability and key balance sheet ratios are below peers. There is a lack of effective control over collateral or there are documentation deficiencies as well as a potential risk of payment default. Collateral coverage is minimal in gross dollars or due to quality issues. Financial information may be inadequate to show the recent condition of borrower. The loan would not be approved as a new credit, and new loans would not be granted. Management may not be adequately qualified or may have very limited prior experience with similar activities or markets. The ability of management to cope with current conditions is questionable. Internal conflict and turnover in key positions may be present. Succession is unclear. The borrower's asset quality is below average. The capital base may be insufficient to cover capital losses. Leverage is above average or increasing. The industry outlook is generally negative but there are reasonable expectations of a turnaround within 12-18 months. The firm may be new, resulting in competitive deficiencies in comparison to the older, more established firms in the industry. Over-capacity may be evident in the industry. Collateral and guarantor strength are comparable to Management Attention-6, but agings and certifications of accounts receivable and inventory are required and are not being provided on a regular basis. Substandard – 8: A "substandard" credit is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans have well-defined weaknesses where a payment default and/or a loss are possible, but not yet probable. Cash flow is insufficient to service debt, with prospects that the condition is permanent. Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower, and there is a likelihood that collateral will have to be liquidated and/or the guarantor called upon to repay the debt. Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage. Loan(s) may have been restructured at less than market terms or have been partially charged off. If deficiencies are not corrected quickly, there is a probability of loss and the borrower’s ability to operate as a going concern may be deemed questionable/is questionable. Management has no prior experience with similar activities, demonstrating inability to realistically address problems and meet commitments. The borrower’s asset quality is poor. The capital base is weak and insufficient to absorb continuing losses, and leverage is significantly above peers. Liquidity is poor with significant reliance on short-term borrowing to support trade debt. Key balance sheet ratios are substantially inferior to industry norms. The industry is currently trending downward or demonstrating recovery from an adverse cycle. The outlook is generally negative at this time. Timing of recovery is unclear, but expectations are that market conditions will improve within 18 - 24 months. The borrower has substantial competitive deficiencies when compared to other firms, such as excess capacity and over-supply, resulting in frequent and significant concessions and discounting. Business failures are prevalent. Collateral coverage is marginal or non-existent. Collateral may be located outside the borrower’s market area. There are no agings or certifications of accounts receivable and inventory being received from the borrower, and collateral has doubtful marketability/convertibility. If guaranteed, the guarantor has limited outside worth and is highly leveraged with a poor credit report, which may reflect liens, collection problems, or lawsuits. Doubtful – 9: 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 87 information suggests that it is unlikely that the loan will be repaid in its entirety. Cash flow is insufficient to service debt. The company has had a series of substantial losses. 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 than 50%. Loans are to be placed on non-accrual status when any portion is classified as doubtful. Non-accrual loans would not be classified "doubtful" as long as the collateral appears adequate to retire the outstanding balance. Management is clearly unable to address problems and meet commitments, and there is little expectation either of improvement or for sustaining the relationship with current management. The company is highly illiquid with excessive leverage. Key balance sheet ratios are at unacceptable levels, and downturn is severe. Timing of recovery is undeterminable. The company is unable to compete; collateral and guarantees provide limited support. Loss – 10: An asset classified "loss" is considered uncollectable and of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future. The loan has doubtful characteristics, but the loan will definitely not be repaid in full. Debt service coverage clearly reflects the company's inability to service debt. The borrower cannot generate sufficient cash flow to cover fixed charges. All near-term and long-term trends concerning cash flow and earnings are negative. The damage to the financial condition of the Company cannot be reversed at this point in time. Collateral and guarantees provide no support. The composition of the loan portfolio as of the periods indicated is as follows: (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 Less: 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 Less: Unearned origination fees, net of origination costs ( 5,085 ) 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. Repayment is expected from the borrowers’ cash flow or, secondarily, the collateral. The Company’s exposure to credit loss, if any, is the outstanding amount of the loan if the collateral is determined to be of no value. 88 Nonaccrual Loans 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 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) 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 Real estate term owner occupied — — 1,520 1,977 3,497 Real estate term other — — 1,176 — 1,176 Consumer secured by 1st deeds of trust — — — 63 63 Consumer other 20 — — 86 106 Total nonaccrual loans 68 229 7,071 3,752 11,120 Government guarantees on nonaccrual loans ( 35 ) ( 258 ) — ( 1,228 ) ( 1,521 ) Net nonaccrual loans $ 33 ($ 29 ) $ 7,071 $ 2,524 $ 9,599 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 Real estate term other — — 1,176 — 1,176 Consumer secured by 1st deeds of trust — — — 68 68 Consumer other 26 89 — 6 121 Total nonaccrual loans 1,937 474 6,010 6,935 15,356 Government guarantees on nonaccrual loans ( 268 ) — — ( 1,137 ) ( 1,405 ) Net nonaccrual loans $ 1,669 $ 474 $ 6,010 $ 5,798 $ 13,951 89 Past Due Loans 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) 30-59 Days Past Due Still Accruing 60-89 Days Past Due Still Accruing Greater Than 90 Days Still 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 Real estate construction other — — — — — 80,315 80,315 Real estate term owner occupied — — 449 449 3,497 159,651 163,597 Real estate term non-owner occupied — — — — — 309,074 309,074 Real estate term other — — — — 1,176 45,444 46,620 Consumer secured by 1st deed of trust 483 — — 483 63 15,039 15,585 Consumer other 18 — — 18 106 21,945 22,069 Subtotal $ 888 $ — $ 449 $ 1,337 $ 11,120 $ 1,443,328 $ 1,455,785 Less: 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 Real estate construction other — — — — — 61,808 61,808 Real estate term owner occupied 338 — — 338 3,489 135,064 138,891 Real estate term non-owner occupied — — — — — 312,960 312,960 Real estate term other 26 — — 26 1,176 41,304 42,506 Consumer secured by 1st deed of trust 750 — — 750 68 15,380 16,198 Consumer other 150 — — 150 121 24,314 24,585 Subtotal $ 1,534 $ — $ — $ 1,534 $ 15,356 $ 1,031,566 $ 1,048,456 Less: Unearned origination fees, net of origination costs ( 5,085 ) Total $ 1,043,371 90 Impaired Loans At December 31, 2020 and 2019, the recorded investment in loans that are considered to be impaired was $ 18.0 million and $ 24.7 million, respectively. 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 December 31, 2020 With no related allowance recorded 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 — Real estate term owner occupied - AQR substandard 6,962 7,047 — 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 — Real estate term other - AQR substandard 1,176 1,176 — Consumer secured by 1st deeds of trust - AQR pass 114 114 — Consumer secured by 1st deeds of trust - AQR substandard 144 144 — Consumer other - AQR substandard 82 87 — Subtotal $ 17,720 $ 18,619 $— With an allowance recorded 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 — Real estate term owner-occupied - AQR substandard 6,962 7,047 — 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 — Real estate term other - AQR substandard 1,176 1,176 — Consumer secured by 1st deeds of trust - AQR pass 114 114 — Consumer secured by 1st deeds of trust - AQR substandard 144 144 — Consumer other - AQR substandard 82 87 — Total $ 18,028 $ 18,927 $ 13 91 (In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance December 31, 2019 With no related allowance recorded 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 other - AQR pass 417 417 — Real estate term other - AQR substandard 1,176 1,176 — Consumer secured by 1st deeds of trust - AQR pass 122 122 — 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 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 other - AQR pass 417 417 — Real estate term other - AQR substandard 1,176 1,176 — Consumer secured by 1st deeds of trust - AQR pass 122 122 — 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. 92 The following table summarizes our average recorded investment and interest income recognized on impaired loans for years ended December 31, 2020 and 2019, respectively: Year Ended December 31, 2020 2019 (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 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 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 substandard 385 19 230 — Real estate term other - AQR pass 362 20 448 31 Real estate term other - AQR substandard 1,189 — 1,046 — Consumer secured by 1st deeds of trust - AQR pass 118 9 126 13 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 Commercial - AQR substandard $ 1,343 $ 8 $ 683 $ — Commercial - AQR doubtful 77 — — — Real estate term other - AQR substandard — — 163 — Consumer secured by 1st deeds of trust - AQR substandard — — 72 — Subtotal $ 1,420 $ 8 $ 918 $ — Total Commercial - AQR pass $ — $ — $ 532 $ 35 Commercial - AQR substandard 10,454 147 17,575 405 Commercial - AQR doubtful 510 — — — Real estate construction one-to-four family - AQR substandard 781 — 1,933 — 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 substandard 385 19 230 — Real estate term other - AQR pass 362 20 448 31 Real estate term other - AQR substandard 1,189 — 1,209 — Consumer secured by 1st deeds of trust - AQR pass 118 9 126 13 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 — Total Impaired Loans $ 20,982 $ 333 $ 28,395 $ 623 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. 93 Troubled Debt Restructurings 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. The modifications granted can generally be described in the following categories: Rate Modification : A modification in which the interest rate is changed. Term Modification : A modification in which the maturity date, timing of payments, or frequency of payments is changed. Payment Modification : A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time is included in this category. Combination Modification : Any other type of modification, including the use of multiple categories above. AQR pass graded loans included above in the impaired loan data are loans classified as TDRs. By definition, TDRs are considered impaired loans. All of the Company’s TDRs are included in impaired loans. 94 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. 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) New Troubled Debt Restructurings Commercial - AQR substandard $ 1,590 $ 161 $ 1,751 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 Pre-Modification Outstanding Recorded Investment: Commercial - AQR substandard 2 $ — $ 3,249 $ 164 $ — $ 3,413 Total 2 $ — $ 3,249 $ 164 $ — $ 3,413 Post-Modification Outstanding Recorded Investment: Commercial - AQR substandard 2 $ — $ 1,590 $ 161 $ — $ 1,751 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 Pre-Modification Outstanding Recorded Investment: Commercial - AQR substandard 7 $ — $ — $ 509 $ 2,585 $ 3,094 Real estate term owner occupied - AQR substandard 1 — — 192 — 192 Total 7 $ — $ — $ 701 $ 2,585 $ 3,286 Post-Modification Outstanding Recorded Investment: Commercial - AQR substandard 7 $ — $ — $ 408 $ 2,561 $ 2,969 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 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 one TDR with specific impairment at December 31, 2020 and none at December 31, 2019, respectively. 95 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. The following table presents TDRs that occurred during 2018 that subsequently defaulted during the twelve-months ended December 31, 2018: December 31, 2018 Number of Contracts Recorded Investment (In Thousands) Troubled Debt Restructurings that Subsequently Defaulted: Commercial - AQR substandard 4 $ 1,166 Real estate term owner occupied - AQR substandard 2 1,694 Total 6 $ 2,860 Loans to Related Parties Certain directors, and companies of which directors are principal owners, have loans and other transactions such as architectural fees with the Company. Such transactions are made on substantially the same terms, including interest rates and collateral required, as those prevailing for similar transactions of unrelated parties. An analysis of the loan transactions for the years indicated follows: (In Thousands) 2020 2019 2018 Balance, beginning of the year $ 309 $ — $ — Loans made — 309 — Repayments 92 — — Balance, end of year $ 217 $ 309 $ — The Company had $ 15,000 of unfunded loan commitments to these directors or their related interests on December 31, 2020 and 2019. Pledged Loans At December 31, 2020 and 2019, there were no loans pledged as collateral to secure public deposits. 96 NOTE 6 - Allowance for Loan Losses The following table details activity in the Allowance for the periods indicated: (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 deed of trust Consumer other Unallocated Total 2020 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 Balance, end of period $ 7,973 $ 679 $ 1,179 $ 2,625 $ 5,133 $ 779 $ 261 $ 400 $ 2,107 $ 21,136 Balance, end of period: Individually evaluated for impairment $ 13 $ — $ — $ — $ — $ — $ — $ — $ — $ 13 Balance, end of period: Collectively evaluated for impairment $ 7,960 $ 679 $ 1,179 $ 2,625 $ 5,133 $ 779 $ 261 $ 400 $ 2,107 $ 21,123 2019 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 ) Balance, end of period $ 6,604 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079 $ 19,088 Balance, end of period: Individually evaluated for impairment $ 17 $ — $ — $ — $ — $ — $ — $ — $ — $ 17 Balance, end of period: Collectively evaluated for impairment $ 6,587 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079 $ 19,071 2018 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 ) Balance, end of period $ 5,660 $ 675 $ 1,275 $ 2,027 $ 5,799 $ 716 $ 306 $ 426 $ 2,635 $ 19,519 Balance, end of period: Individually evaluated for impairment $ 14 $ — $ — $ — $ — $ — $ — $ — $ — $ 14 Balance, end of period: Collectively evaluated for impairment $ 5,646 $ 675 $ 1,275 $ 2,027 $ 5,799 $ 716 $ 306 $ 426 $ 2,635 $ 19,505 97 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) 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 deed of trust Consumer other Total December 31, 2020 Balance, end of period $ 772,468 $ 38,180 $ 79,403 $ 162,724 $ 307,247 $ 46,230 $ 15,548 $ 22,250 $ 1,444,050 Balance, end of period: Individually evaluated for impairment $ 7,786 $ 702 $ — $ 6,962 $ 770 $ 1,467 $ 259 $ 82 $ 18,028 Balance, end of period: Collectively evaluated for impairment $ 764,682 $ 37,478 $ 79,403 $ 155,762 $ 306,477 $ 44,763 $ 15,289 $ 22,168 $ 1,426,022 December 31, 2019 Balance, end of period $ 411,327 $ 38,503 $ 60,906 $ 138,181 $ 311,302 $ 42,200 $ 16,191 $ 24,761 $ 1,043,371 Balance, end of period: Individually evaluated for impairment $ 16,077 $ 1,349 $ — $ 5,104 $ 178 $ 1,594 $ 281 $ 90 $ 24,673 Balance, end of period: Collectively evaluated for impairment $ 395,250 $ 37,154 $ 60,906 $ 133,077 $ 311,124 $ 40,606 $ 15,910 $ 24,671 $ 1,018,698 The following represents the balance of the Allowance for the periods indicated segregated by segment and class: (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 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 Individually evaluated for impairment: AQR Substandard $ 17 $ 17 $ — $ — $ — $ — $ — $ — $ — $ — 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 98 NOTE 7 - Purchased Receivables We purchase accounts receivable from our business customers and provide them with short-term working capital. We provide this service to our customers in Alaska and in Washington and the greater west coast through NFS. Our purchased receivable activity is guided by policies that outline risk management, documentation, and approval limits. 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 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. Management evaluates the adequacy of the reserve for purchased receivable losses based on historical loss experience by segment and class of receivable and its assessment of current economic conditions. As of December 31, 2020, the Company has one segment and class of purchased receivables. There are no purchased receivables past due at December 31, 2020 or 2019, and there were no restructured purchased receivables in 2020, 2019, or 2018. Income on purchased receivables is accrued and recognized on the balance outstanding using an effective interest method, except when management believes doubt exists as to the collectability of the income or principal. As of December 31, 2020, the Company is accruing income on all purchased receivable balances outstanding. The following table summarizes the components of net purchased receivables at December 31, for the years indicated: (In Thousands) 2020 2019 Purchased receivables $ 13,995 $ 24,467 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: (In Thousands) 2020 2019 2018 Balance at beginning of year $ 94 $ 190 $ 200 Reserve for (recovery from) purchased receivables ( 21 ) ( 96 ) ( 10 ) Balance at end of year $ 73 $ 94 $ 190 The Company recorded no charge-offs of purchased receivables in 2020, 2019, or 2018. NOTE 8 - Other Real Estate Owned 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 (income) expense related to OREO for the years indicated: Years Ended December 31, (In Thousands) 2020 2019 2018 OREO (income) expense, net rental income and gains on sale: OREO operating expense $ 658 $ 693 $ 802 Impairment on OREO — — — Rental income on OREO ( 509 ) ( 506 ) ( 541 ) Gains on sale of OREO ( 391 ) ( 380 ) ( 3 ) Total ($ 242 ) ($ 193 ) $ 258 99 NOTE 9 - Premises and Equipment The following summarizes the components of premises and equipment at December 31 for the years indicated: (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 9,182 9,161 Buildings 39 years 37,618 36,205 Total Premises and Equipment 65,094 62,281 Accumulated depreciation and amortization ( 26,992 ) ( 23,859 ) Total Premises and Equipment, Net $ 38,102 $ 38,422 Depreciation expense and amortization of leasehold improvements was $ 3.1 million, $ 3.0 million, and $ 2.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. Related Party Transactions: 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 Mortgage servicing rights The following table details the activity in the Company's MSR for the year indicated: (In Thousands) 2020 2019 2018 Balance, beginning of period $ 11,920 $ 10,821 $ 7,305 Additions for new MSR capitalized 4,824 3,707 3,641 Changes in fair value: Due to changes in model inputs of assumptions (1) ( 2,701 ) ( 1,313 ) 591 Other (2) ( 2,825 ) ( 1,295 ) ( 716 ) Carrying value, December 31 $ 11,218 $ 11,920 $ 10,821 (1) Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates. (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: (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 $ 2.7 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. 100 The following table outlines the key assumptions used in measuring the fair value of mortgage servicing rights as of December 31, 2020 and 2019: 2020 2019 Average constant prepayment rate 13.05 % 10.61 % Average discount rate 7.75 % 8.52 % 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, 2020 December 31, 2019 Aggregate portfolio principal balance $ 683,117 $ 659,048 Weighted average rate of note 3.62 % 3.90 % December 31, 2020 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change Conditional prepayment rate 13.05 % 26.11 % 38.97 % Discount rate 7.75 % 6.75 % 5.75 % Fair value MSR $ 11,218 $ 7,455 $ 5,404 Percentage of MSR 1.64 % 1.09 % 0.79 % December 31, 2019 Conditional prepayment rate 10.61 % 26.25 % 28.39 % Discount rate 8.52 % 7.52 % 6.52 % Fair value MSR $ 11,920 $ 7,005 $ 6,625 Percentage of MSR 1.81 % 1.06 % 1.01 % The above tables show the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four family Alaska Housing Finance Corporation/FNMA/FHLMC serviced home loan. The above tables reference a 100 basis point and 200 basis point decrease in note rates. These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSR is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time. Commercial servicing rights 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. 101 NOTE 11 - Goodwill and Intangible Assets A summary of goodwill and intangible assets at December 31, 2020 and 2019, is as follows: (In Thousands) 2020 2019 Intangible assets: Goodwill $ 15,017 $ 15,017 Core deposit intangible 79 127 Trade name intangible 950 950 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 $ 6.0 million and $ 5.9 million at December 31, 2020 and 2019. The future amortization expense required on these assets is as follows: (In Thousands) 2021 $ 37 2022 25 2023 14 2024 3 2025 — Thereafter — Total $ 79 NOTE 12 – Leases 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. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company also elected the practical expedient on not separating lease components from nonlease components for all operating leases. Additionally, the Company has elected to not apply ASU 2016-02 to short-term leases. Short-term leases are those leases that, at the lease commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. The Company has lease agreements for land and office facilities that it occupies to operate several of its retail branch locations, as well as one storage facility, that are classified as operating leases and are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities. Most of these leases contain options to extend the duration of the leases at management's discretion. 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 102 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. None of the Company's leases include residual value guarantees, and there are no restrictions or covenants imposed by these leases that impose significant additional financial obligations on the Company. The Company uses the rate implicit in each lease as the discount rate to determine the lease liability, which is the present value of lease payments not yet paid at the lease commencement date. If the rate implicit in each lease is not readily determinable, which is often the case, the Company uses its incremental borrowing rate as the discount rate. The incremental borrowing rate is the rate that the Company would have incurred to borrow the funds necessary to purchase the leased asset over a similar term. 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. The following table presents additional information about the Company's operating leases: (In Thousands) 2020 2019 Lease Cost Operating lease cost (1) $ 2,819 $ 2,704 Short term lease cost (1) 35 35 Total lease cost $ 2,854 $ 2,739 Other information Operating leases - operating cash flows $ 2,681 $ 2,684 Weighted average lease term - operating leases, in years 10.72 10.82 Weighted average discount rate - operating leases 3.29 % 3.32 % (1) Expenses are classified within occupancy expense on the Consolidated Statements of Income. 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 2021 $ 2,619 2022 2,215 2023 1,925 2024 1,795 2025 1,732 Thereafter 4,875 Total minimum lease payments $ 15,161 Less: amount of lease payment representing interest ( 2,783 ) Present value of future minimum lease payments $ 12,378 103 NOTE 13 - Other Assets A summary of other assets as of December 31, 2020 and 2019, is as follows: (In Thousands) 2020 2019 Other assets: Investment in Low Income Housing Partnerships $ 24,142 $ 27,841 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 Deferred taxes, net 1,980 2,535 Commercial servicing rights 1,310 1,214 Repossessed assets 231 231 Other assets 2,051 1,690 Total $ 68,488 $ 58,076 Equity Method Investments: The Company applies the equity method of accounting for the following related entities: • The Company owns a 24 % interest in PWA, an investment advisory, trust, and wealth management business located in Seattle, Washington. • The Company owns a 30 % interest in Homestate Mortgage Company, LLC, a mortgage origination business located in Anchorage, Alaska. Low Income Housing Partnerships: The following table shows the Company's commitments to invest in various low income housing tax credit partnerships. The Company earns a return on its investments in the form of tax credits and deductions that flow through to it as a limited partner in these partnerships. The Company recognized amortization expense of $ 3.5 million, $ 2.7 million, and $ 2.7 million in 2020, 2019, and 2018, respectively. 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 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 ) $ 9,866 104 NOTE 14 - Deposits Deposits: At December 31, 2020, the scheduled maturities of certificates of deposit are as follows: (In Thousands) 2021 $ 128,970 2022 37,347 2023 6,890 2024 495 2025 135 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). When a Network member places a deposit using CDARS, that certificate of deposit is divided into amounts under the standard FDIC insurance maximum ($250,000) and is allocated among member banks, making the large deposit eligible for FDIC insurance. The ICS service allows the Company to place customers’ funds through the Network into demand deposit accounts and/or money market accounts at FDIC-insured banks that are also members of the ICS Network in increments below the standard FDIC insurance maximum ($250,000) so that both principal and interest are eligible for FDIC insurance. In addition to customer deposit placement, the CDARS and ICS service also allows placement of the Bank's own investment dollars. 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. Interest expense: Interest expense on deposits is presented below: (In Thousands) 2020 2019 2018 Interest-bearing demand accounts $ 108 $ 182 $ 8 Money market accounts 1,222 1,435 855 Savings accounts 717 1,083 744 Certificates of deposit $250,000 and greater 1,823 1,310 472 Certificates of deposit less than $250,000 1,409 951 228 Total $ 5,279 $ 4,961 $ 2,307 NOTE 15 - Borrowings The Company has a maximum line of credit with the FHLB approximating 45 % of eligible assets. FHLB advances are subject to collateral criteria that require the Company to pledge assets under a blanket pledge arrangement as collateral for its borrowings from the FHLB. Based on assets currently pledged and advances currently outstanding at December 31, 2020, the Company's available borrowing line is $ 232.7 million, representing approximately 11 % of total assets. Additional advances of up to 45 % of eligible assets, or $ 946.2 million, are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Company’s assets. 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. 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. There were no discount window advances outstanding at December 31, 2020 and 2019. The Company paid less than $ 1,000 in interest in 2020 and 2019 on this agreement. The 105 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) 2021 $ 312 2022 412 2023 421 2024 431 2025 441 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. The average interest rates paid on long-term debt in the same periods was 3.12 %, 3.39 %, and 3.39 %, respectively. NOTE 16 - Junior Subordinated Debentures 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”). These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. All of the common securities of Trust 2 are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities 2 were used by Trust 2 to purchase $ 10.3 million of junior subordinated debentures of the Company. Trust 2 is not consolidated in the Company’s financial statements in accordance with GAAP; therefore, the Company has recorded its investment in Trust 2 as an other asset and the subordinated debentures as a liability. The debentures, which represent the sole asset of Trust 2, accrue and pay distributions quarterly at a variable rate of 90 -day LIBOR plus 1.37 % per annum, adjusted quarterly, of the stated liquidation value of $ 1,000 per capital security. The interest rate on these debentures was 1.59 % at December 31, 2020. The interest cost to the Company on these debentures was $ 219,000 , $ 398,000 , and $ 368,000 in 2020, 2019, and 2018, respectively. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities 2; (ii) the redemption price with respect to any Trust Preferred Securities 2 called for redemption by Trust 2; and (iii) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of Trust 2. The Trust Preferred Securities 2 are mandatorily redeemable upon maturity of the debentures on March 15, 2036, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by Trust 2 in whole or in part, on or after March 15, 2011. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. 106 NOTE 17 – Accumulated Other Comprehensive Income (Loss) 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 Total Balance at December 31, 2017 ($ 454 ) $ 184 ($ 270 ) Other comprehensive income (loss), net of tax expense of $ 210 ( 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 ) 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 NOTE 18 – Revenue The Company's revenue is included in net interest income and other operating income on its Consolidated Statements of Income. 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 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. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s non-interest revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below. Bankcard fees Bankcard fees are primarily comprised of debit card income and ATM fees. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa or MasterCard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. The Company’s performance obligation for bankcard fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payments are typically received immediately or in the following month. Service charges on deposit accounts Service charges on deposit accounts consist of general service fees for monthly account maintenance, activity- or transaction-based fees, and account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), and other deposit account related fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. 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 107 charges on deposit accounts are primarily received immediately or in the following month through a direct charge to customers’ accounts. Other 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. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for merchant services income is largely satisfied, and related revenue recognized, when the transactions have been completed. Payment is typically received immediately or in the following month. The Company earns commissions from the sale of mutual funds as periodic service fees (i.e., trailers) from Elliott Cove Capital Management typically based on a percentage of net asset value. Trailer revenue is recorded over time, quarterly, as net asset value is determined. The Company also earns commission income from the sale of annuity products. The Company acts as an intermediary between the Company's customer and Elliott Cove Investment Advisors for these transactions, and commissions from annuity product sales are recorded when the Company’s performance obligation is satisfied, which is generally upon the issuance of the annuity policy. The Company does not earn trailer fees on annuity sales. Payment for commissions from sales of mutual funds and other investments and annuity sales is typically received in the following quarter. Other service charges include revenue from safety deposit box rental fees, processing wire transfers, bank check and other check fees, and other services. The Company’s performance obligations for these other revenue streams are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payments are typically received immediately or in the following month. 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) December 31, Other operating income 2020 2019 2018 In-scope of Topic 606: Bankcard fees $ 2,837 $ 2,976 $ 2,811 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 Other operating income (out-of-scope of Topic 606) 57,861 31,149 26,256 Total other operating income $ 63,328 $ 37,346 $ 32,167 Gains on the sale of OREO are also within the scope of Topic 606 and are recorded within other operating expense on the Company's Consolidated Statements of Income. 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. NOTE 19 - Employee Benefit Plans Employees of the Company are eligible to participate in the Company's 401(k) plan immediately upon date of hire. Employees may elect to have a portion of their salary contributed to the 401(k) plan in accordance with Section 401(k) of the Internal Revenue Code of 1986. The Company provides for a mandatory $ 1.00 match for each $1.00 contributed by employees of Northrim Bank up to 5.5 % of the employee’s eligible salary. The Company provides for a mandatory $ 1.00 match for each $1.00 contributed by employees of RML up to 2 % of the employee’s eligible salary. Northrim Bank or RML may increase the matching contribution at the discretion of the Board of Directors. The Company expensed $ 1.7 million, $ 1.4 million, and $ 1.4 million, in 2020, 2019, and 2018, respectively, for 401(k) contributions and included this expense in "Salaries and other personal expense" in the Consolidated Statements of Income. On July 1, 1994, Northrim Bank implemented a Supplemental Executive Retirement Plan for executive officers of Northrim Bank whose retirement benefits under the 401(k) plan have been limited under provisions of the Internal Revenue Code. Contributions to this plan totaled $ 290,000 , $ 262,000 , and $ 247,000 , in 2020, 2019, and 2018, respectively. These expenses are included in "Salaries and other personnel expense" in the Consolidated Statements of Income. At December 31, 108 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. The SERP's assets primarily consist of the cash surrender value of life insurance policies. Contributions and earnings made to the participant accounts to the SERP are vested over ten years . The Company recorded expenses of $ 997,000 , $ 580,000 , and $ 489,000 in 2020, 2019, and 2018, respectively. RML's recorded obligation under the SERP amounted to $ 2.6 million and $ 2.8 million at December 31, 2020 and 2019, respectively, and was included in "Other liabilities". In February of 2002, Northrim Bank implemented a non-qualified deferred compensation plan in which certain of the executive officers participate. 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 $ 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. At December 31, 2020 and 2019, the balance of the accrued liability for this plan was included in "Other liabilities" and totaled $ 1.6 million and $ 1.6 million, respectively. In November of 2011, Northrim Bank implemented a Profit Sharing Plan. All employees of the Bank employed on the last day of the calendar year are eligible and will participate in the Profit Sharing Plan. The aggregate amount to be paid to employees under the Profit Sharing Plan is determined using Company-wide performance goals that are established by the Compensation Committee of the Board of Directors. If the performance goals are met for the year, profit sharing for the period is calculated based on a formula that is also approved by the Compensation Committee each year. The Compensation Committee has complete discretion to designate an employee as ineligible for profit sharing, or to adjust the amount of profit share payments by individual employee or in aggregate. 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. NOTE 20 - Commitments and Contingencies Employee benefit plans: The Company is self-insured for medical, dental, and vision plan benefits provided to employees. The Company has obtained stop-loss insurance to limit total medical claims in any one year to $ 175,000 per covered individual. The Company has established a liability for outstanding incurred but unreported claims. While management uses what it believes are pertinent factors in estimating the liability, it is subject to change due to claim experience, type of claims, and rising medical costs. Legal proceedings: The Company from time to time may be involved with disputes, claims, and litigation related to the conduct of its banking business. In the opinion of management, the resolution of these matters will not have a material effect on the Company’s financial position, results of operations, or cash flows. Financial Instruments with Off-Balance Sheet Risk: In the ordinary course of business, the Company enters into various types of transactions that involve financial instruments with off-balance sheet risk. These instruments include commitments to extend credit and standby letters of credit and are not reflected in the accompanying balance sheets. These transactions may involve to varying degrees credit and interest rate risk in excess of the amount, if any, recognized in the balance sheets. Certain commitments are collateralized. We apply the same credit standards to these commitments as in all of our lending activities and include these commitments in our lending risk evaluations. Management does not anticipate any loss as a result of these commitments. The Company’s off-balance sheet credit risk exposure is the contractual amount of commitments to extend credit and standby letters of credit. The Company applies the same credit standards to these contracts as it uses in its lending process. (In Thousands) 2020 2019 Off-balance sheet commitments: Commitments to extend credit $ 375,065 $ 301,911 Commitments to originate loans held for sale $ 150,276 $ 48,796 Standby letters of credit $ 2,333 $ 2,006 109 Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and generally have fixed expiration dates but may be terminated by the Company if certain conditions of the contract are violated. Our exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. Although currently subject to draw down, many of the commitments do not necessarily represent future cash requirements. Collateral held relating to these commitments varies, but generally includes real estate, inventory, accounts receivable, and equipment. 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 this loans. Management believes that any liabilities that may result from such recourse provisions are not significant. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Credit risk arises in these transactions from the possibility that a customer may not be able to repay the Company upon default of performance. Collateral held for standby letters of credit is based on an individual evaluation of each customer’s creditworthiness. Total unfunded commitments were $ 527.7 million and $ 352.7 million at December 31, 2020 and 2019, respectively. The Company does not expect that all of these commitments are likely to be fully drawn upon at any one time. The Company has a reserve for losses related to these commitments and letters of credit that is recorded in "Other liabilities" on the Consolidated Balance Sheets. The reserve was $ 187,000 and $ 152,000 as of December 31, 2020 and 2019, respectively. Capital Expenditures and Commitments: 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. There were no other material changes outside of the ordinary course of business to any of our material contractual obligations during 2020. 110 NOTE 21 - Derivatives Interest rate swaps related to community banking activities The Company enters into interest rate swaps with commercial banking customers which are offset with a corresponding swap agreement with a third party financial institution (“counterparty”). The Company has agreements with its counterparties that contain provisions that provide that if the Company fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. These agreements also require that the Company and the counterparty collateralize any fair value shortfalls that exceed $ 250,000 with eligible collateral, which includes cash and securities backed with the full faith and credit of the federal government. 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 $ 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. Interest rate swap income is recorded in "Other income" on the Consolidated Statements of Income. None of these interest rate swaps are designated as hedging instruments. 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. The interest rate swap effectively fixes the Company's interest payments on the $ 10.0 million of junior subordinated debentures held under Trust 2 at 3.72 % through its maturity date. The floating rate that the dealer pays is equal to the three month LIBOR plus 1.37 %, which reprices quarterly on the payment date. This rate was 1.59 % as of December 31, 2020. 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 $ 1.7 million and $ 534,000 as of December 31, 2020 and 2019, respectively. Interest rate swaps related to home mortgage lending activities The Company also uses derivatives to hedge the risk of changes in the fair values of interest rate lock commitments. The Company enters into commitments to originate residential mortgage loans at specific rates; the value of these commitments are detailed in the table below as "interest rate lock commitments". The Company also hedges the interest rate risk associated with its residential mortgage loan commitments using interest rate swaps, which are referred to as "retail interest rate contracts" in the table below. Market risk with respect to commitments to originate loans arises from changes in the value of contractual positions due to changes in interest rates. At December 31, 2020 and 2019, RML had commitments to originate mortgage loans held for sale totaling $ 150.3 million and $ 48.8 million, respectively. Changes in the value of RML's interest rate derivatives are recorded in "Mortgage banking income" on the Consolidated Statements of Income. None of these home mortgage lending derivatives are designated as hedging instruments. 111 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. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes. 112 The following table summarizes the derivatives that have a right of offset as of December 31, 2020 and 2019: 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 Interest rate swaps $ 7,387 $ — $ 7,387 $ — $ — $ 7,387 Liability Derivatives Interest rate swaps $ 7,387 $ — $ 7,387 $ — $ 7,387 $ — Retail interest rate contracts 880 — 880 — — 880 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 Net Amount Asset Derivatives Interest rate swaps $ 2,950 $ — $ 2,950 $ — $ — $ 2,950 Liability Derivatives Interest rate swaps $ 2,950 $ — $ 2,950 $ — $ 2,950 $ — Retail interest rate contracts 71 — 71 — — 71 NOTE 22 - Common Stock Quarterly cash dividends were paid aggregating to $ 8.8 million, $ 8.5 million, and $ 7.1 million, or $ 1.38 per share, $ 1.26 per share, and $ 1.02 per share, in 2020, 2019, and 2018, respectively. On February 25, 2021, the Board of Directors declared a $ 0.37 per share cash dividend payable on March 19, 2021, to shareholders of record on March 11, 2021. Federal and State regulations place certain limitations on the payment of dividends by the Company. 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. The Company can make no assurances that it will continue this program or that it will authorize additional shares for repurchase. During 2020, 2019 and 2018, 327,000 , 347,676 and 15,468 shares were repurchased, respectively. NOTE 23 - Stock-Based Compensation The Company adopted the 2020 Stock Option Plan (“2020 Plan”) following shareholder approval of the 2020 Plan at the 2020 Annual Meeting. Subsequent to the adoption of the 2020 Plan, no additional grants may be issued under the prior plans. The 2020 Plan provides for grants of up to 325,000 shares, which includes any shares subject to stock awards under the previous stock option plans. 113 Stock Options: 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 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. The Company measures the fair value of each stock option at the date of grant using the Black-Scholes option pricing model using assumptions noted in the following table. Expected volatility is based on the historical volatility of the price of the Company’s common stock. The Company uses historical data to estimate option exercise and stock option forfeiture rates within the valuation model. The expected term of options granted is determined based on historical experience with similar options and represents the period of time that options granted are expected to be outstanding. The expected dividend yield is based on dividend trends and the market value of the Company’s common stock at the time of grant. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were used to determine the fair value of stock options as of the grant date to determine compensation expense for the years ended December 31, 2020, 2019, and 2018: Stock Options: 2020 2019 2018 Grant date fair value $ 6.55 $ 5.34 $ 7.69 Expected life of options 8 years 8 years 8 years Risk-free interest rate 0.79 % 1.74 % 3.01 % Dividend yield rate 4.55 % 4.11 % 2.91 % Price volatility 35.44 % 24.34 % 23.47 % The following table summarizes stock option activity during 2020: 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 At December 31, 2020, 2019, and 2018, there were 136,038 , 112,319 , and 100,824 options exercisable, with weighted average exercise prices of $ 29.42 , $ 28.17 , and $ 26.50 , respectively. The aggregate intrinsic value of the stock options is the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on December 31, 2020 and the exercise price, times the number of shares) that would have been received by the option holders had all the option holders exercised their options on December 31, 2020. This amount changes based on the fair value of the Company’s stock. 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, 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 114 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: Under the 2020 Plan and previous plans, the Company grants restricted stock units to certain key employees periodically. Recipients of restricted stock units do not pay any cash consideration to the Company for the shares and receive all dividends with respect to such shares when the shares vest. Restricted stock units cliff vest at the end of a three-year time period. 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 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 The total intrinsic value of restricted stock units vested for the years ended December 31, 2020, 2019, and 2018 was $ 735,000 , $ 906,000 , and $ 654,000 , respectively. For the years ended December 31, 2020, 2019 and 2018, the Company recognized $ 795,000 , $ 689,000 , and $ 633,000 , respectively, in restricted stock unit compensation expense as a component of "Salaries and other personnel expense". As of December 31, 2020, there was approximately $ 1.5 million 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. NOTE 24 - Regulatory Matters The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on a company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of total capital, Tier 1 capital, and common equity Tier 1 to risk-weighted assets, and of Tier 1 capital to average assets (as defined in the regulations). 115 The tables below illustrate the capital requirements for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements. The dividends that the Bank pays to the Company are limited to the extent necessary for the Bank to meet the regulatory requirements of a “well-capitalized” bank. 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 included in the Bank's capital ratios. Northrim BanCorp, Inc. 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) $ 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) $ 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: Common equity tier 1 capital (to risk-weighted assets) $ 178,532 11.89 % $ 67,569 ≥ 4.5 % $ 97,599 ≥ 6.5 % Total Capital (to risk-weighted assets) $ 197,233 13.13 % $ 120,172 ≥ 8 % $ 150,216 ≥ 10 % Tier I Capital (to risk-weighted assets) $ 178,429 11.88 % $ 90,116 ≥ 6 % $ 120,154 ≥ 8 % Tier I Capital (to average assets) $ 178,429 8.55 % $ 83,476 ≥ 4 % $ 104,344 ≥ 5 % As of December 31, 2019: Common equity tier 1 capital (to risk-weighted assets) $ 165,963 11.98 % $ 62,340 ≥ 4.5 % $ 90,047 ≥ 6.5 % Total Capital (to risk-weighted assets) $ 183,299 13.24 % $ 110,755 ≥ 8 % $ 138,443 ≥ 10 % Tier I Capital (to risk-weighted assets) $ 165,963 11.98 % $ 83,120 ≥ 6 % $ 110,827 ≥ 8 % Tier I Capital (to average assets) $ 165,963 10.36 % $ 64,078 ≥ 4 % $ 80,098 ≥ 5 % As of the most recent notification from its regulatory agencies, the Bank was categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s regulatory capital category. Management believes, as of December 31, 2020, that the Company and Bank meets all capital adequacy requirements to which they are subject. The Company and Bank are required to have a “conservation buffer,” consisting of a common equity Tier 1 capital amount equal to 2.5 % of risk-weighted assets. 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. 116 NOTE 25 - Income Taxes Components of the provision for income taxes are as follows: (In Thousands) Current Tax Expense (Benefit) Deferred Expense (Benefit) Total Expense 2020: 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 2019: 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 2018: 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, 2020, 2019 and 2018) as follows: (In Thousands) 2020 2019 2018 Computed “expected” income tax expense $ 8,914 $ 5,486 $ 5,056 State income taxes, net 1,639 957 720 Tax-exempt interest on investment securities and loans ( 256 ) ( 300 ) ( 307 ) Amortization of investment in low income housing tax credit partnerships 3,506 2,668 2,691 Low income housing credits ( 3,168 ) ( 2,721 ) ( 2,821 ) Revaluation of deferred tax assets — — ( 470 ) Other ( 1,076 ) ( 656 ) ( 798 ) Total $ 9,559 $ 5,434 $ 4,071 117 The components of the net deferred tax asset are as follows: (In Thousands) 2020 2019 2018 Deferred Tax Asset: Allowance for loan losses $ 5,772 $ 5,190 $ 5,313 Other real estate owned 69 58 160 Deferred compensation 1,130 1,224 1,121 Equity compensation 481 429 435 Loan discount 93 98 79 Fair market value adjustment on certificates of deposit 76 100 123 Operating lease liabilities 3,519 4,045 — Other 2,330 1,866 1,069 Total Deferred Tax Asset $ 13,470 $ 13,010 $ 8,300 Deferred Tax Liability: Intangible amortization ($ 1,022 ) ($ 587 ) ($ 288 ) Mortgage servicing rights ( 3,530 ) ( 3,767 ) ( 3,424 ) Depreciation and amortization ( 2,066 ) ( 1,848 ) ( 1,873 ) FHLB stock repurchase and dividends ( 30 ) ( 174 ) ( 178 ) 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 ) Net Deferred Tax Asset $ 1,980 $ 2,535 $ 3,246 A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The primary source of recovery of the deferred tax asset will be future taxable income. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax asset. The deferred tax asset is included in "Other assets" in the Consolidated Balance Sheets. 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. The tax years subject to examination by federal taxing authorities are the years ending December 31, 2020, 2019, 2018, and 2017. The tax years subject to examination by the State of Alaska are the years ending December 31, 2020, 2019, 2018, 2017, 2016 and 2015. NOTE 26 - Fair Value Measurements Assets and Liabilities Measured at Fair Value on a Recurring Basis Investment securities available for sale and marketable securities : Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Servicing rights: MSRs and CSRs are measured at fair value on a recurring basis. These assets are classified as Level 3 as quoted prices are not available. 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, 118 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. Derivative instruments: The fair value of the interest rate lock commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Company has determined that the majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2020, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives. As a result, the Company has classified its interest rate derivative valuations in Level 2 of the fair value hierarchy. Commitments to extend credit and standby letters of credit : The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date. Assets Subject to Nonrecurring Adjustment to Fair Value: The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets, loans held for sale, impaired loans, and OREO at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the writedown of individual assets. The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and impaired loans as of each reporting date. In-house appraisals are considered Level 3 inputs and external appraisals are considered Level 2 inputs. The Company’s determination of which method to use is based upon several factors. The Company takes into account compliance with legal and regulatory guidelines, the amount of the loan, the size of the assets, the location and type of property to be valued and how critical the timing of completion of the analysis is to the assessment of value. Those factors are balanced with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists. The Company uses external sources to estimate fair value for projects that are not fully constructed as of the date of valuation. 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 believes that recording other real estate owned that is not fully constructed based on as if complete values is more appropriate than recording other real estate owned that is not fully constructed using as is values. We concluded that as-is-complete values are appropriate for these types of projects based on the accounting guidance for capitalization of project costs and subsequent measurement of the value of real estate. GAAP specifically states that estimates and cost allocations must be reviewed at the end of each reporting period and reallocated based on revised estimates. The Company adjusts the carrying value of other real estate owned in accordance with this guidance for increases in estimated cost to complete that exceed the fair value of the real estate at the end of each reporting period. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 119 Estimated fair values as of the periods indicated are as follows: December 31, 2020 December 31, 2019 (In Thousands) Carrying Amount Fair Value Carrying Amount Fair Value Financial assets: Level 1 inputs: Cash, due from banks and deposits in other banks $ 115,965 $ 115,965 $ 95,424 $ 95,424 Investment securities available for sale 58,865 58,865 75,456 75,456 Marketable equity securities 9,052 9,052 7,945 7,945 Level 2 inputs: Investment securities available for sale 188,768 188,768 200,682 200,682 Investment in Federal Home Loan Bank Stock 2,551 2,551 2,138 2,138 Accrued interest receivable 7,979 7,979 4,512 4,512 Interest rate swaps 7,387 7,387 2,950 2,950 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 Purchased receivables, net 13,922 13,922 24,373 24,373 Interest rate lock commitments 4,034 4,034 810 810 Mortgage servicing rights 11,218 11,218 11,920 11,920 Commercial servicing rights 1,310 1,310 1,214 1,214 Financial liabilities: Level 2 inputs: 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 Interest rate swaps 9,122 9,122 3,484 3,484 Retail interest rate contracts 880 880 71 71 Level 3 inputs: Junior subordinated debentures 10,310 10,475 10,310 11,000 120 The following table sets forth the balances as of the periods indicated of assets measured at fair value on a recurring basis: (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 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 174,601 $ 37,548 $ 137,053 $ — Municipal securities 856 — 856 — Corporate bonds 30,492 21,317 9,175 — Collateralized loan obligations 41,684 — 41,684 — Total available for sale securities $ 247,633 $ 58,865 $ 188,768 $ — Marketable equity securities $ 9,052 $ 9,052 $ — $ — 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 $ — Interest rate lock commitments 4,034 — — 4,034 Mortgage servicing rights 11,218 — — 11,218 Commercial servicing rights 1,310 — — 1,310 Total other assets $ 23,949 $ — $ 7,387 $ 16,562 Liabilities: Interest rate swaps $ 9,122 $ — $ 9,122 $ — Retail interest rate contracts 880 — 880 — Total other liabilities $ 10,002 $ — $ 10,002 $ — December 31, 2019 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 211,852 $ 57,480 $ 154,372 $ — Municipal securities 3,297 — 3,297 — Corporate bonds 35,066 17,976 17,090 — Collateralized loan obligations 25,923 — 25,923 — Total available for sale securities $ 276,138 $ 75,456 $ 200,682 $ — Marketable equity securities $ 7,945 $ 7,945 $ — $ — Total marketable equity securities $ 7,945 $ 7,945 $ — $ — Interest rate swaps $ 2,950 $ — $ 2,950 $ — Interest rate lock commitments 810 — — 810 Mortgage servicing rights 11,920 — — 11,920 Commercial servicing rights 1,214 — — 1,214 Total other assets $ 16,894 $ — $ 2,950 $ 13,944 Liabilities: Interest rate swaps $ 3,484 $ — $ 3,484 $ — Retail interest rate contracts 71 — 71 — Total other liabilities $ 3,555 $ — $ 3,555 $ — 121 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 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 Mortgage servicing rights 11,920 ( 5,526 ) 4,824 — 11,218 Commercial servicing rights 1,214 ( 99 ) 195 — 1,310 Total $ 13,944 ($ 11,305 ) $ 64,205 ($ 40,282 ) $ 26,562 December 31, 2019 Interest rate lock commitments $ 978 ($ 1,942 ) $ 15,904 ($ 14,130 ) $ 810 Mortgage servicing rights 10,821 ( 2,608 ) 3,707 — 11,920 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) 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 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: (In Thousands) 2020 2019 2018 Loans measured for impairment ($ 4 ) $ 3 ($ 952 ) Other operating expense - impairment on equity method investment — — 804 Total (income) loss from nonrecurring measurements ($ 4 ) $ 3 ($ 148 ) 122 Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3) 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 December 31, 2020 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 % 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 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 % Commercial servicing rights Discounted cash flow Constant prepayment rate 7.64 % - 15.67 % Discount rate 11.70 % 123 NOTE 27 - Segment Information The Company's operations are managed along two operating segments: Community Banking and Home Mortgage Lending. The Community Banking segment's principal business focus is the offering of loan and deposit products to business and consumer customers in its primary market areas. As of December 31, 2020, the Community Banking segment operated 16 branches throughout Alaska. The Home Mortgage Lending segment's principal business focus is the origination and sale of mortgage loans for 1-4 family residential properties. Summarized financial information for the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables: December 31, 2020 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 73,435 $ 3,281 $ 76,716 Interest expense 5,788 263 6,051 Net interest income 67,647 3,018 70,665 Provision for loan losses 2,432 — 2,432 Other operating income 10,693 52,635 63,328 Other operating expense 57,614 31,500 89,114 Income before provision for income taxes 18,294 24,153 42,447 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 Consolidated Interest income $ 67,770 $ 2,313 $ 70,083 Interest expense 4,569 1,072 5,641 Net interest income 63,201 1,241 64,442 Benefit for loan losses ( 1,175 ) — ( 1,175 ) Other operating income 13,145 24,201 37,346 Compensation expense, RML acquisition payments 468 — 468 Other operating expense 54,520 21,850 76,370 Income before provision for income taxes 22,533 3,592 26,125 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 $ 67,834 124 December 31, 2018 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 62,097 $ 2,080 $ 64,177 Interest expense 2,370 599 2,969 Net interest income 59,727 1,481 61,208 Provision for loan losses ( 500 ) — ( 500 ) Other operating income 11,323 20,844 32,167 Other operating expense 49,956 19,844 69,800 Income before provision for income taxes 21,594 2,481 24,075 Provision for income taxes 3,361 710 4,071 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 NOTE 28 - Parent Company Information Balance Sheets at December 31, 2020 2019 (In Thousands) Assets Cash and cash equivalents $ 24,742 $ 25,294 Marketable equity securities 9,052 7,945 Investment in Northrim Bank 196,002 183,285 Investment in NISC 1,472 1,530 Investment in NST2 310 310 Taxes receivable, net 1,973 — Other assets 497 6 Total Assets $ 234,048 $ 218,370 Liabilities Junior subordinated debentures $ 10,310 $ 10,310 Other liabilities 2,163 943 Total Liabilities 12,473 11,253 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 18 431 Total Shareholders' Equity 221,575 207,117 Total Liabilities and Shareholders' Equity $ 234,048 $ 218,370 125 Statements of Income for Years Ended: 2020 2019 2018 (In Thousands) Income Interest income $ 599 $ 635 $ 477 Equity in undistributed earnings from Northrim Bank 33,570 20,680 20,888 Equity in undistributed earnings from NISC 174 218 166 Income (loss) on marketable equity securities 61 911 ( 625 ) Other income 108 44 5 Total Income $ 34,512 $ 22,488 $ 20,911 Expense Interest expense 385 389 389 Administrative and other expenses 2,748 2,168 2,524 Total Expense 3,133 2,557 2,913 Income Before Benefit from Income Taxes 31,379 19,931 17,998 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 ) Change in fair value marketable equity securities ( 61 ) ( 911 ) 625 Stock-based compensation 943 832 816 Changes in other assets and liabilities ( 2,118 ) 8,556 ( 6,428 ) Net Cash Used from Operating Activities ( 2,190 ) 8,271 ( 5,903 ) Investing Activities: Purchases of marketable equity securities ( 1,552 ) — ( 3,000 ) Proceeds from sales/calls/maturities of marketable equity securities 503 229 783 Investment in Northrim Bank, NISC & NST2 21,423 19,488 17,877 Net Cash Provided by Investing Activities 20,374 19,717 15,660 Financing Activities: Dividends paid to shareholders ( 8,844 ) ( 8,512 ) ( 7,064 ) Proceeds from issuance of common stock 84 73 243 Repurchase of common stock ( 9,976 ) ( 12,569 ) ( 494 ) Net Cash Used from Financing Activities ( 18,736 ) ( 21,008 ) ( 7,315 ) Net change in Cash and Cash Equivalents ( 552 ) 6,980 2,442 Cash and Cash Equivalents at beginning of year 25,294 18,314 15,872 Cash and Cash Equivalents at end of year $ 24,742 $ 25,294 $ 18,314 126 NOTE 29 - Quarterly Results of Operations (Unaudited) 2020 Quarter Ended Dec. 31 Sept. 30 June 30 March 31 (In Thousands Except Per Share Amounts) Total interest income $ 20,579 $ 19,794 $ 19,004 $ 17,339 Total interest expense 1,355 1,500 1,547 1,649 Net interest income 19,224 18,294 17,457 15,690 (Benefit) provision for loan losses ( 599 ) 567 404 2,060 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. 31 Sept. 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 — — — Other operating expense 20,147 19,324 19,819 17,080 Income before provision for income taxes 5,680 9,566 5,407 5,472 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 Dec. 31 Sept. 30 June 30 March 31 (In Thousands Except Per Share Amounts) Total interest income $ 17,207 $ 16,580 $ 15,595 $ 14,795 Total interest expense 1,070 761 606 532 Net interest income 16,137 15,819 14,989 14,263 Benefit for loan losses ( 200 ) — ( 300 ) — Other operating income 7,718 8,673 8,314 7,462 Other operating expense 18,300 18,099 16,606 16,795 Income before provision for income taxes 5,755 6,393 6,997 4,930 Provision for income taxes 907 1,129 1,167 868 Net income $ 4,848 $ 5,264 $ 5,830 $ 4,062 Earnings per share, basic $ 0.70 $ 0.77 $ 0.85 $ 0.59 Earnings per share, diluted $ 0.69 $ 0.75 $ 0.84 $ 0.58 127 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OF ACCOUNTING AND FINANCIAL DISCLOSURE None.