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Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2020-11-03 · 324 added, 406 removed, 243 unchanged (75% of the section changed)

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

the impact of the results of the recent U.S.

elections on the regulatory landscape, capital markets, and the response to and management of the COVID-19 pandemic, including the effectiveness of already-enacted fiscal stimulus from the federal government and a potential infrastructure bill;

the timing of Paycheck Protection Program ("PPP") loan forgiveness;

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Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Part II.

Item 1A Risk Factors of this report and Item 1A in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, as well as in our other filings with the Securities and Exchange Commission.

Item 1A Risk Factors of this report and Part I.

Item 1A in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, as well as in our other filings with the Securities and Exchange Commission.

However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations.

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Critical Accounting Policies

The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements.

On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances.

We believe that our estimates and assumptions are reasonable;

however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.

The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies.

The Company’s critical accounting policies include those that address the accounting for the allowance for loan losses ("Allowance"), valuation of goodwill and other intangible assets, the valuation of other real estate owned ("OREO"), and the valuation of mortgage servicing rights.

These critical accounting policies are further described in Item 7, Management’s Discussion and Analysis, and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements.

Impact of accounting pronouncements to be implemented in future periods

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

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 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.

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

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

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

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

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

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

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

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

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

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

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

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

As a Smaller Reporting Company, the Company is not required to adopt CECL before January 1, 2023, and we have elected not to early adopt as of January 1, 2020.

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

Based on our loan portfolio composition at September 30, 2020, and the Company's current economic forecast, had we elected to early adopt CECL as of September 30, 2020, we estimate the impact of adoption to be an overall decrease in our allowance for credit losses ("ACL") for loans between approximately $2.0 million and $3.0 million.

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

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

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

We will continue to evaluate and refine the results of our loss estimates until we adopt ASU 2016-13.

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

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

We currently estimate an overall decrease in our ACL, which will result in an increase to our retained earnings and regulatory capital amounts and ratios.

Our critical accounting policies are described in detail in Part II.

Item 7, Management’s Discussion and Analysis, and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods.

As of January 1, 2021, the Company implemented ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13" or "CECL"), and due to the significance of the implementation, the following Allowance for Credit Losses Policy has been updated from the policies disclosed in our prior year financial statements.

The Company's critical accounting policies also include valuation of goodwill and other intangible assets, the valuation of other real estate owned ("OREO"), and the valuation of mortgage servicing rights.

There have been no other material changes to the valuation techniques or models during 2021.

Allowance for Credit Losses Policy:

The Company's Executive Loan Management Committee and Asset Liability Committee are both involved in monitoring various aspects of the Company's allowances for credit losses ("ACL")

The Company's Audit Committee provides board oversight of the ACL process and reviews and approves the ACL methodology on a quarterly basis.

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

Therefore, management has flexibility in selecting the methodology.

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

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

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

Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards, portfolio mix or asset terms, and differences in economic conditions – both current conditions and reasonable and supportable forecasts.

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

Depending on the nature and size of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow (“DCF”) method or a weighted average remaining life method to estimate expected credit losses quantitatively.

Under the DCF method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD").

The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables.

The Company's regression models for PD utilize the Company's actual historical loan level default data.

The Company determines a reasonable and supportable forecast and applies that forecast to the regression model to estimate defaults over the forecast period.

Management leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the Company's four quarter forecast period.

Management utilizes and forecasts Alaska unemployment as a loss driver for all of the loans pools that utilized the DCF method.

Management also utilizes and forecasts either one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses.

Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

Following the forecast period, the economic variables used to calculate PD revert to a historical average at a constant rate over an 8 quarter reversion period.

Other assumptions relevant to the discounted cash flow model to derive the quantitative allowance include the LGD, which is the estimate of loss for a defaulted loan, prepayment speeds, and the discount rate applied to future cash flows.

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

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

The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets.

The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.

In addition to the quantitative portion of the ACL derived using either the DCF or weighted average remaining life method, the Company also considers the effects of the following qualitative factors in its calculation of expected losses in the loan portfolio:

• Lending strategy, policies, and procedures;

• Quality of internal loan review;

• Lending management and staff;

• Trends in underlying collateral values;

• Competition, legal, and regulatory changes;

• Economic and business conditions including fluctuations in the price of Alaska North slope crude oil

• Changes in trends, volume and severity of adversely classified loans, nonaccrual loans, and delinquencies;

• Concentration of credit;

• Changes in the nature and volume of the loan portfolio.

The qualitative factor methodology is based on quantitative metrics, but also includes a high degree of subjectivity and changes in any of the metrics could have a significant impact on our calculation of the ACL.

Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for expected credit losses and are not included in the collective evaluation.

Loans are identified for individual evaluation during regular credit reviews of the portfolio.

A loan is generally identified for individual evaluation when management determines that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments.

When we identify a loan for individual evaluation, we measure expected credit losses using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral.

In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows.

The analysis of collateral dependent loans includes appraisals on loans secured by real property, management’s assessment of the current market, recent payment history and an evaluation of other sources of repayment.

Update on Economic Conditions

When 2020 began, it appeared that Alaska’s economy was on track for a solid year of growth.

A three year mild recession starting in 2016 ended in the 4 th quarter of 2018.

For the next 18 consecutive months, Alaska’s total number of jobs grew month over month compared to the prior year according to the State Department of Labor ("DOL").

That came to an abrupt end in April of 2020 when the full force of the COVID pandemic shocked the global economy.

Alaska faced unemployment rates as high as 13.5% in April after being as low as 5.2% in March of 2020.

The DOL has reported that unemployment rates have moderated each of the last four months since the high in April.

The seasonally adjusted unemployment rate improved from 11.6% in July to 7.4% in August.

In August of 2020, Alaska had approximately 37,000 fewer payroll jobs than August of 2019.

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

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

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

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

The ANS price has firmed up in the $40 range for the last four months.

ANS averaged $41.78 in June, $43.56 in July, $43.36 in August and $40.42 in September.

Despite the serious economic challenges of COVID, there has been extensive government spending to offset the negative impacts of shutdown mandates in the interest of public health.

For Alaska this has meant approximately $5.6 billion in total direct aid to date.

To put that in perspective, the Gross State Product ("GSP") of all annual economic activity in Alaska was measured at $45.6 billion in the second quarter of 2020.

So that is equivalent to 12% or 1/8th of Alaska’s entire GSP.

The stimulus is most easily seen in the personal income data.

The Federal Bureau of Economic Analysis ("BEA") reported personal income for Alaska rose by $2.6 billion or 24% in the second quarter of 2020 as compared to the first quarter of 2020.

This was largely a result of a $4.9 billion increase in government transfer payments.

There was a $2.2 billion reduction in wage income and a $139 million decrease in investment and rental income.

In other words, the increase in government transfer payments was more than double the loss in wages and decrease in dividends, interest and rental income combined.

Inflation is still very low in the U.S.

and even negative in Alaska.

inflation rate is up 1.3% over the last 12 months according to the Bureau of Labor Statistics ("BLS").

This has been consistently below the Federal Reserve’s target rate of 2%.

The BLS reported the consumer price index for Anchorage has actually been a negative 1.5% over the last 12 months.

Notable declines in prices include gasoline -17.3% and clothing -10.1%.

As always it is a mixed bag.

Food and beverage prices have risen by 5.2% and health care costs are up 7.7% according to the BLS.

The housing market has been remarkably stable and even positive in Alaska in 2020.

Prices have increased on average 4.3% in Anchorage, 7.5% in the Mat-Su, 4% in Fairbanks, 7.2% on the Kenai Peninsula and 11% in Kodiak according to the Multiple Listing Service ("MLS").

The number of homes sold is also higher in all these markets except Kenai, which is down just slightly from last year.

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

According to the Mortgage Bankers Association, Alaska’s foreclosure rate was 0.60% at the end of the first quarter 2020 and it declined to 0.54% in the second quarter.

That compares to 0.73% and 0.68% at the end of the first and second quarter of 2020 for the U.S.

The Mortgage Bankers Association national survey reported that the percentage of delinquent mortgage loans in Alaska was 3.23% in the first quarter of 2020 and rose to 7.69% in the second quarter.

The comparable U.S.

rate was 4% in the first quarter of 2020 and 7.97% in the second quarter.

Borrowers who took advantage of three month forbearance programs to delay payments show up as technically delinquent until they are approved for a formal restructure of their missed loan payments or until they catch up on the three months of missed payments.

2020 was a challenging year for the global economy as the COVID-19 pandemic and related governmental policies related to its mitigation led to significant disruption in normal business activity.

Management believes that it is counter-intuitive to have a year where payroll jobs declined by 7% and real gross state product ("GSP") fell 4.9% in Alaska, yet per capita income rose over 3% and housing prices and sales activity increased substantially.

This was only possible because billions of dollars of federal stimulus money reached Alaska and helped support businesses and individuals through the most challenging times.

Record low interest rates and low levels of building activity also contributed to home price increases in Alaska.

Oil prices were shocked much lower at the beginning of 2020 at the height of the virus fears and low level of travel activity.

However, as the year progressed, oil prices returned to a more stable level and oil production levels in Alaska also followed a similar path.

February 2021 employment data from the Alaska Department of Labor ("DOL") shows a 7% reduction in total payroll jobs, a decline of 22,300 compared to February of 2020.

Leisure and hospitality was hit hard, down 23% year over year, a loss of 7,300 jobs.

Direct Oil and Gas jobs fell 38% or 3,900 jobs.

A decline in public education positions led to a 2,000 job decrease in local government, according to the DOL.

Transportation, Warehousing and Utilities declined 9% or 1,800 jobs since last February.

Professional and Business Services has also been negatively impacted, down 6% or 1,600 fewer positions over the past year.

According to the DOL report, State Government was the only sector to grow year over year.

The 1% or 200 job increase was attributed to hiring people for contact tracing and to process unemployment insurance claims.

The level of jobless claims reported by the DOL in the middle of February were 3.75 times higher than the same week in 2020.

Alaska’s GSP was $52.1 billion in 2020, compared to $54.7 billion in 2019, according to the Federal Bureau of Economic Analysis ("BEA") in a preliminary report released on March 26, 2021.

GDP declined 3.5% for 2020.

Alaska’s reduction was 4.9% and the worst state was Hawaii at 8%.

Based on the report, both states were more negatively affected by travel restrictions reducing tourism.

2020 was very erratic due to COVID-19’s impact on the economy.

According to the BEA, Alaska’s GSP declined by 6% and 34% in the first two quarters of the year and then grew 32% and 6% in the third and fourth quarters of 2020 at a seasonally adjusted annualized rate.

This is very similar to the nationwide averages for the U.S.

which saw a decline of 5% and 31% in the first two quarters of 2020, and then increased 33% and 4% in third and fourth quarters.

Alaska’s largest GSP declines in 2020 came from Transportation and Warehousing, followed by Accommodation and Food Services, Oil & Gas and Health Care.

All of these sectors showed positive recovery in the 4th quarter of 2020 in Alaska, helping place it 9th fastest growing for the quarter of the 50 U.S.

Alaska’s seasonally adjusted personal income for 2020 was $47.4 billion compared to $46 billion in 2019, according to a report released by the BEA on March 24, 2021.

Personal income in the U.S.

in 2020 increased 6.1% and Alaska rose 3.1%.

In a typical year, the majority of personal income is derived from wage earnings.

Additionally, some people receive government transfer payments, such as social security, Medicare and Medicaid.

Personal income is further supported by earnings from dividends, interest and rents.

However, in 2020 earnings from wages and investments decreased in the U.S.

The growth in personal income in the U.S.

was primarily from a net $1.1 trillion increase in government transfer payments.

About half of the transfer payment increase was from unemployment insurance.

Direct stimulus payments accounted for a large part of the remainder.

Per capita income in the U.S.

was $59,729 compared to $64,780 in Alaska, according to the BEA.

This places Alaska as the 9th highest income of the 50 U.S.

In Alaska, earnings from wages decreased 1.5% or $435 million in 2020 and investment income fell 0.7% or $65 million.

Government transfer payments rose 24.2% or $1.9 billion over 2019 levels.

By far the largest drop in wage earnings came in Accommodations and Food Services, followed by State and Local Government and Oil & Gas.

There were positive increases in wages in the Professional and Technical Services Industry and Health Care.

Alaska North Slope (“ANS”) crude oil had monthly average prices in 2018 and 2019 ranging from $58.86 to $80.03 a barrel.

ANS began 2020 at $65.48.

Prices fell quickly at the beginning of 2020, responding to fears that COVID-19 would

devastate the global economy and reduce the demand for travel.

The low month was April when ANS averaged $16.54 a barrel.

However, by June the oil markets stabilized and for the last six months the average monthly price remained between $40.42 and $50.32.

Thus far in 2021, the monthly average price was $55.56, $61.88 and $65.60 in January, February and March, respectively.

Alaska’s crude oil production averaged 485,300 barrels per day (“bpd”) in fiscal year (“FY”) 2020, which ended in June.

This was a decrease of 4.8% compared to the previous FY end.

Total output declined 1.2% in FY 2018 and 4.5% in FY 2019.

The State Department of Revenue forecasts production on the North Slope to increase by 0.7% in FY 2021 to 488,900 bpd.

The production average for the month of March 2021 was 494,176 bpd.

In February of 2021 there was an average of 495,076 bpd and 498,176 bpd in January.

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

According to the Mortgage Bankers Association, Alaska’s foreclosure rate was 0.45% at the end of 2020, compared to 0.49% in the third quarter 2020.

This was an improvement from 0.63% at the end of 2019.

The comparable national average rate was slightly higher than Alaska at 0.56% at the end of 2020, 0.59% in the third quarter of 2020, and 0.78% at the end of 2019.

We believe that the foreclosure rates are somewhat misleading because the federal moratorium on foreclosure activity on occupied homes led to declining foreclosure numbers, even though job losses strained the economy and borrowers' ability to pay.

The Mortgage Bankers Association survey reported that the percentage of delinquent mortgage loans at the end of 2020 in Alaska was 6.21%, down considerably from 6.78% at the end of September 2020.

However, this is significantly higher than 2.85% at the end of 2019 before the effects of COVID-19 impacted the market.

The comparable delinquency rate for the entire country was higher than Alaska at 7.19% at the end of 2020, compared to 7.6% in the third quarter of 2020, and 4.07% at the end of 2019.

Management believes that many people across the country took advantage of mortgage forbearance plans available from lenders to delay payments or pay interest only on their homes.

Until these borrowers catch up on past due payments these loans will appear delinquent because they are still behind according to the original terms of the mortgage.

According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 5.9% in 2020 to $396,826.

This is following increases of 0.5% and 2.3% in 2019 and 2018, respectively.

Average sales prices in the Matanuska Susitna Borough rose 9.9% in 2020, continuing a decade of consecutive price gains.

These two markets represent where the vast majority of the bank’s residential building activity occurs.

The number of units sold in Anchorage was up significantly in 2020 by 19.5%, climbing from 2,719 homes sold in 2019 to 3,249 last year.

The main difference was a record number of sales occurred in the last quarter of the year, when sales activity typically declines in the winter.

The Matanuska Susitna Borough also had strong sales activity, up 9.7% in 2020 to 2,135 units sold compared to 1,946 in 2019.

The Matanuska Susitna Borough also had stronger than normal sales in the second half of 2020.

We believe that the low interest rate environment has been a major factor.

According to the Federal Reserve Bank of St.

Louis, the average 30 year fixed rate mortgage in the U.S.

hit all-time record lows last year.

Rates began 2020 at 3.72% in the first week of January and fell more than a percent to 2.67% in the last week of December 2020.

Rates have begun to rise in the first quarter of 2021 and finished March at 3.18%.

COVID-19 Issues:

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

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

Tourism (4%), Oil and Gas (4%), Aviation (non-tourism) (4%), Healthcare (6%), Accommodations (3%), Retail (2%) and Restaurants (2%).

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

Tourism (6%), Oil and Gas (6%), Aviation (non-tourism) (5%), Healthcare (7%), Accommodations (3%), Retail (2%) and Restaurants (2%).

Healthcare (6%), Tourism (5%), Oil and Gas (4%), Aviation (non-tourism) (4%), Accommodations (2%), Retail (2%) and Restaurants (2%).

The Company's exposure as a percent of the total loan portfolio excluding U.S.

Small Business Administration ("SBA") PPP loans as of March 31, 2021 are:

Healthcare (8%), Tourism (7%), Oil and Gas (6%), Aviation (non-tourism) (5%), Accommodations (3%), Retail (3%) and Restaurants (3%).

• Customer Accommodations:

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The outstanding principal balance of loan modifications due to the impacts of COVID-19 were as follows:

Loan Modifications due to COVID-19 as of September 30, 2020

Loan Modifications due to COVID-19 as of March 31, 2021

(Dollars in thousands) Interest Only Full Payment Deferral Total

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Number of modifications 21 9 30

Loan Modifications due to COVID-19 as of June 30, 2020

Loan Modifications due to COVID-19 as of December 31, 2020

(Dollars in thousands) Interest Only Full Payment Deferral Total

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

Of the $120 million and 75 loan modifications as of September 30, 2020, approximately $11.4 million and 12 loans have entered into a second modification.

• Loan Loss Reserve:

The Company booked a loan loss provision of $567,000 for the quarter ended September 30, 2020.

This compares to a provision for loan losses of $404,000 during the previous quarter and a $2.1 million benefit for loan loss provision in the third quarter a year ago.

• Credit Quality:

Net adversely classified loans improved to $14.5 million at September 30, 2020, as compared to $22.3 million at December 31, 2019.

Net loan recoveries were $463,000 in the third quarter of 2020, compared to net loan recoveries of $694,000 in the third quarter of 2019.

Of the $88.3 million and 30 loan modifications as of March 31, 2021, approximately $83.2 million and 26 loans have entered into a second modification.

• Branch Operations:

All branches are fully operational, while a number of customer and employee safety measure continue to be implemented.

No branch operations are limited as a result of COVID-19, while a number of customer and employee safety measures continue to be implemented.

• Remote Workers:

As of September 30, 2020, approximately 50% of the Company's employees are working remotely either on a full- or part-time basis directly due to the pandemic caused by COVID-19.

As of March 31, 2021, approximately 39% of the Company's employees are working remotely either on a full- or part-time basis directly due to the pandemic caused by COVID-19.

These employees primarily hold non-customer facing positions within the Company.

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• Growth and Paycheck Protection Program:

• The Company’s asset base increased during the third quarter ended September 30, 2020, due primarily to commercial and PPP loan originations.

• During the third quarter of 2020, Northrim funded an additional 426 PPP loans totaling $22.7 million to both existing and new customers, bringing the PPP portfolio to approximately 2,888 loans totaling $375.6 million at September 30, 2020.

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

• As of September 30, 2020 Northrim has submitted 17 PPP loans totaling $9.2 million for forgiveness through the SBA.

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

• Over the last twelve months, Northrim funded a total of 5,025 PPP loans totaling $579.6 million to both existing and new customers.

Of this amount, 2,125 loans totaling $204 million were originated during the first quarter of 2021 through the second round of PPP funding.

• As of March 31, 2021, the second round of PPP resulted in 459 new customers totaling $21.3 million in PPP loans, no non-PPP loans, and $10.4 million in new deposit balances.

• PPP round one and two has resulted in 1,844 new customers, with non-PPP loan balances of $26.6 million and deposit balances of $97.4 million as of March 31, 2021.

• Management estimates that we funded approximately 27% of the number and 34% of the value of all Alaska PPP loans for the quarter ending March 31, 2021.

• As of March 31, 2021, Northrim customers had received forgiveness through the SBA on 1,704 PPP loans totaling $170.1 million, of which 1,167 PPP loans totaling $105 million were forgiven in the first quarter of 2021.

• The Company initially utilized the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") to fund PPP loans, but paid back those funds in full during the second quarter of 2020 and has since funded the SBA PPP loans through core deposits and maturity of long-term investments.

• Capital Management:

At September 30, 2020, the capital of Northrim Bank (the "Bank") was well in excess of all regulatory requirements.

The Company resumed its stock repurchase program at the end of August and repurchased 89,000 shares of its common stock in the third quarter of 2020 at an average price of $26.66, leaving 45,549 shares available under the previously announced repurchase authorization.

Highlights and Summary of Performance - Third Quarter of 2020

The Company reported net income and diluted earnings per share of $11.9 million and $1.84, respectively, for the third quarter of 2020 compared to net income and diluted earnings per share of $7.5 million and $1.11, respectively, for the third quarter of 2019.

The Company reported net income and diluted earnings per share of $22.8 million and $3.52, respectively, for the first nine months of 2020 compared to net income and diluted earnings per share of $16.1 million and $2.35, respectively, for the same period in 2019.

The increase in net income for the three and nine month periods ending September 30, 2020 compared to the same periods last year is primarily due to an increase in net income in the Home Mortgage Lending segment as a result of increased production.

• Total revenue in the third quarter of 2020, which includes net interest income plus other operating income, increased 49% to $39.9 million from $26.8 million in the third quarter a year ago, primarily due to a $10.4 million increase in mortgage banking income.

Similarly, total revenue in the first nine months of 2020 increased 28% to $97.0 million from $75.6 million in the first nine months of 2019, primarily due to a $20.0 million increase in mortgage banking income.

• Net interest income increased 12% to $18.3 million in the third quarter of 2020 and increased 7% to $51.4 million in the first nine months of 2020 compared to the same periods in 2019 mainly due to increased loans and loans held for sale balances.

• Net interest margin decreased to 3.90% in the third quarter of 2020 as compared to 4.60% in the third quarter a year ago and decreased to 4.05% for the first nine months of 2020 compared to 4.71% for the first nine months of 2019 primarily due to lower interest rates.

• The provision for loan losses increased to $567,000 and $3.0 million for the three and nine-month periods ending September 30, 2020, compared to a benefit of $2.1 million and a benefit of $1.0 million in the same periods in 2019.

While credit quality has continued to improve as nonperforming loans and adversely classified loans have decreased in 2020, the increase in the provision for loan losses for both periods is the result of management's assessment of risk associated with the COVID-19 pandemic, the reduction in oil prices and a slowing Alaska economy, as well as growth in the unguaranteed portion of the loan portfolio.

• The Company paid cash dividends of $0.35 per common share in the third quarter of 2020, up 6% from $0.33 in the third quarter of 2019.

At March 31, 2021, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements.

During the first quarter of 2021, the Company repurchased 61,399 shares of common stock at an average price of $36.02.

Highlights and Summary of Performance - First Quarter of 2021

The Company reported net income and diluted earnings per share of $12.2 million and $1.94, respectively, for the first quarter of 2021 compared to net income and diluted earnings per share of $1.0 million and $0.16, respectively, for the first quarter of 2020.

The increase in net income for the three-month period ending March 31, 2021 compared to the same period last year is attributable to significant increases in net income in both the Home Mortgage Lending segment, as a result of increased production, and in the Community Banking segment for a variety of reasons, which are discussed below.

• Total revenue in the first quarter of 2021, which includes net interest income plus other operating income, increased 60% to $35.4 million from $22.1 million in the first quarter a year ago, primarily due to a $9.0 million increase in mortgage banking income.

• Net interest income increased 24% to $19.5 million in the first quarter of 2021 compared to the same period in 2020 mainly due to increased loans and loans held for sale balances and fees on PPP loans.

• Net interest margin decreased to 3.90% in the first quarter of 2021 as compared to 4.32% in the first quarter a year ago primarily due to lower interest rates.

• The Company booked a benefit for credit losses of $1.5 million for the three-month period ending March 31, 2021, compared to a provision of $2.1 million in the same period in 2020.

The provision for the current quarter was recorded using the CECL accounting standard and reflects expected lifetime credit losses on loans and off-balance sheet unfunded loan commitments.

The decrease in the provision for loan credit loss in the first quarter of 2021 is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses, which was only partially offset by an increase in the provision for unfunded commitments resulting from increased balances.

• The Company paid cash dividends of $0.37 per common share in the first quarter of 2021, up 9% from $0.34 in the first quarter of 2020.

Other financial measures are shown in the table below:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Return on average assets, annualized 2.25 % 0.25 %

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Nonperforming assets:

Nonperforming assets, net of government guarantees at September 30, 2020 decreased $2.1 million, or 10% to $17.9 million as compared to $19.9 million at December 31, 2019.

OREO, net of government guarantees, decreased $81,000 to $5.7 million at September 30, 2020 as compared to $5.8 million at December 31, 2019 due to the sale of one OREO property in the third quarter of 2020 which was only partially offset by the transfer of one loan to OREO during the second quarter of 2020.

Nonperforming loans, net of government guarantees decreased $2.9 million during the first nine months of 2020 as compared to December 31, 2019, as paydowns and chargeoffs exceeded additions in the first nine months of 2020.

$7.8 million, or 44% of nonperforming assets are nonaccrual loans and nonperforming purchased receivables related to five commercial relationships.

Two of these relationships, which totaled $3.3 million at the end of the third quarter of 2020, are businesses in the medical industry.

Nonperforming assets, net of government guarantees at March 31, 2021 increased $3.2 million, or 20% to $19.5 million as compared to $16.3 million at December 31, 2020.

OREO, net of government guarantees, increased $274,000 to $6.3 million at March 31, 2021 as compared to $6.0 million at December 31, 2020 due to the addition of one OREO property in the first quarter of 2021.

Nonperforming loans, net of government guarantees increased $3.0 million during the first three months of 2021 as compared to December 31, 2020, primarily due to the addition of two relationships in the first three months of 2021.

$10.4 million, or 53% of nonperforming assets are nonaccrual loans related to seven commercial relationships.

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

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

The following table summarizes nonperforming asset activity for the three-month periods ending March 31, 2021 and 2020.

Writedowns Transfers to

(In Thousands) Balance at June 30, 2020 Additions this quarter Payments this quarter /Charge-offs

(In Thousands) Balance at December 31, 2020 Additions this quarter Payments this quarter /Charge-offs

this quarter Transfers to OREO Performing Status

this quarter Sales this quarter Balance at September 30, 2020

Commercial loans $8,362 $386 ($1,861) ($56) $— $— $— $6,831

Commercial real estate 5,123 — (98) (85) — — — 4,940

Construction loans 702 — — — — — — 702

Consumer loans 178 — (4) — — — — 174

this quarter Sales this quarter Balance at March 31, 2021

Nonperforming loans $11,569 $5,995 ($2,215) ($163) ($274) ($449) $— $14,463

Nonperforming loans guaranteed by government (1,483) — 101 — — — — (1,382)

Total nonperforming loans 12,730 386 (1,928) (141) — — — 11,047

Nonperforming loans, net 10,086 5,995 (2,114) (163) (274) (449) — 13,081

Other real estate owned 7,289 274 — — — — — 7,563

Repossessed assets 231 — — (6) — — — 225

Nonperforming purchased receivables 1,226 — (816) — — — — 410

Other real estate owned guaranteed

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Writedowns Transfers to

(In Thousands) Balance at June 30, 2019 Additions this quarter Payments this quarter /Charge-offs

(In Thousands) Balance at December 31, 2019 Additions this quarter Payments this quarter /Charge-offs

this quarter Transfers to OREO/REPO Performing Status

this quarter Sales this quarter Balance at September 30, 2019

Commercial loans $11,207 $1,328 ($1,414) ($22) ($231) $— $— $10,868

Commercial real estate 5,041 — (67) — — — — 4,974

Construction loans 1,492 — (19) — — — — 1,473

Consumer loans 340 7 (213) (7) — — — 127

this quarter Sales this quarter Balance at March 31, 2020

Nonperforming loans $15,356 $1,167 ($1,122) ($165) ($162) $— $— $15,074

Nonperforming loans guaranteed by government (1,405) (268) 2 — — — — (1,671)

Total nonperforming loans 16,941 538 (1,712) (29) (231) — — 15,507

Nonperforming loans, net 13,951 899 (1,120) (165) (162) — — 13,403

Other real estate owned 7,043 162 — — — — — 7,205

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

At September 30, 2020, management had identified potential problem loans of $7.6 million as compared to potential problem loans of $9.0 million at December 31, 2019.

The decrease in potential problem loans from December 31, 2019 to September 30, 2020 is primarily the result of $3.2 million in paydowns and the addition of a government guarantee on one loan totaling $1.4 million.

Three commercial relationships totaling $1.1 million as of December 31, 2019, net of government guarantees, were transferred to nonaccrual status, and there were four new potential problem loans during the first nine months of 2020 totaling $4.3 million, net of government guarantees.

At March 31, 2021, management had identified potential problem loans of $1.4 million as compared to potential problem loans of $6.1 million at December 31, 2020.

The decrease in potential problem loans from December 31, 2020 to March 31, 2021 is primarily the result of one $3.9 million relationship moving to nonaccrual as well as paydowns to existing potential problem loans in the first quarter of 2021.

Troubled debt restructurings (“TDRs”):

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

The Company had $2.4 million in loans

classified as TDRs that were performing and $6.1 million in TDRs included in nonaccrual loans at September 30, 2020 for a total of approximately $8.5 million.

There are $2.5 million in government guarantees associated with TDRs, so total TDRs, net of government guarantees, are $5.9 million at September 30, 2020.

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

The Company had $2.4 million in loans classified as TDRs that were performing and $4.2 million in TDRs included in nonaccrual loans at March 31, 2021 for a total of approximately $6.5 million.

There are $1.5 million in government guarantees associated with TDRs, so total TDRs, net of government guarantees, are $5.0 million at March 31, 2021.

At December 31, 2020 there were $832,000 in loans classified as TDRs, net of government guarantees that were performing and $4.5 million in TDRs included in nonaccrual loans for a total of $5.3 million.

See Note 4 of the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion of TDRs.

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Income Statement

Net income for the third quarter of 2020 increased $4.3 million, or 57%, to $11.9 million as compared to $7.5 million for the same period in 2019.

Net income for the first nine months of 2020 increased $6.7 million, or 41%, to $22.8 million compared to $16.1 million for the first nine months of 2019.

The increase in net income in both periods is primarily due to an increase in net income in the Home Mortgage Lending segment as a result of increased production.

Net income for the first quarter of 2021 increased $11.1 million to $12.2 million as compared to $1.0 million for the same period in 2020.

The increase in net income is attributable to significant increases in net income in both the Home Mortgage Lending segment, as a result of increased production, and in the Community Banking segment for a variety of reasons, which are discussed below.

Net Interest Income/Net Interest Margin

Net interest income for the third quarter of 2020 increased $2.0 million, or 12%, to $18.3 million as compared to $16.3 million for the third quarter of 2019.

Net interest margin decreased 70 basis points to 3.90% in the third quarter of 2020 as compared to 4.60% in the third quarter of 2019.

Net interest income for the first nine months of 2020 increased $3.4 million, or 7%, to $51.4 million as compared to $48.0 million for the first nine months of 2019.

Net interest margin decreased 66 basis points to 4.05% in the first nine months of 2020 as compared to 4.71% in the first nine months of 2019.

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

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

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

Three Months Ended September 30, 2020 vs.

September 30, 2019

Nonaccrual interest adjustments 0.19 %

Impact of SBA Paycheck Protection Program loans (0.33) %

Interest rates and loan fees (0.61) %

Volume and mix of interest-earning assets 0.05 %

Change in net interest margin (0.70) %

Nine Months Ended September 30, 2020 vs.

September 30, 2019

Net interest income for the first quarter of 2021 increased $3.8 million, or 24%, to $19.5 million as compared to $15.7 million for the first quarter of 2020.

Net interest margin decreased 42 basis points to 3.90% in the first quarter of 2021 as compared to 4.32% in the first quarter of 2020.

The increase in net interest income in the first quarter of 2021 compared to the same periods of 2020 was primarily the result of higher interest income on loans due in large part to full recognition of the deferred PPP loan fees upon loan forgiveness through the SBA.

During the first quarter of 2021, Northrim received $105.0 million in loan forgiveness through the SBA, compared to none in the first quarter of 2020, resulting in total net PPP fee income of $3.3 million.

As of March 31, 2021, there was $3.1 million of net PPP fee income from round one remaining and $8.8 million remaining from round two for total net deferred fees on PPP loans of $11.9 million.

The decrease in net interest margin in the first quarter of 2021 as compared to the same period a year ago was primarily the result of the reduction in short-term interest rates in 2020 and the impact of the PPP loans on the resulting yields in the loan portfolio.

Changes in net interest margin in the three months ended March 31, 2021 as compared to the same period in the prior year are detailed below:

Three Months Ended March 31, 2021 vs.

March 31, 2020

Nonaccrual interest adjustments 0.01 %

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Components of Net Interest Margin

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

(Dollars in Thousands) Three Months Ended September 30,

Interest income/

Average Balances Change expense Change Average Yields/Costs

2020 2019 $ % 2020 2019 $ % 2020 2019 Change

$1,465,839 $1,020,186 $445,653 44 % $17,734 $15,154 $2,580 17 % 4.81 % 5.89 % (1.08) %

Loans held for sale 122,994 74,181 48,813 66 % 957 709 248 35 % 3.10 % 3.79 % (0.69) %

Short-term investments 3

60,504 58,754 1,750 3 % 17 313 (296) (95) % 0.11 % 2.11 % (2.00) %

Long-term investments 4

217,599 253,364 (35,765) (14) % 1,086 1,661 (575) (35) % 1.99 % 2.60 % (0.61) %

Total investments 278,103 312,118 (34,015) (11) % 1,103 1,974 (871) (44) % 1.58 % 2.51 % (0.93) %

Interest-earning assets 1,866,936 1,406,485 460,451 33 % 19,794 17,837 1,957 11 % 4.22 % 5.03 % (0.81) %

Nonearning assets 172,853 169,907 2,946 2 %

Total $2,039,789 $1,576,392 $463,397 29 %

Interest-bearing demand $409,758 $288,781 $120,977 42 % $156 $167 ($11) (7) % 0.15 % 0.23 % (0.08) %

Savings deposits 266,588 234,130 32,458 14 % 168 285 (117) (41) % 0.25 % 0.48 % (0.23) %

Money market deposits 218,965 209,147 9,818 5 % 153 303 (150) (50) % 0.28 % 0.57 % (0.29) %

Time deposits 181,882 138,311 43,571 32 % 843 610 233 38 % 1.84 % 1.75 % 0.09 %

Total interest-bearing deposits 1,077,193 870,369 206,824 24 % 1,320 1,365 (45) (3) % 0.49 % 0.62 % (0.13) %

Borrowings 23,574 19,749 3,825 19 % 180 166 14 8 % 3.04 % 3.33 % (0.29) %

Total interest-bearing liabilities 1,100,767 890,118 210,649 24 % 1,500 1,531 (31) (2) % 0.54 % 0.68 % (0.14) %

Demand deposits and other noninterest-bearing liabilities 725,585 479,372 246,213 51 %

Equity 213,437 206,902 6,535 3 %

Total $2,039,789 $1,576,392 $463,397 29 %

Net interest income $18,294 $16,306 $1,988 12 %

Net interest margin 3.90 % 4.60 % (0.70) %

Average loans to average interest-earning assets 78.52 % 72.53 %

Average loans to average total deposits 83.75 % 78.01 %

Average non-interest deposits to average total deposits 38.45 % 33.45 %

Average interest-earning assets to average interest-bearing liabilities 169.60 % 158.01 %

1 Interest income includes loan fees.

Loan fees recognized during the period and included in the yield calculation totaled $2.2 million and $841,000 in the third quarter of 2020 and 2019, respectively.

2 Nonaccrual loans are included with a zero effective yield.

Average nonaccrual loans included in the computation of the average loan balances were $13.9 million and $17.8 million in the third quarter of 2020 and 2019, respectively .

3 Consists of interest bearing deposits in other banks.

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

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the three-month periods ending September 30, 2020 and 2019.

Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates:

(In Thousands) Three Months Ended September 30, 2020 vs.

Increase (decrease) due to

Volume Rate Total

Interest Income:

Loans $2,658 ($78) $2,580

Loans held for sale 342 (94) 248

Short-term investments 9 (305) (296)

Long-term investments (219) (356) (575)

Total interest income $2,790 ($833) $1,957

Interest Expense:

Interest-bearing deposits $282 ($327) ($45)

Borrowings 28 (14) 14

Total interest expense $310 ($341) ($31)

The following table compares average balances and rates as well as margins on earning assets for the nine-month periods ended September 30, 2020 and 2019:

(Dollars in Thousands) Nine Months Ended September 30,

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended March 31, 2021 and 2020:

(Dollars in Thousands) Three Months Ended March 31,

Interest income/

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1 Interest income includes loan fees.

Loan fees recognized during the period and included in the yield calculation totaled $5.1 million and $2.4 million in the first nine months of 2020 and 2019, respectively.

Loan fees recognized during the period and included in the yield calculation totaled $4.1 million and $847,000 in the first quarter of 2021 and 2020, respectively.

2 Nonaccrual loans are included with a zero effective yield.

Average nonaccrual loans included in the computation of the average loan balances were $14.4 million and $17.2 million in the first six months of 2020 and 2019, respectively .

Average nonaccrual loans included in the computation of the average loan balances were $11.2 million and $15.0 million in the first quarter of 2021 and 2020, respectively .

3 Consists of interest bearing deposits in other banks.

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

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the nine-month periods ending September 30, 2020 and 2019.

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

Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates:

(In Thousands) Nine Months Ended September 30, 2020 vs.

(In Thousands) Three Months Ended March 31, 2021 vs.

Increase (decrease) due to

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Total interest expense $389 ($935) ($546)

Provision for Loan Losses

The provision for loan losses increased to $567,000 for the third quarter of 2020 and $3.0 million for the first nine months of 2020 compared to a benefit for loan losses of $2.1 million in the third quarter of 2019 and a benefit for loan losses of $1.0 million for the first nine months of 2019.

While credit quality has continued to improve as nonperforming loans and adversely classified loans have decreased in 2020 as compared to the prior year, the increase in the provision for loan losses for both periods is the result of management's assessment of risk associated with the COVID-19 pandemic, the reduction in oil prices and a slowing Alaska economy, as well as growth in the unguaranteed portion of the loan portfolio.

The ratio of the Allowance to total nonperforming loans, net of government guarantees was 196% at September 30, 2020 and 137% at December 31, 2019.

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

Provision for Credit Losses

The provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the ACL at an appropriate level under CECL.

The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity.

Refer to Note 1 of the notes to Consolidated Financial Statements included in Item 1 of this report for detailed discussion regarding ACL methodologies for loans, available for sale debt securities, held to maturity securities, loans held for investment, unfunded commitments, and purchased receivables.

The following table presents the major categories of credit loss expense:

Three Months Ended March 31,

(In Thousands) 2021 2020

Credit loss expense on loans held for investment ($1,905) $2,060

Credit loss expense on unfunded commitments 417 —

Credit loss expense on available for sale debt securities — —

Credit loss expense on held to maturity securities — —

Credit loss expense on purchased receivables — —

Total credit loss expense ($1,488) $2,060

The decrease in the provision for credit losses on loans is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses.

The increase in the provision for credit losses on unfunded commitments is primarily due to an increase in total unfunded commitments, which was only partially offset by lower lifetime expected loss rates due to improvement in economic assumptions.

Other Operating Income

Other operating income for the three-month period ended September 30, 2020, increased $11.1 million, or 105%, to $21.6 million as compared to $10.5 million for the same period in 2019, primarily due to the $10.4 million increase in mortgage banking income in the third quarter of 2020 compared to the same quarter in 2019.

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

Additionally, the Company recognized $726,000 in interest rate swap fee income in the third quarter of 2020.

This increase was only partially offset by a decrease in purchased receivable income due to customers reportedly using PPP funds instead of selling receivables, and a decrease in service charges on deposit accounts due to customer accommodations related to the impacts of COVID19 as compared to the third quarter of 2019.

Other operating income for the first nine months of 2020 increased $18.0 million, or 65%, to $45.6 million as compared to $27.6 million for the same period in 2019, primarily due to a $20.0 million increase in mortgage banking income.

Similar to the third quarter, this increase in mortgage banking income was primarily due to increased refinance activity and home purchases due to changes in the mortgage interest rates.

This increase in the first nine months of 2020 was only partially offset by decreases in purchased receivable income, due to customers reportedly using PPP funds instead of selling receivables, a decrease in service charges on deposit accounts due to customer accommodations related to the impacts of COVID19 as compared to the first nine months of 2019, and the recognition of a $347,000 unrealized loss on marketable securities in the first nine months of 2020 compared to a $782,000 unrealized gain on marketable securities for the same period in 2019.

Other operating income for the three-month period ended March 31, 2021, increased $9.5 million, or 147%, to $15.9 million as compared to $6.4 million for the same period in 2020, primarily due to the $9.0 million increase in mortgage banking income in the first quarter of 2021 compared to the same quarter in 2020.

This increase in mortgage banking income in the three-month period ended March 31, 2021 as compared to the same period in 2020 was primarily due to increased refinance activity and home purchases due to changes in the mortgage interest rates.

Also, changes in the fair value mark-to-market of the marketable equity securities portfolio decreased other income by $84,000 in the first quarter of 2021 as compared to $871,000 in the first quarter of 2020.

Additionally, the Company recognized $92,000 in interest rate swap fee income in the first quarter of 2021.

These increases were only partially offset by a decrease in purchased receivable income due to customers reportedly using PPP funds instead of selling receivables.

Other Operating Expense

Other operating expense for the third quarter of 2020 increased $4.2 million, or 22%, to $23.5 million as compared to the same period in 2019 primarily due to higher salaries and other personnel expense and other miscellaneous operating expenses related to mortgage banking operations, which fluctuate with production volumes.

Other operating expense for the first nine months of 2020 increased $8.7 million, or 16%, to $65.0 million from $56.2 million in the same period in 2019 primarily due to higher salaries and other personnel expense and other miscellaneous operating expenses related to mortgage banking operations, which fluctuate with production volumes.

Additionally, data processing costs in the Community Banking segment were higher due to charges for additional products and services, and insurance expense in the Community Banking segment increased because of higher FDIC insurance due to the increase in total assets.

The provision for income taxes for the third quarter of 2020 increased $2.0 million, or 97%, as compared to the same period in 2019.

The provision for income taxes in the first nine months of 2020 increased $1.9 million, or 44%, as compared to the first nine months of 2019.

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

The effective tax rate increased to 25% in the three-month period ending September 30, 2020 as compared to 21% in the same period in 2019, and the effective tax rate increased to 22% in the nine-month period ending September 30, 2020 as compared to 21% in the same period in 2019.

The increased rate in both the three and nine-month periods ending September 30, 2020 was primarily due to decreased tax credits and tax exempt interest income as a percentage of net income which was only partially offset by the reversal of a $454,000 accrual for a potential increase in tax expense related to an audit that was performed in 2018 by the State of Alaska for tax years 2014-2016.

The Company 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.

Other operating expense for the first quarter of 2021 increased $2.5 million, or 14%, to $21.3 million as compared to the same period in 2020 primarily due to higher salaries and other personnel expense and other miscellaneous operating expenses related to mortgage banking operations, which fluctuate with production volumes.

The provision for income taxes for the first quarter of 2021 increased $3.1 million, or 1,286%, as compared to the same period in 2020.

The increase in the three-month period ending March 31, 2021 as compared to the same period in 2020 was primarily due to the increase in pretax income.

The effective tax rate increased to 22% in the three-month period ending March 31, 2021 as compared to 19% in the same period in 2020.

The increased rate in three-month period ending March 31, 2021 was primarily due to decreased tax credits and tax exempt interest income as a percentage of net income.

FINANCIAL CONDITION

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Portfolio Investments

Portfolio investments at September 30, 2020 decreased 21%, or $60.2 million, to $223.9 million from $284.1 million at December 31, 2019 as proceeds from sales, maturities, and security calls were used for loan fundings in the first nine months of 2020.

Portfolio investments at March 31, 2021 increased 25%, or $66.6 million, to $333.3 million from $266.7 million at December 31, 2020 as proceeds from an increase in deposits that were not lent out were invested in the first three months of 2021.

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Dollar Amount Percent of Total Dollar Amount Percent of Total

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Loans and Lending Activities

Our loan products include short and medium-term commercial loans, commercial credit lines, construction and real estate loans, and consumer loans.

From our inception, we have emphasized commercial, land development and home construction, and commercial real estate lending.

This type of lending has generally provided us with market opportunities and higher net interest margins than other types of lending.

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

Portfolio loans increased by $449.3 million, or 43%, to $1.493 billion at September 30, 2020 from $1.043 billion at December 31, 2019, primarily as a result of increased commercial loans due to the Company's participation in the SBA PPP.

PPP loans are included in commercial loans in the table below and totaled $375.6 million at September 30, 2020 and zero at December 31, 2019.

Commercial loans net of SBA PPP loans increased $47.9 million, or 12%, in the first nine months of 2020.

As shown in the table below, real estate construction other, real estate term owner occupied and real estate term non-owner occupied loans also increased in the first nine months of 2020.

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

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

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

September 30, 2020 December 31, 2019

The following table presents the concentration distribution of the loan portfolio, net of deferred fees and costs, as of the dates indicated:

March 31, 2021 December 31, 2020

Dollar Amount Percent of Total Dollar Amount Percent of Total

(In Thousands)

Commercial $836,178 56.2 % $412,690 39.5 %

Real estate construction one-to-four family 37,958 2.5 % 38,818 3.7 %

Real estate construction other 82,661 5.5 % 61,808 5.9 %

Real estate term owner occupied 148,993 10.0 % 138,891 13.3 %

Real estate term non-owner occupied 320,693 21.5 % 312,960 30.0 %

Real estate term other 43,539 2.9 % 42,506 4.1 %

Consumer secured by 1st deeds of trust 14,050 0.9 % 16,198 1.6 %

Consumer other 23,133 1.5 % 24,585 2.4 %

Subtotal $1,507,205 $1,048,456

Unearned origination fee,

net of origination costs (14,485) (1.0) % (5,085) (0.5) %

Commercial & industrial loans $695,797 44.9 % $612,254 42.2 %

Commercial real estate:

Owner occupied properties 244,416 15.8 % 233,320 16.2 %

Non-owner occupied and multifamily properties 399,982 25.8 % 392,452 27.2 %

Residential real estate:

1-4 family residential properties secured by first liens 31,930 2.1 % 33,415 2.3 %

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 17,536 1.1 % 18,236 1.3 %

1-4 family residential construction loans 35,051 2.3 % 32,500 2.3 %

Other construction, land development and raw land loans 86,574 5.6 % 83,463 5.8 %

Obligations of states and political subdivisions in the US 15,795 1.0 % 15,318 1.1 %

Agricultural production, including commercial fishing 12,901 0.8 % 12,968 0.9 %

Consumer loans 5,563 0.4 % 5,734 0.4 %

Other loans 3,379 0.2 % 4,390 0.3 %

Total loans $1,548,924 $1,444,050

The above table includes $375.6 million SBA PPP loans within the Commercial loan segment.

Additionally, unearned origination fee, net of origination costs includes $8.8 million associated with SBA PPP loans.

Loans increased by $104.9 million, or 7%, to $1.549 billion at March 31, 2021 from $1.444 billion at December 31, 2020, primarily as a result of increased commercial loans due to the Company's participation in the SBA PPP.

PPP loans are included in commercial and industrial loans in the table below and totaled $402.5 million at March 31, 2021 and $304.6 million at December 31, 2020.

Commercial real estate loans increased $18.9 million, or 3% during the same period.

As shown in the table above, 1-4 family residential construction loans, other construction loans, and obligations of states and political subdivisions also increased in the first quarter of 2021 while the remaining loan segments decreased slightly, as compared to year end 2020.

Management believes that the significant outreach that the Company has done throughout the SBA PPP lending cycle to both customers and non-customers has contributed to growth in our market share for non-PPP lending relationships.

Information about loans directly exposed to the oil and gas industry

The Company defines "direct exposure" to the oil and gas industry as companies that it has identified as significantly reliant upon activity related to the oil and gas industry, such as oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry.

The Company estimates that $66.0 million, or approximately 4% of loans as of September 30, 2020 have direct exposure to the oil and gas industry as compared to $79.2 million, or approximately 8% of loans as of December 31, 2019.

The Company's exposure as a percent of the total loan portfolio excluding SBA PPP loans as of September 30, 2020 was 6%.

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

The balance of this loan was $6.8 million and $14.2 million at September 30, 2020 and December 31, 2019, respectively, and is classified as an Asset Quality Rating ("AQR") system pass loan in both periods.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $63.6 million and $31.1 million at September 30, 2020 and December 31, 2019, respectively.

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

The Company estimates that $64.7 million, or approximately 4% of loans as of March 31, 2021 have direct exposure to the oil and gas industry as compared to $65.1 million, or approximately 4% of loans as of December 31, 2020.

The Company's exposure as a percent of the total loan portfolio excluding SBA PPP loans as of March 31, 2021 and December 31, 2020 was 6%.

The Company has no loans to oil producers or exploration companies as of March 31, 2021 or December 31, 2020, but the totals noted include a loan related to construction of an oil drilling rig.

The balance of this loan was $2.9 million and $3.0 million at March 31, 2021 and December 31, 2020, respectively, and is classified as an Asset Quality Rating ("AQR") system pass loan in both periods.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $67.5 million and $63.5 million at March 31, 2021 and December 31, 2020, respectively.

The portion of the Company's ACL that related to the loans with direct exposure to the oil and gas industry was estimated at $1.5 million as of March 31, 2021 and $1.2 million as of December 31, 2020.

The following table details loan balances by loan segment and class of financing receivable for loans with direct oil and gas exposure as of the dates indicated:

(In Thousands) 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

September 30, 2020

AQR Pass $45,211 $— $— $4,048 $— $— $— $2,261 $51,520

AQR Special Mention 4,304 — — 1,633 6,687 — — — 12,624

AQR Substandard 1,904 — — — — — — — 1,904

Total $51,419 $— $— $5,681 $6,687 $— $— $2,261 $66,048

December 31, 2019

AQR Pass $62,345 $— $— $4,153 $— $— $— $361 $66,859

AQR Special Mention 450 — — 1,900 6,916 — — — 9,266

AQR Substandard 3,070 — — — — — — — 3,070

(In Thousands) March 31, 2021 December 31, 2020

Commercial & industrial loans $41,038 $41,016

Commercial real estate:

Owner occupied properties 11,033 11,296

Non-owner occupied and multifamily properties 6,488 6,606

Consumer loans 2,211 2,256

Other loans 3,929 3,948

Total $64,699 $65,122

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

In addition, at September 30, 2020, the Company had $62.6 million, or 4% of portfolio loans, in the tourism sector, $54.2 million, or 4% of portfolio loans, in the aviation (non-tourism) sector, $83.2 million, or 6% of total loans, in the healthcare sector, $23.0 million, or 2%, in retail loans and $27.1 million, or 2% in the restaurant sector, and $38.9 million, or 3% in the accommodations sector.

At September 30, 2020, the Company had $62.6 million, or 6% of portfolio loans excluding SBA PPP loans, in the tourism sector, $54.2 million, or 5% of portfolio loans excluding SBA PPP loans, in the aviation (non-tourism) sector, $83.2 million, or 7% of total loans excluding SBA PPP loans, in the healthcare sector, $23.0 million, or 2% of total loans excluding SBA PPP loans, in retail loans and $27.1 million, or 2% of total loans excluding SBA PPP loans in the restaurant sector, and $38.9 million, or 3% of total loans excluding SBA PPP loans in the accommodations sector.The portion of the Company's Allowance that related to the loans with exposure to these industries is estimated at the following amounts as of September 30, 2020:

At March 31, 2021, the Company had $80.0 million, or 5% of portfolio loans, in the tourism sector, $57.6 million, or 4% of portfolio loans, in the aviation (non-tourism) sector, $91.4 million, or 6% of total loans, in the healthcare sector, $29.1 million, or 2%, in retail loans and $35.5 million, or 2% in the restaurant sector, and $37.8 million, or 2% in the accommodations sector.

At March 31, 2021, the Company had $80.0 million, or 7% of portfolio loans excluding SBA PPP loans, in the tourism sector, $57.6 million, or 5% of portfolio loans excluding SBA PPP loans, in the aviation (non-tourism) sector, $91.4 million, or 8% of total loans excluding SBA PPP loans, in the healthcare sector, $29.1 million, or 3% of total loans excluding SBA PPP loans, in retail loans and $35.5 million, or 3% of total loans excluding SBA PPP loans in the restaurant sector, and $37.8 million, or 3% of total loans excluding SBA PPP loans in the accommodations sector.

The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of March 31, 2021:

(In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Restaurant Accommodations Total

Allowance $1,224 $1,062 $1,548 $432 $515 $753 $5,534

Analysis of Allowance for Loan Losses

The Company maintains an Allowance to reflect management's assessment of probable, estimable losses inherent in the loan portfolio.

The Allowance is increased by provisions for loan losses and loan recoveries and decreased by loan charge-

The size of the Allowance is determined through quarterly assessments of probable estimated losses in the loan portfolio.

Our methodology for making such assessments and determining the adequacy of the Allowance includes the following key elements:

• A specific allocation for impaired loans.

Management determines the fair value of the majority of these loans based on the underlying collateral values.

This analysis is based upon a specific analysis for each impaired loan, including external appraisals on loans secured by real property, management’s assessment of the current market, recent payment history, and an evaluation of other sources of repayment.

In-house evaluations of fair value are used in the impairment analysis in some situations.

Inputs to the in-house evaluation process include information about sales of comparable properties in the appropriate markets and changes in tax assessed values.

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 obtains updated appraisals on loans secured by real or personal property based upon its assessment of changes in the current market or particular projects or properties, information from other current appraisals, and other sources of information.

Appraisals may be adjusted downward by the Company based on its evaluation of the facts and circumstances on a case by case basis.

External appraisals may be discounted when management believes that the absorption period used in the appraisal is unrealistic, when expected liquidation costs exceed those included in the appraisal, or when management’s evaluation of deteriorating market conditions warrants an adjustment.

Additionally, the Company may also adjust appraisals in the above circumstances between appraisal dates.

The Company uses the information provided in these updated appraisals along with its evaluation of all other information available on a particular property as it assesses the collateral coverage on its performing and nonperforming loans and the impact that may have on the adequacy of its Allowance.

The specific allowance for impaired loans, as well as the overall Allowance, may increase based on the Company’s assessment of updated appraisals.

See Note 11 of the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion of the Company’s estimation of impaired loans measured at fair value.

When the Company determines that a loss has occurred on an impaired loan, a charge-off equal to the difference between carrying value and fair value is recorded.

If a specific allowance is deemed necessary for a loan, and then that loan is partially charged off, the loan remains classified as a nonperforming loan after the charge-off is recognized.

• A general allocation - The Company has identified segments and classes of loans not considered impaired for purposes of establishing the general allocation allowance.

The Company disaggregates the loan portfolio into segments and classes based on its assessment of how different pools of loans with like characteristics in the portfolio behave over time.

This determination is based on historical experience and management’s assessment of how current facts and circumstances are expected to affect the loan portfolio.

The Company first disaggregates the loan portfolio into the following eight segments:

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

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

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

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

There are five loan classes:

pass (pass AQR grades, which are grades 1 – 6), special mention, substandard, doubtful, and loss.

There have been no changes to these loan classes in 2020.

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 loss history for each segment and class.

The Company utilizes a lookback period of five years in the calculation of average historical loss rates.

After the Company calculates a general allocation using our loss history, the 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,including impacts related to COVID-19;

general business conditions;

trends in local real estate markets;

economic, political, and industry specific factors that affect resource development in Alaska;

effects of various political activities;

peer group data;

and internal factors such as underwriting policies and expertise of the Company’s employees.

• An unallocated reserve - The unallocated portion of the Allowance provides for other credit losses inherent in our loan portfolio that may not have been contemplated in the specific and general components of the Allowance, and it acknowledges the inherent imprecision of all loss prediction models.

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

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

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

Three Months Ended September 30, Nine Months Ended September 30,

ACL $953 $611 $1,055 $334 $421 $443 $3,817

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

Three Months Ended March 31,

(In Thousands) 2021 2020

Balance at beginning of period $21,136 $19,088

Commercial 56 22 1,011 195

Real estate term owner occupied 85 — 85 —

Consumer other — 7 14 11

Cumulative effect of adoption of ASU 2016-13 (4,511) —

Commercial & industrial loans 163 151

Consumer loans — 14

Total charge-offs 163 165

Commercial 600 709 656 801

Real estate term other 1 1 2 28

Consumer other 3 13 16 20

Commercial & industrial loans 185 12

Commercial real estate:

Owner occupied properties 2 —

Residential real estate:

1-4 family residential properties secured by junior liens

and revolving secured by 1-4 family first liens 10 9

Agricultural production, including commercial fishing 8 8

Consumer loans 2 5

Total recoveries 207 34

Net, (recoveries) charge-offs (44) 131

Provision for loan losses 567 (2,075) 3,031 (1,025)

(Benefit) provision for credit losses (1,905) 2,060

Balance at end of period $14,764 $21,017

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 of the Allowance.

Moreover, bank regulators frequently monitor banks' loan loss allowances, and if regulators were to determine that the Company’s Allowance is inadequate, they may require the Company to increase the Allowance, which may adversely impact the Company’s net income and financial condition.

The following table sets forth information regarding changes in the ACL for unfunded commitments for the periods indicated:

Three Months Ended March 31,

(In Thousands) 2021 2020

Balance at beginning of period $187 $152

Cumulative effect of adoption of ASU 2016-13 1,229 —

Adjusted balance, beginning of period 1,416 152

Provision for credit losses 417 7

Balance at end of period $1,833 $159

While management believes that it uses the best information available to determine the ACL, unforeseen market conditions and other events could result in adjustment to the ACL, and net income could be significantly affected if circumstances differed substantially from the assumptions used in making the final determination of the ACL.

Moreover, bank regulators frequently monitor banks' loan loss allowances, and if regulators were to determine that the Company’s ACL is inadequate, they may require the Company to increase the ACL, which may adversely impact the Company’s net income and financial condition.

Deposits are the Company’s primary source of funds.

Total deposits increased $433.8 million, or 32%, to $1.806 billion as of September 30, 2020 compared to $1.372 billion as of December 31, 2019.

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

Total deposits increased $226.3 million, or 12%, to $2.051 billion as of March 31, 2021 compared to $1.825 billion as of December 31, 2020.

This increase is primarily due to funding PPP loans, but is also due to new customer relationships as a result of the Company's significant PPP efforts during the first quarter of 2021 and the last nine months of 2020.

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(In thousands) Balance % of total Balance % of total

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Total deposits $2,051,317 $1,824,981

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

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 91% of total deposits at March 31, 2021 and 90% of total deposits at December 31, 2020.

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

At September 30, 2020, the Company had $181.2 million in certificates of deposit as compared to certificates of deposit of $164.5 million at December 31, 2019.

At September 30, 2020, $150.7 million, or 83%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $90.5 million, or 55%, of total certificates of deposit at December 31, 2019.

The aggregate amount of certificates of deposit in amounts of $100,000 and greater at September 30, 2020 and December 31, 2019, was $137.9 million and $118.9 million, respectively.

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

At March 31, 2021, the Company had $184.6 million in certificates of deposit as compared to certificates of deposit of $175.6 million at December 31, 2020.

At March 31, 2021, $135.0 million, or 73%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $175.6 million, or 73%, of total certificates of deposit at December 31, 2020.

The aggregate amount of certificates of deposit in amounts of $100,000 and greater at March 31, 2021 and December 31, 2020, was $143.2 million and $133.3 million, respectively.

The following table sets forth the amount outstanding of deposits in amounts of $100,000 and greater by time remaining until maturity and percentage of total deposits as of March 31, 2021:

Time Certificates of Deposit

8 unchanged sentences

Total $143,245 100 %

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

There were no depositors with deposits representing 10% or more of total deposits at March 31, 2021 or December 31, 2020.

The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB").

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FHLB advances are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Bank’s assets.

At September 30, 2020, our maximum borrowing line from the FHLB was $937.3 million, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $13.7 million as of September 30, 2020 which were originated to match fund low income housing projects that qualify for long term fixed interest rates.

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

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

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

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

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

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

The fourth advance is a $1.0 million FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2019.

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

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

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

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

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

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

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

The last advance is a $2.0 million FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2020.

This advance has a 18 year term with a 30 year amortization period and a fixed interest rate of 1.41%, which mirrors the term of the loan made to the borrower.

All of these FHLB advances are included in borrowings.

At March 31, 2021, our maximum borrowing line from the FHLB was $1.050 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $14.7 million as of March 31, 2021 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%.

Federal Reserve Bank:

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $85.2 million of loans as collateral to secure advances made through the discount window on September 30, 2020.

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

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

of June 30, 2020.

This advance had an interest rate of 0.35%.

The average balance outstanding of PPPLF was zero and $15.0 million during the three and nine-month periods ending September 30, 2020, respectively.

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $80.8 million of loans as collateral to secure advances made through the discount window on March 31, 2021.

There were no discount window advances outstanding at March 31, 2021 or December 31, 2020, respectively.

Other Short-term Borrowings:

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

The average balance outstanding of securities sold under agreements to repurchase during the three-month periods ending September 30, 2020 and 2019 was zero and $470,000, respectively, and zero and $20.3 million, respectively, in the nine-month periods ending September 30, 2020 and 2019.

The maximum outstanding at any month-end was zero and $864,000, respectively, during the three-month periods ending September 30, 2020 and 2019 and zero and $36.6 million, respectively, for the nine-month periods ending September 30, 2020 and 2019.

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

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 15% of total assets or $312.4 million at September 30, 2020 and $244.7 million at December 31, 2019.

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

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

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $816.9 million at March 31, 2021 and $736.0 million at December 31, 2020.

At March 31, 2021 and December 31, 2020, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

Long-term Borrowings.

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

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of March 31, 2021 or December 31, 2020.

Liquidity and Capital Resources

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The primary sources of demands on our liquidity are customer demands for withdrawal of deposits and borrowers' demands that we advance funds against unfunded lending commitments.

Our total unfunded commitments to fund loans and letters of credit at September 30, 2020 were $361.2 million.

Our total unfunded commitments to fund loans and letters of credit at March 31, 2021 were $375.7 million.

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

Additionally, as noted above, our total deposits at September 30, 2020 were $1.806 billion.

As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 "Financial Statements" of this report, net cash used by operating activities was $27.0 million for the first nine months of 2020, primarily due to cash provided by proceeds from the sale of loans held for sale being more than offset by cash used in connection with the origination of loans held for sale.

Net cash used by investing activities was $390.7 million for the same period, primarily due to increases in loans, in particular PPP loans.

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

Additionally, as noted above, our total deposits at March 31, 2021 were $2.051 billion.

As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 "Financial Statements" of this report, net cash provided by operating activities was $44.6 million for the first three months of 2021, primarily due to cash provided by proceeds from the sale of loans held for sale, which were only partially offset by cash used in connection with the origination of loans held for sale.

Net cash used by investing activities was $178.7 million for the same period, primarily due to increases in loans, in particular PPP loans, as well as purchases of available for sale securities.

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

Net cash provided by financing activities in the same period was $221.8 million, primarily due to increases in deposits largely due to funding PPP loans that was done via deposit into customer accounts.

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

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

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

At September 30, 2020, our funds available for borrowing under our existing lines of credit were $1.001 billion.

At March 31, 2021, our funds available for borrowing under our existing lines of credit were $1.116 billion.

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

The Company had $261.1 million in PPP loans eligible to be pledged for the PPPLF program as of September 30, 2020.

The Company had $349.9 million in PPP loans eligible to be pledged for the PPPLF program as of March 31, 2021.

The Company has not obtained any other new borrowing lines or other new sources of liquidity other than the PPPLF program resulting from anticipated liquidity challenges from COVID-19.

Given these sources of liquidity and our expectations for customer demands for cash and for our operating cash needs, we believe our sources of liquidity to be sufficient to fund our ongoing operating activities and our anticipated capital requirements for at least 12 months.

The Company issued 1,946 shares of its common stock in the first nine months of 2020 and repurchased 281,451 shares of its common stock under the Company's previously announced repurchase program.

At September 30, 2020, the Company had 6,279,304 shares of its common stock outstanding.

The Company issued 17,308 shares of its common stock in the first three months of 2021 and repurchased 61,399 shares of its common stock under the Company's previously announced repurchase program.

At March 31, 2021, the Company had 6,206,913 shares of its common stock outstanding.

Capital Requirements and Ratios

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

We believe as of September 30, 2020, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

We believe as of March 31, 2021, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

The table below illustrates the capital requirements in effect for the periods noted for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements.

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

As a result, the Company has $10 million more in regulatory capital than the Bank at both September 30, 2020 and December 31, 2019, which explains most of the difference in the capital ratios for the two entities.

As a result, the Company has $10 million more in regulatory capital than the Bank at both March 31, 2021 and December 31, 2020, which explains most of the difference in the capital ratios for the two entities.

Minimum Required Capital Well-Capitalized Actual Ratio Company Actual Ratio Bank

September 31, 2020

March 31, 2021

Total risk-based capital 8.00% 10.00% 15.50% 13.11%

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Leverage ratio 4.00% 5.00% 10.25% 8.55%

See Note 24 of the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for a detailed discussion of the capital ratios.

See Note 24 of the Consolidated Financial Statements in Part II.

Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 for a detailed discussion of the capital ratios.

The requirements for "well- capitalized" come from the Prompt Corrective Action rules.

See Item 1 - Business - Supervision and Regulation in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

Item 1 - Business - Supervision and Regulation in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

These rules apply to the Bank but not to the Company.

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

As of September 30, 2020 and December 31, 2019, the Company’s commitments to extend credit and to provide letters of credit which are not reflected on its balance sheet amounted to $361.2 million and $301.9 million, respectively.

Additionally, the Company had commitments to originate loans held for sale of $257.3 million and $48.8 million, as of September 30, 2020 and December 31, 2019, respectively.

As of March 31, 2021 and December 31, 2020, the Company’s commitments to extend credit and to provide letters of credit which are not reflected on its balance sheet amounted to $375.7 million and $377.4 million, respectively.

Additionally, the Company had commitments to originate loans held for sale of $181.4 million and $150.3 million, as of March 31, 2021 and December 31, 2020, respectively.

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

The Company has established reserves of $179,000 and $152,000 at September 30, 2020 and December 31, 2019 respectively, for losses related to these commitments that are recorded in other liabilities on the consolidated balance sheet.

The Company has established reserves of $1.8 million and $187,000 at March 31, 2021 and December 31, 2020 respectively, for losses related to these commitments that are recorded in other liabilities on the consolidated balance sheet.

Capital Expenditures and Commitments

The Company has capital commitments related to a new branch in Fairbanks.

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

The Company has capital commitments related to a branch remodel and a branch relocation in Anchorage.

At March 31, 2021 the Company considers these commitments to be immaterial.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our assessment of market risk as of September 30, 2020 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2019.

Our assessment of market risk as of March 31, 2021 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis