NORTHRIM BANCORP INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the unaudited consolidated financial statements of Northrim BanCorp, Inc. (the “Company”) and the notes thereto presented elsewhere in this report and with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Except as otherwise noted, references to "we", "our", "us" or "the Company" refer to Northrim BanCorp, Inc. and its subsidiaries that are consolidated for financial reporting purposes. Note Regarding Forward Looking-Statements This quarterly report on Form 10-Q includes “forward-looking statements,” as that term is defined for purposes of Section 21E of the Securities Exchange Act of 1934, as amended, which are not historical facts. These forward-looking statements describe management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of the Company’s style of banking, the strength of the local economy, and statements related to the expected or potential impact of the novel coronavirus ("COVID-19") pandemic and related responses of the government. All statements other than statements of historical fact, including statements regarding industry prospects, future results of operations or financial position and the expected or potential impact of COVID-19 and related responses of the government, made in this report are forward-looking. We use words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management’s current plans and expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations, and those variations may be both material and adverse. Forward-looking statements, whether concerning COVID-19 and the government response related thereto or otherwise, are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the uncertainties relating to the impact of COVID-19 on the Company's credit quality, business, operations and employees; the availability and terms of funding from government sources related to COVID-19; 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; the general condition of, and changes in, the Alaska economy; our ability to maintain or expand our market share or net interest margin; our ability to maintain asset quality; our ability to implement our marketing and growth strategies; and our ability to execute our business plan. Further, actual results may be affected by competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. 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 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. In addition, you should note that forward looking statements are made only as of the date of this report and that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements, other than as required by law. Critical Accounting Policies 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") 43 methodology. 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; and • 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. 44 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 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. The U.S. 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. states. 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. and Alaska. 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. states. 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 45 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: • Industry Exposure: 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 March 31, 2021 are being impacted: 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%). 46 • Customer Accommodations: The Company has implemented several forms of assistance to help our customers in the event that they experience financial hardship as a result of COVID-19 in addition to our participation in PPP lending. The provisions of the CARES Act included an election to not apply the guidance on accounting for certain troubled debt restructurings related to COVID-19 and allow certain accommodations to borrowers. These accommodations include interest only and deferral options on loan payments, as well as the waiver of various fees related to loans, deposits and other services. The Company has elected to adopt these provisions of the CARES Act. 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 March 31, 2021 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $65,201 $23,096 $88,297 Number of modifications 21 9 30 Loan Modifications due to COVID-19 as of December 31, 2020 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $43,379 $22,165 $65,544 Number of modifications 23 11 34 Consumer loans represent 1% of total loan modifications identified above. 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: 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 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. Prior to the pandemic, less than 8% of the Company's employees worked remotely. The increase in the number of employees that work remotely has had no material impact on the Company's operations. • Growth and Paycheck Protection Program: • 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 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. 47 • 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 March 31, 2021 2020 Return on average assets, annualized 2.25 % 0.25 % Return on average shareholders' equity, annualized 21.40 % 2.00 % Dividend payout ratio 18.99 % 215.20 % Credit Quality Nonperforming assets: 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. 48 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 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 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) 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 Other real estate owned guaranteed by government (1,279) — — — — — — (1,279) Total nonperforming assets, net of government guarantees $16,327 $6,269 ($2,114) ($169) ($274) ($449) $— $19,590 Writedowns Transfers to (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 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) Nonperforming loans, net 13,951 899 (1,120) (165) (162) — — 13,403 Other real estate owned 7,043 162 — — — — — 7,205 Repossessed assets 231 — — — — — — 231 Other real estate owned guaranteed by government (1,279) — — — — — — (1,279) Total nonperforming assets, net of government guarantees $19,946 $1,061 ($1,120) ($165) ($162) $— $— $19,560 Potential problem loans: Potential problem loans are loans which are currently performing in accordance with contractual terms but that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, or impaired loans. These loans are closely monitored and their performance is reviewed by management on a regular basis. 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”): TDRs are those loans for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower, have been granted due to the borrower’s weakened financial condition. 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 $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. 49 RESULTS OF OPERATIONS Income Statement Net Income 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 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 % Impact of SBA Paycheck Protection Program loans 0.19 % Interest rates and loan fees (0.46) % Volume and mix of interest-earning assets (0.16) % Change in net interest margin (0.42) % 50 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 March 31, 2021 and 2020: (Dollars in Thousands) Three Months Ended March 31, Interest income/ Average Balances Change expense Change Average Yields/Costs 2021 2020 $ % 2021 2020 $ % 2021 2020 Change Loans 1,2 $1,492,906 $1,059,023 $433,883 41 % $18,642 $14,919 $3,723 25 % 5.06 % 5.67 % (0.61) % Loans held for sale 114,585 50,375 64,210 127 % 782 440 342 78 % 2.77 % 3.51 % (0.74) % Short-term investments 3 120,875 68,076 52,799 78 % 38 236 (198) (84) % 0.13 % 1.39 % (1.26) % Long-term investments 4 298,776 284,068 14,708 5 % 1,134 1,744 (610) (35) % 1.54 % 2.47 % (0.93) % Total investments 419,651 352,144 67,507 19 % 1,172 1,980 (808) (41) % 1.13 % 2.26 % (1.13) % Interest-earning assets 2,027,142 1,461,542 565,600 39 % 20,596 17,339 3,257 19 % 4.12 % 4.77 % (0.65) % Nonearning assets 170,565 174,049 (3,484) (2) % Total $2,197,707 $1,635,591 $562,116 34 % Interest-bearing demand $470,382 $320,767 $149,615 47 % $118 $164 ($46) (28) % 0.10 % 0.21 % (0.11) % Savings deposits 317,520 229,639 87,881 38 % 129 237 (108) (46) % 0.16 % 0.42 % (0.26) % Money market deposits 246,009 206,043 39,966 19 % 114 257 (143) (56) % 0.19 % 0.50 % (0.31) % Time deposits 173,168 169,410 3,758 2 % 588 826 (238) (29) % 1.38 % 1.96 % (0.58) % Total interest-bearing deposits 1,207,079 925,859 281,220 30 % 949 1,484 (535) (36) % 0.32 % 0.64 % (0.32) % Borrowings 25,100 22,188 2,912 13 % 154 165 (11) (7) % 2.49 % 2.99 % (0.50) % Total interest-bearing liabilities 1,232,179 948,047 284,132 30 % 1,103 1,649 (546) (33) % 0.36 % 0.70 % (0.34) % Demand deposits and other noninterest-bearing liabilities 734,711 479,578 255,133 53 % Equity 230,817 207,966 22,851 11 % Total $2,197,707 $1,635,591 $562,116 34 % Net interest income $19,493 $15,690 $3,803 24 % Net interest margin 3.90 % 4.32 % (0.42) % Average loans to average interest-earning assets 73.65 % 72.46 % Average loans to average total deposits 78.79 % 77.91 % Average non-interest deposits to average total deposits 36.30 % 31.88 % Average interest-earning assets to average interest-bearing liabilities 164.52 % 154.16 % 1 Interest income includes loan fees. 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 $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 in debt securities available for sale, equity securities, investment securities held to maturity, and investment in Federal Home Loan Bank stock. 51 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 March 31, 2021 and 2020. Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates: (In Thousands) Three Months Ended March 31, 2021 vs. 2020 Increase (decrease) due to Volume Rate Total Interest Income: Loans $2,985 $738 $3,723 Loans held for sale 414 (72) 342 Short-term investments 105 (303) (198) Long-term investments 81 (691) (610) Total interest income $3,585 ($328) $3,257 Interest Expense: Interest-bearing deposits $370 ($905) ($535) Borrowings 19 (30) (11) Total interest expense $389 ($935) ($546) 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. 52 Other Operating Income 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 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. Income Taxes 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 Balance Sheet Overview Portfolio Investments 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: March 31, 2021 December 31, 2020 Dollar Amount Percent of Total Dollar Amount Percent of Total (In Thousands) Balance % of total Balance % of total U.S. Treasury and government sponsored entities $224,493 67.4 % $174,601 65.5 % Municipal securities 856 0.3 % 856 0.3 % Corporate bonds 50,456 15.1 % 40,492 15.2 % Collateralized loan obligations 48,005 14.4 % 41,684 15.6 % Preferred stock 9,471 2.8 % 9,052 3.4 % Total portfolio investments $333,281 $266,685 53 Loans and Lending Activities 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 & 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 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. 54 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 $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) 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 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 ACL $953 $611 $1,055 $334 $421 $443 $3,817 55 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 Cumulative effect of adoption of ASU 2016-13 (4,511) — Charge-offs: Commercial & industrial loans 163 151 Consumer loans — 14 Total charge-offs 163 165 Recoveries: 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 (Benefit) provision for credit losses (1,905) 2,060 Balance at end of period $14,764 $21,017 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. 56 Deposits Deposits are the Company’s primary source of funds. 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: March 31, 2021 December 31, 2020 (In thousands) Balance % of total Balance % of total Demand deposits $762,793 37 % $643,825 35 % Interest-bearing demand 524,373 26 % 459,095 25 % Savings deposits 325,625 16 % 308,725 17 % Money market deposits 253,934 12 % 237,705 13 % Time deposits 184,592 9 % 175,631 10 % 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 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 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 of $100,000 or More Percent of Total Deposits (In Thousands) Amount Amounts maturing in: Three months or less $27,297 19 % Over 3 through 6 months 51,359 36 % Over 6 through 12 months 29,976 21 % Over 12 months 34,613 24 % Total $143,245 100 % There were no depositors with deposits representing 10% or more of total deposits at March 31, 2021 or December 31, 2020. Borrowings FHLB: The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). As a member, the Bank is eligible to obtain advances from the FHLB. FHLB advances are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Bank’s assets. At March 31, 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%. 57 Federal Reserve Bank: 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: 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 March 31, 2021 or December 31, 2020. Liquidity and Capital Resources The Company is a single bank holding company and its primary ongoing source of liquidity is from dividends received from the Bank. Such dividends arise from the cash flow and earnings of the Bank. Banking regulations and regulatory authorities may limit the amount of, or require the Bank to obtain certain approvals before paying, dividends to the Company. Given that the Bank currently meets and the Bank anticipates that it will continue to meet, all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards, the Company expects to continue to receive dividends from the Bank during the remainder of 2021. The Company manages its liquidity through its Asset and Liability Committee. Our primary sources of funds are customer deposits and advances from the FHLB. These funds, together with loan repayments, loan sales, other borrowed funds, retained earnings, and equity are used to make loans, to acquire securities and other assets, and to fund deposit flows and continuing operations. The primary sources of demands on our liquidity are customer demands for withdrawal of deposits and borrowers' demands that we advance funds against unfunded lending commitments. Our total unfunded commitments to fund loans and letters of credit at March 31, 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 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. 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 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 $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 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. 58 Capital Requirements and Ratios We are subject to minimum capital requirements. Federal banking agencies have adopted regulations establishing minimum requirements for the capital adequacy of banks and bank holding companies. The requirements address both risk-based capital and leverage capital. 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. Management intends to maintain capital ratios for the Bank in 2021, exceeding the FDIC’s requirements for the “well-capitalized” classification. The capital ratios for the Company exceed those for the Bank primarily because the $10 million trust preferred securities offering completed in the fourth quarter of 2005 is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our financial statements. The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital. 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 March 31, 2021 Total risk-based capital 8.00% 10.00% 15.50% 13.11% Tier 1 risk-based capital 6.00% 8.00% 14.55% 12.15% Common equity tier 1 capital 4.50% 6.50% 13.93% 12.16% Leverage ratio 4.00% 5.00% 10.33% 8.62% December 31, 2020 Total risk-based capital 8.00% 10.00% 15.46% 13.13% Tier 1 risk-based capital 6.00% 8.00% 14.20% 11.88% Common equity tier 1 capital 4.50% 6.50% 13.57% 11.89% Leverage ratio 4.00% 5.00% 10.25% 8.55% 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 Part I. 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. Under the rules of the Federal Reserve Bank, a bank holding company such as the Company is generally defined to be "well capitalized" if its Tier 1 risk-based capital ratio is 8.0% or more and its total risk-based capital ratio is 10.0% or more. Off-Balance Sheet Items The Company is a party to financial instruments with off-balance sheet risk. Among the off-balance sheet items entered into in the ordinary course of business are commitments to extend credit, commitments to originate loans held for sale and the issuance of letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheet. Certain commitments are collateralized. We apply the same credit standards to these commitments as in all of our lending activities and include these commitments in our lending risk evaluations. 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 $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 branch remodel and a branch relocation in Anchorage. At March 31, 2021 the Company considers these commitments to be immaterial. 59 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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.