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, natural resource extraction industries, capital markets, and the response to and management of the COVID-19 pandemic, including the effectiveness of previously-enacted fiscal stimulus from the federal government and a potential infrastructure bill; the timing of Paycheck Protection Program ("PPP") loan forgiveness; the impact of interest rates, inflation, trade policies and tensions, including tariffs, and potential geopolitical instability; 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. 46 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") 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 utilize 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 eight 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. 47 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 The Alaska economy began to recover from the effect of the pandemic in the fourth quarter of 2020, and Alaska’s real Gross State Product ("GSP") continued to increase in the first quarter of 2021. The Alaska Department of Labor ("DOL") has released data through May of 2021. They report total payroll jobs have grown 16,500 from May of 2020. This is a total of 305,000 jobs or an improvement of 5.7% over the prior 12 months. Tourism related jobs were the hardest hit from travel restrictions and have also been the fastest to recover. According to the DOL, the Leisure and Hospitality sector added 6,000 jobs between May of 2020 and May of 2021. However, this is still 9,900 jobs less than May of 2019. Oil and Gas direct jobs continued to decline in the last 12 months, down 1,400 jobs to 6,100 in May of 2021. This is the only major sector to have fewer jobs than May of 2020. Construction has recovered more than half of the 1,300 job decline from two years ago, adding 700 jobs since May of 2020. Health Care and Manufacturing, which is primarily seafood processing, have now surpassed the total number of jobs seen two years ago in May of 2019 according to the DOL report. 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"). Alaska’s reduction was 4.9% and the worst state was Hawaii at 8%. Both states were more negatively affected by travel restrictions reducing tourism. The U.S. GDP declined 3.5% in 2020. 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 fourth quarter of 2020 in Alaska, helping place it ninth fastest growing for the quarter of the 50 U.S. states. Alaska’s real GSP growth continued in the first quarter of 2021, increasing 5.4% on an annualized basis, according to a June 25, 2021 BEA report. Alaska’s seasonally adjusted personal income for 2020 was $47.4 billion compared to $46 billion in 2019, according to the BEA. Personal income in the U.S. in 2020 increased 6.1% and Alaska rose 3.1%. 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 ninth highest per capita income of the 50 U.S. states. 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 $500 million in Alaska according to the BEA's report. The growth in personal income came predominantly from a $1.9 billion 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. 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. 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 of 2020, when ANS averaged $16.54 a barrel. However, by June of last year the oil markets stabilized and for the last six months of 2020 the average monthly price remained between $40.42 and $50.32. In the first six months of 2021 ANS prices continued to rise. The monthly average price was $55.56 in January of 2021. It rose to $65.60 in March, and $73.18 in June of 2021. 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 improved from 0.63% at the end of 2019 to 0.45% at the end of 2020. In the first quarter of 2021 the foreclosure rate improved again slightly to 0.41%. The comparable national average rate was higher than Alaska at 0.54% in the first quarter of 2021. Management believes 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. 48 The Mortgage Bankers Association survey reported that the percentage of delinquent mortgage loans at the end of 2019 in Alaska was 2.9%. This increased to 6.2% at the end of 2020 after the effects of COVID-19 impacted jobs. In the first quarter of 2021, it has improved to 5.4% in Alaska. According to the survey, the comparable delinquency rate for the entire country remains higher than Alaska at 6.1% in the first quarter of 2021. According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 5.9% in 2020 to $396,779. 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 average sales price for the first six months of 2021 is 8% higher in Anchorage and 14.8% higher in the Matanuska Susitna Borough than the 12 month average of 2020. The number of units sold in Anchorage was up significantly in 2020 by 19.5%, climbing from 2,719 homes sold in 2019 to 3,250 last year as reported by the Alaska Multiple Listing Services. 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. In the first six months of 2021 there have been 1,567 home sales in Anchorage, or 30.3% more than in the first six months of 2020. The Matanuska Susitna Borough had 998 sales in the first half of 2021, an increase of 25.2% over the same time period in 2020. We believe that the low interest rate environment has been a major factor in the increase in home sales. According to the Federal Reserve Bank of St. Louis, the average 30 year fixed rate mortgage in the U.S. hit an all-time record low last year. Rates began 2020 at 3.7% in the first week of January and fell one percent to 2.7% by the end of the year. Rates began to rise in the first quarter of 2021 and finished March at 3.2%. However, in the second quarter of 2021 they declined to slightly under 3%. 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 June 30, 2021 are being impacted: Healthcare (6%), Tourism (5%), Oil and Gas (4%), Aviation (non-tourism) (4%), Accommodations (2%), Retail (2%), Fishing (3%), and Restaurants (3%). The Company's exposure as a percent of the total loan portfolio excluding U.S. Small Business Administration ("SBA") PPP loans as of June 30, 2021 are: Healthcare (8%), Tourism (7%), Oil and Gas (5%), Aviation (non-tourism) (5%), Accommodations (3%), Retail (3%), Fishing (3%), and Restaurants (3%). 49 • 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 June 30, 2021 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $75,613 $7,440 $83,053 Number of modifications 23 1 24 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 Of the $83.1 million and 24 loan modifications as of June 30, 2021, approximately $64.0 million and 22 loans have entered into a second modification. • Branch Operations: As of June 30, 2021, 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 June 30, 2021, approximately 31% 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 fifteen months, Northrim funded a total of nearly 5,800 PPP loans totaling $612.6 million to both existing and new customers. Of this amount, 745 loans totaling $33 million were originated during the second quarter of 2021 and 2,125 loans totaling $204.0 million were originated during the first quarter of 2021, through the second round of PPP funding. • As of June 30, 2021, PPP has resulted in 2,340 new customers totaling $40 million in non-PPP loans, and $83 million in new deposit balances. • Management estimates that we funded approximately 24% of the number and 32% of the value of all Alaska PPP second round loans as of June 30, 2021. • As of June 30, 2021, Northrim customers had received forgiveness through the SBA on 2,321 PPP loans totaling $303 million, of which 617 PPP loans totaling $133 million were forgiven in the second quarter of 2021, and 1,167 PPP loans totaling $105 million were forgiven in the first quarter of 2021. Of the PPP loans forgiven in the second quarter of 2021, 81 loans totaling $2.2 million related to PPP round two. • 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. 50 Highlights and Summary of Performance - Second Quarter of 2021 The Company reported net income and diluted earnings per share of $8.3 million and $1.33, respectively, for the second quarter of 2021 compared to net income and diluted earnings per share of $9.9 million and $1.52, respectively, for the second quarter of 2020. The Company reported net income and diluted earnings per share of $20.5 million and $3.27, respectively, for the first six months of 2021 compared to $10.9 million and $1.68, respectively, for the same period in 2020. The decrease in net income for the three-month period ending June 30, 2021 compared to the same period last year is primarily attributable to a decrease in net income in the Home Mortgage Lending segment, as a result of decreased production. The increase in net income for the six-month period ending June 30, 2021 compared to the same period last year is attributable to increases in net income in the Home Mortgage Lending segment, as a result of increased production in the first quarter of 2021 compared to 2020, and increased net income in the Community Banking segment mostly due to fee income from PPP loans and a reduction in the provision for credit losses. • Total revenue in the second quarter of 2021, which includes net interest income plus other operating income, decreased 5% to $33.3 million from $35.0 million in the second quarter a year ago, primarily due to a $3.9 million decrease in mortgage banking income which was only partially offset by a $1.7 million increase in net interest income. • Net interest income increased 10% to $19.2 million in the second quarter of 2021 compared to the same period in 2020 mainly due to increased loan balances and fees on PPP loans. • Net interest margin decreased to 3.48% in the second quarter of 2021 as compared to 3.98% in the second quarter a year ago primarily due to lower interest rates and a change in the mix of earning assets. These decreases were only partially offset by fees on PPP loans. • The Company booked a benefit for credit losses of $427,000 for the three-month period ending June 30, 2021, compared to a provision of $404,000 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 second quarter of 2021 compared to the same quarter in 2020 is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses. • The Company paid cash dividends of $0.37 per common share in the second quarter of 2021, up 9% from $0.34 in the second quarter of 2020. • At June 30, 2021, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements. During the second quarter of 2021, there were no shares repurchased under the previously announced share repurchase program. Other financial measures are shown in the table below: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Return on average assets, annualized 1.42 % 2.04 % 1.80 % 1.23 % Return on average shareholders' equity, annualized 14.26 % 19.44 % 17.68 % 10.65 % Dividend payout ratio 27.80 % 22.11 % 22.57 % 40.35 % Credit Quality Nonperforming assets: Nonperforming assets, net of government guarantees at June 30, 2021 increased $1.5 million, or 9% to $17.8 million as compared to $16.3 million at December 31, 2020. OREO, net of government guarantees, decreased $216,000 to $5.8 million at June 30, 2021 as compared to $6.0 million at December 31, 2020 due to the sale of one property in the second quarter of 2021 which was only partially offset by the addition of one OREO property in the first quarter of 2021. Nonperforming loans, net of government guarantees increased $2.0 million, or 20% to $12 million as of June 30, 2021 from $10 million as of December 31, 2020, primarily due to the addition of two relationships in the first three months of 2021 which were only partially offset by payoffs and paydowns in the second quarter of 2021. $9.5 million, or 54% of nonperforming assets at June 30, 2021, are nonaccrual loans related to six 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. 51 The following table summarizes nonperforming asset activity for the three-month periods ending June 30, 2021 and 2020. Writedowns Transfers to (In Thousands) Balance at March 31, 2021 Additions this quarter Payments this quarter /Charge-offs this quarter Transfers to OREO Performing Status this quarter Sales this quarter Balance at June 30, 2021 Nonperforming loans $14,463 $173 ($1,422) ($110) $— $— $— $13,104 Nonperforming loans guaranteed by government (1,382) — 286 — — — — (1,096) Nonperforming loans, net 13,081 173 (1,136) (110) — — — 12,008 Other real estate owned 7,563 — — — — — (490) 7,073 Repossessed assets 225 — — — — — (225) — Other real estate owned guaranteed by government (1,279) — — — — — — (1,279) Total nonperforming assets, net of government guarantees $19,590 $173 ($1,136) ($110) $— $— ($715) $17,802 Writedowns Transfers to (In Thousands) Balance at March 31, 2020 Additions this quarter Payments this quarter /Charge-offs this quarter Transfers to OREO/REPO Performing Status this quarter Sales this quarter Balance at June 30, 2020 Nonperforming loans $15,074 $1,563 ($773) ($804) ($695) $— $— $14,365 Nonperforming loans guaranteed by government (1,671) (54) 90 — — — — (1,635) Nonperforming loans, net 13,403 1,509 (683) (804) (695) — — 12,730 Other real estate owned 7,205 — — — — — — 7,205 Repossessed assets 231 695 (7) — — — — 919 Nonperforming purchased receivables — 1,226 — — — — — 1,226 Other real estate owned guaranteed by government (1,279) — — — — — — (1,279) Total nonperforming assets, net of government guarantees $19,560 $3,430 ($690) ($804) ($695) $— $— $20,801 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 June 30, 2021, management had identified potential problem loans of $5.4 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 June 30, 2021 is primarily the result of one $3.9 million relationship moving to nonaccrual as well as paydowns and credit risk upgrades to existing potential problem loans in the first six months of 2021 which were only partially offset by additions to potential problem loans in the first six months 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 $2.3 million in loans classified as TDRs that were performing and $3.9 million in TDRs included in nonaccrual loans at June 30, 2021 for a total of approximately $6.2 million. There are $2.5 million in government guarantees associated with TDRs, so total TDRs, net of government guarantees, are $3.8 million at June 30, 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. 52 RESULTS OF OPERATIONS Income Statement Net Income Net income for the second quarter of 2021 decreased $1.6 million to $8.3 million as compared to $9.9 million for the same period in 2020. The decrease in net income is attributable to a $2.3 million decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production that was only partially offset by a $662,000 increase in net income in the Community Banking segment. The increase in net income in the Community Banking segment in the three months ended June 30, 2021, as compared to the same period a year ago is primarily due an increase in net interest income from PPP fees and a decrease in the provision for credit losses, and these changes were only partially offset by an increase in the provision for income taxes. Net income for the first six months of 2021 increased $9.6 million to $20.5 million as compared to $10.9 million for the same period in 2020. The increase in net income is attributable to a $7.0 million increase in net income in the Community Banking segment due an increase in net interest income from PPP fees and a decrease in the provision for credit losses, and similar to the second quarter comparison discussed above, these changes were only partially offset by an increase in the provision for income taxes. Net income in the Home Mortgage Lending segment increased $2.6 million in the first six months of 2021 as compared to the same period in 2020, primarily due to increases in production and net mortgage servicing income. Net Interest Income/Net Interest Margin Net interest income for the second quarter of 2021 increased $1.7 million, or 10%, to $19.2 million as compared to $17.5 million for the second quarter of 2020. Net interest margin decreased 50 basis points to 3.48% in the second quarter of 2021 as compared to 3.98% in the second quarter of 2020. Net interest income for the first half of 2021 increased $5.5 million, or 17%, to $38.7 million as compared to $33.1 million for the first half of 2020. The increase in net interest income in the second quarter and first six-months of 2021 compared to the same periods of 2020 was primarily the result of higher average earning asset balances, an increase in loan fee income due in large part to full recognition of the deferred PPP loan fees upon loan forgiveness through the SBA, and reduced interest expense. During the three and six-month periods ending June 30, 2021, Northrim received $133.0 million and $238 million, respectively, in loan forgiveness through the SBA compared to none in the same periods in 2020. Total net PPP fee income including accretion and full fee recognition upon loan forgiveness was $2.6 million and $5.9 million during the three and six-month periods ending June 30, 2021, respectively, compared to $1.3 million in both the three and six-month periods ending June 30, 2020. PPP fee income for 2020 included only fee accretion. As of June 30, 2021, there was $1.0 million of net PPP fee income from round one remaining and $10.0 million remaining from round two for total net deferred fees on PPP loans of $11.0 million. The decrease in net interest margin in the second quarter and first six months of 2021 as compared to the same periods a year ago was primarily the result of lower interest rates and a less favorable mix of earning assets due to significant increases in short-term investments, which is the lowest yielding type of earning asset for the Company. Changes in net interest margin in the three and six-month periods ended June 30, 2021 as compared to the same period in the prior year are detailed below: Three Months Ended June 30, 2021 vs. June 30, 2020 Nonaccrual interest adjustments 0.01 % Impact of SBA Paycheck Protection Program loans 0.22 % Interest rates and loan fees (0.27) % Volume and mix of interest-earning assets (0.46) % Change in net interest margin (0.50) % Six Months Ended June 30, 2021 vs. June 30, 2020 Nonaccrual interest adjustments 0.02 % Impact of SBA Paycheck Protection Program loans 0.14 % Interest rates and loan fees (0.41) % Volume and mix of interest-earning assets (0.21) % Change in net interest margin (0.46) % 53 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 June 30, 2021 and 2020: (Dollars in Thousands) Three Months Ended June 30, Interest income/ Average Balances Change expense Change Average Yields/Costs 2021 2020 $ % 2021 2020 $ % 2021 2020 Change Loans 1,2 $1,541,701 $1,342,717 $198,984 15 % $18,200 $16,584 $1,616 10 % 4.74 % 4.97 % (0.23) % Loans held for sale 111,228 111,475 (247) — % 763 870 (107) (12) % 2.75 % 3.14 % (0.39) % Short-term investments 3 208,067 51,448 156,619 304 % 61 31 30 97 % 0.12 % 0.24 % (0.12) % Long-term investments 4 354,260 256,500 97,760 38 % 1,229 1,519 (290) (19) % 1.39 % 2.38 % (0.99) % Total investments 562,327 307,948 254,379 83 % 1,290 1,550 (260) (17) % 0.92 % 2.02 % (1.10) % Interest-earning assets 2,215,256 1,762,140 453,116 26 % 20,253 19,004 1,249 7 % 3.67 % 4.34 % (0.67) % Nonearning assets 173,164 186,583 (13,419) (7) % Total $2,388,420 $1,948,723 $439,697 23 % Interest-bearing demand $561,570 $379,851 $181,719 48 % $128 $156 ($28) (18) % 0.09 % 0.17 % (0.08) % Savings deposits 311,929 246,379 65,550 27 % 126 176 (50) (28) % 0.16 % 0.29 % (0.13) % Money market deposits 256,215 214,532 41,683 19 % 112 164 (52) (32) % 0.18 % 0.31 % (0.13) % Time deposits 186,315 176,782 9,533 5 % 513 835 (322) (39) % 1.10 % 1.90 % (0.80) % Total interest-bearing deposits 1,316,029 1,017,544 298,485 29 % 879 1,331 (452) (34) % 0.27 % 0.53 % (0.26) % Borrowings 25,032 73,349 (48,317) (66) % 182 216 (34) (16) % 2.92 % 1.18 % 1.74 % Total interest-bearing liabilities 1,341,061 1,090,893 250,168 23 % 1,061 1,547 (486) (31) % 0.32 % 0.57 % (0.25) % Demand deposits and other noninterest-bearing liabilities 809,971 652,989 156,982 24 % Equity 237,388 204,841 32,547 16 % Total $2,388,420 $1,948,723 $439,697 23 % Net interest income $19,192 $17,457 $1,735 10 % Net interest margin 3.48 % 3.98 % (0.50) % Average loans to average interest-earning assets 69.59 % 76.20 % Average loans to average total deposits 74.01 % 82.88 % Average non-interest deposits to average total deposits 36.82 % 37.19 % Average interest-earning assets to average interest-bearing liabilities 165.19 % 161.53 % 1 Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $3.4 million and $2.0 million in the second 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 $13.8 million and $14.6 million in the second 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. 54 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 June 30, 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 June 30, 2021 vs. 2020 Increase (decrease) due to Volume Rate Total Interest Income: Loans $2,362 ($746) $1,616 Loans held for sale (2) (105) (107) Short-term investments 52 (22) 30 Long-term investments 545 (835) (290) Total interest income $2,957 ($1,708) $1,249 Interest Expense: Interest-bearing deposits $322 ($774) ($452) Borrowings 27 (61) (34) Total interest expense $349 ($835) ($486) 55 The following table compares average balances and rates as well as margins on earning assets for the six-month periods ended June 30, 2021 and 2020: (Dollars in Thousands) Six Months Ended June 30, Interest income/ Average Balances Change expense Change Average Yields/Costs 2021 2020 $ % 2021 2020 $ % 2021 2020 Change Loans 1,2 $1,517,438 $1,200,870 $316,568 26 % $36,842 $31,503 $5,339 17 % 4.90 % 5.28 % (0.38) % Loans held for sale 112,897 80,925 31,972 40 % 1,545 1,310 235 18 % 2.76 % 3.26 % (0.50) % Short-term investments 3 164,712 59,762 104,950 176 % 99 267 (168) (63) % 0.12 % 0.90 % (0.78) % Long-term investments 4 326,671 270,284 56,387 21 % 2,363 3,263 (900) (28) % 1.46 % 2.43 % (0.97) % Total investments 491,383 330,046 161,337 49 % 2,462 3,530 (1,068) (30) % 1.01 % 2.15 % (1.14) % Interest-earning assets 2,121,718 1,611,841 509,877 32 % 40,849 36,343 4,506 12 % 3.88 % 4.53 % (0.65) % Nonearning assets 171,870 180,316 (8,446) (5) % Total $2,293,588 $1,792,157 $501,431 28 % Interest-bearing demand $516,228 $350,308 $165,920 47 % $246 $320 ($74) (23) % 0.10 % 0.18 % (0.08) % Savings deposits 314,709 238,009 76,700 32 % 255 413 (158) (38) % 0.16 % 0.35 % (0.19) % Money market deposits 251,140 210,288 40,852 19 % 225 421 (196) (47) % 0.18 % 0.40 % (0.22) % Time deposits 179,778 173,096 6,682 4 % 1,102 1,661 (559) (34) % 1.24 % 1.93 % (0.69) % Total interest-bearing deposits 1,261,855 971,701 290,154 30 % 1,828 2,815 (987) (35) % 0.29 % 0.58 % (0.29) % Borrowings 25,066 47,769 (22,703) (48) % 336 381 (45) (12) % 2.70 % 1.60 % 1.10 % Total interest-bearing liabilities 1,286,921 1,019,470 267,451 26 % 2,164 3,196 (1,032) (32) % 0.34 % 0.63 % (0.29) % Demand deposits and other noninterest-bearing liabilities 772,548 566,284 206,264 36 % Equity 234,119 206,403 27,716 13 % Total $2,293,588 $1,792,157 $501,431 28 % Net interest income $38,685 $33,147 $5,538 17 % Net interest margin 3.68 % 4.14 % (0.46) % Average loans to average interest-earning assets 71.52 % 74.50 % Average loans to average total deposits 76.27 % 80.62 % Average non-interest deposits to average total deposits 36.57 % 34.77 % Average interest-earning assets to average interest-bearing liabilities 164.87 % 158.11 % 1 Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $7.6 million and $2.9 million in the first six months 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 $12.2 million and $14.7 million in the first six months 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. 56 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 six-month periods ending June 30, 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) Six Months Ended June 30, 2021 vs. 2020 Increase (decrease) due to Volume Rate Total Interest Income: Loans $9,724 ($4,385) $5,339 Loans held for sale 386 (151) 235 Short-term investments 500 (668) (168) Long-term investments 1,697 (2,597) (900) Total interest income $12,307 ($7,801) $4,506 Interest Expense: Interest-bearing deposits $1,745 ($2,732) ($987) Borrowings (445) 400 (45) Total interest expense $1,300 ($2,332) ($1,032) Provision for Credit Losses The Company adopted ASU 2016-13 effective January 1, 2021. 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 June 30, Six Months Ended June 30, (In Thousands) 2021 2020 2021 2020 Credit loss expense on loans held for investment ($161) $404 ($2,066) $2,464 Credit loss expense on unfunded commitments (266) — 151 — 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 ($427) $404 ($1,915) $2,464 As noted above, the provision for credit losses was recorded in accordance with CECL in 2021. The provision for credit losses in 2020, prior to adoption of CECL, was recorded under the incurred loss model. Despite the fact that two different methodologies were used in the calculation of the provision for credit losses in 2021 versus 2020, in general the decrease in the provision for credit losses on loans for the three and six-month periods ending June 30, 2021 as compared to the same periods in 2020 is primarily the result of improvement in economic assumptions used to estimate credit losses. The ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration. 57 Other Operating Income Other operating income for the three-month period ended June 30, 2021, decreased $3.4 million, or 19%, to $14.1 million as compared to $17.5 million for the same period in 2020, primarily due to a $3.9 million decrease in mortgage banking income in the second quarter of 2021 compared to the same quarter in 2020. The decrease in mortgage banking income in the three-month period ended June 30, 2021 as compared to the same period in 2020 was primarily due to decreased refinance activity due to changes in the mortgage interest rates that was only partially offset by increased mortgages for home purchases. Additionally, there was a decrease in purchased receivable income due to customers reportedly using PPP funds instead of selling receivables. These decreases were only partially offset by an increase in bankcard fees due to lower transaction volume in the second quarter of 2020 resulting from quarantine restrictions related to the COVID-19 pandemic, an increase in service charges on deposits due to customer accommodations related to the impacts of COVID-19 that lowered service changes on deposits in the second quarter of 2020, and an increase in interest rate swap income. Other operating income for the six-month period ended June 30, 2021, increased $6.1 million, or 25%, to $30.0 million as compared to $24.0 million for the same period in 2020, primarily due to a $5.1 million increase in mortgage banking income in the second half of 2021 compared to the same period in 2020. The increase in mortgage banking income in the six-month period ended June 30, 2021 as compared to the same period in 2020 was primarily due to increased home purchase activity that was only partially offset by lower refinance activity due to changes in the mortgage interest rates. Additionally, there was a $94,000 unrealized gain on marketable securities recognized in the first half of 2021 compared to a $722,000 unrealized loss in the same period in 2020. Bankcard fees, service charges on deposits, and interest rate swap income also increased in the first half of 2021 compared to 2020 due to the cessation of COVID-19 quarantine restrictions and higher transaction volume as compared to the same period in 2020. 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 second quarter of 2021 decreased $338,000, or 1%, to $22.3 million as compared to the same period in 2020 primarily due to lower salaries and other personnel expense related to mortgage banking operations, which fluctuate with production volumes. This decrease was only partially offset by an increase in occupancy expense as a result of miscellaneous repairs and maintenance and tenant improvements at several of the Company's locations and data processing expense. Other operating expense for the first half of 2021 increased $2.2 million, or 5%, to $43.7 million from $41.5 million for the same period in 2020 primarily due to higher salaries and other personnel expense related to mortgage banking operations, which fluctuate with production volumes. Additionally, data processing and occupancy expenses increased in the first half of 2021 as compared to 2020 due to miscellaneous repairs and maintenance, IT maintenance and services, and tenant improvements at several of the Company's locations. Income Taxes For the second quarter and first half of 2021, Northrim recorded a higher effective tax rate as compared to the same periods in 2020 as a result of a decrease in tax credits and tax exempt interest income as a percentage of pre-tax income in 2021, as well as the reversal of a $454,000 accrual of tax expense in the second quarter of 2020. In the second quarter of 2021, Northrim recorded $3.1 million in state and federal income tax expense for an effective tax rate of 26.9%, compared to $3.4 million, or 21.7% in the first quarter of 2021 and $2.0 million, or 16.9% in the second quarter a year ago. For the first half of 2021, Northrim recorded $6.4 million in state and federal income tax expense, for an effective tax rate of 23.9% compared to $2.3 million and 17.1% for the same period in 2020. FINANCIAL CONDITION Balance Sheet Overview Portfolio Investments Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at June 30, 2021 increased 38%, or $100.1 million, to $366.8 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 six months of 2021. 58 The table below details portfolio investment balances by portfolio investment type: June 30, 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 $253,351 69.1 % $174,601 65.5 % Municipal securities 852 0.2 % 856 0.3 % Corporate bonds 55,487 15.1 % 40,492 15.2 % Collateralized loan obligations 47,541 13.0 % 41,684 15.6 % Preferred stock 9,588 2.6 % 9,052 3.4 % Total portfolio investments $366,819 $266,685 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: June 30, 2021 December 31, 2020 Dollar Amount Percent of Total Dollar Amount Percent of Total (In Thousands) Commercial & industrial loans $609,214 41.0 % $612,254 42.2 % Commercial real estate: Owner occupied properties 260,879 17.5 % 233,320 16.2 % Non-owner occupied and multifamily properties 410,572 27.7 % 392,452 27.2 % Residential real estate: 1-4 family residential properties secured by first liens 33,661 2.3 % 33,415 2.3 % 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 17,793 1.2 % 18,236 1.3 % 1-4 family residential construction loans 34,958 2.3 % 32,500 2.3 % Other construction, land development and raw land loans 79,431 5.3 % 83,463 5.8 % Obligations of states and political subdivisions in the US 17,331 1.2 % 15,318 1.1 % Agricultural production, including commercial fishing 15,558 1.0 % 12,968 0.9 % Consumer loans 5,156 0.3 % 5,734 0.4 % Other loans 3,415 0.2 % 4,390 0.3 % Total loans $1,487,968 $1,444,050 Loans increased by $43.9 million, or 3%, to $1.488 billion at June 30, 2021 from $1.444 billion at December 31, 2020, primarily as a result of increased commercial real estate loans. Commercial real estate loans increased $45.7 million, or 7% during the six-month period ending June 30, 2021. As shown in the table above, 1-4 family residential construction loans, obligations of states and political subdivisions, and agriculture production, including commercial fishing also increased in the first six months 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 existing customers and new PPP loan customers has contributed to growth in our market share for non-PPP lending relationships. PPP loans are included in commercial and industrial loans in the table above and totaled $300.9 million at June 30, 2021 and $304.6 million at December 31, 2020. 59 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 $65.0 million, or approximately 4% of loans as of June 30, 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 June 30, 2021 was 5% and as of December 31, 2020 was 6%. The Company has no loans to oil producers or exploration companies as of June 30, 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 $6.7 million and $3.0 million at June 30, 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 $67.3 million and $63.5 million at June 30, 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 $1.4 million as of June 30, 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) June 30, 2021 December 31, 2020 Commercial & industrial loans $45,492 $41,016 Commercial real estate: Owner occupied properties 11,617 11,296 Non-owner occupied and multifamily properties 6,357 6,606 Consumer loans — 2,256 Other loans 1,509 3,948 Total $64,975 $65,122 Supplemental information about significant COVID-19 exposure on directly impacted industries At June 30, 2021, the Company had $93.7 million, or 6% of portfolio loans, in the healthcare sector, $82.3 million, or 5% of portfolio loans, in the tourism sector, $57.8 million, or 4% of portfolio loans, in the aviation (non-tourism) sector, $40.8 million, or 3% in the restaurant sector, $37.9 million, or 3% of portfolio loans, in the fishing sector, $36.3 million, or 2% of portfolio loans, in the retail sector, and $36.4 million, or 2% of portfolio loans, in the accommodations sector. At June 30, 2021, the Company had $93.7 million, or 8% of total loans excluding SBA PPP loans, in the healthcare sector, $82.3 million, or 7% of portfolio loans excluding SBA PPP loans, in the tourism sector, $57.8 million, or 5% of portfolio loans excluding SBA PPP loans, in the aviation (non-tourism) sector, $40.8 million, or 3% of total loans excluding SBA PPP loans in the restaurant sector, 60 $37.9 million, or 3% of total loans excluding SBA PPP loans, in the fishing sector, $36.4 million, or 3% of total loans excluding SBA PPP loans in the accommodations sector, and $36.3 million, or 3% of total loans excluding SBA PPP loans, in retail loans. 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 June 30, 2021: (In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurant Accommodations Total ACL $940 $591 $1,046 $352 $348 $450 $376 $4,103 The following table sets forth information regarding changes in the ACL for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, (In Thousands) 2021 2020 2021 2020 Balance at beginning of period $14,764 $21,017 $21,136 $19,088 Cumulative effect of adoption of ASU 2016-13 — — (4,511) — Charge-offs: Commercial & industrial loans 110 804 273 955 Consumer loans — — — — Other loans — — — 14 Total charge-offs 110 804 273 969 Recoveries: Commercial & industrial loans 27 17 212 29 Commercial real estate: Owner occupied properties 2 — 4 — Residential real estate: 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 10 11 20 20 Obligations of states and political subdivisions in the US — — 20 20 Agricultural production, including commercial fishing 7 7 — — Consumer loans — 1 15 15 Other loans — — 2 6 Total recoveries 46 36 253 70 Net, charge-offs 64 768 20 899 (Benefit) provision for credit losses (161) 404 (2,066) 2,464 Balance at end of period $14,539 $20,653 $14,539 $20,653 The following table sets forth information regarding changes in the ACL for unfunded commitments for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, (In Thousands) 2021 2020 2021 2020 Balance at beginning of period $1,833 $159 $187 $152 Cumulative effect of adoption of ASU 2016-13 — — 1,229 — Adjusted balance, beginning of period 1,833 159 1,416 152 (Benefit) provision for credit losses (266) 8 151 15 Balance at end of period $1,567 $167 $1,567 $167 61 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 Deposits are the Company’s primary source of funds. Total deposits increased $321.5 million, or 18%, to $2.146 billion as of June 30, 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 six months of 2021 and the last nine months of 2020. The following table summarizes the Company's composition of deposits as of the periods indicated: June 30, 2021 December 31, 2020 (In thousands) Balance % of total Balance % of total Demand deposits $798,231 37 % $643,825 35 % Interest-bearing demand 582,669 27 % 459,095 25 % Savings deposits 322,645 15 % 308,725 17 % Money market deposits 258,116 12 % 237,705 13 % Time deposits 184,777 9 % 175,631 10 % Total deposits $2,146,438 $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 June 30, 2021 and 90% of total deposits at December 31, 2020. The only deposit category with stated maturity dates is certificates of deposit. At June 30, 2021, the Company had $184.8 million in certificates of deposit as compared to certificates of deposit of $175.6 million at December 31, 2020. At June 30, 2021, $128.6 million, or 70%, 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 June 30, 2021 and December 31, 2020, was $144.7 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 June 30, 2021: Time Certificates of Deposit of $100,000 or More Percent of Total Deposits (In Thousands) Amount Amounts maturing in: Three months or less $58,628 41 % Over 3 through 6 months 30,979 21 % Over 6 through 12 months 24,907 17 % Over 12 months 30,156 21 % Total $144,670 100 % There were no depositors with deposits representing 10% or more of total deposits at June 30, 2021 or December 31, 2020. 62 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 June 30, 2021, our maximum borrowing line from the FHLB was $1.097 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 June 30, 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 $77.7 million of loans as collateral to secure advances made through the discount window on June 30, 2021. There were no discount window advances outstanding at June 30, 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 $852.9 million at June 30, 2021 and $736.0 million at December 31, 2020. At June 30, 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 June 30, 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 June 30, 2021 were $393.9 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 June 30, 2021 were $2.146 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 $68.5 million for the first six 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 $152.0 million for the same period, primarily due to purchases of available for sale securities and an increase in loans. 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 $314.5 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 June 30, 2021, our funds available for borrowing under our existing lines of credit were $1.161 billion. Additionally, the Company could have obtained additional nonrecourse borrowings under the Federal Reserve Bank's PPPLF until July 30, 2021, 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 $292.3 million in PPP loans eligible to be pledged for the PPPLF program as of June 30, 2021. The Company has 63 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 six months of 2021 and repurchased 61,399 shares of its common stock under the Company's previously announced repurchase program. The Company did not repurchase any shares of its common stock in the second quarter of 2021. At June 30, 2021, the Company had 6,206,913 shares of its common stock outstanding. 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 June 30, 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 June 30, 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 June 30, 2021 Total risk-based capital 8.00% 10.00% 15.45% 12.65% Tier 1 risk-based capital 6.00% 8.00% 14.54% 11.73% Common equity tier 1 capital 4.50% 6.50% 13.93% 11.75% Leverage ratio 4.00% 5.00% 9.77% 7.88% 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. 64 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 June 30, 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 $393.9 million and $377.4 million, respectively. Additionally, the Company had commitments to originate loans held for sale of $174.0 million and $150.3 million, as of June 30, 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 $1.6 million and $187,000 at June 30, 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 June 30, 2021 the Company considers these commitments to be immaterial. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our assessment of market risk as of June 30, 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.