What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-04 · 193 added, 207 removed, 433 unchanged (48% of the section changed)

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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 impact of interest rates, inflation, supply-chain constraints, trade policies and tensions, including tariffs, and potential geopolitical instability;

the general condition of, and changes in, the Alaska economy;

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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.

There have been no other material changes to the valuation techniques or models, that affect our estimates during 2021.

Allowance for Credit Losses Policy:

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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.

When we identify a loan for individual evaluation, we measure expected credit losses using DCF, 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 DCF.

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.

The Alaska economy is slowly recovering in 2021 from the effect of the global pandemic.

Management believes that rising oil prices, an improvement in tourism, and strong liquidity levels in the private sector from government stimulus programs have helped Alaska rebound from the economic lows seen in 2020.

The housing market remains strong with average sales prices and the number of units sold up significantly, while home foreclosure and delinquency rates continue to improve.

Rising prices are starting to stress affordability levels for homes and supply chain disruptions are expected to moderate construction activity in the short run.

The Alaska Department of Labor ("DOL") has released data through August of 2021.

They report total payroll jobs in Alaska have grown by 13,600 compared to August of 2020.

This is a total of 308,900 jobs or an improvement of 4.4% 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.

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.

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.

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.

According to the DOL, the Leisure and Hospitality sector added 5,600 jobs between August of 2020 and August of 2021, an increase of 19.9%.

However, this is still 10,800 jobs less than August of 2019.

Trade, Transport, and Utilities have added 14.3% more jobs than August of 2020 and Manufacturing, which is primarily seafood processing, is 11.3% higher over the last 12 months.

Oil and Gas direct jobs continued to decline in the last 12 months, down 400 jobs compared to August of 2020 and down 3,300 jobs from August of 2019.

Education and Health Care are the only private sector industries to surpass the August 2019 job levels in August of 2021 according to the DOL report.

Alaska’s revised Gross State Product (“GSP”) for 2020 was $49.8 billion, compared to $54.5 billion in 2019, according to the Federal Bureau of Economic Analysis ("BEA").

The national average for the second quarter was a 6.7% increase according to an October 1, 2021 BEA report.

Alaska’s seasonally adjusted personal income for the second quarter of 2021 was $47.7 billion compared to $48.5 billion for the second quarter of 2020, according to the BEA.

There was a tremendous loss of jobs in 2020 that reduced wage earnings last year.

This was more than compensated for by a significant amount of government transfer payments.

Alaska, like the rest of the U.S., experienced a decline in government transfer payments in the second quarter of 2021.

However, wage earnings are growing here and across the country as a recovery in jobs continues in 2021.

Alaska North Slope (“ANS”) crude oil began 2020 at $65.48 a barrel.

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.

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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.

ANS prices continued to rise throughout 2021 and averaged over $70 a barrel in June, July and August.

The monthly average for September has not yet been posted by the Alaska Department of Revenue, but the daily spot price was $82.94 on October 8, 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.

In the first quarter of 2021 the foreclosure rate improved slightly to 0.41% and again in the second quarter to 0.36%.

The comparable national average rate was higher than Alaska at 0.51% in the second quarter of 2021.

We believe that the foreclosure rates are somewhat misleading because the recently ended 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 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.

In the first quarter of 2021 it improved to 5.4% in Alaska and again in the second quarter to 5.1%.

According to the survey, the comparable delinquency rate for the entire country remains higher than Alaska at 5.5% in the second quarter of 2021.

According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 5.8% in 2020 to $396,741.

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.

In the first nine months of 2021, the average sales price has increased 7.5% to $426,445.

Average sales prices in the Matanuska Susitna Borough rose 9.9% in 2020 to $301,049, continuing a decade of consecutive price gains.

In the first nine months of 2021 prices have risen 15.1% to $346,353.

These two markets represent where the vast majority of the Bank’s residential lending activity occurs.

The number of units sold in Anchorage was up significantly in 2020 by 19.6%, climbing from 2,719 homes sold in 2019 to 3,251 last year, as reported by the Alaska Multiple Listing Services.

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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.

Through the third quarter of 2021 there have been 2,647 home sales in Anchorage, or 15.9% more than in the first nine months of 2020.

The Matanuska Susitna Borough had 1,719 sales through the third quarter of 2021, an increase of 13.2% over the same time period in 2020.

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

According to the Federal Reserve Bank of St.

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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%.

Rates began to rise slightly in 2021 and finished the third quarter at 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:

Northrim has identified various industries that may be adversely impacted by the COVID-19 pandemic and the volatility in oil prices that has occurred over the last 18 months.

Healthcare (7%), Tourism (6%), Oil and Gas (4%), Aviation (non-tourism) (4%), Accommodations (4%), Retail (3%), Fishing (4%), 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:

Small Business Administration ("SBA") PPP loans as of September 30, 2021 are:

Healthcare (8%), Tourism (7%), Oil and Gas (5%), Aviation (non-tourism) (5%), Accommodations (4%), Retail (3%), Fishing (5%), and Restaurants (3%).

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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

The number of loans with modifications has decreased since December 31, 2020, with approximately 82% of the modifications at September 30, 2021, representing three relationships.

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

Loan Modifications due to COVID-19 as of September 30, 2021

(Dollars in thousands) Interest Only Full Payment Deferral Total

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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.

All 24 loan modifications totaling $57.4 million as of September 30, 2021, have entered into more than one 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.

As of September 30, 2021, branch operations have returned to pre-pandemic levels, 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.

As of September 30, 2021, approximately 51% of the Company's employees are working remotely either on a full- or part-time basis directly due to the pandemic caused by COVID-19.

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

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• Growth and Paycheck Protection Program:

• 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.

• Over the last 18 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.

No additional PPP loans were originated in the third quarter of 2021.

• As of September 30, 2021, PPP has resulted in 2,341 new customers totaling $68.0 million in non-PPP loans, and $125.6 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 September 30, 2021, Northrim customers had received forgiveness through the SBA on 3,439 PPP loans totaling $405.8 million, of which 1,118 PPP loans totaling $102.4 million were forgiven in the third quarter of 2021, and 617 PPP loans totaling $133 million were forgiven in the second quarter of 2021.

Of the PPP loans forgiven in the third quarter of 2021, 578 loans totaling $35.2 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.

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.

Highlights and Summary of Performance - Third Quarter of 2021

The Company reported net income and diluted earnings per share of $8.9 million and $1.42, respectively, for the third quarter of 2021 compared to net income and diluted earnings per share of $11.9 million and $1.84, respectively, for the third quarter of 2020.

The Company reported net income and diluted earnings per share of $29.4 million and $4.69, respectively, for the first nine months of 2021 compared to $22.8 million and $3.52, respectively, for the same period in 2020.

The decrease in net income for the three-month period ending September 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 nine-month period ending September 30, 2021 compared to the same period last year is attributable to increased net income in the Community Banking segment mostly due to fee income from PPP loans and a reduction in the ACL.

This increase in the Community Banking segment was only partially offset by a decrease in net income in the Home Mortgage Lending segment, which resulted primarily from decreased production in the second and third quarters of 2021 compared to 2020.

• Total revenue in the third quarter of 2021, which includes net interest income plus other operating income, decreased 17% to $33.1 million from $39.9 million in the third quarter a year ago, primarily due to a $8.0 million decrease in mortgage banking income which was only partially offset by a $2.1 million increase in net interest income.

Total revenue in the first nine months of 2021 increased 5% to $101.8 million from $97.0 million compared to the same period a year ago, primarily due to a $7.7 million increase in net interest income which was only partially offset by a $2.9 million decrease in mortgage banking income.

The increases in net interest income in both periods in 2021 compared to the same periods in 2020 are mainly due to increased loan balances and fees on PPP loans.

• The Company booked a benefit for credit losses of $1.1 million for the three-month period ending September 30, 2021, compared to a provision of $567,000 in the same period in 2020.

For the first nine months of 2021, the Company booked a benefit for credit losses of $3.0 million compared to a provision of $3.0 million in the same period in 2020.

The provisions for both periods in 2021 were recorded using the CECL accounting standard and reflect expected lifetime credit losses on loans and off-balance sheet unfunded loan commitments.

The decrease in the provision for credit losses in both periods of 2021 compared to the same periods in 2020 is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses, which was only partially offset by increases in loan balances, net of government guarantees.

• The Company paid cash dividends of $0.38 per common share in the third quarter of 2021, up 9% from $0.35 in the third quarter of 2020.

• At September 30, 2021, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements.

During the third quarter of 2021, the Company repurchased 29,613 shares of its common stock under the previously announced share repurchase program with 221,988 shares remaining of the 313,000 authorized for repurchase.

Other financial measures are shown in the table below:

Three Months Ended June 30, Six Months Ended June 30,

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

2021 2020 2021 2020

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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.

Nonperforming assets, net of government guarantees at September 30, 2021 decreased $180,000, or 1% to $16.1 million as compared to $16.3 million at December 31, 2020.

OREO, net of government guarantees, decreased $1.4 million to $4.6 million at September 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 and one property in the third 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 $1.4 million, or 14% to $11.5 million as of September 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 pay downs in the second and third quarters of 2021.

$9.3 million, or 82% of nonperforming assets at September 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.

The following table summarizes nonperforming asset activity for the three-month periods ending June 30, 2021 and 2020.

The following table summarizes nonperforming asset activity for the three-month periods ending September 30, 2021 and 2020.

Writedowns Transfers to

(In Thousands) Balance at March 31, 2021 Additions this quarter Payments this quarter /Charge-offs

(In Thousands) Balance at June 30, 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

this quarter Sales this quarter Balance at September 30, 2021

Nonperforming loans $13,104 $— ($611) $— $— $— $— $12,493

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Other real estate owned 7,073 — — — — — (1,161) 5,912

Repossessed assets 225 — — — — — (225) —

Other real estate owned guaranteed

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Writedowns Transfers to

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

(In Thousands) Balance at June 30, 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

this quarter Sales this quarter Balance at September 30, 2020

Nonperforming loans $14,365 $386 ($1,963) ($141) $— $— $— $12,647

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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.

At September 30, 2021, management had identified potential problem loans of $4.7 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 September 30, 2021 is primarily the result of one $3.9 million relationship moving to nonaccrual as well as pay downs and credit risk upgrades to existing potential problem loans in the first nine months of 2021 which were only partially offset by additions to potential problem loans in the first nine months of 2021.

Troubled debt restructurings (“TDRs”):

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

The Company had $2.3 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.

The Company had $2.4 million in loans classified as TDRs that were performing and $4.7 million in TDRs included in nonaccrual loans at September 30, 2021 for a total of approximately $7.0 million.

There are $2.4 million in government guarantees associated with TDRs, resulting in total TDRs, net of government guarantees, of $4.6 million at September 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.

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Income Statement

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 income for the third quarter of 2021 decreased $3.0 million to $8.9 million as compared to $11.9 million for the same period in 2020.

The decrease in net income is attributable to a $4.9 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 $1.9 million increase in net income in the Community Banking segment.

The increase in net income in the Community Banking segment in the three months ended September 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 nine months of 2021 increased $6.6 million to $29.4 million as compared to $22.8 million for the same period in 2020.

The increase in net income is attributable to a $8.9 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 third 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 decreased $2.3 million in the first nine months of 2021 as compared to the same period in 2020, primarily due to a decrease in production.

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.

Net interest income for the third quarter of 2021 increased $2.1 million, or 12%, to $20.4 million as compared to $18.3 million for the third quarter of 2020.

Net interest margin decreased 45 basis points to 3.45% in the third quarter of 2021 as compared to 3.90% in the third quarter of 2020.

Net interest income for the first nine months of 2021 increased $7.7 million, or 15%, to $59.1 million as compared to $51.4 million for the first nine months of 2020.

Net interest margin decreased 45 basis points to 3.60% in the first nine months of 2021 as compared to 4.05% in the same period in 2020.

The increase in net interest income in the third quarter and first nine-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 nine-month periods ending September 30, 2021, Northrim received $102.4 million and $339.4 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 $3.0 million and $8.9 million during the three and nine-month periods ending September 30, 2021, respectively, compared to $1.4 million and $2.7 million in the three and nine-month periods ending September 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

As of September 30, 2021, there was $197,000 of net PPP fee income from round one remaining and $7.9 million remaining from round two for total net deferred fees on PPP loans of $8.1 million.

The decrease in net interest margin in the third quarter and first nine 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 nine-month periods ended September 30, 2021 as compared to the same period in the prior year are detailed below:

Three Months Ended September 30, 2021 vs.

September 30, 2020

Nonaccrual interest adjustments (0.07) %

3 unchanged sentences

Change in net interest margin (0.45) %

Six Months Ended June 30, 2021 vs.

June 30, 2020

Nine Months Ended September 30, 2021 vs.

September 30, 2020

Nonaccrual interest adjustments (0.01) %

4 unchanged sentences

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,

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended September 30, 2021 and 2020:

(Dollars in Thousands) Three Months Ended September 30,

Interest income/

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1 Interest income includes loan fees.

Loan fees recognized during the period and included in the yield calculation totaled $3.4 million and $2.0 million in the second quarter of 2021 and 2020, respectively.

Loan fees recognized during the period and included in the yield calculation totaled $3.9 million and $2.2 million in the third 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 .

Average nonaccrual loans included in the computation of the average loan balances were $12.7 million and $13.9 million in the third 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.

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.

(In Thousands) Three Months Ended September 30, 2021 vs.

Increase (decrease) due to

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Total interest expense $312 ($962) ($650)

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,

The following table compares average balances and rates as well as margins on earning assets for the nine-month periods ended September 30, 2021 and 2020:

(Dollars in Thousands) Nine Months Ended September 30,

Interest income/

28 unchanged sentences

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.

Loan fees recognized during the period and included in the yield calculation totaled $11.5 million and $5.1 million in the first nine 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 .

Average nonaccrual loans included in the computation of the average loan balances were $12.3 million and $14.4 million in the first nine 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.

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.

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

(In Thousands) Nine Months Ended September 30, 2021 vs.

Increase (decrease) due to

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

Three Months Ended June 30, Six Months Ended June 30,

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

(In Thousands) 2021 2020 2021 2020

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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.

Despite the fact that a different methodology was 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 nine-month periods ending September 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.

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 income for the three-month period ended September 30, 2021, decreased $9.0 million, or 41%, to $12.7 million as compared to $21.6 million for the same period in 2020, primarily due to an $8.0 million decrease in mortgage banking income in the third quarter of 2021 compared to the same quarter in 2020.

The decrease in mortgage banking income in the three-month period ended September 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 and decreased mortgages for home purchases.

Additionally, there was a decrease in interest rate swap income and unrealized gain on marketable securities.

These decreases were only partially offset by an increase in bankcard fees due to lower transaction volume in the third quarter of 2020 resulting from quarantine restrictions related to the COVID-19 pandemic and 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 third quarter of 2020.

Other operating income for the nine-month period ended September 30, 2021, decreased $2.9 million, or 6%, to $42.7 million as compared to $45.6 million for the same period in 2020, primarily due to a $2.9 million decrease in mortgage banking income in the first nine months of 2021 compared to the same period in 2020.

The decrease in mortgage banking income in the nine-month period ended September 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 interest rate swap income due to fewer of these transactions and purchased receivable income decreased due to customers reportedly using PPP funds instead of selling receivables.

These decreases were only partially offset by increases in bankcard fees and service charges on deposits due to the cessation of COVID-19 quarantine restrictions and higher transaction volume as compared to the same period in 2020, as well as an increase in unrealized gain on marketable securities in the first nine months of 2021 compared to 2020.

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.

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.

Other operating expense for the third quarter of 2021 decreased $972,000, or 4%, to $22.5 million as compared to $23.5 million for the same period in 2020 primarily due to lower salaries and other personnel expense related to mortgage banking operations, which fluctuate with production volumes.

OREO expense, net of renal income and gains on sale also decreased in the third quarter of 2021 as compared to 2020 due to a gain on the sale of one OREO property in the third quarter of 2021.

These decreases were only partially offset by an increase in data processing expense primarily related to increased customer and transaction volume.

Other operating expense for the first nine months of 2021 increased $1.2 million, or 2%, to $66.2 million from $65.0 million for the same period in 2020 primarily due to higher salaries and other personnel expense in the Community Banking segment due to salary increases and a higher accrual for profit sharing expense.

Additionally, data processing and occupancy expenses increased in the first nine months of 2021 as compared to 2020 due to increased customer and transaction volume, miscellaneous repairs and maintenance, and tenant improvements at several of the Company's locations.

These increases were only partially offset by lower salary and other personnel expense related to mortgage banking operations, which fluctuate with production volumes, and a decrease in OREO expense, net of renal income and gains on sale due to a gain on the sale of one OREO property noted above that occurred in the third quarter of 2021.

For the first nine months of 2021, Northrim recorded $9.2 million in state and federal income tax expense, for an effective tax rate of 23.9% compared to $6.3 million and 21.5% for the same period in 2020.

Northrim recorded a higher effective tax rate for the first nine months of 2021 as compared to the same period 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 third quarter of 2021, Northrim recorded $2.8 million in state and federal income tax expense for an effective tax rate of 23.9%, compared to $4.0 million, or 25.2% in the third quarter of 2020.

Northrim recorded a lower effective tax rate for the third quarter of 2021 as compared to the same period in 2020 as a result of an increase in tax credits and tax exempt interest income as a percentage of pre-tax income in 2021 as compared to 2020.

FINANCIAL CONDITION

1 unchanged sentence

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.

Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at September 30, 2021 increased 53%, or $141.0 million, to $407.7 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 nine months of 2021.

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

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Dollar Amount Percent of Total Dollar Amount Percent of Total

9 unchanged sentences

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

September 30, 2021 December 31, 2020

Dollar Amount Percent of Total Dollar Amount Percent of Total

14 unchanged sentences

Total loans $1,450,657 $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.

Loans increased by $6.6 million, or 0.5%, to $1.451 billion at September 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 $109.5 million, or 17% during the nine-month period ending September 30, 2021 as compared to December 31, 2020.

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 nine 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.

PPP loans are included in commercial and industrial loans in the table above and totaled $203.4 million at September 30, 2021 and $304.6 million at December 31, 2020.

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 Company estimates that $61.6 million, or approximately 4% of loans as of September 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 September 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 September 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 $3.9 million and $3.0 million at September 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 $70.5 million and $63.5 million at September 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 $1.3 million as of September 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

(In Thousands) September 30, 2021 December 31, 2020

Commercial & industrial loans $42,201 $41,016

6 unchanged sentences

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,

$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:

At September 30, 2021, the Company had $99.8 million, or 7% of portfolio loans, in the healthcare sector, $83.4 million, or 6% of portfolio loans, in the tourism sector, $59.5 million, or 4% of portfolio loans, in the aviation (non-tourism) sector, $42.0 million, or 3% in the restaurant sector, $64.2 million, or 4% of portfolio loans, in the fishing sector, $40.2 million, or 3% of portfolio loans, in the retail sector, and $52.9 million, or 4% of portfolio loans, in the accommodations sector.

At September 30, 2021, the Company had $99.8 million, or 8% of total loans excluding SBA PPP loans, in the healthcare sector, $83.4 million, or 7% of portfolio loans excluding SBA PPP loans, in the tourism sector, $59.5 million, or 5% of portfolio loans excluding SBA PPP loans, in the aviation (non-tourism) sector, $42.0 million, or 3% of total loans excluding SBA PPP loans in the restaurant sector, $64.2 million, or 5% of total loans excluding SBA PPP loans, in the fishing sector, $52.9 million, or 4% of

total loans excluding SBA PPP loans in the accommodations sector, and $40.2 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 September 30, 2021:

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

1 unchanged sentence

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,

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

(In Thousands) 2021 2020 2021 2020

2 unchanged sentences

Commercial & industrial loans — 56 273 1,011

Consumer loans — — — —

Commercial real estate:

Owner occupied properties — 85 — 85

Other loans — — — 14

3 unchanged sentences

Owner occupied properties 2 — 6 —

Residential real estate:

1-4 family residential properties secured by junior liens

and revolving secured by 1-4 family first liens 9 3 29 23

Obligations of states and political subdivisions in the US — — 20 20

Agricultural production, including commercial fishing 5 — 20 —

6 unchanged sentences

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,

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

(In Thousands) 2021 2020 2021 2020

4 unchanged sentences

Balance at end of period $1,223 $179 $1,223 $179

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.

circumstances differed substantially from the assumptions used in making the final determination of the ACL.

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

Deposits are the Company’s primary source of funds.

Total deposits increased $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.

Total deposits increased $471.6 million, or 26%, to $2.297 billion as of September 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 nine 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

September 30, 2021 December 31, 2020

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

5 unchanged sentences

Total deposits $2,296,541 $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 Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 92% of total deposits at September 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:

At September 30, 2021, the Company had $174.7 million in certificates of deposit as compared to certificates of deposit of $175.6 million at December 31, 2020.

At September 30, 2021, $101.2 million, or 58%, 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 September 30, 2021 and December 31, 2020, was $135.9 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 September 30, 2021:

Time Certificates of Deposit

8 unchanged sentences

Total $135,939 100 %

There were no depositors with deposits representing 10% or more of total deposits at June 30, 2021 or December 31, 2020.

There were no depositors with deposits representing 10% or more of total deposits at September 30, 2021 or December 31, 2020.

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

1 unchanged sentence

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.

At September 30, 2021, our maximum borrowing line from the FHLB was $1.167 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $14.6 million as of September 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.

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $60.4 million of loans as collateral to secure advances made through the discount window on September 30, 2021.

There were no discount window advances outstanding at September 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.

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $907.6 million at September 30, 2021 and $736.0 million at December 31, 2020.

At September 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.

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of September 30, 2021 or December 31, 2020.

Liquidity and Capital Resources

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

Our total unfunded commitments to fund loans and letters of credit at June 30, 2021 were $393.9 million.

Our total unfunded commitments to fund loans and letters of credit at September 30, 2021 were $371.9 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.

Additionally, as noted above, our total deposits at September 30, 2021 were $2.297 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 $75.3 million for the first nine 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 $160.0 million for the same period, primarily due to purchases of available for sale and held to maturity securities and increases in loans and purchased receivables.

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

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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

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.

At September 30, 2021, our funds available for borrowing under our existing lines of credit were $1.219 billion.

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 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.

The Company issued 17,308 shares of its common stock in the first nine months of 2021 and repurchased 91,012 shares of its common stock under the Company's previously announced repurchase program.

The Company repurchased 29,613 shares of its common stock in the third quarter of 2021.

At September 30, 2021, the Company had 6,177,300 shares of its common stock outstanding.

Capital Requirements and Ratios

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

We believe as of June 30, 2021, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

We believe as of September 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.

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

As a result, the Company has $10 million more in regulatory capital than the Bank at both June 30, 2021 and December 31, 2020, which explains most of the difference in the capital ratios for the two entities.

As a result, the Company has $10 million more in regulatory capital than the Bank at both September 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

September 30, 2021

Total risk-based capital 8.00% 10.00% 15.00% 12.18%

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

As of 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.

As of September 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 $371.9 million and $377.4 million, respectively.

Additionally, the Company had commitments to originate loans held for sale of $169.4 million and $150.3 million, as of September 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.

The Company has established reserves of $1.2 million and $187,000 at September 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.

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

At September 30, 2021 the Company considers these commitments to be immaterial.

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.

Our assessment of market risk as of September 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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis