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Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-03 · 228 added, 368 removed, 258 unchanged (70% of the section changed)

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

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

elections on the regulatory landscape, 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 impact of the results of government initiatives 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, supply-chain constraints, 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, including the ware in Ukraine;

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

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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, that affect our estimates during 2021.

Allowance for Credit Losses Policy:

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

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

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

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

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

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

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

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.

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.

The Alaska economy showed broad improvements in 2021 and the first quarter of 2022 as it rebounded from the pandemic lows of 2020.

A steady recovery of jobs in Alaska in nearly every sector resulted from improved tourism, rising oil prices, a strong housing market and consumer liquidity from government stimulus programs.

Management believes that the potential effects of rising interest rates, high inflation, and supply chain disruptions are the most pressing issues facing the economy in 2022.

The Alaska Department of Labor ("DOL") has released data through February of 2022.

The DOL reports total payroll jobs in Alaska in February 2022 increased 2.4% or 7,100 jobs compared to February of 2021.

The Oil and Gas sector showed the fastest year over year increase of 10.8%.

Tourism related jobs were the hardest hit from the pandemic travel restrictions.

The Leisure and Hospitality sector improved 10.2% since February of 2021.

Other sectors showing improvement over the last 12 months include Wholesale Trade (+8.3%);

Other Services (+8%);

Construction (+6%);

and Trade, Warehousing, and Utilities (+4.7%).

The only private sector payroll jobs to decline year over year were Information with 100 fewer jobs, down 2.1%, and Health Care with 200 fewer jobs, down 0.5%.

The Government sector was up slightly 0.4%, an increase of 300 jobs through February 2022 as compared to the preceding February.

Alaska’s Gross State Product (“GSP”), seasonally adjusted at annualized rates, for the fourth quarter of 2021 was up 3% to $58 billion, according to the Federal Bureau of Economic Analysis ("BEA") in a report that was released March 31, 2022.

Alaska’s GSP declined at an annualized rate of 7% in the first quarter of 2021, but improved 4%, 0.4% and 3% in the second, third and fourth quarters of 2021, respectively.

The BEA’s preliminary estimate for Alaska is an overall annual growth in GSP of 0.3% in 2021.

Alaska’s seasonally adjusted personal income in 2021 was $49.2 billion, an improvement of 5.9% for the year according to the BEA.

Alaska’s personal income grew 3.3% annualized in the fourth quarter of 2021, over the third quarter, primarily due to a $336 million increase in wage earnings for the quarter.

This resulted from inflationary pressure on salaries and an improvement in the total number of jobs.

According to the BEA, the Health Care sector had the largest increase in wage earnings in Alaska for the fourth quarter and for all of 2021.

There were also notable improvements in total wage earnings in Accommodations and Food Services;

Retail Trade;

Transportation and Warehousing;

and Construction.

The price of Alaska North Slope crude oil began 2021 averaging $55.56 in January and climbed steadily throughout the year to a monthly average high of $84.36 a barrel in October.

2022 began with a monthly average of $86.50 in January and rose steadily due to rising global demand and the war in Ukraine to average $110.41 a barrel in the month of March 2022.

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 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.

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 and 0.32% at the end of 2021.

The comparable national average rate was higher than Alaska at 0.42% at the end of 2021.

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 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.

By the end of 2021 it has improved to 4.1% in Alaska.

According to the survey, the comparable delinquency rate for the entire country remains higher than Alaska at 4.6% at the end of 2021.

According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 6.9% in 2021 to $424,148.

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 15.6% in 2021 to $347,974, 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.

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.

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.

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 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 volatility in oil prices that has occurred over the last 18 months.

Though the industries affected may change through the progression of the pandemic, the following sectors for which the Company has exposure, as a percent of the total loan portfolio as of September 30, 2021 are being impacted:

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 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%).

Prices also increased 13.9% in the Fairbanks North Star Borough, 13% in the Kenai Peninsula Borough, and 13.8% in the Kodiak Island Borough in 2021, as compared to 2020.

The number of housing units sold in Anchorage was up by 11.2% in 2021, as compared to the prior year, following an increase of 19.6% in 2020 as compared to 2019,, as reported by the Alaska Multiple Listing Services.

The Matanuska Susitna Borough also had strong sales activity, up 11.6% in 2021 and 9.7% in 2020 in each case as compared to the preceding year.

We believe that rising interest rates will moderate this level of activity in 2022.

Highlights and Summary of Performance - First Quarter of 2022

The Company reported net income and diluted earnings per share of $7.2 million and $1.20, respectively, for the first quarter of 2022 compared to net income and diluted earnings per share of $12.2 million and $1.94, respectively, for the first quarter of 2021.

The decrease in net income for the three-month period ending March 31, 2022 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, as well as a lower benefit for the provision for credit losses.

• Total revenue in the first quarter of 2022, which includes net interest income plus other operating income, decreased 15% to $30.1 million from $35.4 million in the first quarter a year ago, primarily due to a $6.6 million decrease in mortgage banking income that was only partially offset by $2.0 million in life insurance proceeds received in connection with the death of the Company’s former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021.

• Net interest income in the first quarter of 2022 decreased 1% to $19.3 million compared to $19.5 million in the first quarter of 2021.

Net interest income excluding PPP interest and fees in the first quarter of 2022 increased 11% to $17.0 million, compared to $15.3 million in the first quarter of 2021.

• Net interest margin was 3.18% for the first quarter of 2022, a 72 basis point decrease from the first quarter of 2021 primarily due to the change in the mix of earning assets.

Average interest bearing deposits in other banks increased to $538.5 million in the first quarter of 2022 compared to $120.9 million in the first quarter of 2021.

• Loans were $1.38 billion at March 31, 2022, down 3% from December 31, 2021 primarily as a result of PPP forgiveness.

Loans excluding the impact from PPP, were $1.31 billion at March 31, 2022, up 1% from December 31, 2021.

73% of core portfolio loans are adjustable rate and are subject to rate increases as the prime rate and other indices increase.

• The Company booked a benefit for credit losses of $150,000 for the three-month period ending March 31, 2022, compared to a benefit of $1.5 million in the same period in 2021.

The decrease in the benefit for credit losses in the first quarter of 2022 compared to the same period in the prior year is primarily the result of a smaller change in the Company's forecast of economic assumptions used to estimate lifetime credit losses during the first quarter of 2022 as compared to the first quarter of 2021.

• The Company opened a loan production office in Nome, Alaska in the first quarter of 2022 to become the second bank with operations in that market.

• The Company paid cash dividends of $0.41 per common share in the first quarter of 2022, up 11% from $0.37 in the first quarter of 2021.

• At March 31, 2022, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements.

During the first quarter of 2022, the Company repurchased 133,105 shares of its common stock under the previously announced share repurchase program at an average price of $44.50 per share.

There are 200,619 shares remaining of the 300,000 currently authorized for repurchase.

Other financial measures are shown in the table below:

Three Months Ended March 31,

Return on average assets, annualized 1.12 % 2.25 %

Return on average shareholders' equity, annualized 12.36 % 21.40 %

Dividend payout ratio 34.20 % 18.99 %

Growth and Paycheck Protection Program:

• In 2020 and 2021, Northrim funded a total of nearly 5,800 PPP loans totaling $612.6 million to both existing and new customers.

Management estimates that we funded approximately 24% of the number and 32% of the value of all Alaska PPP second round loans.

• As of March 31, 2022, PPP has resulted in 2,344 new customers totaling $64.6 million in non-PPP loans, and $121.1 million in new deposit balances.

• As of March 31, 2022, Northrim customers had received forgiveness through the U.S, Small Business Administration ("SBA") on 4,988 PPP loans totaling $548.3 million, of which 537 PPP loans totaling $56.9 million were forgiven in the first quarter of 2022, and 4,451 PPP loans totaling $491.4 million were forgiven in 2021.

Of the PPP loans forgiven in the first quarter of 2022, 509 loans totaling $56.1 million related to PPP round two.

As of March 31, 2022, approximately 99% of PPP round one and 74% of PPP round two loans have been forgiven.

Credit Quality

• 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 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

The Company implemented several forms of assistance to help our customers in the event that they experienced financial hardship as a result of COVID-19 in addition to our participation in PPP lending.

As of March 31, 2022, remaining accommodations include interest only and deferral options on loan payments.

The total 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 March 31, 2022

(Dollars in thousands) Interest Only Full Payment Deferral Total

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Number of modifications 13 — 13

Number of relationships 3 — 3

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

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Number of modifications 16 — 16

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

• Branch Operations:

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 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.

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 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.

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 - 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 September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Return on average assets, annualized 1.40 % 2.31 % 1.66 % 1.62 %

Return on average shareholders' equity, annualized 14.47 % 22.10 % 16.57 % 14.58 %

Dividend payout ratio 26.86 % 18.95 % 23.86 % 29.22 %

Credit Quality

Number of relationships 6 — 6

These loan accommodations are scheduled to return to normal principal and interest payments in 2022, with $36.6 million, or 81% of the $45.1 million in COVID-19 loan accommodations outstanding as of March 31, 2022 scheduled to return to normal principal and interest payments by the end of the second quarter of 2022.

Nonperforming assets:

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 September 30, 2021 and 2020.

Nonperforming assets, net of government guarantees at March 31, 2022 decreased 13%, or $2.0 million to $13.1 million as compared to $15.0 million at December 31, 2021.

Other Real Estate Owned ("OREO"), net of government guarantees, remained at $4.4 million at March 31, 2022 as compared to December 31, 2021.

Nonperforming loans, net of government guarantees decreased $2.0 million, or 18% to $8.7 million as of March 31, 2022 from $10.7 million as of December 31, 2021, primarily due to the transfer of one relationship back to accrual status in the first three months of 2022 as well as payoffs and pay downs in the first quarter of 2022.

$7.0 million, or 54% of nonperforming assets at March 31, 2022, are nonaccrual loans related to six commercial relationships.

The following table summarizes nonperforming asset activity for the three-month periods ending March 31, 2022 and 2021.

Writedowns Transfers to

(In Thousands) Balance at June 30, 2021 Additions this quarter Payments this quarter /Charge-offs

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

this quarter Transfers to OREO Performing Status

this quarter Sales this quarter Balance at September 30, 2021

this quarter Sales this quarter Balance at March 31, 2022

Nonperforming loans $11,650 $166 ($835) ($295) $— ($1,077) $— $9,609

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Writedowns Transfers to

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

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

this quarter Transfers to OREO/REPO Performing Status

this quarter Sales this quarter Balance at September 30, 2020

this quarter Sales this quarter Balance at March 31, 2021

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

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

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

Other real estate owned guaranteed

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

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.

At March 31, 2022, management had identified potential problem loans of $1.7 million as compared to potential problem loans of $2.1 million at December 31, 2021.

The decrease in potential problem loans from December 31, 2021 to March 31, 2022 is primarily the result of one relationship payoff in the first three months of 2022.

Troubled debt restructurings (“TDRs”):

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

The Company had $2.4 million in loans classified as TDRs that were performing and $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.

The Company had $3.0 million in loans classified as TDRs that were performing and $7.1 million in TDRs included in nonaccrual loans at March 31, 2022 for a total of approximately $10.0 million.

There are $3.1 million in government guarantees associated with TDRs, resulting in total TDRs, net of government guarantees, of $6.9 million at March 31, 2022.

At December 31, 2021 there were $773,000 in loans classified as TDRs, net of government guarantees that were performing and $6.5 million in TDRs included in nonaccrual loans for a total of $7.3 million.

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Income Statement

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 income for the first quarter of 2022 decreased $5.0 million to $7.2 million as compared to $12.2 million for the same period in 2021.

The decrease in net income is mostly attributable to a $4.0 million decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production and a $952,000 decrease in net income in the Community Banking segment.

The decrease in net income in the Community Banking segment in the three months ended March 31, 2022, as compared to the same period a year ago is primarily due to a decrease in the benefit for credit losses.

This decrease was only partially offset by $2.0 million in life insurance proceeds received in connection with the death of the Company’s former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021.

Net Interest Income/Net Interest Margin

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 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) %

Impact of SBA Paycheck Protection Program loans 0.61 %

Interest rates and loan fees (0.18) %

Volume and mix of interest-earning assets (0.81) %

Change in net interest margin (0.45) %

Nine Months Ended September 30, 2021 vs.

September 30, 2020

Net interest income for the first quarter of 2022 decreased $189,000, or 1%, to $19.3 million as compared to $19.5 million for the first quarter of 2021.

Net interest margin decreased 72 basis points to 3.18% in the first quarter of 2022 as compared to 3.90% in the first quarter of 2021.

The decrease in net interest income in the first quarter of 2022 compared to the same period of 2021 was primarily the result of a decrease in loan fee income due in large part to decreased recognition of the deferred PPP loan fees upon loan forgiveness through the SBA which was only partially offset by increased interest on investments and decreased interest expense.

During the three-month periods ending March 31, 2022 and 2021, Northrim received $56.9 million and $105.0 million, respectively, in loan forgiveness through the SBA.

Total net PPP fee income including accretion and full fee recognition upon loan forgiveness was $2.1 million and $3.3 million during the three-month periods ending March 31, 2022 and 2021, respectively.

As of March 31, 2022, there was $2.4 million of net deferred fees remaining on PPP loans mostly from the second round of PPP originations.

The decrease in net interest margin in the first quarter of 2022 as compared to the same period a year ago was primarily the result of 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-month periods ended March 31, 2022 as compared to the same period in the prior year are detailed below:

Three Months Ended March 31, 2022 vs.

March 31, 2021

Nonaccrual interest adjustments (0.01) %

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Components of Net Interest Margin

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

(Dollars in Thousands) Three Months Ended September 30,

The following table compares average balances and rates as well as margins on earning assets for the three-month periods ended March 31, 2022 and 2021.

Average yields or costs are not calculated on a tax-equivalent basis.

(Dollars in Thousands) Three Months Ended March 31,

Interest income/

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2022 2021 $ % 2022 2021 $ % 2022 2021 Change

Interest-bearing deposits in other banks 1

$538,537 $120,875 $417,662 346 % $242 $38 $204 537 % 0.18 % 0.13 % 0.05 %

Loans held for sale 99,716 122,994 (23,278) (19) % 727 957 (230) (24) % 2.89 % 3.10 % (0.21) %

Short-term investments 3

Taxable long-term investments 2

490,196 297,919 192,277 65 % 1,544 1,130 414 37 % 1.28 % 1.54 % (0.26) %

Long-term investments 4

Non-taxable long-term investments 2

833 857 (24) (3) % 4 4 — — % 1.95 % 1.89 % 0.06 %

Total investments 779,635 278,103 501,532 180 % 1,382 1,103 279 25 % 0.70 % 1.58 % (0.88) %

Loans held for sale 52,630 114,585 (61,955) (54) % 405 782 (377) (48) % 3.12 % 2.77 % 0.35 %

1,379,850 1,492,906 (113,056) (8) % 17,863 18,642 (779) (4) % 5.25 % 5.06 % 0.19 %

Interest-earning assets 5

2,462,046 2,027,142 434,904 21 % 20,058 20,596 (538) (3) % 3.30 % 4.12 % (0.82) %

Nonearning assets 156,482 170,565 (14,083) (8) %

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Total interest-bearing liabilities 1,550,877 1,232,179 318,698 26 % 754 1,103 (349) (32) % 0.20 % 0.36 % (0.16) %

Demand deposits and other noninterest-bearing liabilities 869,864 725,585 144,279 20 %

Non-interest bearing demand deposits 794,702 687,789 106,913 16 %

Other liabilities 830,537 734,711 (11,087) (24) %

Equity 237,114 230,817 6,297 3 %

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Average interest-earning assets to average interest-bearing liabilities 158.75 % 164.52 %

1 Consists of interest bearing deposits in other banks and domestic CDs.

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

Taxable long-term investments consist of U.S.

treasury and government sponsored entities, corporate bonds, collateral loan obligations, marketable equity securities, and Federal Home Loan Bank stock.

Non-taxable long-term investments consist of municipal securities.

3 Interest income includes loan fees.

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.

Loan fees recognized during the period and included in the yield calculation totaled $3.0 million and $4.1 million in the first quarter of 2022 and 2021, respectively.

4 Nonaccrual loans are included with a zero effective yield.

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 September 30, 2021 and 2020.

Average nonaccrual loans included in the computation of the average loan balances were $11.0 million and $11.2 million in the first quarter of 2022 and 2021, respectively .

5 The Company does not have any fed funds sold or securities purchased with agreements to resell to disclose as part of its total interest-earning assets in the periods presented.

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

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

The Company did not have any fed funds sold or securities purchased with agreements to resell for the three-month periods ending March 31, 2022 and 2021.

(In Thousands) Three Months Ended March 31, 2022 vs.

Increase (decrease) due to

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Interest Income:

Loans $513 $926 $1,439

Loans held for sale (172) (58) (230)

Short-term investments $197 $7 $204

Long-term investments 737 (590) 147

Taxable long-term investments 631 (217) 414

Nontaxable long-term investments — — —

Loans held for sale (494) 117 (377)

Loans (1,804) 1,025 (779)

Total interest income ($1,470) $932 ($538)

Interest Expense:

Interest-bearing deposits $302 ($955) ($653)

Borrowings 10 (7) 3

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

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/

Average Balances Change expense Change Average Yields/Costs

2021 2020 $ % 2021 2020 $ % 2021 2020 Change

$1,501,139 $1,289,838 $211,301 16 % $56,015 $49,237 $6,778 14 % 4.99 % 5.10 % (0.11) %

Loans held for sale 108,455 95,050 13,405 14 % 2,272 2,267 5 — % 2.80 % 3.19 % (0.39) %

Short-term investments 3

240,635 60,011 180,624 301 % 248 284 (36) (13) % 0.14 % 0.63 % (0.49) %

Long-term investments 4

347,888 252,594 95,294 38 % 3,596 4,349 (753) (17) % 1.38 % 2.30 % (0.92) %

Total investments 588,523 312,605 275,918 88 % 3,844 4,633 (789) (17) % 0.87 % 1.98 % (1.11) %

Interest-earning assets 2,198,117 1,697,493 500,624 29 % 62,131 56,137 5,994 11 % 3.78 % 4.42 % (0.64) %

Nonearning assets 171,350 177,811 (6,461) (4) %

Total $2,369,467 $1,875,304 $494,163 26 %

Interest-bearing demand $40 ($42) ($2)

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Time deposits 14 (372) (358)

Total interest-bearing deposits 1,301,825 1,007,122 294,703 29 % 2,495 4,135 (1,640) (40) % 0.26 % 0.55 % (0.29) %

Borrowings 25,031 39,645 (14,614) (37) % 519 561 (42) (7) % 2.77 % 1.89 % 0.88 %

Total interest-bearing liabilities 1,326,856 1,046,767 280,089 27 % 3,014 4,696 (1,682) (36) % 0.30 % 0.60 % (0.30) %

Demand deposits and other noninterest-bearing liabilities 805,343 619,772 185,571 30 %

Equity 237,268 208,765 28,503 14 %

Total $2,369,467 $1,875,304 $494,163 26 %

Net interest income $59,117 $51,441 $7,676 15 %

Net interest margin 3.60 % 4.05 % (0.45) %

Average loans to average interest-earning assets 68.29 % 75.98 %

Average loans to average total deposits 72.77 % 81.79 %

Average non-interest deposits to average total deposits 36.89 % 36.14 %

Average interest-earning assets to average interest-bearing liabilities 165.66 % 162.17 %

1 Interest income includes loan fees.

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 $12.3 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 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) Nine Months Ended September 30, 2021 vs.

Increase (decrease) due to

Volume Rate Total

Interest Income:

Loans $7,603 ($825) $6,778

Loans held for sale 35 (30) 5

Short-term investments 317 (353) (36)

Long-term investments 1,554 (2,307) (753)

Total interest income $9,509 ($3,515) $5,994

Interest Expense:

Interest-bearing deposits 93 (467) (374)

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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 provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the Allowance for Credit Losses ("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 September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(In Thousands) 2022 2021

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Credit loss expense on purchased receivables — —

Total credit loss expense ($1,106) $567 ($3,021) $3,031

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 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.

Total credit loss (benefit) expense ($150) ($1,488)

The decrease in the benefit for credit losses on loans for the three-month periods ending March 31, 2022 as compared to the same periods in 2021 is primarily the result of an improvement in economic assumptions used to estimate credit losses in the first quarter of 2022 as compared to the same period in 2021.

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 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 income for the three-month period ended March 31, 2022, decreased $5.1 million, or 32%, to $10.8 million as compared to $15.9 million for the same period in 2021, primarily due to a $6.6 million decrease in mortgage banking income in the first quarter of 2022 compared to the same quarter in 2021.

The decrease in mortgage banking income in the three-month period ended March 31, 2022 as compared to the same period in 2021 was primarily due to decreased volume due to decreased refinance activity resulting from increases in the mortgage interest rates.

Additionally, there was a decrease in unrealized gain on marketable securities.

These decreases were only partially offset by $2.0 million in life insurance proceeds received in connection with the death of the Company’s former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021, as well as small increases in bankcard fees and service charges on deposit accounts due to an increase in customers.

Other Operating Expense

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.

Other operating expense for the first quarter of 2022 decreased $226,000, or 1%, to $21.1 million as compared to $21.3 million for the same period in 2021 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 lower salary expense deferrals related to loan originations due to high PPP loan originations in the first quarter of 2021.

Insurance expense increased in the first quarter of 2022 as compared to the first quarter of 2021 due to higher FDIC insurance premiums primarily due to growth in the Company's balance sheet.

For the first three months of 2022, Northrim recorded $1.9 million in state and federal income tax expense, for an effective tax rate of 21.25% compared to $3.4 million and 21.67% for the same period in 2021.

Northrim recorded a lower effective tax rate for the first three months of 2022 as compared to the same period in 2021 as a result of an increase in tax credits and tax exempt interest income as a percentage of pre-tax income in 2022.

FINANCIAL CONDITION

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Portfolio Investments

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.

Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at March 31, 2022 increased 14%, or $66.0 million, to $521.1 million from $455.1 million at December 31, 2021 as proceeds from an increase in deposits that were not lent out were invested in the first three months of 2022.

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Dollar Amount Percent of Total Dollar Amount Percent of Total

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Dollar Amount Percent of Total Dollar Amount Percent of Total

14 unchanged sentences

Total loans $1,377,387 $1,413,886

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.

Loans decreased by $36.5 million, or 2.6%, to $1.377 billion at March 31, 2022 from $1.414 billion at December 31, 2021, primarily as a result of decreased SBA PPP loans.

Loans excluding PPP loans increased $17.5 million, or 1.3% to $1.313 billion at March 31, 2022 from $1.296 billion at December 31, 2021.

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 $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

PPP loans are included in commercial and industrial loans in the table above and totaled $64.3 million at March 31, 2022 and $118.2 million at December 31, 2021.

Information about loan concentrations

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 $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 Company estimates that $65.1 million, or approximately 5% of loans as of March 31, 2022 have direct exposure to the oil and gas industry as compared to $63.6 million, or approximately 5% of loans as of December 31, 2021.

The Company's exposure as a percent of the total loan portfolio excluding SBA PPP loans as of March 31, 2022 and as of December 31, 2021 was 5%.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $64.3 million and $66.4 million at March 31, 2022 and December 31, 2021, 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 $635,000 as of March 31, 2022 and $684,000 as of December 31, 2021.

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) September 30, 2021 December 31, 2020

(In Thousands) March 31, 2022 December 31, 2021

Commercial & industrial loans $47,263 $45,338

2 unchanged sentences

Non-owner occupied and multifamily properties 6,427 6,564

Consumer loans — 2,256

Other loans 1,478 1,495

Total $65,065 $63,641

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

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:

The Company monitors other concentrations within the loan portfolio depending on trends in the current and future estimated economic conditions.

At March 31, 2022, the Company had $118.6 million, or 9% of portfolio loans, in the Healthcare sector, $95.2 million, or 7% of portfolio loans, in the Tourism sector, $67.0 million, or 5% of portfolio loans, in the Aviation (non-tourism) sector, $49.7 million, or 4% in the Restaurant sector, $55.1 million, or 4% of portfolio loans, in the Fishing sector, $42.3 million, or 3% of portfolio loans, in the Retail sector, and $50.6 million, or 4% of portfolio loans, in the Accommodations sector.

At March 31, 2022, the Company had $118.6 million, or 9% of total loans excluding SBA PPP loans, in the Healthcare sector, $95.2 million, or 7% of portfolio loans excluding SBA PPP loans, in the Tourism sector, $67.0 million, or 5% of portfolio loans excluding SBA PPP loans, in the Aviation (non-tourism) sector, $49.7 million, or 4% of total loans excluding SBA PPP loans in the Restaurant sector, $55.1 million, or 4% of total loans excluding SBA PPP loans, in the Fishing sector, $50.6 million, or 4% of total loans excluding SBA PPP loans in the Accommodations sector, and $42.3 million, or 3% of total loans excluding SBA PPP loans, in the Retail sector.

The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of March 31, 2022:

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

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

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

Three Months Ended March 31,

(In Thousands) 2022 2021

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Commercial & industrial loans (295) (163)

Commercial real estate:

Owner occupied properties — 85 — 85

Other loans — — — 14

Total charge-offs (295) (163)

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Consumer loans 1 2

Other loans — — — 6

Total recoveries 33 207

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

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

Three Months Ended March 31,

(In Thousands) 2022 2021

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Balance at end of period $1,113 $1,833

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

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

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

Deposits are the Company’s primary source of funds.

Total deposits increased $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.

Total deposits decreased $78.6 million, or 3%, to $2.343 billion as of March 31, 2022 compared to $2.422 billion as of December 31, 2021, primarily due to the drawdown of a large temporary deposit.

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

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

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Total deposits $2,343,066 $2,421,631

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 Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 93% of total deposits at March 31, 2022 and 93% of total deposits at December 31, 2021.

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

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:

At March 31, 2022, the Company had $175.2 million in certificates of deposit as compared to certificates of deposit of $178.0 million at December 31, 2021.

At March 31, 2022, $136.2 million, or 78%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $118.5 million, or 67%, of total certificates of deposit at December 31, 2021.

The aggregate amount of certificates of deposit in amounts of $250,000 and greater at March 31, 2022 and December 31, 2021, was $75.6 million and $77.1 million, respectively.

The following table sets forth the amount outstanding of deposits in amounts of $250,000 and greater by time remaining until maturity and percentage of total deposits as of March 31, 2022:

Time Certificates of Deposit

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Total $75,630 100 %

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").

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

At September 30, 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.

At March 31, 2022, our maximum borrowing line from the FHLB was $1.175 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $14.4 million as of March 31, 2022 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 $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.

The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $56.5 million of loans as collateral to secure advances made through the discount window on March 31, 2022.

There were no discount window advances outstanding at March 31, 2022 or December 31, 2021, 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 $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.

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $914.1 million at March 31, 2022 and $948.0 million at December 31, 2021.

At March 31, 2022 and December 31, 2021, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

Long-term Borrowings.

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

The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of March 31, 2022 or December 31, 2021.

Liquidity and Capital Resources

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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 2022.

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.

Other available sources of liquidity for the bank holding company include the issuance of debt and the issuance of common or preferred stock.

As of March 31, 2022, the Company has 10.0 million authorized shares of common stock, of which 5.9 million are issued and outstanding, leaving 4.1 million shares available for issuance.

Additionally, the Company has 2.5 million authorized shares of preferred stock available for issuance.

The Bank manages its liquidity through its Asset and Liability Committee.

The Bank's primary source of funds are customer deposits.

These funds, together with loan repayments, loan sales, maturity of investment securities, borrowed funds, and retained earnings 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 September 30, 2021 were $371.9 million.

The Company had cash and cash equivalents of $532.8 million, or 20% of total assets at March 31, 2022 compared to $645.8 million, or 24% of total assets as of December 31, 2021.

The decrease in cash and cash equivalents is primarily due to a decrease in deposits, but is still elevated as compared to historical norms.

Management expects this elevated level of liquidity to continue through 2022 and potentially into subsequent years.

Accordingly, management has invested in slightly longer term investment securities as compared to the last several years.

As of March 31, 2022, the weighted average maturity of available for sale securities is 4.0 years compared to 4.1 years at December 31, 2021 and 2.6 years at December 31, 2020.

At March 31, 2022, $5.0 million in available for sale securities mature within one year, $74 million mature within one to two years, and $134 million mature within two to three years.

Our total unfunded commitments to fund loans and letters of credit at March 31, 2022 were $392.5 million.

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

Additionally, as noted above, our total deposits at September 30, 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.

Net cash provided by financing activities in the same period was $461.0 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 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 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.

At March 31, 2022, certificates of deposit totaling $136.2 million are scheduled to mature over the next 12 months and may be withdrawn from the Bank.

Similar to loans, we do not expect that these maturing certificates of deposit, or other non-maturity deposits, to be withdrawn from the Bank in a manner that will strain liquidity;

however, unforeseen future circumstances or events may cause higher than anticipated withdrawal of deposits or draws of unfunded commitments to fund new loans.

Management believes that cash requirements to fund future non-deposit liabilities, including operating lease liabilities, other liabilities, or borrowings as of March 31, 2022, are not material to the Company's liquidity position as of March 31, 2022.

The Company has other available sources of liquidity to fund unforeseen liquidity needs.

These include borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB.

At March 31, 2022, our liquid assets were $787.0 million and our funds available for borrowing under our existing lines of credit were $1.233 billion.

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 in the foreseeable future.

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 $19.8 million for the first three months of 2022, 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 $45.8 million for the same period, primarily due to purchases of available for sale and held to maturity securities.

This use of cash was only partially offset by a decrease in loans, mostly attributable to SBA PPP forgiveness.

Net cash used by financing activities in the same period was $87.0 million, primarily due to a decrease in deposits.

Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market.

The Company repurchased 133,105 shares of its common stock under the Company's previously announced repurchase program in the first three months of 2022.

The Company intends to continue to repurchase our stock from time-to-time depending upon market conditions, but we can make no assurances that we will continue this program or that we will authorize additional shares for repurchase.

Capital Requirements and Ratios

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

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.

We believe as of March 31, 2022, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

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

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

As a result, the Company has $10 million more in regulatory capital than the Bank at both September 30, 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 March 31, 2022 and December 31, 2021, which explains most of the difference in the capital ratios for the two entities.

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

September 30, 2021

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

Tier 1 risk-based capital 6.00% 8.00% 14.17% 11.34%

Common equity tier 1 capital 4.50% 6.50% 13.59% 11.36%

Leverage ratio 4.00% 5.00% 9.48% 7.57%

December 31, 2020

March 31, 2022

Total risk-based capital 8.00% 10.00% 14.37% 11.96%

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Under the rules of the Federal Reserve Bank, a bank holding company such as the Company is generally defined to be "well capitalized" if its Tier 1 risk-based capital ratio is 8.0% or more and its total risk-based capital ratio is 10.0% or more.

Off-Balance Sheet Items

The Company is a party to financial instruments with off-balance sheet risk.

Among the off-balance sheet items entered into in the ordinary course of business are commitments to extend credit, commitments to originate loans held for sale and the issuance of letters of credit.

These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheet.

Certain commitments are collateralized.

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

As of 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 $1.2 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 in Anchorage.

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

Critical Accounting Policies

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

The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments as a result of the need to make "critical accounting estimates", which are estimates that involve estimation uncertainty that has had or is reasonably likely to have a material impact on the Company's financial condition or results of operations.

The Company's critical accounting policies include allowance for credit losses, valuation of goodwill and other intangible assets, the valuation of OREO, the valuation of mortgage servicing rights, and fair value.

There have been no material changes to the valuation techniques or models, that affect our estimates during 2022 except as noted below.

Allowance for Credit Losses Policy:

For loan pools that utilize the discounted cash flow ("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").

As of December 31, 2021, management utilized and forecasted Alaska unemployment as a loss driver for all of the loans pools that utilized the DCF method.

Management also utilized and forecasted 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 correlated to expected future losses.

Additionally, the Company's regression models for PD as of December 31, 2021 utilized the Company's actual historical loan level default data.

As of January 1, 2022, management utilizes and forecasts U.S.

unemployment as the sole loss driver for all of the loan pools that utilize the DCF method.

The Company's regression models for PD as of January 1, 2022 utilize peer historical loan level default data.

Peers for this purpose include banks in the United States with total assets between $1 billion and $5 billion whose loan portfolios share certain characteristics with the Company's loan portfolio.

Peers differ by loan segment;

a bank is included in the peer group for each loan segment under the following circumstances:

• The percentage the balance of the loan segment compared to total loans over a five year look back period is within 1.5 standard deviations of the Company's data, and

• The percentage of total charge offs for the loan segment over a five year look back period is within 1 standard deviation of the Company's data;

• The percentage of total charge offs for the loan segment during the recessionary period from the fourth quarter of 2008 to the fourth quarter of 2021 is within 1 standard deviation of the Company's data.

No other changes have been made to the Company's Allowance for Credit Losses Policy since December 31, 2021.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

Our assessment of market risk as of March 31, 2022 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, 2021.

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