UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☑ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September~~June 30, ~~2020~~2021

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from_____to____

Commission File Number 000-33501

NORTHRIM BANCORP, INC.

(Exact name of registrant as specified in its charter)


Alaska						92-0175752
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

3111 C Street

Anchorage, Alaska 99503

(Address of principal executive offices) (Zip Code)

(907) 562-0062

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None


TITLE OF EACH CLASS	TRADING SYMBOL	NAME OF EXCHANGE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

ý Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer ¨ Accelerated Filer ý Non-accelerated Filer ¨

Smaller Reporting Company ☒ Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ý No

The number of shares of the issuer’s Common Stock, par value $1 per share, outstanding at ~~November 3, 2020~~August 4, 2021 was ~~6,233,755.~~6,206,913.


TABLE OF CONTENTS

Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Shareholders' Equity	6
	Consolidated Statements of Cash Flows	8
	Notes to the Consolidated Financial Statements	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4446
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6465
Item 4.	Controls and Procedures	6465

Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	6465
Item 1A.	Risk Factors	6566
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6766
Item 3.	Defaults Upon Senior Securities	6866
Item 4.	Mine Safety Disclosures	6866
Item 5.	Other Information	6967
Item 6.	Exhibits	6967
SIGNATURES		7068

PART I. FINANCIAL INFORMATION

These consolidated financial statements should be read in conjunction with the financial statements, accompanying notes and other relevant information included in Northrim BanCorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS

NORTHRIM BANCORP, INC.

Consolidated Balance Sheets

(Unaudited)


		September 30, 2020	December 31, 2019		June 30, 2021	December 31, 2020
(In Thousands, Except Share Data)	(In Thousands, Except Share Data)			(In Thousands, Except Share Data)
ASSETS	ASSETS			ASSETS
Cash and due from banks	Cash and due from banks	$31,165	$20,518	Cash and due from banks	$25,486	$23,304
Interest bearing deposits in other banks	Interest bearing deposits in other banks	69,964	74,906	Interest bearing deposits in other banks	321,399	92,661
Investment securities available for sale, at fair value	Investment securities available for sale, at fair value	215,369	276,138	Investment securities available for sale, at fair value	337,231	247,633
Marketable equity securities	Marketable equity securities	8,534	7,945	Marketable equity securities	9,588	9,052

Investment securities held to maturity, at amortized cost				Investment securities held to maturity, at amortized cost	20,000	10,000
Total portfolio investments				Total portfolio investments	366,819	266,685
Investment in Federal Home Loan Bank stock	Investment in Federal Home Loan Bank stock	2,508	2,138	Investment in Federal Home Loan Bank stock	3,114	2,551

Loans held for sale	Loans held for sale	128,105	67,834	Loans held for sale	105,819	146,178

Loans	Loans	1,492,720	1,043,371	Loans	1,487,968	1,444,050
Allowance for loan losses		(21,683)	(19,088)
Allowance for credit losses				Allowance for credit losses	(14,539)	(21,136)
Net loans	Net loans	1,471,037	1,024,283	Net loans	1,473,429	1,422,914
Purchased receivables, net	Purchased receivables, net	13,520	24,373	Purchased receivables, net	12,500	13,922
Mortgage servicing rights, at fair value	Mortgage servicing rights, at fair value	10,589	11,920	Mortgage servicing rights, at fair value	12,835	11,218
Other real estate owned, net	Other real estate owned, net	6,962	7,043	Other real estate owned, net	7,073	7,289
Premises and equipment, net	Premises and equipment, net	38,615	38,422	Premises and equipment, net	38,202	38,102
Operating lease right-of-use asset		12,943	14,306
Operating lease right-of-use assets				Operating lease right-of-use assets	11,374	12,440
Goodwill	Goodwill	15,017	15,017	Goodwill	15,017	15,017
Other intangible assets, net	Other intangible assets, net	1,041	1,077	Other intangible assets, net	1,011	1,029
Other assets	Other assets	72,369	58,076	Other assets	59,489	68,488
Total assets	Total assets	$2,097,738	$1,643,996	Total assets	$2,453,567	$2,121,798
LIABILITIES	LIABILITIES			LIABILITIES
Deposits:	Deposits:			Deposits:
Demand	Demand	$697,363	$451,896	Demand	$798,231	$643,825
Interest-bearing demand	Interest-bearing demand	427,811	320,264	Interest-bearing demand	582,669	459,095
Savings	Savings	272,624	229,918	Savings	322,645	308,725
Money market	Money market	227,106	205,801	Money market	258,116	237,705
Certificates of deposit less than $250,000	Certificates of deposit less than $250,000	94,743	90,702	Certificates of deposit less than $250,000	102,632	92,047
Certificates of deposit $250,000 and greater	Certificates of deposit $250,000 and greater	86,486	73,770	Certificates of deposit $250,000 and greater	82,145	83,584
Total deposits	Total deposits	1,806,133	1,372,351	Total deposits	2,146,438	1,824,981

Borrowings	Borrowings	13,737	8,891	Borrowings	14,680	14,817
Junior subordinated debentures	Junior subordinated debentures	10,310	10,310	Junior subordinated debentures	10,310	10,310
Operating lease liability		12,881	14,229
Operating lease liabilities				Operating lease liabilities	11,335	12,378
Other liabilities	Other liabilities	40,061	31,098	Other liabilities	33,586	37,737
Total liabilities	Total liabilities	1,883,122	1,436,879	Total liabilities	2,216,349	1,900,223
SHAREHOLDERS' EQUITY	SHAREHOLDERS' EQUITY			SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 2,500,000 shares authorized, NaN issued or outstanding	Preferred stock, $1 par value, 2,500,000 shares authorized, NaN issued or outstanding	0	0	Preferred stock, $1 par value, 2,500,000 shares authorized, NaN issued or outstanding	0	—
Common stock, $1 par value, 10,000,000 shares authorized, 6,279,304 and 6,558,809 issued and outstanding at September 30, 2020 and December 31, 2019, respectively		6,279	6,559
Common stock, $1 par value, 10,000,000 shares authorized, 6,206,913 and 6,251,004 issued and outstanding at June 30, 2021 and December 31, 2020, respectively				Common stock, $1 par value, 10,000,000 shares authorized, 6,206,913 and 6,251,004 issued and outstanding at June 30, 2021 and December 31, 2020, respectively	6,207	6,251
Additional paid-in capital	Additional paid-in capital	42,966	50,512	Additional paid-in capital	39,871	41,808
Retained earnings	Retained earnings	165,606	149,615	Retained earnings	191,791	173,498
Accumulated other comprehensive (loss) income, net of tax	Accumulated other comprehensive (loss) income, net of tax	(235)	431	Accumulated other comprehensive (loss) income, net of tax	(651)	18
Total shareholders' equity	Total shareholders' equity	214,616	207,117	Total shareholders' equity	237,218	221,575
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$2,097,738	$1,643,996	Total liabilities and shareholders' equity	$2,453,567	$2,121,798

See notes to consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Income

(Unaudited)


		Three Months Ended		Nine Months Ended			Three Months Ended		Six Months Ended
		September 30,					June 30,
(In Thousands, Except Per Share Data)	(In Thousands, Except Per Share Data)	2020	2019	2020	2019	(In Thousands, Except Per Share Data)	2021	2020	2021	2020
Interest and Dividend Income	Interest and Dividend Income					Interest and Dividend Income
Interest and fees on loans and loans held for sale	Interest and fees on loans and loans held for sale	$18,691	$15,863	$51,504	$46,193	Interest and fees on loans and loans held for sale	$18,963	$17,454	$38,387	$32,813
Interest on investment securities available for sale	Interest on investment securities available for sale	940	1,528	3,951	4,850	Interest on investment securities available for sale	815	1,389	1,593	3,011
Dividends on marketable equity securities	Dividends on marketable equity securities	122	114	336	330	Dividends on marketable equity securities	126	112	213	214

Interest on investment securities held to maturity						Interest on investment securities held to maturity	265	0	511	0
Dividends on Federal Home Loan Bank stock	Dividends on Federal Home Loan Bank stock	24	19	62	57	Dividends on Federal Home Loan Bank stock	23	18	46	38
Interest on deposits in other banks	Interest on deposits in other banks	17	313	284	591	Interest on deposits in other banks	61	31	99	267
Total Interest Income	Total Interest Income	19,794	17,837	56,137	52,021	Total Interest Income	20,253	19,004	40,849	36,343
Interest Expense	Interest Expense					Interest Expense
Interest expense on deposits	Interest expense on deposits	1,320	1,365	4,135	3,477	Interest expense on deposits	879	1,331	1,828	2,815
Interest expense on securities sold under agreements to repurchase		0	1	0	41

Interest expense on borrowings	Interest expense on borrowings	84	70	277	189	Interest expense on borrowings	88	122	148	193
Interest expense on junior subordinated debentures	Interest expense on junior subordinated debentures	96	95	284	282	Interest expense on junior subordinated debentures	94	94	188	188
Total Interest Expense	Total Interest Expense	1,500	1,531	4,696	3,989	Total Interest Expense	1,061	1,547	2,164	3,196
Net Interest Income	Net Interest Income	18,294	16,306	51,441	48,032	Net Interest Income	19,192	17,457	38,685	33,147
Provision (benefit) for loan losses		567	(2,075)	3,031	(1,025)
Net Interest Income After Provision for Loan Losses		17,727	18,381	48,410	49,057
(Benefit) provision for credit losses						(Benefit) provision for credit losses	(427)	404	(1,915)	2,464
Net Interest Income After Provision for Credit Losses						Net Interest Income After Provision for Credit Losses	19,619	17,053	40,600	30,683
Other Operating Income	Other Operating Income					Other Operating Income
Mortgage banking income	Mortgage banking income	17,932	7,565	37,824	17,813	Mortgage banking income	11,360	15,227	24,982	19,892
Bankcard fees	Bankcard fees	770	820	2,094	2,214	Bankcard fees	879	681	1,619	1,324
Purchased receivable income	Purchased receivable income	516	709	2,112	2,355	Purchased receivable income	575	675	1,107	1,596
Service charges on deposit accounts	Service charges on deposit accounts	269	398	802	1,224	Service charges on deposit accounts	308	171	598	533
Unrealized (loss) gain on marketable equity securities		375	130	(347)	782
Unrealized gain (loss) on marketable equity securities						Unrealized gain (loss) on marketable equity securities	178	149	94	(722)
Interest rate swap income	Interest rate swap income	726	0	743	734	Interest rate swap income	103	17	195	17
Gain on sale of marketable equity securities, net	Gain on sale of marketable equity securities, net	0	0	98	0	Gain on sale of marketable equity securities, net	31	0	31	98
Gain on sale of investment securities available for sale, net		0	0	0	23

Other income	Other income	1,040	887	2,270	2,466	Other income	698	615	1,402	1,230
Total Other Operating Income	Total Other Operating Income	21,628	10,509	45,596	27,611	Total Other Operating Income	14,132	17,535	30,028	23,968
Other Operating Expense	Other Operating Expense					Other Operating Expense
Salaries and other personnel expense	Salaries and other personnel expense	16,418	13,186	44,311	37,433	Salaries and other personnel expense	14,917	15,637	29,645	27,893
Data processing expense	Data processing expense	1,851	1,849	5,653	5,324	Data processing expense	2,206	2,033	4,241	3,802
Occupancy expense	Occupancy expense	1,648	1,576	4,923	4,989	Occupancy expense	1,869	1,618	3,529	3,275
Marketing expense						Marketing expense	672	696	1,076	1,279
Professional and outside services	Professional and outside services	884	610	2,206	1,850	Professional and outside services	642	714	1,266	1,322
Marketing expense		302	357	1,581	1,609
Insurance expense	Insurance expense	315	102	928	592	Insurance expense	329	301	643	613
OREO expense (income), net						OREO expense (income), net	47	21	11	(15)
Intangible asset amortization expense	Intangible asset amortization expense	12	15	36	45	Intangible asset amortization expense	9	12	18	24

OREO expense (income), net rental income and gains on sale		23	(31)	8	(186)

Other operating expense	Other operating expense	2,053	1,660	5,321	4,567	Other operating expense	1,645	1,642	3,234	3,268
Total Other Operating Expense	Total Other Operating Expense	23,506	19,324	64,967	56,223	Total Other Operating Expense	22,336	22,674	43,663	41,461
Income Before Provision for Income Taxes	Income Before Provision for Income Taxes	15,849	9,566	29,039	20,445	Income Before Provision for Income Taxes	11,415	11,914	26,965	13,190
Provision for income taxes	Provision for income taxes	3,994	2,028	6,251	4,334	Provision for income taxes	3,070	2,014	6,439	2,257

Net Income	Net Income	$11,855	$7,538	$22,788	$16,111	Net Income	$8,345	$9,900	$20,526	$10,933
Earnings Per Share, Basic	Earnings Per Share, Basic	$1.87	$1.13	$3.57	$2.38	Earnings Per Share, Basic	$1.34	$1.54	$3.30	$1.70
Earnings Per Share, Diluted	Earnings Per Share, Diluted	$1.84	$1.11	$3.52	$2.35	Earnings Per Share, Diluted	$1.33	$1.52	$3.27	$1.68
Weighted Average Shares Outstanding, Basic	Weighted Average Shares Outstanding, Basic	6,338,465	6,604,044	6,391,164	6,760,672	Weighted Average Shares Outstanding, Basic	6,206,913	6,367,397	6,213,392	6,417,514
Weighted Average Shares Outstanding, Diluted	Weighted Average Shares Outstanding, Diluted	6,413,221	6,707,523	6,467,991	6,861,973	Weighted Average Shares Outstanding, Diluted	6,277,265	6,440,898	6,280,369	6,496,515

See notes to consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

2010

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2020 2019 2020 2019
Net income $11,855 $7,538 $22,788 $16,111
Other comprehensive income (loss), net of tax:
   Securities available for sale:
         Unrealized gains arising during the period $54 $83 $477 $2,816
            Reclassification of net gains included in net income, net of tax expense
             of $0 for the third quarters of 2020 and 2019, and $28 and $7 for the
             nine months ended September 30, 2020 and 2019, respectively 0 0 (70) (16)
Derivatives and hedging activities:
     Unrealized gains (losses) arising during the period 245 (691) (1,622) (1,672)
     Income tax (expense) benefit related to unrealized gains and losses (85) (23) 549 (742)
Other comprehensive (loss) income, net of tax 214 (631) (666) 386
Comprehensive income $12,069 $6,907 $22,122 $16,497


	Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	2021	2020	2021	2020
Net income	$8,345	$9,900	$20,526	$10,933
Other comprehensive income (loss), net of tax:
Securities available for sale:
Unrealized (losses) gains arising during the period	($90)	$1,753	($1,608)	$423



Derivatives and hedging activities:
Unrealized (losses) gains arising during the period	(587)	0	673	(1,867)
Income tax benefit (expense) related to reclassifications and unrealized gains
and losses	189	(497)	266	564
Other comprehensive (loss) gain, net of tax	(488)	1,256	(669)	(880)
Comprehensive income	$7,857	$11,156	$19,857	$10,053

See notes to consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)


		Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net of Tax					Total		Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), net of Tax		Total
		Number of Shares	Par Value							Total	Number of Shares		Par Value				Additional Paid-in Capital	Retained Earnings		Accumulated Other Comprehensive Income (Loss), net of Tax			Total
(In Thousands)	(In Thousands)							Accumulated Other Comprehensive Income (Loss), net of Tax							Accumulated Other Comprehensive Income (Loss), net of Tax
Balance as of January 1, 2019		6,883		$6,883					$62,132			td37,452										($520)				td05,947
Cash dividend on common stock ($0.30 per share)		—	—			—			(2,087)		—						(2,087)
Stock-based compensation expense		—	—		196		—		—					196
Exercise of stock options and vesting of restricted stock units, net		2	2		(2)		—		—					0
Repurchase of common stock		(6)	(6)		(199)		—		—					(205)
Other comprehensive income, net of tax		—	—		—		—		675					675

Net income		—	—		—		4,312		—					4,312
Balance as of March 31, 2019		6,879	$6,879		$62,127		$139,677		$155					$208,838
Cash dividend on common stock ($0.30 per share)		—	—		—		(2,060)		—					(2,060)
Balance as of January 1, 2020															Balance as of January 1, 2020	6,559			$6,559			$50,512			$149,615			$431		$207,117
Cash dividend on common stock ($0.34 per share)															Cash dividend on common stock ($0.34 per share)	—			—		—			(2,223)			—		(2,223)
Stock-based compensation expense	Stock-based compensation expense	—	—		155		—		—					155	Stock-based compensation expense	—			—		242			—			—		242

Repurchase of common stock	Repurchase of common stock	(150)	(150)		(5,048)		—		—					(5,198)	Repurchase of common stock	(193)			(193)		(6,117)			—			—		(6,310)
Other comprehensive income, net of tax	Other comprehensive income, net of tax	—	—		—		—		342					342	Other comprehensive income, net of tax	—			—		—			—			(2,136)		(2,136)
Cumulative effect of adoption of accounting principles related to equity compensation expense															Cumulative effect of adoption of accounting principles related to equity compensation expense	—			—		139			(139)			—		0

Net income	Net income	—	—		—		4,261		—					4,261	Net income	—			—		—			1,033			—		1,033
Balance as of June 30, 2019		6,729	$6,729		$57,234		$141,878		$497					$206,338
Cash dividend on common stock ($0.33 per share)		—	—		—		(2,199)		—					(2,199)
Stock-based compensation expense		—	—		193		—		—					193
Exercise of stock options and vesting of restricted stock units, net		3	3		(37)		—		—					(34)
Repurchase of common stock		(192)	(192)		(6,974)		—		—					(7,166)
Other comprehensive loss, net of tax		—	—		—		—		(631)					(631)
Net income		—	—		—		7,538		—					7,538
Balance as of September 30, 2019		6,540	$6,540		$50,416		$147,217		($134)					$204,039
Cash dividend on common stock ($0.33 per share)		—	—		—		(2,182)		—					(2,182)
Balance as of March 31, 2020															Balance as of March 31, 2020	6,366			$6,366		$44,776			$148,286			($1,705)		$197,723
Cash dividend on common stock ($0.34 per share)															Cash dividend on common stock ($0.34 per share)	—			—		—			(2,188)			—		(2,188)
Stock-based compensation expense	Stock-based compensation expense	—	—		288		—		—					288	Stock-based compensation expense	—			—		238			—			—		238
Exercise of stock options and vesting of restricted stock units, net	Exercise of stock options and vesting of restricted stock units, net	19	19		(192)		—		—					(173)	Exercise of stock options and vesting of restricted stock units, net	2			2		(8)			—			—		(6)

Other comprehensive income, net of tax	Other comprehensive income, net of tax	—	—		—		—		565					565	Other comprehensive income, net of tax	—			—		—			—			1,256		1,256
Net income	Net income	—	—		—		4,580		—					4,580	Net income	—			—		—			9,900			—		9,900
Balance as of December 31, 2019		6,559	$6,559		$50,512		$149,615		$431					$207,117
Balance as of June 30, 2020															Balance as of June 30, 2020	6,368			$6,368		$45,006			$155,998			($449)		$206,923
Cash dividend on common stock ($0.35 per share)															Cash dividend on common stock ($0.35 per share)	—			—		—			(2,247)			—		(2,247)
Stock-based compensation expense															Stock-based compensation expense	—			—		237			—			—		237

Repurchase of common stock															Repurchase of common stock	(89)			(89)		(2,277)			—			—		(2,366)
Other comprehensive loss, net of tax															Other comprehensive loss, net of tax	—			—		—			—			214		214
Net income															Net income	—			—		—			11,855			—		11,855
Balance as of September 30, 2020															Balance as of September 30, 2020	6,279			$6,279		$42,966			$165,606			($235)		$214,616
Cash dividend on common stock ($0.35 per share)															Cash dividend on common stock ($0.35 per share)	—			—		—			(2,208)			—		(2,208)
Stock-based compensation expense															Stock-based compensation expense	—			—		226			—			—		226
Exercise of stock options and vesting of restricted stock units, net															Exercise of stock options and vesting of restricted stock units, net	17			17		(129)			—			—		(112)
Repurchase of common stock															Repurchase of common stock	(45)			(45)		(1,255)			—			—		(1,300)
Other comprehensive income, net of tax															Other comprehensive income, net of tax	—			—		—			—			253		253
Net income															Net income	—			—		—			10,100			—		10,100
Balance as of December 31, 2020															Balance as of December 31, 2020	6,251			$6,251		$41,808			$173,498			$18		$221,575

See notes to consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Changes in Shareholders’ Equity

(Continued)

(Unaudited)


		Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net of Tax					Total		Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), net of Tax		Total
		Number of Shares	Par Value							Total	Number of Shares		Par Value				Additional Paid-in Capital	Retained Earnings		Accumulated Other Comprehensive Income (Loss), net of Tax			Total
(In Thousands)	(In Thousands)							Accumulated Other Comprehensive Income (Loss), net of Tax							Accumulated Other Comprehensive Income (Loss), net of Tax
Balance as of January 1, 2020		6,559		$6,559					$50,512			td49,615										$431				td07,117
Cash dividend on common stock ($0.34 per share)		—	—			—			(2,223)		—						(2,223)
Balance as of January 1, 2021															Balance as of January 1, 2021	6,251			$6,251			$41,808			$173,498			$18		$221,575
Cash dividend on common stock ($0.37 per share)															Cash dividend on common stock ($0.37 per share)	—			—		—			(2,313)			—		(2,313)
Stock-based compensation expense															Stock-based compensation expense	—			—		280			—			—		280
Exercise of stock options and vesting of restricted stock units, net															Exercise of stock options and vesting of restricted stock units, net	17			17		(295)			—			—		(278)
Repurchase of common stock															Repurchase of common stock	(61)			(61)		(2,151)			—			—		(2,212)
Other comprehensive loss, net of tax															Other comprehensive loss, net of tax	—			—		—			—			(181)		(181)
Cumulative effect of adoption of ASU 2016-13															Cumulative effect of adoption of ASU 2016-13	—			—		—			2,400			—		2,400
Net income															Net income	—			—		—			12,181			—		12,181
Balance as of March 31, 2021															Balance as of March 31, 2021	6,207			$6,207		$39,642			$185,766			($163)		$231,452
Cash dividend on common stock ($0.37 per share)															Cash dividend on common stock ($0.37 per share)	—			—		—			(2,320)			—		(2,320)
Stock-based compensation expense	Stock-based compensation expense	—	—		242		—		—					242	Stock-based compensation expense	—			—		229			—			—		229

Repurchase of common stock		(193)	(193)		(6,117)		—		—					(6,310)

Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		—		(2,136)					(2,136)	Other comprehensive loss, net of tax	—			—		—			—			(488)		(488)
Cumulative effect of adoption of accounting principles related to equity compensation expense		—	—		139		(139)		—					0
Net income	Net income	—	—		—		1,033		—					1,033	Net income	—			—		—			8,345			—		8,345
Balance as of March 31, 2020		6,366	$6,366		$44,776		$148,286		($1,705)					$197,723
Cash dividend on common stock ($0.34 per share)		—	—		—		(2,188)		—					(2,188)
Stock-based compensation expense		—	—		238		—		—					238
Exercise of stock options and vesting of restricted stock units, net		2	2		(8)		—		—					(6)
Balance as of June 30, 2021															Balance as of June 30, 2021	6,207			$6,207		$39,871			$191,791			($651)		$237,218

Other comprehensive income, net of tax		—	—		—		—		1,256					1,256
Net income		—	—		—		9,900		—					9,900
Balance as of June 30, 2020		6,368	$6,368		$45,006		$155,998		($449)					$206,923
Cash dividend on common stock ($0.35 per share)		—	—		—		(2,247)		—					(2,247)
Stock-based compensation expense		—	—		237		—		—					237

Repurchase of common stock		(89)	(89)		(2,277)		—		—					(2,366)
Other comprehensive income, net of tax		—	—		—		—		214					214
Net income		—	—		—		11,855		—					11,855
Balance as of September 30, 2020		6,279	$6,279		$42,966		$165,606		($235)					$214,616

See notes to consolidated financial statements

NORTHRIM BANCORP, INC.

Consolidated Statements of Cash Flows

(Unaudited)


		Nine Months Ended September 30,			Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020	2019	(In Thousands)	2021	2020
Operating Activities:	Operating Activities:			Operating Activities:
Net income	Net income	$22,788	$16,111	Net income	$20,526	$10,933
Adjustments to Reconcile Net Income to Net Cash Used by Operating Activities:
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities:				Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities:
Gain on sale of securities, net	Gain on sale of securities, net	(98)	(23)	Gain on sale of securities, net	(31)	(98)
Loss on disposal of premises and equipment		22	0

Depreciation and amortization of premises and equipment	Depreciation and amortization of premises and equipment	2,337	2,231	Depreciation and amortization of premises and equipment	1,632	1,542
Amortization of software	Amortization of software	821	753	Amortization of software	574	551
Intangible asset amortization	Intangible asset amortization	36	45	Intangible asset amortization	18	24
Amortization of investment security premium, net of discount accretion	Amortization of investment security premium, net of discount accretion	(24)	26	Amortization of investment security premium, net of discount accretion	223	(63)
Unrealized loss (gain) on marketable equity securities		347	(782)
Deferred tax (benefit) expense		(477)	758
Unrealized (gain) loss on marketable equity securities				Unrealized (gain) loss on marketable equity securities	(94)	722
Deferred tax expense (benefit)				Deferred tax expense (benefit)	692	(562)
Stock-based compensation	Stock-based compensation	717	544	Stock-based compensation	509	480

Deferred loan fees and amortization, net of costs	Deferred loan fees and amortization, net of costs	9,399	137	Deferred loan fees and amortization, net of costs	5,710	9,921
Provision (benefit) for loan losses		3,031	(1,025)
Benefit for purchased receivables		(7)	(103)
(Benefit) provision for credit losses				(Benefit) provision for credit losses	(1,915)	2,464
(Benefit) provision for purchased receivables				(Benefit) provision for purchased receivables	0	(1)
Additions to home mortgage servicing rights carried at fair value	Additions to home mortgage servicing rights carried at fair value	(3,032)	(2,672)	Additions to home mortgage servicing rights carried at fair value	(3,193)	(1,659)
Change in fair value of home mortgage servicing rights carried at fair value	Change in fair value of home mortgage servicing rights carried at fair value	4,363	2,287	Change in fair value of home mortgage servicing rights carried at fair value	1,576	2,858
Change in fair value of commercial servicing rights carried at fair value	Change in fair value of commercial servicing rights carried at fair value	180	118	Change in fair value of commercial servicing rights carried at fair value	76	79
Gain on sale of loans	Gain on sale of loans	(30,701)	(14,598)	Gain on sale of loans	(21,265)	(15,965)
Proceeds from the sale of loans held for sale	Proceeds from the sale of loans held for sale	883,899	470,561	Proceeds from the sale of loans held for sale	648,901	499,134
Origination of loans held for sale	Origination of loans held for sale	(913,469)	(503,195)	Origination of loans held for sale	(587,277)	(549,310)
Gain on sale of other real estate owned	Gain on sale of other real estate owned	(176)	(380)	Gain on sale of other real estate owned	(189)	(75)

Net changes in assets and liabilities:	Net changes in assets and liabilities:			Net changes in assets and liabilities:
(Increase) decrease in accrued interest receivable		(3,512)	19
(Increase) in other assets		(6,443)	3,257
Decrease in other liabilities		2,980	3,590
Net Cash (Used) by Operating Activities		(27,019)	(22,341)
Decrease (increase) in accrued interest receivable				Decrease (increase) in accrued interest receivable	132	(3,877)
Increase (decrease) in other assets				Increase (decrease) in other assets	6,543	(4,309)
(Increase) decrease in other liabilities				(Increase) decrease in other liabilities	(4,698)	617
Net Cash Provided (Used) by Operating Activities				Net Cash Provided (Used) by Operating Activities	68,450	(46,594)
Investing Activities:	Investing Activities:			Investing Activities:
Investment in securities:	Investment in securities:			Investment in securities:
Purchases of investment securities available for sale	Purchases of investment securities available for sale	(89,173)	(63,904)	Purchases of investment securities available for sale	(173,968)	(51,074)
Purchases of marketable equity securities	Purchases of marketable equity securities	(1,439)	0	Purchases of marketable equity securities	(493)	(1,038)
Purchases of FHLB stock	Purchases of FHLB stock	(5,884)	(879)	Purchases of FHLB stock	(570)	(5,801)
Purchases of investment securities held to maturity				Purchases of investment securities held to maturity	(10,000)	0
Proceeds from sales/calls/maturities of securities available for sale	Proceeds from sales/calls/maturities of securities available for sale	150,544	81,059	Proceeds from sales/calls/maturities of securities available for sale	82,575	125,451
Proceeds from sales of marketable equity securities	Proceeds from sales of marketable equity securities	502	0	Proceeds from sales of marketable equity securities	47	503

Proceeds from redemption of FHLB stock	Proceeds from redemption of FHLB stock	5,514	840	Proceeds from redemption of FHLB stock	7	5,511
Decrease in purchased receivables, net	Decrease in purchased receivables, net	10,860	836	Decrease in purchased receivables, net	1,422	12,825
Increase in loans, net	Increase in loans, net	(459,346)	(51,545)	Increase in loans, net	(49,921)	(400,812)
Proceeds from sale of other real estate owned	Proceeds from sale of other real estate owned	419	1,149	Proceeds from sale of other real estate owned	679	75

Purchases of software	Purchases of software	(96)	(374)	Purchases of software	(76)	(89)

Purchases of premises and equipment	Purchases of premises and equipment	(2,552)	(1,697)	Purchases of premises and equipment	(1,732)	(2,175)
Net Cash (Used) by Investing Activities	Net Cash (Used) by Investing Activities	(390,651)	(34,515)	Net Cash (Used) by Investing Activities	(152,030)	(316,624)
Financing Activities:	Financing Activities:			Financing Activities:
Increase in deposits	Increase in deposits	433,782	122,941	Increase in deposits	321,457	365,008
Decrease in securities sold under repurchase agreements		0	(34,278)
Increase in borrowings		4,846	1,692

(Decrease) increase in borrowings				(Decrease) increase in borrowings	(137)	2,863
Repurchase of common stock	Repurchase of common stock	(8,676)	(12,569)	Repurchase of common stock	(2,212)	(6,310)
Proceeds from the issuance of common stock	Proceeds from the issuance of common stock	8	0	Proceeds from the issuance of common stock	5	8

Cash dividends paid	Cash dividends paid	(6,585)	(6,280)	Cash dividends paid	(4,613)	(4,363)
Net Cash Provided by Financing Activities	Net Cash Provided by Financing Activities	423,375	71,506	Net Cash Provided by Financing Activities	314,500	357,206
Net Change in Cash and Cash Equivalents	Net Change in Cash and Cash Equivalents	5,705	14,650	Net Change in Cash and Cash Equivalents	230,920	(6,012)
Cash and Cash Equivalents at Beginning of Period				Cash and Cash Equivalents at Beginning of Period	115,965	95,424


Cash and Cash Equivalents at Beginning of Period		95,424	77,538
Cash and Cash Equivalents at End of Period	Cash and Cash Equivalents at End of Period	$101,129	$92,188	Cash and Cash Equivalents at End of Period	$346,885	$89,412

Supplemental Information:	Supplemental Information:			Supplemental Information:
Income taxes paid	Income taxes paid	$1,940	$275	Income taxes paid	$1,852	$3
Interest paid	Interest paid	$4,580	$3,889	Interest paid	$2,132	$3,112
Noncash commitments to invest in Low Income Housing Tax Credit Partnerships		$0	$7,282

Transfer of loans to other real estate owned	Transfer of loans to other real estate owned	$162	$0	Transfer of loans to other real estate owned	$274	$162

Non-cash lease liability arising from obtaining right of use assets	Non-cash lease liability arising from obtaining right of use assets	$370	$528	Non-cash lease liability arising from obtaining right of use assets	$79	$0
Cash dividends declared but not paid	Cash dividends declared but not paid	$73	$66	Cash dividends declared but not paid	$45	$48

See notes to consolidated financial statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

The accompanying unaudited consolidated financial statements and corresponding footnotes have been prepared by Northrim BanCorp, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. The year-end Consolidated Balance Sheet data was derived from the Company's audited financial statements. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company owns a 100% interest in Residential Mortgage Holding Company, LLC, the parent company of Residential Mortgage, LLC (collectively "RML") and consolidates their balance sheets and income statement into its financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company determined that it operates in 2 primary operating segments: Community Banking and Home Mortgage Lending. The Company has evaluated subsequent events and transactions for potential recognition or disclosure. Operating results for the interim period ended ~~September~~June 30, ~~2020~~2021 are not necessarily indicative of the results anticipated for the year ending December 31, ~~2020.~~2021. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~ 2020.

The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. There have been no significant changes in our application of these accounting policies in 2021, except as noted below.

As a result of the adoption of Accounting Standards Codification ("ASC") 326 Financial Instruments - Credit Losses on January 1, 2020, the Company has updated the following significant accounting policies.

Allowance for Credit Losses - Investment Securities: For available for sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. The ACL may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in such a situation.

In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors.

Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

The ACL on held to maturity securities is estimated on a collective basis by major security type. At June 30, 2021, the Company’s held to maturity securities consisted of investments in corporate bonds. Expected credit losses for these securities are estimated using a discounted cash flow ("DCF") methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

Accrued interest receivable is excluded from the estimate of credit losses.

Allowance for Credit Losses - Loans: Under the current expected credit loss model adopted by the Company on January 1, 2021, the allowance for credit losses on loans is a valuation allowance estimated at each balance sheet date that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.

Expected credit losses are reflected in the ACL through a provision for or (reversal) of credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible when management believes that collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ACL when received.

The Company measures expected credit losses of financial assets on a collective (pool) basis, when the financial assets share similar risk characteristics. Depending on the nature and size of the pool of financial assets with similar risk characteristics, the Company uses a DCF method or a weighted average remaining life method to estimate expected credit losses quantitatively. The Company uses a DCF method for 8 of its 11 loan pools, which represent 98% of the amortized cost basis of total loan pools at June 30, 2021. The weighted average remaining life method is used for the remaining 3 loan pools primarily because loan level data constraints preclude the use of the DCF model. The weighted average remaining life method uses exposure at default, along with the expected credit losses adjusted for prepayments to calculate the required allowance. The Company utilizes peer historical loss data to estimate credit losses under the weighted average remaining life method.

Under the DCF method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD"). The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables. The Company's regression models for PD utilize the Company's actual historical loan level default data. The Company determines a reasonable and supportable forecast and applies that forecast to the regression model to estimate defaults over the forecast period. Management leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the Company's four quarter forecast period. Management utilizes and forecasts Alaska unemployment as a loss driver for all of the loans pools that utilized the DCF method. Management also utilizes and forecasts either one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics. Following the forecast period, the economic variables used to calculate PD revert to a historical average at a constant rate over an 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 summary, under the DCF method the combination of adjustments for credit expectations (PD and LGD) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis.

The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses under the current expected credit loss model adopted by the Company on January 1, 2021:

Commercial & industrial - Commercial loans are loans for commercial, corporate and business purposes. The Company’s commercial business loan portfolio is comprised of loans for a variety of purposes and across a variety of industries. These loans include general commercial and industrial loans, loans to purchase capital equipment, and other business loans for working capital and operational purposes. Commercial loans are generally secured by accounts receivable, inventory and other

business assets. Also included in commercial loans are our Paycheck Protection Program ("PPP") loans originated during 2020 and 2021. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Commercial real estate - This category of loans consists of the following loan types:

Owner occupied - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including owner occupied commercial real estate loans primarily secured by commercial office or industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Non-owner occupied and multifamily - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including investment real estate loans that are primarily secured by office and industrial buildings, warehouses or retail buildings where the owner of the building does not occupy the property, non-owner occupied apartment or multifamily residential buildings, and various special purpose properties. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. Generally, these types of loans are thought to involve a greater degree of credit risk than owner occupied commercial real estate as they are more sensitive to adverse economic conditions. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Residential real estate - This category of loans consists of the following loan types:

1-4 family residential properties secured by first liens - This category of loans includes term loans secured by first liens on residential real estate. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens - This category of loans includes term loans primarily secured by junior liens on residential real estate and revolving credit lines that are secured by first liens on residential real estate. Home equity revolving lines of credit and home equity term loans are included in this group of loans. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

1-4 family residential construction - This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of 1-4 family residential properties which will secure the loan. These loans may also be secured by tracts or individual parcels of land on which 1-4 family residential properties are being constructed. The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third-party. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Other construction, land development, and raw land - This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of owner occupied and non-owner occupied commercial properties, and loans secured by raw or improved land. The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third-party. Repayment of land secured loans are dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Agricultural production, including commercial fishing - These loans are for the purpose of financing agricultural production, including growing and storing of crops, and for the purpose of financing fisheries and forestries, including loans to commercial fishermen. These loans may be secured or unsecured, but any loans for these purposes that are secured by real estate are included in a real estate category. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool.

Consumer - Loans used for personal use, which may be secured or unsecured, and customer overdrafts. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Obligations of states and political subdivisions in the US - This category of loans includes all loans made to states, counties municipalities, school districts, drainage and sewer districts, and Indian tribes in the U.S. These loans maybe be secured by any type of collateral, including real estate. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool.

Other - This category of loans includes all other loans that cannot properly be reported in one of the preceding categories. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool.

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

•Lending strategy, policies, and procedures;

•Quality of internal loan review;

•Lending management and staff;

•Trends in underlying collateral values;

•Competition, legal, and regulatory changes;

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

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

•Concentration of credit; and

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

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

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

A loan that has been modified or renewed is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty; and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.

If we determine that the value of and individually evaluated loan is less than the recorded investment in the loan, we either recognize an allowance for credit losses specific to that loan, or charge-off the deficit balance on collateral dependent loans if it is determined that such amount represents a confirmed loss. Subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.

Paycheck Protection Program and other loans guaranteed by the U.S. government: With the passage of the PPP, the Company has actively participated in assisting its customers with applications for loans through the program. Loans funded through the PPP program are fully guaranteed by the U.S. government subject to certain representations and warranties. This guarantee exists at the inception of the loans and throughout the lives of the loans and was not entered into separately and apart from the loans. ASC 326 requires credit enhancements that mitigate credit losses, such as the U.S. government guarantee on PPP loans, to be considered in estimating credit losses. The guarantee is considered “embedded” and, therefore, is considered when estimating credit loss on the PPP loans and other loans guaranteed by the U.S. government. Given that the loans are fully guaranteed by the U.S. government and absent any specific loss information on any of our guaranteed loans, the Company does not carry an ACL on its PPP and other loans guaranteed by the U.S. government at June 30, 2021 or December 31, 2020.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company enters into various types of transactions that involve financial instruments with off-balance sheet risk, including commitments

to extend credit and standby letters of credit issued to meet customer financing needs. 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. The Company’s exposure to credit loss in the event of nonperformance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to provision for credit loss expense in the Company’s consolidated statements of income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s consolidated balance sheets.

Purchased Receivables and related Allowance for Credit Losses: The Company purchases accounts receivable from its customers. The purchased receivables are carried at amortized cost, net of an allowance for credit losses. Management measures expected credit losses on purchased receivables by evaluating each receivable individually. Each quarter, management reviews purchased receivable asset balances compared to assets eligible for advancement of funds in order to determine the exposure to loss for the Company. Exposure is zero when outstanding balances exceed assets eligible for advancement. Management may determine that an ACL is appropriate for individual purchased receivables based on asset specific facts and circumstances. Fees charged to the customer are earned while the balances of the purchases are outstanding, which is typically less than one year. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or total shareholders' equity.

Recent Accounting Pronouncements

Accounting pronouncements implemented in ~~2020~~2021

~~In March 2016, the FASB issued~~ ~~ASU 2016-09~~, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including allowing entities to elect an accounting policy to account for forfeitures as they occur by reversing compensation expense when the award is forfeited instead of estimating future forfeitures that will occur when recognizing compensation expense related to share-based payment awards. The Company elected to account for forfeitures as they occur in accordance with the guidance in ASU 2016-09 on January 1, 2020, which resulted in a $139,000 decrease in beginning retained earnings through a cumulative-effect adjustment.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (“ASU 2017-04”). ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. The Company adopted ASU 2017-04 on January 1, 2020. The adoption of ASU 2017-04 did not have a material impact on the Company’s consolidated financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial position or results of operations.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04"). ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by ASU 2020-04 do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company adopted ASU 2020-04 as of March 31, 2020. The adoption of ASU 2020-04 did not have a

~~material impact on the Company’s consolidated financial position or results of operations because no contract modifications have been made to date.~~

~~Accounting pronouncements to be implemented in future periods~~

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13” or “CECL”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ~~For loans and held-to-maturity debt securities,~~Under ASU 2016-13 ~~requires a current expected credit loss ("CECL") measurement to estimate the allowance for credit losses ("ACL") for the remaining estimated life of the~~ financial ~~asset (including off-balance sheet credit exposures) using historical experience, current conditions, and reasonable and supportable forecasts. Financial~~ institutions and other organizations will ~~now~~ use forward-looking information to better inform their credit loss estimates but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 eliminates the existing guidance for purchased credit impaired loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination. In addition, ASU 2016-13 modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit. ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's ~~loan~~ portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

ASU 2016-13 is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2019, and must be applied prospectively. However, on October 16, 2019 the FASB voted to delay ASU 2016-13 for Smaller Reporting Companies. In addition, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed by the President of the United States that included an option for entities to delay the implementation of ASU 2016-13 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. The Company has elected Small Reporting Company status, which changes the effective date for ASU 2016-13 for the Company to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2022. Early application was permitted for specified periods. The Company elected to early adopt ASU 2016-13 on January 1, 2021 after finalizing data and model validation and our internal governance framework. The guidance was applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at January 1, 2021. However, certain provisions of the guidance are only required to be applied on a prospective basis.

~~Our implementation process includes loss forecasting model development, evaluation~~Results for periods beginning after January 1, 2021 and presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable US GAAP. The Company recorded a net increase in retained earnings of ~~technical accounting topics, updates to our allowance documentation, reporting processes and related internal controls, and overall operational readiness for our~~$2.4 million upon adoption of ~~the~~ ASU ~~2016-13, which will continue until adoption, including parallel runs for CECL alongside our current allowance process.~~

~~We are~~2016-13. The transition adjustment includes a decrease in the ~~process~~ACL on loans of developing, validating, and implementing models used to estimate credit losses under CECL. We have completed substantially all of our loss forecasting models, and we expect to complete the validation process for our loan models during 2020. Our current planned approach for estimating expected life-time credit losses for loans and debt securities includes the following key components:

•An initial loss forecast period of one year for all loan portfolio segments and classes of financing receivables and off balance-sheet credit exposures. This period reflects management’s expectation of losses based on forward-looking economic scenarios over that time.

•~~A historical loss forecast period covering the remaining contractual life, adjusted for prepayments, by segment and class of financing receivables based on the change~~$4.5 million, a decrease in ~~key historical economic variables during representative historical expansionary and recessionary periods.~~

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

•Utilization of discounted cash flow ("DCF") methods to measure credit impairment for loans modified in a troubled debt restructuring, unless they are collateral dependent and measured at the fair value of collateral. The DCF methods would obtain estimated life-time credit losses using the conceptual components described above.

•~~For debt securities classified as available-for-sale or held-to-maturity, we plan to utilize the DCF methods to measure~~ the ACL ~~which will incorporate expected credit losses using~~on purchased receivables of $73,000, and an increase in the ~~conceptual components described above.~~

~~We will recognize an ACL for available-for-sale and held-to-maturity debt securities. The~~ ACL on ~~available-for-sale debt securities will be subject to a limitation based on the fair value~~unfunded commitments of $1.2 million, net of the ~~debt securities. Based on the credit quality~~corresponding net decrease in deferred tax assets of ~~our~~$954,000.

1114

~~existing debt securities portfolio, we do not expect the ACL for held-to-maturity and available-for-sale debt securities~~Accounting pronouncements to be ~~significant. As of September 30,~~implemented in future periods

In March 2020, the ~~Company does not hold any~~FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Report of Financial Reporting ("ASU 2020-04"). ASU 2020-04 was issued to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. The last expedient is a one-time election to sell or transfer debt securities classified as ~~held-to-maturity.~~held to maturity. The expedients are in effect from March 12, 2020, through December 31, 2022. The Company will be able to use the expedients in this guidance to manage through the transition away from LIBOR, specifically for our loan portfolio, derivative contracts, and bond portfolio.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, ("ASU 2021-01"). The ~~ultimate effect~~amendments in ASU 2021-01 are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of ~~CECL~~reference rate reform. The amendments clarify certain optional expedients and exceptions in Topic 848 for contract modifications apply to derivatives that are affected by the discounting transition.

LIBOR is a widely-referenced benchmark rate, which is published in five currencies and a range of tenors, and seeks to estimate the cost at which banks can borrow on an unsecured basis from other banks. The administrator of LIBOR, ICE Benchmark Administration, published a consultation in December 2020 regarding its intention to cease the publication of LIBOR after December 31, 2021, with the exception of certain tenors of U.S. dollar (USD) LIBOR that it proposed would remain available for use in legacy contracts or as otherwise enumerated by financial regulators until June 30, 2023. The Company has some assets and liabilities referenced to LIBOR, such as commercial loans, derivatives, debt securities, and junior subordinated debentures. As of June 30, 2021, we had approximately $164.9 million of assets, including $111.4 million in commercial loans and $43.5 million in debt securities, and $10.3 million of liabilities in the form of our junior subordinated debentures linked to USD LIBOR. These amounts exclude derivative assets and liabilities on our ~~ACL will depend~~consolidated balance sheet. As of June 30, 2021, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $156.7 million. Of this amount, $73.2 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers. An additional $73.2 million in notional value represent corresponding swap agreements with third party financial institutions that offset the commercial loan swaps. Swap agreements with third party institutions are $83.5 million, including an interest rate swap agreement for $10.3 million in notional value related to our junior subordinated debentures. Each of the USD LIBOR-linked amounts referenced above are expected to vary in future periods as current contracts expire with potential replacement contracts using an alternative reference rate.

In an effort to mitigate the risks associated with a transition away from LIBOR, our Asset Liability Committee has undertaken initiatives to: (i) develop more robust fallback language and disclosures related to the LIBOR transition, (ii) develop a plan to seek to amend legacy contracts to reference such fallback language or alternative reference rates, (iii) enhance systems to support commercial loans, securities, and derivatives linked to the Secured Overnight Financing Rate and other alternative reference rates, (iv) develop and evaluate internal guidance, policies and procedures focused on the ~~size~~transition away from LIBOR to alternative reference rate products, and ~~composition of our loan~~(v) prepare and ~~investment portfolios,~~disseminate internal and external communications regarding the ~~portfolios' credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions. At adoption, we will~~LIBOR transition.

ASU 2021-01 does not have a ~~cumulative-effect adjustment to retained earnings for our change in~~material impact on the ~~ACL.~~ Company's consolidated financial statements.

2. Cash and Cash Equivalents

The Company is required to maintain cash balances or deposits with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank") sufficient to meet its statutory reserve requirements and for purposes of settling financial transactions and charges for the Federal Reserve Bank services. The average reserve requirement for the maintenance ~~period for the quarter~~periods ended ~~September~~June 30, 2021 and December 31, 2020, ~~was~~were 0.

The Company is required to maintain a ~~$500,000~~$300,000 and $250,000 balance with a correspondent bank for outsourced servicing of ~~ATMs.~~ATMs as of June 30, 2021 and December 31, 2020, respectively.

As of ~~September~~June 30, 2021 and December 31, 2020, the Company was required to maintain a $100,000 and $2.8 million balance with a correspondent bank to collateralize the initial margin and the fair value exposure, respectively, of its interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures.

3. Investment Securities

Marketable Equity Securities

The ~~amortized cost and estimated~~Company held marketable equity securities with fair values of ~~investment~~$9.6 million and $9.1 million at June 30, 2021 and December 31, 2020, respectively. The gross realized and unrealized gains (losses) recognized on marketable equity securities in other operating income in the Company's Consolidated Statements of Income were as follows:


	Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	2021	2020	2021	2020
Unrealized gain (loss) on marketable equity securities	$178	$149	$94	($722)
Gain on sale of marketable equity securities, net	31	0	31	98
Total	$209	$149	$125	($624)

Debt securities

Debt securities have been classified in the financial statements as available for sale or held to maturity. The following table summarizes the amortized cost, estimated fair value, and allowance for credit losses of debt securities and the corresponding amounts of gross unrealized gains and losses of available-for-sale securities recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses of held to maturity securities at the periods ~~indicated are presented below:~~indicated:


(In Thousands)	(In Thousands)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value	(In Thousands)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Allowance for Credit Losses	Fair Value
September 30, 2020
June 30, 2021						June 30, 2021
Securities available for sale	Securities available for sale					Securities available for sale
U.S. Treasury and government sponsored entities	U.S. Treasury and government sponsored entities	$155,971	$1,629	($48)	$157,552	U.S. Treasury and government sponsored entities	$253,760	$586	($995)	$0	$253,351
Municipal securities	Municipal securities	2,295	41	0	2,336	Municipal securities	820	32	0	0	852

Corporate bonds	Corporate bonds	26,750	465	0	27,215	Corporate bonds	34,975	514	(2)	0	35,487
Collateralized loan obligations	Collateralized loan obligations	28,526	7	(267)	28,266	Collateralized loan obligations	47,522	52	(33)	0	47,541
Total securities available for sale	Total securities available for sale	$213,542	$2,142	($315)	$215,369	Total securities available for sale	$337,077	$1,184	($1,030)	$0	$337,231

December 31, 2019
Securities available for sale
U.S. Treasury and government sponsored entities		$210,756	$1,133	($37)	$211,852
Municipal securities		3,288	9	0	3,297

Corporate bonds		34,764	302	0	35,066
Collateralized loan obligations		25,980	0	(57)	25,923
Total securities available for sale		$274,788	$1,444	($94)	$276,138


(In Thousands)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
June 30, 2021
Securities held to maturity
Corporate bonds	$20,000	$0	($639)	$19,361
Allowance for credit losses	0	—	—	—
Total securities held to maturity, net of ACL	$20,000	$0	($639)	$19,361

1216


(In Thousands)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
December 31, 2020
Securities available for sale
U.S. Treasury and government sponsored entities	$173,318	$1,330	($47)	$174,601
Municipal securities	820	36	0	856

Corporate bonds	29,951	546	(5)	30,492
Collateralized loan obligations	41,782	44	(142)	41,684
Total securities available for sale	$245,871	$1,956	($194)	$247,633
Securities held to maturity
Corporate bonds	$10,000	$0	$0	$10,000
Total securities held to maturity	$10,000	$0	$0	$10,000

Gross unrealized losses on ~~investment~~available for sale securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:

Less Than 12 Months More Than 12 Months Total
(In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
September 30, 2020:
Securities available for sale
     U.S. Treasury and government sponsored entities $36,286 ($48) $0 $0 $36,286 ($48)
     Collateralized loan obligations 21,812 (223) 2,947 (44) 24,759 (267)
          Total $58,098 ($271) $2,947 ($44) $61,045 ($315)
December 31, 2019:
Securities available for sale
     U.S. Treasury and government sponsored entities $39,797 ($33) $2,996 ($4) $42,793 ($37)
     Collateralized loan obligations 14,972 (17) 7,951 (40) 22,923 (57)
          Total $54,769 ($50) $10,947 ($44) $65,716 ($94)


	Less Than 12 Months		More Than 12 Months		Total
(In Thousands)	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
June 30, 2021:
Securities available for sale
U.S. Treasury and government sponsored entities	$185,079	($995)	$0	$0	$185,079	($995)
Corporate bonds	$2,016	($2)	$0	$0	$2,016	($2)
Collateralized loan obligations	7,961	(32)	577	(1)	8,538	(33)



Total	$195,056	($1,029)	$577	($1)	$195,633	($1,030)




December 31, 2020:
Securities available for sale
U.S. Treasury and government sponsored entities	$31,270	($47)	$0	$0	$31,270	($47)
Corporate bonds	3,198	(5)	0	0	3,198	(5)
Collateralized loan obligations	23,670	(118)	2,967	(24)	26,637	(142)


Total	$58,138	($170)	$2,967	($24)	$61,105	($194)

~~The~~Management evaluates available for sale debt securities in unrealized losses on investments in U.S. treasury and government sponsored entities and collateralized loan obligations in both periods were caused by changes in interest rates. At September 30, 2020 and December 31, 2019, there were 11 and 8 available-for-sale securities with unrealized losses that have been in a loss ~~position for~~positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to the extent to which the fair value is less than ~~twelve months, respectively. There were 1~~cost, the financial condition and 3near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

At June 30, 2021, the Company had 27 available for sale securities ~~as of September 30, 2020 and December 31, 2019 that have been~~ in an unrealized loss position without an allowance for ~~more than twelve months, respectively. The contractual terms of~~credit losses. At June 30, 2021, the ~~investments~~Company had 2 held to maturity securities in aan unrealized loss position dowithout an allowance for credit losses. Management does not ~~permit~~have the ~~issuer~~intent to ~~settle the~~sell any of these securities ~~at a price less than the amortized cost of the investment. Because~~and believes that it is more likely than not that the Company will ~~hold these~~not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments ~~until a~~decline. Accordingly, as of June 30, 2021, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market ~~price recovery or maturity, these investments are not considered other-than-temporarily impaired.~~conditions, and therefore no losses have been recognized in the Company's Consolidated Statements of Income.

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, $85.0~~2020, $49.4 million and ~~$30.6~~$77.9 million in securities were pledged for deposits and borrowings, respectively.

1317

The amortized cost and estimated fair values of debt securities at ~~September~~June 30, ~~2020,~~2021, are distributed by contractual maturity as shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


(In Thousands)	(In Thousands)	Amortized Cost	Fair Value	Weighted Average Yield		(In Thousands)	Amortized Cost	Fair Value	Weighted Average Yield
US Treasury and government sponsored entities	US Treasury and government sponsored entities					US Treasury and government sponsored entities
Within 1 year	Within 1 year	$69,006	$69,784	2.22	%	Within 1 year	$20,000	$20,148	2.09	%
1-5 years	1-5 years	86,965	87,768	1.15	%	1-5 years	228,497	227,955	0.70	%

5-10 years						5-10 years	5,263	5,248	0.82	%
Total	Total	$155,971	$157,552	1.63	%	Total	$253,760	$253,351	0.81	%

Corporate bonds	Corporate bonds					Corporate bonds

Within 1 year						Within 1 year	$2,240	$2,248	1.13	%
1-5 years	1-5 years	$26,750	$27,215	1.45	%	1-5 years	$37,701	$38,070	2.41	%

5-10 years						5-10 years	15,034	14,530	6.50	%
Total	Total	$26,750	$27,215	1.45	%	Total	$54,975	$54,848	2.75	%
Collateralized loan obligations	Collateralized loan obligations					Collateralized loan obligations
5-10 years	5-10 years	$5,090	$5,053	1.89	%	5-10 years	$47,522	$47,541	1.48	%
Over 10 years		23,436	23,213	1.70	%

Total	Total	$28,526	$28,266	1.73	%	Total	$47,522	$47,541	1.48	%
Municipal securities	Municipal securities					Municipal securities

1-5 years	1-5 years	$2,295	$2,336	3.92	%	1-5 years	$820	$852	2.14	%

Total	Total	$2,295	$2,336	3.92	%	Total	$820	$852	2.14	%

~~The~~There were 0 proceeds ~~and resulting gains and losses, computed using specific identification,~~ from sales of investment securities for the three and ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2020~~2021 and ~~2019, are as follows:~~ 2020.

(In Thousands) Proceeds Gross Gains Gross Losses
Three Months Ended September 30, 2020
Available for sale securities $0 $0 $0
Three Months Ended September 30, 2019
Available for sale securities $0 $0 $0
Nine Months Ended September 30, 2020
Available for sale securities $0 $0 $0
Nine Months Ended September 30, 2019
Available for sale securities $4,219 $23 $0

A summary of interest income for the three and ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, on available for sale investment securities are as follows:


		Three Months Ended September 30,		Nine Months Ended September 30,			Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020	2019	2020	2019	(In Thousands)	2021	2020	2021	2020
US Treasury and government sponsored entities	US Treasury and government sponsored entities	$680	$943	$2,839	$3,085	US Treasury and government sponsored entities	$516	$998	$1,016	$2,159

Other	Other	237	573	1,040	1,671	Other	294	369	568	803
Total taxable interest income	Total taxable interest income	$917	$1,516	$3,879	$4,756	Total taxable interest income	$810	$1,367	$1,584	$2,962
Municipal securities	Municipal securities	$23	$12	$72	$94	Municipal securities	$5	$22	$9	$49
Total tax-exempt interest income	Total tax-exempt interest income	$23	$12	$72	$94	Total tax-exempt interest income	$5	$22	$9	$49
Total	Total	$940	$1,528	$3,951	$4,850	Total	$815	$1,389	$1,593	$3,011

4. Loans and Allowance for Credit Losses

Loans Held for Sale

Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of June 30, 2021 and December 31, 2020.

Loans Held for Investment

The Company adopted ASU 2016-13 effective January 1, 2021. Upon adoption, the Company changed its loan segments for purposes of the calculation of the ACL. Prior to January 1, 2021, the Company's loan segments were based on a combination of loan purpose and loan collateral. Effective January 1, 2021 and thereafter, the Company's loan segments are primarily based on loan collateral. The following table presents the Company's loan segments as of December 31, 2020 under the legacy segmentation and the new segmentation under ASU 2016-13:


(In Thousands)			Pre-ASU 2016-13
Commercial loans			$780,058
Real estate construction one-to-four family			38,467
Real estate construction other			80,315
Real estate term owner occupied			163,597
Real estate term non-owner occupied			309,074
Real estate term other			46,620
Consumer secured by 1st deeds of trust			15,585
Consumer other			22,069
Subtotal			1,455,785
Unearned loan fees, net			(11,735)
Total portfolio loans			$1,444,050

			Post-ASU 2016-13
Commercial & industrial loans			$619,304
Commercial real estate:
Owner occupied properties			234,364
Non-owner occupied and multifamily properties			394,860
Residential real estate:
1-4 family residential properties secured by first liens			33,463
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens			18,114
1-4 family residential construction loans			32,760
Other construction, land development and raw land loans			84,352
Obligations of states and political subdivisions in the US			15,274
Agricultural production, including commercial fishing			13,093
Consumer loans			5,794
Other loans			4,407
Subtotal			$1,455,785
Unearned loan fees, net			($11,735)
Total portfolio loans			$1,444,050

1419

~~4. Loans and Credit Quality~~

The following table presents ~~total portfolio~~amortized cost and unpaid principal balance of loans ~~by portfolio segment~~for the periods indicated:


	June 30, 2021			December 31, 2020
(In Thousands)	Amortized Cost	Unpaid Principal	Difference	Amortized Cost	Unpaid Principal	Difference
Commercial & industrial loans	$609,214	$621,281	($12,067)	$612,254	$619,304	($7,050)
Commercial real estate:
Owner occupied properties	260,879	262,177	(1,298)	233,320	234,363	(1,043)
Non-owner occupied and multifamily properties	410,572	413,186	(2,614)	392,452	394,860	(2,408)
Residential real estate:
1-4 family residential properties secured by first liens	33,661	33,734	(73)	33,415	33,510	(95)
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	17,793	17,669	124	18,236	18,114	122
1-4 family residential construction loans	34,958	35,175	(217)	32,500	32,760	(260)
Other construction, land development and raw land loans	79,431	80,529	(1,098)	83,463	84,351	(888)
Obligations of states and political subdivisions in the US	17,331	17,513	(182)	15,318	15,274	44
Agricultural production, including commercial fishing	15,558	15,627	(69)	12,968	13,093	(125)
Consumer loans	5,156	5,114	42	5,734	5,794	(60)
Other loans	3,415	3,429	(14)	4,390	4,407	(17)
Total	1,487,968	1,505,434	(17,466)	1,444,050	1,455,830	(11,780)
Allowance for credit losses	(14,539)			(21,136)
	$1,473,429	$1,505,434	($17,466)	$1,422,914	$1,455,830	($11,780)

The difference between the amortized cost and ~~class~~unpaid principal balance is primarily net deferred origination fees totaling $17.4 million and $11.7 million at June 30, 2021 and December 31, 2020, respectively, and premiums and discounts associated with acquired loans totaling $21,000 and $47,000 at June 30, 2021 and December 31, 2020, respectively.

Accrued interest on loans, which is excluded from the amortized cost of ~~financing receivable, based on~~loans held for investment, totaled $6.6 million and $7.1 million at June 30, 2021 and December 31, 2020, respectively, and was included in other assets in the ~~Company's asset quality rating ("AQR") criteria:~~Consolidated Balance Sheets.

(In Thousands) Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deeds of trust Consumer other Total
September 30, 2020
AQR Pass $821,117 $37,256 $82,661 $138,886 $302,902 $40,191 $13,726 $23,023 $1,459,762
AQR Special Mention 5,782 0 0 2,677 17,178 2,172 176 0 27,985
AQR Substandard 8,971 702 0 7,430 613 1,176 148 110 19,150
AQR Doubtful 308 0 0 0 0 0 0 0 308
Subtotal $836,178 $37,958 $82,661 $148,993 $320,693 $43,539 $14,050 $23,133 $1,507,205
Less: Unearned origination fees, net of origination costs (14,485)
Total loans $1,492,720
December 31, 2019
AQR Pass $394,107 $34,132 $61,808 $129,959 $295,482 $38,771 $15,860 $24,464 $994,583
AQR Special Mention 2,279 3,337 0 3,828 17,478 2,559 179 0 29,660
AQR Substandard 16,304 1,349 0 5,104 0 1,176 159 121 24,213
Subtotal $412,690 $38,818 $61,808 $138,891 $312,960 $42,506 $16,198 $24,585 $1,048,456
Less: Unearned origination fees, net of origination costs (5,085)
Total loans $1,043,371

~~The~~Amortized cost in the above table includes ~~$375.6~~$300.9 million and $304.6 million as of June 30, 2021 and December 31, 2020, respectively, in ~~Paycheck Protection Program ("PPP")~~PPP loans administered by the U.S. Small Business Administration ("SBA") within the Commercial & industrial loan ~~segment as of September 30, 2020. Additionally, unearned origination fee, net of origination costs includes $8.8 million associated with SBA PPP loans.~~segment.

1520

Allowance for Credit Losses

The activity in the ACL related to loans held for investment is as follows:


Three Months Ended June 30,	Beginning Balance	Credit Loss Expense	Charge-offs	Recoveries	Ending Balance
	(In Thousands)
2021
Commercial & industrial loans	$4,269	$105	($110)	$27	$4,291
Commercial real estate:
Owner occupied properties	3,366	(28)	0	2	3,340
Non-owner occupied and multifamily properties	3,704	137	0	0	3,841
Residential real estate:
1-4 family residential properties secured by first liens	813	(183)	0	0	630
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	342	(12)	0	10	340
1-4 family residential construction loans	260	(29)	0	0	231
Other construction, land development and raw land loans	1,821	(151)	0	0	1,670
Obligations of states and political subdivisions in the US	36	3	0	0	39
Agricultural production, including commercial fishing	46	4	0	7	57
Consumer loans	104	(10)	0	0	94
Other loans	3	3	0	0	6
Total	$14,764	($161)	($110)	$46	$14,539


Three Months Ended June 30,	Beginning Balance	Provision (benefit)	Charge-offs	Recoveries	Ending Balance
	(In Thousands)
2020
Commercial	$8,269	($129)	($804)	$30	$7,366
Real estate construction 1-4 family	$643	$47	$0	$0	$690
Real estate construction other	1,279	(64)	0	0	1,215
Real estate term owner occupied	2,430	103	0	0	2,533
Real estate term non-owner occupied	5,491	(70)	0	0	5,421
Real estate term other	711	(10)	0	1	702
Consumer secured by 1st deed of trust	274	(16)	0	0	258
Consumer other	453	(11)	0	5	447
Unallocated	1,467	554	0	0	2,021
Total	$21,017	$404	($804)	$36	$20,653


Six Months Ended June 30,	Beginning Balance	Impact of adopting ASC 326	Credit Loss Expense	Charge-offs	Recoveries	Ending Balance
	(In Thousands)
2021
Commercial	$7,973	($7,973)	$—	$—	$—	—
Real estate construction 1-4 family	679	(679)	—	—	—	—
Real estate construction other	1,179	(1,179)	—	—	—	—
Real estate term owner occupied	2,625	(2,625)	—	—	—	—
Real estate term non-owner occupied	5,133	(5,133)	—	—	—	—
Real estate term other	779	(779)	—	—	—	—
Consumer secured by 1st deed of trust	261	(261)	—	—	—	—
Consumer other	400	(400)	—	—	—	—
Unallocated	2,107	(2,107)	—	—	—	—
Commercial & industrial loans	—	4,348	4	(273)	212	4,291
Commercial real estate:
Owner occupied properties	—	3,579	(243)	0	4	3,340
Non-owner occupied and multifamily properties	—	4,944	(1,103)	0	0	3,841
Residential real estate:
1-4 family residential properties secured by first liens	—	673	(43)	0	0	630
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	—	419	(99)	0	20	340
1-4 family residential construction loans	—	454	(223)	0	0	231
Other construction, land development and raw land loans	—	1,994	(324)	0	0	1,670
Obligations of states and political subdivisions in the US	—	44	(5)	0	0	39
Agricultural production, including commercial fishing	—	49	(7)	0	15	57
Consumer loans	—	118	(26)	0	2	94
Other loans	—	3	3	0	0	6
Total	$21,136	($4,511)	($2,066)	($273)	$253	$14,539


Six Months Ended June 30,	Beginning Balance	Provision (benefit)	Charge-offs	Recoveries	Ending Balance
	(In Thousands)
2020
Commercial	$6,604	$1,661	($955)	$56	$7,366
Real estate construction 1-4 family	$643	$47	$0	$0	$690
Real estate construction other	1,017	198	0	0	1,215
Real estate term owner occupied	2,188	345	0	0	2,533
Real estate term non-owner occupied	5,180	241	0	0	5,421
Real estate term other	671	30	0	1	702
Consumer secured by 1st deed of trust	270	(12)	0	0	258
Consumer other	436	12	(14)	13	447
Unallocated	2,079	(58)	0	0	2,021
Total	$19,088	$2,464	($969)	$70	$20,653

The Company adopted ASU 2016-13 effective January 1, 2021. Upon adoption, the Company established an ACL of $16.6 million. As of June 30, 2021 the ACL decreased to $14.5 million primary due to projected improvement in the economic indicators, or loss drivers, that the Company uses to calculate expected lifetime losses. Management's projections for these economic indicators as of June 30, 2021 have not changed significantly as compared to March 31, 2021. The Company primarily uses the DCF method to estimate ACL for loans. The Company utilizes and forecasts unemployment in Alaska as our primary loss driver. The Company also utilizes and forecasts either the 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. Consistent forecasts of the loss drivers are used across the loan segments.

At June 30, 2021 and March 31, 2021, as compared to January 1, 2021, the Company forecasted a significantly lower unemployment rate in Alaska, a slightly lower one-year percentage change in the national commercial real estate price index, and a slightly higher one-year percentage change in the Alaska home price index over the reasonable and supportable forecast period. Specifically regarding the forecasts used to calculate the June 30, 2021, management expects unemployment to remain consistent with actual levels observed in Alaska as of December 2020, which remained relatively unchanged in January through May 2021. This rate is above pre-pandemic levels over the forecast period, but is lower than rates previously projected by management.

The following table presents loans individually and collectively evaluated for impairment and their respective allowance for credit loss allocations as of December 31, 2020, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


(In Thousands)	Loan Evaluation			ALLL Allocations
	Individually	Collectively	Total	Individually	Collectively	Total

Commercial	$7,786	$764,682	$772,468	$13	$7,960	$7,973
Real estate construction 1-4 family	702	$37,478	38,180	0	679	679
Real estate construction other	0	$79,403	79,403	0	1,179	1,179
Real estate term owner occupied	6,962	$155,762	162,724	0	2,625	2,625
Real estate term non-owner occupied	770	$306,477	307,247	0	5,133	5,133
Real estate term other	1,467	$44,763	46,230	0	779	779
Consumer secured by 1st deed of trust	259	$15,289	15,548	0	261	261
Consumer other	82	$22,168	22,250	0	400	400
Unallocated	0	0	0	0	2,107	2,107
Total	$18,028	$1,426,022	$1,444,050	$13	$21,123	$21,136

The following table presents information pertaining to impaired loans as of December 31, 2020, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


	Impaired Loans With a Valuation Allowance			Impaired Loans Without a Valuation Allowance
(In Thousands)	Recorded Investment	Unpaid Principal	Related Allowance	Recorded Investment	Unpaid Principal

Commercial	$308	$308	$13	$7,478	$8,287
Real estate construction 1-4 family	0	0	0	702	702
Real estate construction other	0	0	0	0	0
Real estate term owner occupied	0	0	0	6,962	7,047
Real estate term non-owner occupied	0	0	0	771	771
Real estate term other	0	0	0	1,467	1,467
Consumer secured by 1st deed of trust	0	0	0	258	258
Consumer other	0	0	0	82	87
Total	$308	$308	$13	$17,720	$18,619

The following table presents average impaired loans information, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13, and interest recognized on such loans, for the three and six-month periods ended June 30, 2020:


	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
(In Thousands)	Average Impaired Loans	Interest Recognized	Average Impaired Loans	Interest Recognized
Commercial	$12,892	$65	$13,161	$95
Real estate construction 1-4 family	808	0	970	0
Real estate construction other	0	0	0	0
Real estate term owner occupied	6,707	49	6,378	78
Real estate term non-owner occupied	490	3	333	7
Real estate term other	1,562	7	1,572	14
Consumer secured by 1st deed of trust	272	5	275	9
Consumer other	86	0	88	0
Total	$22,817	$129	$22,777	$203

Credit Quality Information

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management utilizes a loan risk grading system called the Asset Quality Rating (“AQR”) system to assign a risk classification to each of its loans. The risk classification is a dual rating system that contemplates both probability of default and risk of loss given default. Loans are graded on a scale of 1 to 10 and, loans graded 1 – 6 are considered “pass” grade loans. Loans graded 7 or higher are considered "classified" loans. A description of the general characteristics of the AQR risk classifications are as follows:

Pass grade loans – 1 through 6: The borrower demonstrates sufficient cash flow to fund debt service, including acceptable profit margins, cash flows, liquidity and other balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The Company has competent management with an acceptable track record. The category does not include loans with undue or unwarranted credit risks that constitute identifiable weaknesses.

Classified loans:

Special Mention – 7: A "special mention" credit has weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date.

Substandard – 8: A "substandard" credit is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Northrim Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – 9: An asset classified "doubtful" has all the weaknesses inherent in one that is classified "substandard-8" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. The loan has substandard characteristics, and available information suggests that it is unlikely that the loan will be repaid in its entirety.

Loss – 10: An asset classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future.

The following tables present the Company's portfolio of risk-rated loans by grade and by year of origination. Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below.


June 30, 2021	2021	2020	2019	2018	2017	Prior	Total
	(In Thousands)
Commercial & industrial loans
Pass	$265,638	$145,215	$44,036	$54,271	$23,829	$56,019	$589,008
Classified	6,229	533	3,649	3,826	725	5,244	20,206
Total commercial & industrial loans	$271,867	$145,748	$47,685	$58,097	$24,554	$61,263	$609,214

Commercial real estate:
Owner occupied properties
Pass	$33,530	$86,495	$40,842	$12,966	$14,944	$62,722	$251,499
Classified	0	1,465	0	546	0	7,369	9,380
Total commercial real estate owner occupied properties	$33,530	$87,960	$40,842	$13,512	$14,944	$70,091	$260,879

Non-owner occupied and multifamily properties
Pass	$38,720	$75,377	$57,305	$32,925	$19,741	$176,086	$400,154
Classified	0	0	0	0	10,418	0	10,418
Total commercial real estate non-owner occupied and multifamily properties	$38,720	$75,377	$57,305	$32,925	$30,159	$176,086	$410,572

Residential real estate:
1-4 family residential properties secured by first liens
Pass	$3,519	$11,418	$3,978	$854	$1,813	$10,003	$31,585
Classified	0	1,352	499	0	0	225	2,076
Total residential real estate 1-4 family residential properties secured by first liens	$3,519	$12,770	$4,477	$854	$1,813	$10,228	$33,661

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens
Pass	$1,994	$2,797	$3,789	$3,813	$366	$4,754	$17,513
Classified	0	0	0	263	0	17	280
Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	$1,994	$2,797	$3,789	$4,076	$366	$4,771	$17,793

1-4 family residential construction loans
Pass	$13,376	$5,692	$4,269	$122	$0	$11,227	$34,686
Classified	0	163	0	0	109	0	272
Total residential real estate 1-4 family residential construction loans	$13,376	$5,855	$4,269	$122	$109	$11,227	$34,958

Other construction, land development and raw land loans
Pass	$10,143	$27,730	$23,212	$8,470	$150	$4,770	$74,475
Classified	0	0	0	3,421	0	1,535	4,956
Total other construction, land development and raw land loans	$10,143	$27,730	$23,212	$11,891	$150	$6,305	$79,431

Obligations of states and political subdivisions in the US
Pass	$50	$2,916	$3,150	$403	$2,748	$8,064	$17,331


Classified	0	0	0	0	0	0	0
Total obligations of states and political subdivisions in the US	$50	$2,916	$3,150	$403	$2,748	$8,064	$17,331

Agricultural production, including commercial fishing
Pass	$3,697	$6,740	$1,233	$1,313	$830	$1,745	$15,558
Classified	0	0	0	0	0	0	0
Total agricultural production, including commercial fishing	$3,697	$6,740	$1,233	$1,313	$830	$1,745	$15,558

Consumer loans
Pass	$647	$995	$732	$493	$358	$1,930	$5,155
Classified	0	1	0	0	0	0	1
Total consumer loans	$647	$996	$732	$493	$358	$1,930	$5,156

Other loans
Pass	$0	$1,911	$448	$234	$0	$822	$3,415
Classified	0	0	0	0	0	0	0
Total other loans	$0	$1,911	$448	$234	$0	$822	$3,415

Total loans
Pass	$371,314	$367,286	$182,994	$115,864	$64,779	$338,142	$1,440,379
Classified	6,229	3,514	4,148	8,056	11,252	14,390	47,589
Total loans	$377,543	$370,800	$187,142	$123,920	$76,031	$352,532	$1,487,968

Total pass loans	$371,314	$367,286	$182,994	$115,864	$64,779	$338,142	$1,440,379
Government guarantees	(230,330)	(86,037)	(14,929)	(3,493)	(341)	(6,447)	(341,577)
Total pass loans, net of government guarantees	$140,984	$281,249	$168,065	$112,371	$64,438	$331,695	$1,098,802

Total classified loans	$6,229	$3,514	$4,148	$8,056	$11,252	$14,390	$47,589
Government guarantees	(5,118)	(1,318)	(14)	0	(9,644)	(1,585)	(17,679)
Total classified loans, net government guarantees	$1,111	$2,196	$4,134	$8,056	$1,608	$12,805	$29,910

The following table presents the Company's portfolio of risk-rated loans by grade as of December 31, 2020:


	Pass	Classified	Total
	(In Thousands)
December 31, 2020
Commercial	$758,362	$14,106	$772,468
Real estate construction 1-4 family	37,093	1,087	38,180
Real estate construction other	79,403	0	79,403
Real estate term owner occupied	152,734	9,990	162,724
Real estate term non-owner occupied	289,555	17,692	307,247
Real estate term other	42,900	3,330	46,230
Consumer secured by 1st deed of trust	15,404	144	15,548
Consumer other	22,144	106	22,250
Portfolio loans	1,397,595	46,455	1,444,050
Government guarantees	(334,639)	(14,587)	(349,226)
Portfolio loans, net of government guarantees	$1,062,956	$31,868	$1,094,824

Past Due Loans: The following tables present an aging of contractually past due loans:


(In Thousands)	30-59 Days Past Due	60-89 Days Past Due	Greater Than 90 Days Past Due	Total Past Due	Current	Total	Greater Than 90 Days Past Due Still Accruing
June 30, 2021
Commercial & industrial loans	$3,763	$14	$862	$4,639	$604,575	$609,214	$0
Commercial real estate:
Owner occupied properties	0	0	1,421	1,421	259,458	260,879	128
Non-owner occupied and multifamily properties	0	0	0	0	410,572	410,572	0
Residential real estate:
1-4 family residential properties secured by first liens	76	0	0	76	33,585	33,661	0
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	113	44	139	296	17,497	17,793	0
1-4 family residential construction loans	0	0	109	109	34,849	34,958	0
Other construction, land development and raw land loans	0	0	1,545	1,545	77,886	79,431	0
Obligations of states and political subdivisions in the US	0	0	0	0	17,331	17,331	0
Agricultural production, including commercial fishing	0	0	0	0	15,558	15,558	0
Consumer loans	0	0	0	0	5,156	5,156	0
Other loans	0	0	0	0	3,415	3,415	0
Total	$3,952	$58	$4,076	$8,086	$1,479,882	$1,487,968	$128
December 31, 2020
Commercial & industrial loans	$242	$229	$2,675	$3,146	$609,108	$612,254	$0
Commercial real estate:
Owner occupied properties	2,203	0	2,459	4,662	228,658	233,320	449
Non-owner occupied and multifamily properties	0	0	0	0	392,452	392,452	0
Residential real estate:
1-4 family residential properties secured by first liens	446	0	0	446	32,969	33,415	0
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	38	0	139	177	18,059	18,236	0
1-4 family residential construction loans	0	0	702	702	31,798	32,500	0
Other construction, land development and raw land loans	0	0	1,545	1,545	81,918	83,463	0
Obligations of states and political subdivisions in the US	0	0	0	0	15,318	15,318	0
Agricultural production, including commercial fishing	0	0	0	0	12,968	12,968	0
Consumer loans	0	0	272	272	5,462	5,734	0
Other loans	0	0	0	0	4,390	4,390	0
Total	$2,929	$229	$7,792	$10,950	$1,433,100	$1,444,050	$449

Nonaccrual loans: Nonaccrual loans net of government guarantees totaled ~~$11.0~~$11.9 million and ~~$14.0~~$9.6 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. ~~Nonaccrual~~The following table presents loans ~~at the periods indicated are presented below by segment:~~on nonaccrual status and loan on nonaccrual status for which there was no related allowance for credit losses:

(In Thousands) 30-59 Days
Past Due 60-89 Days
Past Due Greater Than
90 Days Past Due Current Total
September 30, 2020
Commercial $115 $0 $4,634 $2,082 $6,831
Real estate construction one-to-four family 0 0 702 0 702
Real estate term owner occupied 0 226 2,729 809 3,764
Real estate term other 0 0 1,176 0 1,176
Consumer secured by 1st deeds of trust 0 0 0 65 65
Consumer other 0 0 0 109 109
Total nonperforming loans 115 226 9,241 3,065 12,647
Government guarantees on nonaccrual loans 0 0 0 (1,600) (1,600)
Net nonaccrual loans $115 $226 $9,241 $1,465 $11,047
December 31, 2019
Commercial $270 $385 $2,862 $5,636 $9,153
Real estate construction one-to-four family 0 0 1,349 0 1,349
Real estate term owner occupied 1,641 0 623 1,225 3,489
Real estate term other 0 0 1,176 0 1,176
Consumer secured by 1st deeds of trust 0 0 0 68 68
Consumer other 26 89 0 6 121
Total nonperforming loans 1,937 474 6,010 6,935 15,356
Government guarantees on nonaccrual loans (268) 0 0 (1,137) (1,405)
Net nonaccrual loans $1,669 $474 $6,010 $5,798 $13,951


	June 30, 2021		December 31, 2020
(In Thousands)	Nonaccrual	Nonaccrual With No ACL	Nonaccrual	Nonaccrual With No ACL

Commercial & industrial loans	$5,240	$1,393	$3,848	$3,513
Commercial real estate:
Owner occupied properties	3,802	3,763	4,620	4,582

Residential real estate:
1-4 family residential properties secured by first liens	1,999	1,501	160	160
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	280	218	242	221
1-4 family residential construction loans	109	109	702	702
Other construction, land development and raw land loans	1,545	1,545	1,545	1,545


Consumer loans	1	0	3	0

Total nonperforming loans	12,976	8,529	11,120	10,723
Government guarantees on nonaccrual loans	(1,096)	(1,096)	(1,483)	(1,483)
Net nonaccrual loans	$11,880	$7,433	$9,637	$9,240

~~Past Due Loans:~~ ~~Past due loans and~~There was 0 interest on nonaccrual loans ~~at the~~reversed through interest income during three and six-month periods ~~indicated are presented below by segment:~~

(In Thousands) 30-59 Days
Past Due
Still
Accruing 60-89 Days
Past Due
Still
Accruing Greater Than
90 Days
Still
Accruing Total Past
Due Nonaccrual Current Total
September 30, 2020
Commercial $0 $0 $0 $0 $6,831 $829,347 $836,178
Real estate construction one-to-four family 0 0 0 0 702 37,256 37,958
Real estate construction other 0 0 0 0 0 82,661 82,661
Real estate term owner occupied 0 1,421 0 1,421 3,764 143,808 148,993
Real estate term non-owner occupied 0 691 0 691 0 320,002 320,693
Real estate term other 0 0 0 0 1,176 42,363 43,539
Consumer secured by 1st deed of trust 236 0 0 236 65 13,749 14,050
Consumer other 0 0 0 0 109 23,024 23,133
Subtotal $236 $2,112 $0 $2,348 $12,647 $1,492,210 $1,507,205
Less: Unearned origination fees,  net of origination costs (14,485)
     Total $1,492,720
December 31, 2019
Commercial $270 $0 $0 $270 $9,153 $403,267 $412,690
Real estate construction one-to-four family 0 0 0 0 1,349 37,469 38,818
Real estate construction other 0 0 0 0 0 61,808 61,808
Real estate term owner occupied 338 0 0 338 3,489 135,064 138,891
Real estate term non-owner occupied 0 0 0 0 0 312,960 312,960
Real estate term other 26 0 0 26 1,176 41,304 42,506
Consumer secured by 1st deed of trust 750 0 0 750 68 15,380 16,198
Consumer other 150 0 0 150 121 24,314 24,585
Subtotal $1,534 $0 $0 $1,534 $15,356 $1,031,566 $1,048,456
Less: Unearned origination fees,  net of origination costs (5,085)
     Total $1,043,371
ending June 30, 2021 and June 30, 2020, respectively.

~~Impaired Loans:~~ ~~The following table presents information about impaired~~There was 0 interest earned on nonaccrual loans ~~by class as of the~~during three and six-month periods ~~indicated:~~

(In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance
September 30, 2020
With no related allowance recorded
Commercial - AQR substandard $8,668 $8,872 $—
Commercial - AQR doubtful 308 308 —
Real estate construction one-to-four family - AQR substandard 702 702 —
Real estate term owner occupied - AQR substandard 7,430 7,515 —
Real estate term non-owner occupied - AQR pass 177 177 —
Real estate term non-owner occupied - AQR substandard 613 613 —
Real estate term other - AQR pass 322 322 —
Real estate term other - AQR substandard 1,176 1,176 —
Consumer secured by 1st deeds of trust - AQR pass 116 116 —
Consumer secured by 1st deeds of trust - AQR substandard 148 148 —
Consumer other - AQR substandard 84 88 —
Subtotal $19,744 $20,037 $—

With an allowance recorded
Commercial - AQR substandard $202 $202 $41
Subtotal $202 $202 $41

Total
Commercial - AQR substandard $8,870 $9,074 $41
Commercial - AQR doubtful 308 308 —
Real estate construction one-to-four family - AQR substandard 702 702 —
Real estate term owner-occupied - AQR substandard 7,430 7,515 —
Real estate term non-owner occupied - AQR pass 177 177 —
Real estate term non-owner occupied - AQR substandard 613 613 —
Real estate term other - AQR pass 322 322 —
Real estate term other - AQR substandard 1,176 1,176 —
Consumer secured by 1st deeds of trust - AQR pass 116 116 —
Consumer secured by 1st deeds of trust - AQR substandard 148 148 —
Consumer other - AQR substandard 84 88 —
Total $19,946 $20,239 $41

(In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance
December 31, 2019
With no related allowance recorded
Commercial - AQR substandard $15,517 $15,582 $—
Real estate construction one-to-four family -AQR substandard 1,349 1,349 —
Real estate term owner occupied - AQR substandard 5,104 5,104 —
Real estate term non-owner occupied - AQR pass 178 178 —
Real estate term other - AQR pass 417 417 —
Real estate term other - AQR substandard 1,176 1,176 —
Consumer secured by 1st deeds of trust - AQR pass 122 122 —
Consumer secured by 1st deeds of trust - AQR substandard 159 163 —
Consumer other - AQR substandard 90 94 —
Subtotal $24,112 $24,185 $—

With an allowance recorded
Commercial - AQR substandard $561 $561 $17
Subtotal $561 $561 $17

Total
Commercial - AQR substandard $16,078 $16,143 $17
Real estate construction one-to-four family -AQR substandard 1,349 1,349 —
Real estate term owner occupied - AQR substandard 5,104 5,104 —
Real estate term non-owner occupied - AQR pass 178 178 —
Real estate term other - AQR pass 417 417 —
Real estate term other - AQR substandard 1,176 1,176 —
Consumer secured by 1st deeds of trust - AQR pass 122 122 —
Consumer secured by 1st deeds of trust - AQR substandard 159 163 —
Consumer other - AQR substandard 90 94 —
Total $24,673 $24,746 $17
ending June 30, 2021 and June 30, 2020, respectively.

~~The unpaid principal balance included in the tables above represents the recorded investment at the dates indicated, plus amounts charged off for book purposes.~~

~~The following tables summarize our average recorded investment and interest income recognized on impaired loans for the three and nine-month periods ended September 30, 2020 and 2019:~~

Three Months Ended September 30, 2020 2019
(In Thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
With no related allowance recorded
     Commercial - AQR substandard $8,564 $42 $17,616 $107
     Commercial - AQR doubtful 308 0 0 0
     Real estate construction one-to-four family - AQR substandard 488 0 1,482 0
     Real estate term owner occupied- AQR substandard 6,998 47 5,896 34
     Real estate term non-owner occupied- AQR pass 177 3 242 4
     Real estate term non-owner occupied- AQR substandard 619 19 0 0
     Real estate term other - AQR pass 348 6 438 8
     Real estate term other - AQR substandard 1,228 0 1,198 0
     Consumer secured by 1st deeds of trust - AQR pass 117 3 125 3
     Consumer secured by 1st deeds of trust - AQR substandard 269 0 93 2
     Consumer other - AQR substandard 84 0 93 0
         Subtotal $19,200 $120 $27,183 $158

With an allowance recorded
     Commercial - AQR substandard $226 $8 $391 $0
     Consumer secured by 1st deeds of trust - AQR substandard 0 0 74 0
         Subtotal $226 $8 $465 $0

Total
     Commercial - AQR substandard $8,790 $50 $18,007 $107
     Commercial - AQR doubtful 308 0 0 0
     Real estate construction one-to-four family - AQR substandard 488 0 1,482 0
     Real estate term owner-occupied - AQR substandard 6,998 47 5,896 34
     Real estate term non-owner occupied - AQR pass 177 3 242 4
     Real estate term non-owner occupied - AQR substandard 619 19 0 0
     Real estate term other - AQR pass 348 6 438 8
     Real estate term other - AQR substandard 1,228 0 1,198 0
     Consumer secured by 1st deeds of trust - AQR pass 117 3 125 3
     Consumer secured by 1st deeds of trust - AQR substandard 269 0 167 2
     Consumer other - AQR substandard 84 0 93 0
         Total Impaired Loans $19,426 $128 $27,648 $158

Nine Months Ended September 30, 2020 2019
(In Thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
With no related allowance recorded
     Commercial - AQR pass $0 $0 $711 $35
     Commercial - AQR substandard 9,899 138 17,205 292
     Commercial - AQR doubtful 103 0 0 0
     Real estate construction one-to-four family - AQR substandard 808 0 2,109 0
     Real estate term owner occupied- AQR substandard 6,586 125 5,896 83
     Real estate term non-owner occupied- AQR pass 177 10 269 15
     Real estate term non-owner occupied- AQR substandard 312 20 307 0
     Real estate term other - AQR pass 380 20 457 24
     Real estate term other - AQR substandard 1,194 0 998 0
     Consumer secured by 1st deeds of trust - AQR pass 119 9 127 9
     Consumer secured by 1st deeds of trust - AQR substandard 149 3 215 5
     Consumer secured by 1st deeds of trust - AQR loss 44 0 0 0
     Consumer other - AQR substandard 87 0 63 0
Subtotal $19,858 $325 $28,357 $463

With an allowance recorded
     Commercial - AQR substandard $1,794 $8 $715 $0
     Real estate term other - AQR substandard 0 0 218 0
     Consumer secured by 1st deeds of trust - AQR substandard 0 0 97 0
Subtotal $1,794 $8 $1,030 $0

Total
     Commercial - AQR pass $0 $0 $711 $35
     Commercial - AQR substandard 11,693 146 17,920 292
     Commercial - AQR doubtful 103 0 0 0
     Real estate construction one-to-four family - AQR substandard 808 0 2,109 0
     Real estate term owner-occupied - AQR substandard 6,586 125 5,896 83
     Real estate term non-owner occupied - AQR pass 177 10 269 15
     Real estate term non-owner occupied - AQR substandard 312 20 307 0
     Real estate term other - AQR pass 380 20 457 24
     Real estate term other - AQR substandard 1,194 0 1,216 0
     Consumer secured by 1st deeds of trust - AQR pass 119 9 127 9
     Consumer secured by 1st deeds of trust - AQR substandard 149 3 312 5
     Consumer secured by 1st deeds of trust - AQR loss 44 0 0 0
     Consumer other - AQR substandard 87 0 63 0
Total Impaired Loans $21,652 $333 $29,387 $463

Troubled Debt Restructurings: Loans classified as ~~troubled debt restructurings (“TDR”)~~TDRs totaled ~~$8.5~~$6.2 million and ~~$10.1~~$7.9 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession that it would not grant otherwise.

The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) ~~December 31, 2020~~January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company has elected to adopt these provisions of the CARES Act. As of ~~September~~June 30, ~~2020,~~2021, the Company has made the following types of loan modifications related to COVID-19, which are not classified as TDRs with principal balance outstanding of:

(Dollars in thousands) Interest Only Full Payment Deferral Total
Portfolio loans $46,056 $74,337 $120,393
Number of modifications 16 59 75


(Dollars in thousands)	Interest Only	Full Payment Deferral	Total
Portfolio loans	$75,613	$7,440	$83,053
Number of modifications	23	1	24

The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Payment Modification: A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time is included in this category.

Combination Modification: Any other type of modification, including the use of multiple categories above.

AQR pass graded loans included above in the impaired loan data are loans classified as TDRs. By definition, TDRs are considered impaired loans. All of the Company's TDRs are included in impaired loans.

The following table presents the breakout between newly restructured loans that occurred during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and restructured loans that occurred prior to ~~2020~~2021 that are still included in portfolio loans. As discussed above, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, ~~2019.~~2020. The ~~below~~ disclosed restructurings were not related to COVID-19 ~~modifications:~~modifications.


		Accrual Status	Nonaccrual Status		Total Modifications		Accrual Status		Nonaccrual Status	Total Modifications
(In Thousands)	(In Thousands)			(In Thousands)
New Troubled Debt Restructurings	New Troubled Debt Restructurings							New Troubled Debt Restructurings

Commercial - AQR substandard		$1,565	$163		$1,728

Commercial & industrial loans						Commercial & industrial loans	$0		$251	$251
Subtotal	Subtotal	$1,565	$163		$1,728	Subtotal	$0		$251	$251
Existing Troubled Debt Restructurings	Existing Troubled Debt Restructurings	$802	$5,946		$6,748	Existing Troubled Debt Restructurings	$2,341		$3,629	$5,970
Total	Total	$2,367	$6,109		$8,476	Total	$2,341		$3,880	$6,221

2229

The following tables present newly restructured loans that occurred during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, by concession (terms modified):

September 30, 2020
Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications
(In Thousands)
Pre-Modification Outstanding Recorded Investment:
Commercial - AQR substandard 2 $0 $3,249 $164 $0 $3,413
Total 2 $0 $3,249 $164 $0 $3,413
Post-Modification Outstanding Recorded Investment:
Commercial - AQR substandard 2 $0 $1,565 $163 $0 $1,728
Total 2 $0 $1,565 $163 $0 $1,728


			September 30, 2019									June 30, 2021
		Number of Contracts	Rate Modification	Term Modification	Payment Modification		Combination Modification	Total Modifications		Number of Contracts		Rate Modification		Term Modification		Payment Modification		Combination Modification		Total Modifications
(In Thousands)	(In Thousands)					(In Thousands)
Pre-Modification Outstanding Recorded Investment:	Pre-Modification Outstanding Recorded Investment:													Pre-Modification Outstanding Recorded Investment:
Commercial - AQR substandard	Commercial - AQR substandard	5	$0	$0	$509		$1,350	$1,859	Commercial - AQR substandard		1		$0		$254		$—		$0		$254
Real estate term owner occupied- AQR substandard		1	0	0	192		0	192
Total	Total	6	$0	$0	$701		$1,350	$2,051	Total	1		$0		$254		$0		$0		$254
Post-Modification Outstanding Recorded Investment:	Post-Modification Outstanding Recorded Investment:								Post-Modification Outstanding Recorded Investment:
Commercial - AQR substandard	Commercial - AQR substandard	5	$0	$0	$425		$1,340	$1,765	Commercial - AQR substandard	1		$0		$251		$0		$0		$251
Real estate term owner occupied- AQR substandard		1	0	0	188		0	188
Total	Total	6	$0	$0	$613		$1,340	$1,953	Total	1		$0		$251		$0		$0		$251


		June 30, 2020
	Number of Contracts	Rate Modification	Term Modification	Payment Modification	Combination Modification	Total Modifications
(In Thousands)
Pre-Modification Outstanding Recorded Investment:
Commercial - AQR substandard	1	$0	$3,249	$0	$0	$3,249
Total	1	$0	$3,249	$0	$0	$3,249
Post-Modification Outstanding Recorded Investment:
Commercial - AQR substandard	1	$0	$2,031	$0	$0	$2,031
Total	1	$0	$3,281	$0	$0	$2,031

The Company had 0 commitments to extend additional credit to borrowers whose terms have been modified in TDRs. There were 0 in charge-offs in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 on loans that were newly classified as TDRs during the same period.

~~All~~As of December 31, 2020, all TDRs are also classified as impaired loans and are included in the loans individually evaluated for ~~impairment in the calculation of the allowance for loan losses ("Allowance").~~impairment. There were 0 TDRs with specific impairment at ~~September 30, 2020 and~~ December 31, ~~2019, respectively.~~2020.

The Company had 0 TDRs that defaulted within twelve months of restructure and defaulted during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

5. ~~Allowance for Loan Losses~~

~~The following tables detail activity in the Allowance for the periods indicated:~~

Three Months Ended

September 30, Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deed of trust Consumer other Unallocated Total
2020
Balance, beginning of period $7,366 $690 $1,215 $2,533 $5,421 $702 $258 $447 $2,021 $20,653
Charge-Offs (56) 0 0 (85) 0 0 0 0 0 (141)
Recoveries 600 0 0 0 0 1 0 3 0 604
Provision (benefit) 285 10 58 21 61 55 (2) (7) 86 567
Balance, end of period $8,195 $700 $1,273 $2,469 $5,482 $758 $256 $443 $2,107 $21,683
Balance, end of period:
Individually evaluated
for impairment $41 $0 $0 $0 $0 $0 $0 $0 $0 $41
Balance, end of period:
Collectively evaluated
for impairment $8,154 $700 $1,273 $2,469 $5,482 $758 $256 $443 $2,107 $21,642
2019
Balance, beginning of period $7,123 $739 $1,112 $2,281 $6,231 $761 $322 $486 $1,463 $20,518
Charge-Offs (22) 0 0 0 0 0 0 (7) 0 (29)
Recoveries 709 0 0 0 0 1 0 13 0 723
Provision (benefit) (1,340) (122) (101) (299) (703) (48) (49) (62) 649 (2,075)
Balance, end of period $6,470 $617 $1,011 $1,982 $5,528 $714 $273 $430 $2,112 $19,137
Balance, end of period:
Individually evaluated
for impairment $97 $0 $0 $0 $0 $0 $5 $0 $0 $102
Balance, end of period:
Collectively evaluated
for impairment $6,373 $617 $1,011 $1,982 $5,528 $714 $268 $430 $2,112 $19,035

Nine Months Ended September 30, Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deed of trust Consumer other Unallocated Total
2020
Balance, beginning of period $6,604 $643 $1,017 $2,188 $5,180 $671 $270 $436 $2,079 $19,088
Charge-Offs (1,011) 0 0 (85) 0 0 0 (14) 0 (1,110)
Recoveries 656 0 0 0 0 2 0 16 0 674
Provision (benefit) 1,946 57 256 366 302 85 (14) 5 28 3,031
Balance, end of period $8,195 $700 $1,273 $2,469 $5,482 $758 $256 $443 $2,107 $21,683
Balance, end of period:
Individually evaluated
for impairment $41 $0 $0 $0 $0 $0 $0 $0 $0 $41
Balance, end of period:
Collectively evaluated
for impairment $8,154 $700 $1,273 $2,469 $5,482 $758 $256 $443 $2,107 $21,642
2019
Balance, beginning of period $5,660 $675 $1,275 $2,027 $5,799 $716 $306 $426 $2,635 $19,519
Charge-Offs (195) 0 0 0 0 0 0 (11) 0 (206)
Recoveries 801 0 0 0 0 28 0 20 0 849
Provision (benefit) 204 (58) (264) (45) (271) (30) (33) (5) (523) (1,025)
Balance, end of period $6,470 $617 $1,011 $1,982 $5,528 $714 $273 $430 $2,112 $19,137
Balance, end of period:
Individually evaluated
for impairment $97 $0 $0 $0 $0 $0 $5 $0 $0 $102
Balance, end of period:
Collectively evaluated
for impairment $6,373 $617 $1,011 $1,982 $5,528 $714 $268 $430 $2,112 $19,035

The following is a detail of the recorded investment, including unearned origination fees, net of origination costs, in the loan portfolio, segregated by amounts evaluated individually or collectively in the Allowance at the periods indicated:

(In Thousands) Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deed of trust Consumer other Total
September 30, 2020
Balance, end of period $825,702 $37,751 $81,772 $148,167 $318,738 $43,245 $14,037 $23,308 $1,492,720
Balance, end of period:
Individually evaluated
for impairment $9,178 $701 $0 $7,430 $790 $1,499 $264 $84 $19,946
Balance, end of period:
Collectively evaluated
for impairment $816,524 $37,050 $81,772 $140,737 $317,948 $41,746 $13,773 $23,224 $1,472,774
December 31, 2019
Balance, end of period $411,327 $38,503 $60,906 $138,181 $311,302 $42,200 $16,191 $24,761 $1,043,371
Balance, end of period:
Individually evaluated
for impairment $16,077 $1,349 $0 $5,104 $178 $1,594 $281 $90 $24,673
Balance, end of period:
Collectively evaluated
for impairment $395,250 $37,154 $60,906 $133,077 $311,124 $40,606 $15,910 $24,671 $1,018,698

~~The following represents the balance of the Allowance for the periods indicated segregated by segment and class:~~

(In Thousands) Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deeds of trust Consumer other Unallocated Total
September 30, 2020
Individually evaluated for impairment:
AQR Substandard $41 $0 $0 $0 $0 $0 $0 $0 $0 $41
Collectively evaluated for impairment:
AQR Pass 8,009 700 1,273 2,421 5,343 719 251 439 0 19,155
AQR Special Mention 141 0 0 48 139 39 5 0 0 372
AQR Substandard 4 0 0 0 0 0 0 4 0 8
AQR Doubtful 0 0 0 0 0 0 0 0 0 0
Unallocated 0 0 0 0 0 0 0 0 2,107 2,107
$8,195 $700 $1,273 $2,469 $5,482 $758 $256 $443 $2,107 $21,683
December 31, 2019
Individually evaluated for impairment:
AQR Substandard $17 $0 $0 $0 $0 $0 $0 $0 $0 $17
Collectively evaluated for impairment:
AQR Pass 6,514 588 1,017 2,125 4,829 629 266 431 0 16,399
AQR Special Mention 64 55 0 63 351 42 4 0 0 579
AQR Substandard 9 0 0 0 0 0 0 5 0 14
Unallocated 0 0 0 0 0 0 0 0 2,079 2,079
$6,604 $643 $1,017 $2,188 $5,180 $671 $270 $436 $2,079 $19,088

6. Purchased Receivables

Purchased receivables are carried at their principal amount outstanding, net of ~~a reserve~~an allowance for ~~anticipated~~credit losses, ~~that have not yet been identified,~~ and have a maturity of less than one year. Purchased receivable balances are charged against this reserve when management believes that collection of principal is unlikely. Management evaluates the adequacy of the reserve for purchased receivable losses based on historical loss experience by class of receivable and its assessment of current economic conditions. As of September 30, 2020, the Company has 1 class of purchased receivables. There were 0 purchased receivables past due at ~~September~~June 30, ~~2020~~2021 or December 31, ~~2019,~~2020, and there were 0 restructured purchased receivables at ~~September~~June 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

Income on purchased receivables is accrued and recognized on the principal amount outstanding using an effective interest method except when management believes doubt exists as to the collectability of the income or principal. ~~Purchased receivables of $410,000 related to 1 customer relationship are considered nonperforming assets as of September 30, 2020 for which the Company is not accruing and recognizing income.~~ There were 0 nonperforming purchased receivables as of June 30, 2021 and December 31, ~~2019.~~2020, respectively.

The following table summarizes the components of net purchased receivables for the periods indicated:


(In Thousands)	(In Thousands)	September 30, 2020	December 31, 2019	(In Thousands)	June 30, 2021	December 31, 2020
Purchased receivables	Purchased receivables	$13,607	$24,467	Purchased receivables	$12,500	$13,995
Reserve for purchased receivable losses		(87)	(94)
Allowance for credit losses - purchased receivables				Allowance for credit losses - purchased receivables	0	(73)
Total	Total	$13,520	$24,373	Total	$12,500	$13,922

The following table sets forth information regarding changes in the ACL on purchased ~~receivable reserve~~receivables for the three and ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively:


		Three Months Ended September 30,		Nine Months Ended September 30,			Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020	2019	2020	2019	(In Thousands)	2021	2020	2021	2020
Balance, beginning of period	Balance, beginning of period	$93	$98	$94	$190	Balance, beginning of period	$0	$99	$0	$94
Charge-offs	Charge-offs	0	0	0	0	Charge-offs	0	0	0	0
Recoveries	Recoveries	0	0	0	0	Recoveries	0	0	0	0
Charge-offs net of recoveries	Charge-offs net of recoveries	0	0	0	0	Charge-offs net of recoveries	0	0	0	0
Benefit for purchased receivables	Benefit for purchased receivables	(6)	(11)	(7)	(103)	Benefit for purchased receivables	0	(6)	0	(1)
Balance, end of period	Balance, end of period	$87	$87	$87	$87	Balance, end of period	$0	$93	$0	$93

7.6. Servicing Rights

Mortgage servicing rights

The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


		Three Months Ended September 30,		Nine Months Ended September 30,			Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020	2019	2020	2019	(In Thousands)	2021	2020	2021	2020

Balance, beginning of period	Balance, beginning of period	$10,721	$10,836	$11,920	$10,821	Balance, beginning of period	$11,657	$11,653	$11,218	$11,920
Additions for new MSR capitalized	Additions for new MSR capitalized	1,373	1,033	3,032	2,672	Additions for new MSR capitalized	1,745	996	3,193	1,659
Changes in fair value:	Changes in fair value:					Changes in fair value:
Due to changes in model inputs of assumptions (1)	Due to changes in model inputs of assumptions (1)	(699)	(378)	(2,291)	(1,385)	Due to changes in model inputs of assumptions (1)	16	(891)	(164)	(1,592)
Other (2)	Other (2)	(806)	(285)	(2,072)	(902)	Other (2)	(583)	(1,037)	(1,412)	(1,266)
Balance, end of period	Balance, end of period	$10,589	$11,206	$10,589	$11,206	Balance, end of period	$12,835	$10,721	$12,835	$10,721

(1) Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates.

(2) Represents changes due to collection/realization of expected cash flows over time.

The following table details information related to our serviced mortgage loan portfolio as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	June 30, 2021		December 31, 2020

Balance of mortgage loans serviced for others	Balance of mortgage loans serviced for others	$655,733		$659,048		Balance of mortgage loans serviced for others	$713,926		$683,117
MSR as a percentage of serviced loans	MSR as a percentage of serviced loans	1.61	%	1.81	%	MSR as a percentage of serviced loans	1.80	%	1.64	%

The Company recognized servicing fees of ~~$671,000~~$707,000 and ~~$616,000~~$639,000 during the three-month periods ending ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$2.0~~$1.4 million and ~~$1.8~~$1.3 million during the ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the weighted average key assumptions used in measuring the fair value of MSR as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020

Constant prepayment rate	Constant prepayment rate	14.31	%	10.61	%	Constant prepayment rate	11.68	%	13.05	%
Discount rate	Discount rate	7.75	%	8.52	%	Discount rate	8.00	%	7.75	%

Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:


(In Thousands)	(In Thousands)			September 30, 2020		December 31, 2019		(In Thousands)			June 30, 2021		December 31, 2020
Aggregate portfolio principal balance	Aggregate portfolio principal balance			$655,733		$659,048		Aggregate portfolio principal balance			$713,926		$683,117
Weighted average rate of note	Weighted average rate of note			3.74	%	3.90	%	Weighted average rate of note			3.43	%	3.62	%

September 30, 2020		Base		1.0% Adverse Rate Change		2.0% Adverse Rate Change
June 30, 2021								June 30, 2021	Base		1.0% Adverse Rate Change		2.0% Adverse Rate Change
Constant prepayment rate	Constant prepayment rate	14.31	%	42.34	%	50.41	%	Constant prepayment rate	11.68	%	23.36	%	34.68	%
Discount rate	Discount rate	7.75	%	6.75	%	5.75	%	Discount rate	8.00	%	7.00	%	6.00	%
Fair value MSR	Fair value MSR	$10,589		$4,748		$3,808		Fair value MSR	$12,835		$9,179		$7,040
Percentage of MSR	Percentage of MSR	1.61	%	0.72	%	0.58	%	Percentage of MSR	1.80	%	1.29	%	0.99	%

December 31, 2019
December 31, 2020								December 31, 2020
Constant prepayment rate	Constant prepayment rate	10.61	%	26.25	%	28.39	%	Constant prepayment rate	13.05	%	26.11	%	38.97	%
Discount rate	Discount rate	8.52	%	7.52	%	6.52	%	Discount rate	7.75	%	6.75	%	5.75	%
Fair value MSR	Fair value MSR	$11,920		$7,005		$6,625		Fair value MSR	$11,218		$7,455		$5,404
Percentage of MSR	Percentage of MSR	1.81	%	1.06	%	1.01	%	Percentage of MSR	1.64	%	1.09	%	0.79	%

The above tables show the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four family Alaska Housing Finance Corporation/FNMA/FHLMC serviced home loan. The above tables reference a 100 basis point and 200 basis point decrease in discount rates.

These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSR is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.

Commercial servicing rights

The commercial servicing right asset ("CSR") has a carrying value $1.3 million ~~and $1.2 million~~ at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, respectively,~~2020, and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets. Total commercial loans serviced for others were ~~$267.9~~$270.8 million and ~~$252.9~~$274.6 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Key assumptions used in measuring the fair value of the CSR as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 include a constant prepayment rate of ~~12.25%~~9.66% and a discount rate of ~~11.70%~~9.46%.

8.7. Leases

~~We adopted ASU 2016-02~~ ~~Leases (Topic 842)~~ ("ASU 2016-02") using the modified retrospective approach with an effective date as of January 1, 2019. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company also elected the practical expedient on not separating lease components from nonlease components for all operating leases. Additionally, the Company has elected to not apply ASU 2016-02 to short-term leases. Short-term leases are those leases that, at the lease commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise.

The ~~Company has~~Company's lease commitments consist primarily of agreements ~~for~~to lease land and office facilities that it occupies to operate several of its retail branch locations ~~as well as one storage facility,~~ that are classified as operating leases and are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities. Most of these leases contain options to extend the duration of the leases at management's discretion. Management has recognized these renewal options as part of its ROU asset and lease liabilities when management is reasonably certain to exercise these options. Whether or not management is reasonably certain to exercise such an option is determined based on facts and circumstances for each individual lease. However, if a renewal option is offered at below market terms, management considers the exercise of that option to be reasonably certain for the purposes of calculating its ROU assets and lease liabilities. None of the Company's leases include residual value guarantees, and there are no restrictions or covenants imposed by these leases that impose significant additional financial obligations on the Company. The Company uses the rate implicit in each lease as the discount rate to determine the lease liability, which is the present value of lease payments not yet paid at the lease commencement date. If the rate implicit in each lease is not readily determinable, which is often the case, the Company uses its incremental borrowing rate as the discount rate. The incremental borrowing rate is the rate that the Company would have incurred to borrow the funds necessary to purchase the leased asset over a similar term.

As of ~~September~~June 30, ~~2020,~~2021, the Company has operating lease ROU assets of ~~$12.9~~$11.4 million and operating lease liabilities of ~~$12.9~~$11.3 million. As of December 31, ~~2019,~~2020, the Company had operating lease ROU assets of ~~$14.3~~$12.4 million and operating lease liabilities of ~~$14.2~~$12.4 million. The Company did not have any agreements that are classified as finance leases as of ~~September~~June 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

The following table presents additional information about the Company's operating leases:


			Three Months Ended September 30,		Nine Months Ended September 30,						Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	(In Thousands)		2020	2019	2020		2019		(In Thousands)		2021	2020	2021		2020
Lease Cost	Lease Cost								Lease Cost
		Operating lease cost(1)	$710	$675	$2,111		$2,030			Operating lease cost(1)	$702	$706	$1,418		$1,401
		Short term lease cost(1)	9	9	26		26			Short term lease cost(1)	6	8	13		17
		Total lease cost	$719	$684	$2,137		$2,056			Total lease cost	$708	$714	$1,431		$1,418

Other information	Other information								Other information
		Operating leases - operating cash flows			$2,012		$2,015			Operating leases - operating cash flows			$1,323		$1,341
		Weighted average lease term - operating leases, in years			10.85		11.11			Weighted average lease term - operating leases, in years			10.80
		Weighted average discount rate - operating leases			3.30	%	3.33	%		Weighted average discount rate - operating leases			3.30	%	3.34	%
(1)	(1)	Expenses are classified within occupancy expense on the Consolidated Statements of Income.							(1)	Expenses are classified within occupancy expense on the Consolidated Statements of Income.

The table below reconciles the remaining undiscounted cash flows for the next five years for each twelve-month period presented (unless otherwise indicated) and the total of the subsequent remaining years to the operating lease liabilities recorded on the balance sheet:


(In Thousands)	(In Thousands)	Operating Leases	(In Thousands)	Operating Leases
2020 (Three months)		$678
2020 (Six months)			2020 (Six months)	$1,299
2021	2021	2,594	2021	2,240
2022	2022	2,189	2022	1,949
2023	2023	1,902	2023	1,814
2024	2024	1,795	2024	1,752
Thereafter	Thereafter	6,607	Thereafter	4,880
Total minimum lease payments	Total minimum lease payments	$15,765	Total minimum lease payments	$13,934
Less: amount of lease payment representing interest	Less: amount of lease payment representing interest	(2,884)	Less: amount of lease payment representing interest	(2,599)
Present value of future minimum lease payments	Present value of future minimum lease payments	$12,881	Present value of future minimum lease payments	$11,335

9.8. Revenue

The Company's revenue is included in net interest income and other operating income on its Consolidated Statements of Income. Topic 606 in the Accounting Standards Codification ("Topic 606") includes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to

customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our ongoing revenue-generating transactions are not subject to Topic 606, including revenue associated with financial instruments and revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with MSRs, purchased receivable income, financial guarantees, and derivatives are also not in scope of the guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant services income, and commissions from the sales of mutual funds and other investments. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s non-interest revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

~~Bankcard fees~~

Bankcard fees are primarily comprised of debit card income and ATM fees. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa or MasterCard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. The Company’s performance obligation for bankcard fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payments are typically received immediately or in the following month.

~~Service charges on deposit accounts~~

Service charges on deposit accounts consist of general service fees for monthly account maintenance, activity- or transaction-based fees, and account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), and other deposit account related fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payments for service charges on deposit accounts are primarily received immediately or in the following month through a direct charge to customers’ accounts.

~~Other~~

Other operating income consists of other recurring revenue streams such as merchant services income, commissions from sales of mutual funds and other investments, safety deposit box rental fees, bank check and other check fees, unrealized gains and losses on marketable securities, and other miscellaneous revenue streams. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for merchant services income is largely satisfied, and related revenue recognized, when the transactions have been completed. Payment is typically received immediately or in the following month. The Company earns commissions from the sale of mutual funds as periodic service fees (i.e., trailers) from Elliott Cove Capital Management typically based on a percentage of net asset value. Trailer revenue is recorded over time, quarterly, as net asset value is determined. The Company also earns commission income from the sale of annuity products. The Company acts as an intermediary between the Company's customer and Elliott Cove Investment Advisors for these transactions, and commissions from annuity product sales are recorded when the Company’s performance obligation is satisfied, which is generally upon the issuance of the annuity policy. The Company does not earn trailer fees on annuity sales. Payment for commissions from sales of mutual funds and other investments and annuity sales is typically received in the following quarter. Other service charges include revenue from safety deposit box rental fees, processing wire transfers, bank check and other check fees, and other services. The Company’s performance obligations for these other revenue streams are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payments are typically received immediately or in the following month.

The following presents other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


(In Thousands)	(In Thousands)			Three Months Ended September 30,		Nine Months Ended September 30,		(In Thousands)			Three Months Ended June 30,		Six Months Ended June 30,
Other operating income	Other operating income			2020	2019	2020	2019	Other operating income			2021	2020	2021	2020
		In-scope of Topic 606:							In-scope of Topic 606:
			Bankcard fees	$770	$820	$2,094	$2,214			Bankcard fees	$879	$681	$1,619	$1,324
			Service charges on deposit accounts	269	398	802	1,224			Service charges on deposit accounts	308	171	598	533
			Other	389	433	1,123	1,249			Other	460	421	830	735
		Other operating income (in-scope of Topic 606)		$1,428	$1,651	$4,019	$4,687		Other operating income (in-scope of Topic 606)		$1,647	$1,273	$3,047	$2,592
		Other operating income (out-of-scope of Topic 606)		20,200	8,858	41,577	22,924		Other operating income (out-of-scope of Topic 606)		12,485	16,262	26,981	21,376
Total other operating income	Total other operating income			$21,628	$10,509	$45,596	$27,611	Total other operating income			$14,132	$17,535	$30,028	$23,968

Gains on the sale of other real estate owned ("OREO") are also within the scope of Topic 606 and are recorded within other operating expense on the Company's Consolidated Statements of Income. Gains on the sale of OREO properties were ~~$100,000~~$157,000 and ~~$63,000~~$38,000 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$176,000~~$189,000 and ~~$380,000~~$75,000 for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and 2019, respectively .~~

respectively.

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~~10.~~9. Derivatives

Derivatives swaps related to community banking activities

The Company enters into commercial loan interest rate swap agreements with commercial banking customers which are offset with a corresponding swap agreement with a third party financial institution ("counterparty"). The Company has agreements with its counterparties that contain provisions that provide that if the Company fails to maintain its status as a "well-capitalized" institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. These agreements also require that the Company and the counterparty collateralize any fair value shortfalls that exceed $250,000 with eligible collateral, which includes cash and securities backed with the full faith and credit of the federal government. Similarly, the Company could be required to settle its obligations under the agreement if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels. The Company pledged ~~$10.7~~$7.1 million as of ~~September~~June 30, ~~2020~~2021 and ~~$4.7~~$10.7 million as of December 31, ~~2019~~2020 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.

The Company had interest rate swaps related to commercial loans with an aggregate notional amount of ~~$172.8~~$209.0 million and ~~$94.4~~$196.0 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. At ~~September~~June 30, ~~2020,~~2021, the notional amount of interest rate swaps is made up of 1318 variable to fixed rate swaps to commercial loan customers totaling ~~$86.4~~$104.5 million, and 1318 fixed to variable rate swaps with a counterparty totaling ~~$86.4~~$104.5 million. Changes in fair value from these 1318 interest rate swaps offset each other in the first six months of ~~2020.~~2021. The Company recognized ~~$726,000~~$103,000 and 0$195,000 in fee income related to interest rate swaps in the three ~~month~~and six-month periods ending ~~September~~June 30, ~~2020~~2021 and ~~September 30, 2019, respectively, and $743,000 and $734,000~~$17,000 in fee income related to interest rate swaps in the ~~nine month~~three and six-month periods ending ~~September~~June 30, 2020, ~~and September 30, 2019,~~ respectively. Interest rate swap income is recorded in other operating income on the Consolidated Statements of Income. None of these interest rate swaps are designated as hedging instruments.

The Company has an interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures, which is floating rate debt, by swapping the cash flows with an interest rate swap which receives floating and pays fixed. The Company has designated this interest rate swap as a hedging instrument. The interest rate swap effectively fixes the Company's interest payments on the $10.0 million of junior subordinated debentures held under Northrim Statutory Trust 2 at 3.72% through its maturity date. The floating rate that the dealer pays is equal to the three month LIBOR plus 1.37% which reprices quarterly on the payment date. This rate was ~~1.62%~~1.49% as of ~~September~~June 30, ~~2020.~~2021. The Company pledged $2.9 ~~million and $1.3~~ million in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020. Changes in the fair value of this interest rate swap are reported in other comprehensive ~~income.~~income on the Consolidated Statements of Income. The unrealized loss on this interest rate swap was ~~$2.2~~$1.1 million as of ~~September~~June 30, ~~2020~~2021 and the unrealized loss was ~~$534,000~~$1.7 million as of December 31, ~~2019.~~2020.

Derivatives related to home mortgage banking activities

The Company also uses derivatives to hedge the risk of changes in the fair values of interest rate lock commitments. The Company enters into commitments to originate residential mortgage loans at specific rates; the value of these commitments are detailed in the table below as "interest rate lock commitments". The Company also hedges the interest rate risk associated with its residential mortgage loan commitments, which are referred to as "retail interest rate contracts" in the table below. Market risk with respect to commitments to originate loans arises from changes in the value of contractual positions due to changes in interest rates. RML had commitments to originate mortgage loans held for sale totaling ~~$257.3~~$174.0 million and ~~$48.8~~$150.3 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Changes in the value of RML's interest rate derivatives are recorded in mortgage banking income on the Consolidated Statements of Income. None of these derivatives are ~~designed~~designated as hedging instruments.

The following table presents the fair value of derivatives not designated as hedging instruments at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

(In Thousands)

Asset Derivatives

(In Thousands)

Asset Derivatives

September 30, 2020

December 31, 2019

June 30, 2021

December 31, 2020

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Interest rate swaps

Other assets

$8,846

$2,950

Interest rate swaps

Other assets

$6,301

$7,387

Interest rate lock commitments

Other assets

6,519

810

Interest rate lock commitments

Other assets

3,044

4,034

Total

$15,365

$3,760

Total

$9,345

$11,421

(In Thousands)

Liability Derivatives

(In Thousands)

Liability Derivatives

September 30, 2020

December 31, 2019

June 30, 2021

December 31, 2020

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Interest rate swaps

Other liabilities

$8,846

$2,950

Interest rate swaps

Other liabilities

$6,301

$7,387

Retail interest rate contracts

Other liabilities

466

Retail interest rate contracts

Other liabilities

209

880

Total

$9,312

$3,021

Total

$6,510

$8,267

The following table presents the net gains (losses) of derivatives not designated as hedging instruments for ~~the three and nine-month~~ periods ~~ending September 30, 2020 and 2019:~~indicated below:


			Three Months Ended September 30,		Nine Months Ended September 30,				Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	(In Thousands)	Income Statement Location	2020	2019	2020	2019	(In Thousands)	Income Statement Location	2021	2020	2021	2020
Retail interest rate contracts	Retail interest rate contracts	Mortgage banking income	($1,823)	($242)	($6,525)	($934)	Retail interest rate contracts	Mortgage banking income	($1,187)	($1,579)	$1,813	($4,702)
Interest rate lock commitments	Interest rate lock commitments	Mortgage banking income	1,781	(692)	5,372	313	Interest rate lock commitments	Mortgage banking income	369	1,447	(1,001)	3,591
Total	Total		($42)	($934)	($1,153)	($621)	Total		($818)	($132)	$812	($1,111)

Our derivative transactions with counterparties under International Swaps and Derivative Association master agreements include "right of set-off" provisions. "Right of set-off" provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes.

The following table summarizes the derivatives that have a right of offset as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


September 30, 2020					Gross amounts not offset in the Statement of Financial Position
June 30, 2021								June 30, 2021				Gross amounts not offset in the Statement of Financial Position
(In Thousands)								(In Thousands)	Gross amounts of recognized assets and liabilities	Gross amounts offset in the Statement of Financial Position	Net amounts of assets and liabilities presented in the Statement of Financial Position	Financial Instruments	Collateral Posted	Net Amount
Asset Derivatives								Asset Derivatives
Interest rate swaps								Interest rate swaps	$6,301	$0	$6,301	$0	$0	$6,301

Liability Derivatives								Liability Derivatives
Interest rate swaps								Interest rate swaps	$6,301	$0	$6,301	$0	$6,301	$0
Retail interest rate contracts								Retail interest rate contracts	209	0	209	0	0	209

December 31, 2020								December 31, 2020				Gross amounts not offset in the Statement of Financial Position
(In Thousands)	(In Thousands)	Gross amounts of recognized assets and liabilities	Gross amounts offset in the Statement of Financial Position	Net amounts of assets and liabilities presented in the Statement of Financial Position	Financial Instruments	Collateral Posted	Net Amount	(In Thousands)	Gross amounts of recognized assets and liabilities	Gross amounts offset in the Statement of Financial Position	Net amounts of assets and liabilities presented in the Statement of Financial Position	Financial Instruments	Collateral Posted	Net Amount
Asset Derivatives	Asset Derivatives							Asset Derivatives
Interest rate swaps	Interest rate swaps	$8,846	$0	$8,846	$0	$0	$8,846	Interest rate swaps	$7,387	$0	$7,387	$0	$0	$7,387

Liability Derivatives	Liability Derivatives							Liability Derivatives
Interest rate swaps	Interest rate swaps	$8,846	$0	$8,846	$0	$8,846	$0	Interest rate swaps	$7,387	$0	$7,387	$0	$7,387	$0
Retail interest rate contracts	Retail interest rate contracts	466	0	466	0	0	466	Retail interest rate contracts	880	0	880	0	0	880

December 31, 2019					Gross amounts not offset in the Statement of Financial Position
(In Thousands)		Gross amounts of recognized assets and liabilities	Gross amounts offset in the Statement of Financial Position	Net amounts of assets and liabilities presented in the Statement of Financial Position	Financial Instruments	Collateral Posted	Net Amount
Asset Derivatives
Interest rate swaps		$2,950	$0	$2,950	$0	$0	$2,950

Liability Derivatives
Interest rate swaps		$2,950	$0	$2,950	$0	$2,950	$0
Retail interest rate contracts		71	0	71	0	0	71

~~11.~~10. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment securities available for sale and marketable equity securities: Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Servicing rights: MSR and CSR are measured at fair value on a recurring basis. These assets are classified as Level 3 as quoted prices are not available. In order to determine the fair value of MSR and CSR, the present value of net expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates, and ancillary fee income net of servicing costs. The model assumptions are also compared to publicly filed information from several large MSR holders, as available.

Derivative instruments: The fair value of the interest rate lock commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Company has determined that the

3537

majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of ~~September~~June 30, ~~2020,~~2021, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives. As a result, the Company has classified its interest rate derivative valuations in Level 2 of the fair value hierarchy.

Commitments to extend credit and standby letters of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

Assets Subject to Nonrecurring Adjustment to Fair Value

The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets, impaired loans, and OREO at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the ~~writedown~~write-down of individual assets.

The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and impaired loans as of each reporting date. In-house appraisals are considered Level 3 inputs and external appraisals are considered Level 2 inputs. The Company’s determination of which method to use is based upon several factors. The Company takes into account compliance with legal and regulatory guidelines, the amount of the loan, the size of the assets, the location and type of property to be valued and how critical the timing of completion of the analysis is to the assessment of value. Those factors are balanced with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists.

The Company uses external sources to estimate fair value for projects that are not fully constructed as of the date of valuation. These projects are generally valued as if complete, with an appropriate allowance for cost of completion, including contingencies developed from external sources such as vendors, engineers and contractors. The Company believes that recording OREO that is not fully constructed based on as if complete values is more appropriate than recording OREO that is not fully constructed using as is values. We concluded that as-is-complete values are appropriate for these types of projects based on the accounting guidance for capitalization of project costs and subsequent measurement of the value of real estate. GAAP specifically states that estimates and cost allocations must be reviewed at the end of each reporting period and reallocated based on revised estimates. The Company adjusts the carrying value of OREO in accordance with this guidance for increases in estimated cost to complete that exceed the fair value of the real estate at the end of each reporting period.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

3638

Estimated fair values as of the periods indicated are as follows:


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
(In Thousands)	(In Thousands)	Carrying Amount	Fair Value	Carrying Amount	Fair Value	(In Thousands)	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Financial assets:	Financial assets:					Financial assets:
Level 1 inputs:	Level 1 inputs:					Level 1 inputs:
Cash, due from banks and deposits in other banks	Cash, due from banks and deposits in other banks	$101,129	$101,129	$95,424	$95,424	Cash, due from banks and deposits in other banks	$346,885	$346,885	$115,965	$115,965
Investment securities available for sale	Investment securities available for sale	59,865	59,865	75,456	75,456	Investment securities available for sale	120,553	120,553	58,865	58,865
Marketable equity securities	Marketable equity securities	8,534	8,534	7,945	7,945	Marketable equity securities	9,588	9,588	9,052	9,052

Level 2 inputs:	Level 2 inputs:					Level 2 inputs:
Investment securities available for sale	Investment securities available for sale	155,504	155,504	200,682	200,682	Investment securities available for sale	216,678	216,678	188,768	188,768
Investment in Federal Home Loan Bank stock	Investment in Federal Home Loan Bank stock	2,508	2,508	2,138	2,138	Investment in Federal Home Loan Bank stock	3,114	3,114	2,551	2,551
Loans held for sale						Loans held for sale	105,819	105,819	146,178	146,178
Accrued interest receivable	Accrued interest receivable	8,024	8,024	4,512	4,512	Accrued interest receivable	7,847	7,847	7,979	7,979
Interest rate swaps	Interest rate swaps	8,846	8,846	2,950	2,950	Interest rate swaps	6,301	6,301	7,387	7,387

Level 3 inputs:	Level 3 inputs:					Level 3 inputs:
Loans and loans held for sale		1,620,826	1,602,727	1,111,205	1,095,031
Investment securities held to maturity						Investment securities held to maturity	20,000	19,361	10,000	10,000
Loans						Loans	1,487,968	1,452,700	1,444,051	1,414,179
Purchased receivables, net	Purchased receivables, net	13,520	13,520	24,373	24,373	Purchased receivables, net	12,500	12,500	13,922	13,922
Interest rate lock commitments	Interest rate lock commitments	6,519	6,519	810	810	Interest rate lock commitments	3,044	3,044	4,034	4,034
Mortgage servicing rights	Mortgage servicing rights	10,589	10,589	11,920	11,920	Mortgage servicing rights	12,835	12,835	11,218	11,218
Commercial servicing rights	Commercial servicing rights	1,286	1,286	1,214	1,214	Commercial servicing rights	1,292	1,292	1,310	1,310

Financial liabilities:	Financial liabilities:					Financial liabilities:
Level 2 inputs:	Level 2 inputs:					Level 2 inputs:
Deposits	Deposits	$1,806,133	$1,808,534	$1,372,351	$1,373,647	Deposits	$2,146,438	$2,147,629	$1,824,981	$1,826,990

Borrowings	Borrowings	13,737	15,119	8,891	9,216	Borrowings	14,680	15,348	14,817	15,538
Accrued interest payable	Accrued interest payable	139	139	23	23	Accrued interest payable	97	97	65	65
Interest rate swaps	Interest rate swaps	11,002	11,002	3,484	3,484	Interest rate swaps	7,363	7,363	9,122	9,122
Retail interest rate contracts	Retail interest rate contracts	466	466	71	71	Retail interest rate contracts	209	209	880	880

Level 3 inputs:	Level 3 inputs:					Level 3 inputs:

Junior subordinated debentures	Junior subordinated debentures	10,310	10,610	10,310	11,000	Junior subordinated debentures	10,310	9,978	10,310	10,475

3739

The following table sets forth the balances as of the periods indicated of assets and liabilities measured at fair value on a recurring basis:


(In Thousands)	(In Thousands)	Total	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	(In Thousands)	Total	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
September 30, 2020
June 30, 2021						June 30, 2021
Assets:	Assets:					Assets:
Available for sale securities	Available for sale securities					Available for sale securities
U.S. Treasury and government sponsored entities	U.S. Treasury and government sponsored entities	$157,552	$37,691	$119,861	$0	U.S. Treasury and government sponsored entities	$253,351	$87,097	$166,254	$0
Municipal securities	Municipal securities	2,336	0	2,336	0	Municipal securities	852	0	852	0

Corporate bonds	Corporate bonds	27,215	22,174	5,041	0	Corporate bonds	35,487	33,456	2,031	0
Collateralized loan obligations	Collateralized loan obligations	28,266	0	28,266	0	Collateralized loan obligations	47,541	0	47,541	0
Total available for sale securities	Total available for sale securities	$215,369	$59,865	$155,504	$0	Total available for sale securities	$337,231	$120,553	$216,678	$0
Marketable equity securities	Marketable equity securities	$8,534	$8,534	$0	$0	Marketable equity securities	$9,588	$9,588	$0	$0
Total marketable equity securities	Total marketable equity securities	$8,534	$8,534	$0	$0	Total marketable equity securities	$9,588	$9,588	$0	$0
Interest rate swaps	Interest rate swaps	8,846	0	8,846	0	Interest rate swaps	6,301	0	6,301	0
Interest rate lock commitments	Interest rate lock commitments	6,519	0	0	6,519	Interest rate lock commitments	3,044	0	0	3,044
Mortgage servicing rights	Mortgage servicing rights	10,589	0	0	10,589	Mortgage servicing rights	12,835	0	0	12,835
Commercial servicing rights	Commercial servicing rights	1,286	0	0	1,286	Commercial servicing rights	1,292	0	0	1,292

Total other assets	Total other assets	$27,240	$0	$8,846	$18,394	Total other assets	$23,472	$0	$6,301	$17,171
Liabilities:	Liabilities:					Liabilities:
Interest rate swaps	Interest rate swaps	$11,002	$0	$11,002	$0	Interest rate swaps	$7,363	$0	$7,363	$0
Retail interest rate contracts	Retail interest rate contracts	466	0	466	0	Retail interest rate contracts	209	0	209	0
Total other liabilities	Total other liabilities	$11,468	$0	$11,468	$0	Total other liabilities	$7,572	$0	$7,572	$0
December 31, 2019
December 31, 2020						December 31, 2020
Assets:	Assets:					Assets:
Available for sale securities	Available for sale securities					Available for sale securities
U.S. Treasury and government sponsored entities	U.S. Treasury and government sponsored entities	$211,852	$57,480	$154,372	$0	U.S. Treasury and government sponsored entities	$174,601	$37,548	$137,053	$0
Municipal securities	Municipal securities	3,297	0	3,297	0	Municipal securities	856	0	856	0

Corporate bonds	Corporate bonds	35,066	17,976	17,090	0	Corporate bonds	30,492	21,317	9,175	0
Collateralized loan obligations	Collateralized loan obligations	25,923	0	25,923	0	Collateralized loan obligations	41,684	0	41,684	0
Total available for sale securities	Total available for sale securities	$276,138	$75,456	$200,682	$0	Total available for sale securities	$247,633	$58,865	$188,768	$0
Marketable equity securities	Marketable equity securities	$7,945	$7,945	$0	$0	Marketable equity securities	$9,052	$9,052	$0	$0
Total marketable securities	Total marketable securities	$7,945	$7,945	$0	$0	Total marketable securities	$9,052	$9,052	$0	$0
Interest rate swaps	Interest rate swaps	2,950	0	2,950	0	Interest rate swaps	7,387	0	7,387	0
Interest rate lock commitments	Interest rate lock commitments	810	0	0	810	Interest rate lock commitments	4,034	0	0	4,034
Mortgage servicing rights	Mortgage servicing rights	11,920	0	0	11,920	Mortgage servicing rights	11,218	0	0	11,218
Commercial servicing rights	Commercial servicing rights	1,214	0	0	1,214	Commercial servicing rights	1,310	0	0	1,310
Total other assets	Total other assets	$16,894	$0	$2,950	$13,944	Total other assets	$23,949	$0	$7,387	$16,562
Liabilities:	Liabilities:					Liabilities:
Interest rate swaps	Interest rate swaps	$3,484	$0	$3,484	$0	Interest rate swaps	$9,122	$0	$9,122	$0
Retail interest rate contracts	Retail interest rate contracts	71	0	71	0	Retail interest rate contracts	880	0	880	0
Total other liabilities	Total other liabilities	$3,555	$0	$3,555	$0	Total other liabilities	$10,002	$0	$10,002	$0

The following tables provide a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


(In Thousands)	(In Thousands)	Beginning balance	Change included in earnings	Purchases and issuances	Sales and settlements	Ending balance	Net change in unrealized gains (losses) relating to items held at end of period	(In Thousands)	Beginning balance	Change included in earnings	Purchases and issuances	Sales and settlements	Ending balance	Net change in unrealized gains (losses) relating to items held at end of period
Three Months Ended September 30, 2020
Three Months Ended June 30, 2021								Three Months Ended June 30, 2021
Interest rate lock commitments	Interest rate lock commitments	$4,653	($1,784)	$15,329	($11,679)	$6,519	$6,519	Interest rate lock commitments	$2,713	($867)	$7,183	($5,985)	$3,044	$3,044
Mortgage servicing rights	Mortgage servicing rights	10,721	(1,505)	1,373	0	10,589	0	Mortgage servicing rights	11,657	(567)	1,745	0	12,835	0
Commercial servicing rights	Commercial servicing rights	1,162	(101)	225	0	1,286	0	Commercial servicing rights	1,327	(53)	18	0	1,292	0
Total	Total	$16,536	($3,390)	$16,927	($11,679)	$18,394	$6,519	Total	$15,697	($1,487)	$8,946	($5,985)	$17,171	$3,044
Three Months Ended September 30, 2019
Three Months Ended June 30, 2020								Three Months Ended June 30, 2020
Interest rate lock commitments	Interest rate lock commitments	$2,072	($553)	$4,569	($4,725)	$1,363	$1,363	Interest rate lock commitments	$3,188	($2,242)	$17,605	($13,898)	$4,653	$4,653
Mortgage servicing rights	Mortgage servicing rights	10,836	(663)	1,033	0	11,206	0	Mortgage servicing rights	11,653	(1,928)	996	0	10,721	0
Commercial servicing rights	Commercial servicing rights	999	(20)	39	0	1,018	0	Commercial servicing rights	1,200	(58)	20	0	1,162	0
Total	Total	$13,907	($1,236)	$5,641	($4,725)	$13,587	$1,363	Total	$16,041	($4,228)	$18,621	($13,898)	$16,536	$4,653

(In Thousands) Beginning balance Change included in earnings Purchases and issuances Sales and settlements Ending balance Net change in unrealized gains (losses) relating to items held at end of period
Nine Months Ended September 30, 2020
Interest rate lock commitments $810 ($4,923) $40,441 ($29,809) $6,519 $6,519
Mortgage servicing rights 11,920 (4,363) 3,032 0 10,589 0
Commercial servicing rights 1,214 (180) 252 0 1,286 0
Total $13,944 ($9,466) $43,725 ($29,809) $18,394 $6,519
Nine Months Ended September 30, 2019
Interest rate lock commitments $978 ($1,431) $12,759 ($10,943) $1,363 $1,363
Mortgage servicing rights 10,821 (2,287) 2,672 0 11,206 0
Commercial servicing rights 1,030 (118) 106 0 1,018 0
Total $12,829 ($3,836) $15,537 ($10,943) $13,587 $1,363


(In Thousands)	Beginning balance	Change included in earnings	Purchases and issuances	Sales and settlements	Ending balance	Net change in unrealized gains (losses) relating to items held at end of period
Six Months Ended June 30, 2021
Interest rate lock commitments	$4,034	($2,014)	$16,451	($15,427)	$3,044	$3,044
Mortgage servicing rights	11,218	(1,576)	3,193	0	12,835	0
Commercial servicing rights	1,310	(76)	58	0	1,292	0
Total	$16,562	($3,666)	$19,702	($15,427)	$17,171	$3,044
Six Months Ended June 30, 2020
Interest rate lock commitments	$810	($3,139)	$25,112	($18,130)	$4,653	$4,653
Mortgage servicing rights	11,920	(2,858)	1,659	0	10,721	0
Commercial servicing rights	1,214	(79)	27	0	1,162	0
Total	$13,944	($6,076)	$26,798	($18,130)	$16,536	$4,653

There were 0 changes in unrealized gains and losses for the three and ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 included in other comprehensive income for recurring Level 3 fair value measurements.

As of and for the periods ending ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis. For loans measured for impairment, the Company classifies fair value measurements using observable inputs, such as external appraisals, as Level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as Level 3 valuations in the fair value hierarchy.


(In Thousands)	(In Thousands)	Total	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	(In Thousands)	Total	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
September 30, 2020
June 30, 2021						June 30, 2021
Loans measured for impairment	Loans measured for impairment	$202	$0	$0	$202	Loans measured for impairment	$4,325	$0	$0	$4,325

Total	Total	$202	$0	$0	$202	Total	$4,325	$0	$0	$4,325
December 31, 2019
December 31, 2020						December 31, 2020
Loans measured for impairment	Loans measured for impairment	$561	$0	$0	$561	Loans measured for impairment	$308	$0	$0	$308

Total	Total	$561	$0	$0	$561	Total	$308	$0	$0	$308

The following table presents the gains resulting from nonrecurring fair value adjustments for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


		Three Months Ended September 30,		Nine Months Ended September 30,			Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	(In Thousands)	2020	2019	2020	2019	(In Thousands)	2021	2020	2021	2020
Loans measured for impairment	Loans measured for impairment	$10	$96	$24	$89	Loans measured for impairment	($213)	($651)	$772	$14

Total loss from nonrecurring measurements	Total loss from nonrecurring measurements	$10	$96	$24	$89	Total loss from nonrecurring measurements	($213)	($651)	$772	$14

4042

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average Rate Range

~~September~~June 30, 2021

Loans measured for impairment

In-house valuation of collateral

Discount rate

5% - 100%

Interest rate lock commitment

External pricing model

Pull through rate

91.16

Mortgage servicing rights

Discounted cash flow

Constant prepayment rate

8.59% - 13.13%

Discount rate

Commercial servicing rights

Discounted cash flow

Constant prepayment rate

7.38% - 9.94%

Discount rate

9.46

December 31, 2020

Loans measured for impairment

In-house valuation of collateral

Discount rate

4030

Interest rate lock commitment

External pricing model

Pull through rate

~~90.24~~90.65

Mortgage servicing rights

Discounted cash flow

Constant prepayment rate

~~9.54%~~7.77% - ~~14.50%~~13.17%

Discount rate

~~7.75~~

%7.75% - 0.00%

Commercial servicing rights

Discounted cash flow

Constant prepayment rate

~~7.64%~~7.38% - ~~15.67%~~9.94%

Discount rate

~~11.70~~

~~December 31, 2019~~

~~Loans measured for impairment~~

~~In-house valuation of collateral~~

~~Discount rate~~

~~Interest rate lock commitment~~

~~External pricing model~~

~~Pull through rate~~

~~92.65~~

~~Mortgage servicing rights~~

~~Discounted cash flow~~

~~Constant prepayment rate~~

~~9.11% - 10.67%~~

~~Discount rate~~

~~8.51% - 8.66%~~

~~Commercial servicing rights~~

~~Discounted cash flow~~

~~Constant prepayment rate~~

~~7.64% - 15.67%~~

~~Discount rate~~

~~11.70~~9.46

4143

~~12.~~11. Segment Information

The Company's operations are managed along 2 operating segments: Community Banking and Home Mortgage Lending. The Community Banking segment's principal business focus is the offering of loan and deposit products to business and consumer customers in its primary market areas. As of ~~September~~June 30, ~~2020,~~2021, the Community Banking segment operated 1617 branches throughout Alaska. The Home Mortgage Lending segment's principal business focus is the origination and sale of mortgage loans for 1-4 family residential properties.

Summarized financial information for the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables:


		Three Months Ended September 30, 2020				Three Months Ended June 30, 2021
(In Thousands)	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated

Interest income	Interest income	$18,821	$973	$19,794	Interest income	$19,476	$777	$20,253
Interest expense	Interest expense	1,433	67	1,500	Interest expense	1,008	53	1,061
Net interest income	Net interest income	17,388	906	18,294	Net interest income	18,468	724	19,192
Provision for loan losses		567	0	567
Benefit for credit losses					Benefit for credit losses	(427)	0	(427)
Other operating income	Other operating income	3,696	17,932	21,628	Other operating income	2,772	11,360	14,132

Other operating expense	Other operating expense	14,353	9,153	23,506	Other operating expense	14,551	7,785	22,336
Income before provision for income taxes	Income before provision for income taxes	6,164	9,685	15,849	Income before provision for income taxes	7,116	4,299	11,415
Provision (benefit) for income taxes		1,249	2,745	3,994
Provision for income taxes					Provision for income taxes	1,850	1,220	3,070
Net income	Net income	$4,915	$6,940	$11,855	Net income	$5,266	$3,079	$8,345


		Three Months Ended September 30, 2019				Three Months Ended June 30, 2020
(In Thousands)	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated

Interest income	Interest income	$17,108	$729	$17,837	Interest income	$18,117	$887	$19,004
Interest expense	Interest expense	1,108	423	1,531	Interest expense	1,468	79	1,547
Net interest income	Net interest income	16,000	306	16,306	Net interest income	16,649	808	17,457
Provision for loan losses		(2,075)	0	(2,075)
Provision for credit losses					Provision for credit losses	404	0	404
Other operating income	Other operating income	2,944	7,565	10,509	Other operating income	2,308	15,227	17,535

Other operating expense	Other operating expense	13,126	6,198	19,324	Other operating expense	14,113	8,561	22,674
Income before provision for income taxes	Income before provision for income taxes	7,893	1,673	9,566	Income before provision for income taxes	4,440	7,474	11,914
Provision for income taxes		1,550	478	2,028
Provision (benefit) for income taxes					Provision (benefit) for income taxes	(124)	2,138	2,014
Net income	Net income	$6,343	$1,195	$7,538	Net income	$4,564	$5,336	$9,900

4244

Nine Months Ended September 30, 2020
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Interest income $53,818 $2,319 $56,137
Interest expense 4,520 176 4,696
Net interest income 49,298 2,143 51,441
Provision for loan losses 3,031 0 3,031
Other operating income 7,772 37,824 45,596
Other operating expense 42,078 22,889 64,967
Income before provision for income taxes 11,961 17,078 29,039
Provision for income taxes 1,391 4,860 6,251
Net income $10,570 $12,218 $22,788


		Nine Months Ended September 30, 2019				Six Months Ended June 30, 2021
(In Thousands)	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated

Interest income	Interest income	$50,377	$1,644	$52,021	Interest income	$39,275	$1,574	$40,849
Interest expense	Interest expense	3,256	733	3,989	Interest expense	2,073	91	2,164
Net interest income	Net interest income	47,121	911	48,032	Net interest income	37,202	1,483	38,685
Benefit for loan losses		(1,025)	0	(1,025)
Provision for credit losses					Provision for credit losses	(1,915)	0	(1,915)
Other operating income	Other operating income	9,798	17,813	27,611	Other operating income	5,046	24,982	30,028

Other operating expense	Other operating expense	39,755	16,468	56,223	Other operating expense	28,215	15,448	43,663
Income before provision for income taxes	Income before provision for income taxes	18,189	2,256	20,445	Income before provision for income taxes	15,948	11,017	26,965
Provision for income taxes		3,689	645	4,334
Provision (benefit) for income taxes					Provision (benefit) for income taxes	3,302	3,137	6,439
Net income	Net income	$14,500	$1,611	$16,111	Net income	$12,646	$7,880	$20,526

September 30, 2020
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Total assets $1,928,465 $169,273 $2,097,738
Loans held for sale $0 $128,105 $128,105


	Six Months Ended June 30, 2020
(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated

Interest income	$34,997	$1,346	$36,343
Interest expense	3,087	109	3,196
Net interest income	31,910	1,237	33,147
Provision for credit losses	2,464	0	2,464
Other operating income	4,076	19,892	23,968

Other operating expense	27,725	13,736	41,461
Income before provision for income taxes	5,797	7,393	13,190
Provision (benefit) for income taxes	142	2,115	2,257
Net income	$5,655	$5,278	$10,933

December 31, 2019
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Total assets $1,540,869 $103,127 $1,643,996
Loans held for sale $0 $67,834 $67,834


June 30, 2021
(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated

Total assets	$2,308,286	$145,281	$2,453,567
Loans held for sale	$0	$105,819	$105,819


December 31, 2020
(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated

Total assets	$1,935,871	$185,927	$2,121,798
Loans held for sale	$0	$146,178	$146,178

4345

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the unaudited consolidated financial statements of Northrim BanCorp, Inc. (the “Company”) and the notes thereto presented elsewhere in this report and with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Except as otherwise noted, references to "we", "our", "us" or "the Company" refer to Northrim BanCorp, Inc. and its subsidiaries that are consolidated for financial reporting purposes.

Note Regarding Forward Looking-Statements

This quarterly report on Form 10-Q includes “forward-looking statements,” as that term is defined for purposes of Section 21E of the Securities Exchange Act of 1934, as amended, which are not historical facts. These forward-looking statements describe management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of the Company’s style of banking, the strength of the local economy, and statements related to the expected or potential impact of the novel coronavirus ("COVID-19") pandemic and related responses of the government. All statements other than statements of historical fact, including statements regarding industry prospects, future results of operations or financial position and the expected or potential impact of COVID-19 and related responses of the government, made in this report are forward-looking. We use words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management’s current plans and expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations, and those variations may be both material and adverse. Forward-looking statements, whether concerning COVID-19 and the government response related thereto or otherwise, are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the uncertainties relating to the impact of COVID-19 on the Company's credit quality, business, operations and employees; the availability and terms of funding from government sources related to COVID-19; the impact of the results of the recent U.S. elections on the regulatory landscape, natural resource extraction industries, capital markets, and the response to and management of the COVID-19 pandemic, including the effectiveness of previously-enacted fiscal stimulus from the federal government and a potential infrastructure bill; the timing of Paycheck Protection Program ("PPP") loan forgiveness; the impact of interest rates, inflation, trade policies and tensions, including tariffs, and potential geopolitical instability; the general condition of, and changes in, the Alaska economy; our ability to maintain or expand our market share or net interest margin; our ability to maintain asset quality; our ability to implement our marketing and growth strategies; and our ability to execute our business plan. Further, actual results may be affected by competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Part II. Item 1A Risk Factors of this report and Part I. Item 1A in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, as well as in our other filings with the Securities and Exchange Commission. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition, you should note that forward looking statements are made only as of the date of this report and that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements, other than as required by law.

Critical Accounting Policies

The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.

The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. The Company’s critical accounting policies include those that address the accounting for the allowance for loan losses ("Allowance"), valuation of goodwill and other intangible assets, the valuation of other real estate owned ("OREO"), and the valuation of mortgage servicing rights. TheseOur critical accounting policies are ~~further~~ 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, ~~2019. Management has applied its critical~~2020. The SEC defines "critical accounting ~~policies~~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 ~~estimation methods consistently in all periods presented in these consolidated financial statements.~~

~~Impact of accounting pronouncements to be implemented~~may change in future ~~periods~~

~~In June 2016,~~periods. As of January 1, 2021, the ~~FASB issued~~Company implemented ASU 2016-13, Financial Instruments - Credit Losses (“("ASU ~~2016-13”~~2016-13" or "CECL")~~. ASU 2016-13 is intended~~, and due to ~~improve~~the significance of the implementation, the following Allowance for Credit Losses Policy has been updated from the policies disclosed in our prior year financial ~~reporting by requiring timelier recording~~statements. The Company's critical accounting policies also include valuation of ~~credit losses on loans~~goodwill and other ~~financial instruments held by financial institutions~~intangible assets, the valuation of other real estate owned ("OREO"), and the valuation of mortgage servicing rights. There have been no other ~~organizations. Financial institutions and other organizations will now use forward-looking information~~material changes to ~~better inform their credit loss estimates, but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 is effective for~~ the ~~Company for fiscal years, and interim periods within those fiscal years, beginning on~~valuation techniques or after December 15, 2019, and must be applied prospectively. However, on October 16, 2019 the FASB voted to delay ASU 2016-13 for Smaller Reporting Companies. In addition, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed by the President of the United States that included an option for entities to delay the implementation of ASU 2016-13 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. The Company has elected Small Reporting Company status, which changes the effective date for ASU 2016-13 for the Company to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2022.

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

We are in the process of developing, validating, and implementing models used to estimate credit losses under CECL. We have completed substantially all of our loss forecasting models, and we expect to complete the validation process for our loan models during ~~2020. Our current planned approach for estimating expected life-time credit losses for loans includes the following key components:~~

•An initial loss forecast period of one year for all loan portfolio segments and classes of financing receivables and offbalance- sheet credit exposures. This period reflects management’s expectation of losses based on forward-looking economic scenarios over that time.2021.

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

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

As a Smaller Reporting Company, the Company is not required to adopt CECL before January 1, 2023, and we have elected not to early adopt as of January 1, 2020. However, we have the option to early adopt CECL as of either January 1, 2021, or January 1, 2022. Based on our loan portfolio composition at September 30, 2020, and the Company's current economic forecast, had we elected to early adopt CECL as of September 30, 2020, we estimate the impact of adoption to be an overall decrease in our allowance for credit losses ("ACL") for loans between approximately $2.0 million and $3.0 million. The estimated reduction reflects an expected decrease for all loan segments given their short contractual maturities. The Company does not hold a material amount of residential mortgage loans with long or indeterminate maturities as of September 30, 2020. In most instances the Company believes that the ACL for these types of loans would lead to an increase in the ACL. We will continue to evaluate and refine the results of our loss estimates until we adopt ASU 2016-13.

The ultimate effect of CECL on our ACL will depend on the size and composition of our loan portfolio, the loan portfolio’s credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions. At adoption, we will have a cumulative-effect adjustment to retained earnings for our change in the ACL. We currently estimate an overall decrease in our ACL, which will result in an increase to our retained earnings and regulatory capital amounts and ratios.

4546

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.

•Lending strategy, policies, and procedures;

•Quality of internal loan review;

•Lending management and staff;

•Trends in underlying collateral values;

•Competition, legal, and regulatory changes;

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

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

•Concentration of credit; and

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

Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for expected credit losses and are not included in the collective evaluation. Loans are identified for individual evaluation during regular credit reviews of the portfolio. A loan is generally identified for individual evaluation when management determines that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan for individual evaluation, we measure expected credit losses using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. The analysis of collateral dependent loans includes appraisals on loans secured by real property, management’s assessment of the current market, recent payment history and an evaluation of other sources of repayment.

Update on Economic Conditions

~~When 2020~~ The Alaska economy began ~~it appeared that Alaska’s economy was on track for a solid year~~to recover from the effect of ~~growth. A three year mild recession starting in 2016 ended~~the pandemic in the 4thfourth quarter of ~~2018. For~~2020, and Alaska’s real Gross State Product ("GSP") continued to increase in the ~~next 18 consecutive~~first quarter of 2021.

The Alaska Department of Labor ("DOL") has released data through May of 2021. They report total payroll jobs have grown 16,500 from May of 2020. This is a total of 305,000 jobs or an improvement of 5.7% over the prior 12 months. Tourism related jobs were the hardest hit from travel restrictions and have also been the fastest to recover. According to the DOL, the Leisure and Hospitality sector added 6,000 jobs between May of 2020 and May of 2021. However, this is still 9,900 jobs less than May of 2019. Oil and Gas direct jobs continued to decline in the last 12 months, ~~Alaska’s~~down 1,400 jobs to 6,100 in May of 2021. This is the only major sector to have fewer jobs than May of 2020. Construction has recovered more than half of the 1,300 job decline from two years ago, adding 700 jobs since May of 2020. Health Care and Manufacturing, which is primarily seafood processing, have now surpassed the total number of jobs ~~grew month over month compared to the prior year~~seen two years ago in May of 2019 according to the ~~State Department~~DOL report.

Alaska’s GSP was $52.1 billion in 2020, compared to $54.7 billion in 2019, according to the Federal Bureau of ~~Labor~~Economic Analysis ("~~DOL"~~BEA"). ~~That~~Alaska’s reduction was 4.9% and the worst state was Hawaii at 8%. Both states were more negatively affected by travel restrictions reducing tourism. The U.S. GDP declined 3.5% in 2020. Alaska’s largest GSP declines in 2020 came ~~to an abrupt end~~from Transportation and Warehousing, followed by Accommodation and Food Services, Oil & Gas and Health Care. All of these sectors showed positive recovery in ~~April~~the fourth quarter of 2020 ~~when~~in Alaska, helping place it ninth fastest growing for the ~~full force~~quarter of the ~~COVID pandemic shocked~~50 U.S. states. Alaska’s real GSP growth continued in the ~~global economy.~~first quarter of 2021, increasing 5.4% on an annualized basis, according to a June 25, 2021 BEA report.

Alaska’s seasonally adjusted personal income for 2020 was $47.4 billion compared to $46 billion in 2019, according to the BEA. Personal income in the U.S. in 2020 increased 6.1% and Alaska ~~faced unemployment rates~~rose 3.1%. Per capita income in the U.S. was $59,729 compared to $64,780 in Alaska, according to the BEA. This places Alaska as ~~high as 13.5% in April after being as low as 5.2% in March of 2020. The DOL has reported that unemployment rates have moderated each~~the ninth highest per capita income of the ~~last four months since~~50 U.S. states.

In a typical year, the ~~high in April. The seasonally adjusted unemployment rate improved~~majority of personal income is derived from ~~11.6% in July to 7.4% in August. In August of 2020, Alaska had approximately 37,000 fewer payroll jobs than August of 2019.~~

~~Oil prices have been fluctuating significantly~~wage earnings. Additionally, some people receive government transfer payments, such as social security, Medicare and Medicaid. Personal income is further supported by earnings from dividends, interest and rents. However, in 2020 ~~as the global economy reacts~~earnings from wages and investments decreased $500 million in Alaska according to the ~~COVID-19 pandemic. Average monthly~~ BEA's report. The growth in personal income came predominantly from a $1.9 billion increase in government transfer payments. About half of the transfer payment increase was from unemployment insurance. Direct stimulus payments accounted for a large part of the remainder. In Alaska, earnings from wages decreased 1.5% or $435 million in 2020 and investment income fell 0.7% or $65 million. Government transfer payments rose 24.2% or $1.9 billion over 2019 levels.

Alaska North Slope (“ANS”) crude oil prices began the year averaging $65.48 for the month of January. The virus concerns began to have an effect when monthly ANS prices declined to $54.48 in February and $33.21 in March. In the second quarter, ANS prices hit ahad monthly average prices in 2018 and 2019 ranging from $58.86 to $80.03 a barrel. ANS began 2020 at $65.48. Prices fell quickly at the beginning of 2020, responding to fears that COVID-19 would devastate the global economy and reduce the demand for travel. The low month was April of 2020, when ANS averaged $16.54 ~~in April~~a barrel. However, by June of last year the oil markets stabilized and ~~increased to $28.21 in May. The ANS price has firmed up in the $40 range~~ for the last ~~four months.~~six months of 2020 the average monthly price remained between $40.42 and $50.32. In the first six months of 2021 ANS ~~averaged $41.78~~prices continued to rise. The monthly average price was $55.56 in January of 2021. It rose to $65.60 in March, and $73.18 in June ~~$43.56 in July, $43.36 in August and $40.42 in September.~~

~~Despite the serious economic challenges~~ of COVID, there has been extensive government spending to offset the negative impacts of shutdown mandates in the interest of public health. For Alaska this has meant approximately $5.6 billion in total direct aid to date. To put that in perspective, the Gross State Product ("GSP") of all annual economic activity in Alaska was measured at $45.6 billion in the second quarter of 2020. So that is equivalent to 12% or 1/8th of Alaska’s entire GSP.

~~The stimulus is most easily seen in the personal income data.~~The Federal Bureau of Economic Analysis ("BEA") reported personal income for Alaska rose by $2.6 billion or 24% in the second quarter of 2020 as compared to the first quarter of 2020. This was largely a result of a $4.9 billion increase in government transfer payments. There was a $2.2 billion reduction in wage income and a $139 million decrease in investment and rental income. In other words, the increase in government transfer payments was more than double the loss in wages and decrease in dividends, interest and rental income combined.

Inflation is still very low in the U.S. and even negative in Alaska. The U.S. inflation rate is up 1.3% over the last 12 months according to the Bureau of Labor Statistics ("BLS"). This has been consistently below the Federal Reserve’s target rate of 2%. The BLS reported the consumer price index for Anchorage has actually been a negative 1.5% over the last 12 months. Notable declines in prices include gasoline -17.3% and clothing -10.1%. As always it is a mixed bag. Food and beverage prices have risen by 5.2% and health care costs are up 7.7% according to the BLS.

The housing market has been remarkably stable and even positive in Alaska in 2020. Prices have increased on average 4.3% in Anchorage, 7.5% in the Mat-Su, 4% in Fairbanks, 7.2% on the Kenai Peninsula and 11% in Kodiak according to the Multiple Listing Service ("MLS"). The number of homes sold is also higher in all these markets except Kenai, which is down just slightly from last year.

2021.

Alaska’s home mortgage delinquency and foreclosure levels continue to be better than most of the nation. According to the Mortgage Bankers Association, Alaska’s foreclosure rate ~~was 0.60%~~improved from 0.63% at the end of ~~the first quarter 2020 and it declined~~2019 to ~~0.54% in the second quarter. That compares to 0.73% and 0.68%~~0.45% at the end of 2020. In the first ~~and second~~ quarter of ~~2020 for~~2021 the ~~U.S.~~foreclosure rate improved again slightly to 0.41%. The comparable national average rate was higher than Alaska at 0.54% in the first quarter of 2021. Management believes that the foreclosure rates are somewhat misleading because the federal moratorium on foreclosure activity on occupied homes led to declining foreclosure numbers, even though job losses strained the economy and borrowers' ability to pay.

The Mortgage Bankers Association ~~national~~ survey reported that the percentage of delinquent mortgage loans at the end of 2019 in Alaska was ~~3.23%~~2.9%. This increased to 6.2% at the end of 2020 after the effects of COVID-19 impacted jobs. In the first quarter of 2021, it has improved to 5.4% in Alaska. According to the survey, the comparable delinquency rate for the entire country remains higher than Alaska at 6.1% in the first quarter of 2021.

According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 5.9% in 2020 to $396,779. This is following increases of 0.5% and 2.3% in 2019 and 2018, respectively. Average sales prices in the Matanuska Susitna Borough rose 9.9% in 2020, continuing a decade of consecutive price gains. These two markets represent where the vast majority of the Bank’s residential building activity occurs. The average sales price for the first six months of 2021 is 8% higher in Anchorage and 14.8% higher in the Matanuska Susitna Borough than the 12 month average of 2020.

The number of units sold in Anchorage was up significantly in 2020 by 19.5%, climbing from 2,719 homes sold in 2019 to ~~7.69%~~3,250 last year as reported by the Alaska Multiple Listing Services. The main difference was a record number of sales occurred in the last quarter of the year, when sales activity typically declines in the winter. The Matanuska Susitna Borough also had strong sales activity, up 9.7% in 2020 to 2,135 units sold compared to 1,946 in 2019. The Matanuska Susitna Borough also had stronger than normal sales in the second ~~quarter.~~half of 2020. In the first six months of 2021 there have been 1,567 home sales in Anchorage, or 30.3% more than in the first six months of 2020. The ~~comparable~~Matanuska Susitna Borough had 998 sales in the first half of 2021, an increase of 25.2% over the same time period in 2020.

We believe that the low interest rate environment has been a major factor in the increase in home sales. According to the Federal Reserve Bank of St. Louis, the average 30 year fixed rate mortgage in the U.S. ~~rate was 4%~~hit an all-time record low last year. Rates began 2020 at 3.7% in the first week of January and fell one percent to 2.7% by the end of the year. Rates began to rise in the first quarter of ~~2020~~2021 and ~~7.97%~~finished March at 3.2%. However, in the second ~~quarter. Borrowers who took advantage~~quarter of ~~three month forbearance programs~~2021 they declined to ~~delay payments show up as technically delinquent until they are approved for a formal restructure of their missed loan payments or until they catch up on the three months of missed payments.~~slightly under 3%.

COVID-19 Issues:

•Industry Exposure: Northrim has identified various industries that may be adversely impacted by the COVID-19 pandemic and the significant decline in oil prices. Though the industries affected may change through the progression of the pandemic, the following sectors for which the Company has exposure, as a percent of the total loan portfolio as of ~~September~~June 30, ~~2020~~2021 are being impacted: Healthcare (6%), Tourism ~~(4%~~(5%), Oil and Gas (4%), Aviation (non-tourism) (4%), ~~Healthcare (6%),~~ Accommodations ~~(3%~~(2%), Retail (2%), Fishing (3%), and Restaurants ~~(2%~~(3%). The Company's exposure as a percent of the total loan portfolio excluding ~~SBA~~U.S. Small Business Administration ("SBA") PPP loans as of ~~September~~June 30, ~~2020~~2021 are: Healthcare (8%), Tourism ~~(6%~~(7%), Oil and Gas ~~(6%~~(5%), Aviation (non-tourism) (5%), ~~Healthcare (7%),~~ Accommodations (3%), Retail ~~(2%~~(3%), Fishing (3%), and Restaurants ~~(2%~~(3%).

•Customer Accommodations: The Company has implemented several forms of assistance to help our customers in the event that they experience financial hardship as a result of COVID-19 in addition to our participation in PPP lending. The provisions of the CARES Act included an election to not apply the guidance on accounting for certain troubled debt restructurings related to COVID-19 and allow certain accommodations to borrowers. These accommodations include interest only and deferral options on loan payments, as well as the waiver of various fees related to loans, deposits and other services. The Company has elected to adopt these provisions of the CARES Act. The outstanding principal balance of loan modifications due to the impacts of COVID-19 were as follows:


Loan Modifications due to COVID-19 as of September 30, 2020
Loan Modifications due to COVID-19 as of June 30, 2021					Loan Modifications due to COVID-19 as of June 30, 2021
(Dollars in thousands)	(Dollars in thousands)	Interest Only	Full Payment Deferral	Total	(Dollars in thousands)	Interest Only	Full Payment Deferral	Total
Portfolio loans	Portfolio loans	$46,056	$74,337	$120,393	Portfolio loans	$75,613	$7,440	$83,053
Number of modifications	Number of modifications	16	59	75	Number of modifications	23	1	24


Loan Modifications due to COVID-19 as of June 30, 2020
Loan Modifications due to COVID-19 as of December 31, 2020					Loan Modifications due to COVID-19 as of December 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Interest Only	Full Payment Deferral	Total	(Dollars in thousands)	Interest Only	Full Payment Deferral	Total
Portfolio loans	Portfolio loans	$64,298	$293,224	$357,522	Portfolio loans	$43,379	$22,165	$65,544
Number of modifications	Number of modifications	76	403	479	Number of modifications	23	11	34

~~Consumer loans represent 1% of total loan modifications identified above.~~ Of the ~~$120~~$83.1 million and 7524 loan modifications as of ~~September~~June 30, ~~2020,~~2021, approximately ~~$11.4~~$64.0 million and 1222 loans have entered into a second modification.

•~~Loan Loss Reserve:~~ The Company booked a loan loss provision of $567,000 for the quarter ended September 30, 2020. This compares to a provision for loan losses of $404,000 during the previous quarter and a $2.1 million benefit for loan loss provision in the third quarter a year ago.

•~~Credit Quality:~~ Net adversely classified loans improved to $14.5 million at September 30, 2020, as compared to $22.3 million at December 31, 2019. Net loan recoveries were $463,000 in the third quarter of 2020, compared to net loan recoveries of $694,000 in the third quarter of 2019.

•Branch Operations: ~~All branches~~As of June 30, 2021, no branch operations are ~~fully operational,~~limited as a result of COVID-19, while a number of customer and employee safety ~~measure~~measures continue to be implemented.

•Remote Workers: As of ~~September~~June 30, ~~2020,~~2021, approximately ~~50%~~31% of the Company's employees are working remotely either on a full- or part-time basis directly due to the pandemic caused by COVID-19. These employees primarily hold non-customer facing positions within the Company. Prior to the pandemic, less than 8% of the Company's employees worked remotely. The increase in the number of employees that work remotely has had no material impact on the Company's operations.

•Growth and Paycheck Protection Program:

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

•~~During the third quarter of 2020,~~last fifteen months, Northrim funded ~~an additional 426~~a total of nearly 5,800 PPP loans totaling ~~$22.7~~$612.6 million to both existing and new ~~customers, bringing the PPP portfolio to approximately 2,888~~customers. Of this amount, 745 loans totaling ~~$375.6~~$33 million ~~at September 30, 2020.~~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.

•~~According to the SBA, the Company originated more SBA~~As of June 30, 2021, PPP has resulted in 2,340 new customers totaling $40 million in non-PPP loans, and $83 million in ~~the State of Alaska than any other financial institution, funding 23%~~new deposit balances.

•Management estimates that we funded approximately 24% of the number and ~~28%~~32% of the value of all Alaska PPP second round loans ~~for the period ending~~as of June 30, ~~2020.~~2021.

•As of ~~September~~June 30, ~~2020~~2021, Northrim ~~has submitted 17~~customers had received forgiveness through the SBA on 2,321 PPP loans totaling ~~$9.2~~$303 million, ~~for forgiveness through~~of which 617 PPP loans totaling $133 million were forgiven in the ~~SBA.~~second quarter of 2021, and 1,167 PPP loans totaling $105 million were forgiven in the first quarter of 2021. Of the PPP loans forgiven in the second quarter of 2021, 81 loans totaling $2.2 million related to PPP round two.

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

•~~Capital Management:~~ At September 30, 2020, the capital of Northrim Bank (the "Bank") was well in excess of all regulatory requirements. The Company resumed its stock repurchase program at the end of August and repurchased 89,000 shares of its common stock in the third quarter of 2020 at an average price of $26.66, leaving 45,549 shares available under the previously announced repurchase authorization.

Highlights and Summary of Performance - ~~Third~~Second Quarter of ~~2020~~2021

The Company reported net income and diluted earnings per share of ~~$11.9~~$8.3 million and ~~$1.84,~~$1.33, respectively, for the ~~third~~second quarter of ~~2020~~2021 compared to net income and diluted earnings per share of ~~$7.5~~$9.9 million and ~~$1.11,~~$1.52, respectively, for the ~~third~~second quarter of ~~2019.~~2020. The Company reported net income and diluted earnings per share of ~~$22.8~~$20.5 million and ~~$3.52,~~$3.27, respectively, for the first ~~nine~~six months of ~~2020~~2021 compared to ~~net income and diluted earnings per share of $16.1~~$10.9 million and ~~$2.35,~~$1.68, respectively, for the same period in ~~2019.~~2020. The decrease in net income for the three-month period ending June 30, 2021 compared to the same period last year is primarily attributable to a decrease in net income in the Home Mortgage Lending segment, as a result of decreased production. The increase in net income for the ~~three and nine month periods~~six-month period ending ~~September~~June 30, ~~2020~~2021 compared to the same ~~periods~~period last year is ~~primarily due~~attributable to ~~an increase~~increases in net income in the Home Mortgage Lending segment, as a result of increased ~~production.~~production in the first quarter of 2021 compared to 2020, and increased net income in the Community Banking segment mostly due to fee income from PPP loans and a reduction in the provision for credit losses.

•Total revenue in the ~~third~~second quarter of ~~2020,~~2021, which includes net interest income plus other operating income, ~~increased 49%~~decreased 5% to ~~$39.9~~$33.3 million from ~~$26.8~~$35.0 million in the ~~third~~second quarter a year ago, primarily due to a ~~$10.4~~$3.9 million decrease in mortgage banking income which was only partially offset by a $1.7 million increase in mortgage banking income. Similarly, total revenue in the first nine months of 2020 increased 28% to $97.0 million from $75.6 million in the first nine months of 2019, primarily due to a $20.0 million increase in mortgage bankingnet interest income.

•Net interest income increased ~~12%~~10% to ~~$18.3~~$19.2 million in the ~~third~~second quarter of ~~2020 and increased 7% to $51.4 million in the first nine months of 2020~~2021 compared to the same ~~periods~~period in ~~2019~~2020 mainly due to increased ~~loans~~loan balances and ~~loans held for sale balances.~~fees on PPP loans.

•Net interest margin decreased to ~~3.90%~~3.48% in the ~~third~~second quarter of ~~2020~~2021 as compared to ~~4.60%~~3.98% in the ~~third~~second quarter a year ago ~~and decreased to 4.05% for the first nine months of 2020 compared to 4.71% for the first nine months of 2019~~ primarily due to lower interest ~~rates.~~rates and a change in the mix of earning assets. These decreases were only partially offset by fees on PPP loans.

•The ~~provision~~Company booked a benefit for ~~loan~~credit losses ~~increased to $567,000 and $3.0 million~~of $427,000 for the ~~three and nine-month periods~~three-month period ending ~~September~~June 30, ~~2020,~~2021, compared to a ~~benefit~~provision of ~~$2.1 million and a benefit of $1.0 million~~$404,000 in the same ~~periods~~period in ~~2019. While~~2020. The provision for the current quarter was recorded using the CECL accounting standard and reflects expected lifetime credit ~~quality has continued to improve as nonperforming~~losses on loans and ~~adversely classified loans have decreased in 2020, the increase~~off-balance sheet unfunded loan commitments. The decrease in the provision for loan ~~losses for both periods~~credit loss in the second quarter of 2021 compared to the same quarter in 2020 is primarily the result of ~~management's assessment of risk associated with the COVID-19 pandemic, the reduction~~improvement in ~~oil prices and a slowing Alaska economy, as well as growth in the unguaranteed portion of the loan portfolio.~~economic assumptions used to estimate lifetime credit losses.

•The Company paid cash dividends of ~~$0.35~~$0.37 per common share in the ~~third~~second quarter of ~~2020,~~2021, up 6%9% from ~~$0.33~~$0.34 in the ~~third~~second quarter of ~~2019.~~2020.

•At June 30, 2021, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements. During the second quarter of 2021, there were no shares repurchased under the previously announced share repurchase program.

Other financial measures are shown in the table below:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Return on average assets, annualized	Return on average assets, annualized	2.31	%	1.90	%	1.62	%	1.41	%	Return on average assets, annualized	1.42	%	2.04	%	1.80	%	1.23	%
Return on average shareholders' equity, annualized	Return on average shareholders' equity, annualized	22.10	%	14.45	%	14.58	%	10.32	%	Return on average shareholders' equity, annualized	14.26	%	19.44	%	17.68	%	10.65	%
Dividend payout ratio	Dividend payout ratio	18.95	%	29.17	%	29.22	%	39.40	%	Dividend payout ratio	27.80	%	22.11	%	22.57	%	40.35	%

Credit Quality

Nonperforming assets: Nonperforming assets, net of government guarantees at ~~September~~June 30, ~~2020 decreased $2.1~~2021 increased $1.5 million, or ~~10%~~9% to ~~$17.9~~$17.8 million as compared to ~~$19.9~~$16.3 million at December 31, ~~2019.~~2020. OREO, net of government guarantees, decreased ~~$81,000 to $5.7 million at September 30, 2020 as compared~~$216,000 to $5.8 million at June 30, 2021 as compared to $6.0 million at December 31, ~~2019~~2020 due to the sale of one ~~OREO~~ property in the ~~third~~second quarter of ~~2020~~2021 which was only partially offset by the ~~transfer~~addition of one ~~loan to~~ OREO ~~during~~property in the ~~second~~first quarter of ~~2020.~~2021. Nonperforming loans, net of government guarantees ~~decreased $2.9~~increased $2.0 million, ~~during the first nine months~~or 20% to $12 million as of ~~2020~~June 30, 2021 from $10 million as ~~compared to~~of December 31, ~~2019, as paydowns and chargeoffs exceeded additions~~2020, primarily due to the addition of two relationships in the first ~~nine~~three months of ~~2020. $7.8~~2021 which were only partially offset by payoffs and paydowns in the second quarter of 2021. $9.5 million, or ~~44%~~54% of nonperforming assets at June 30, 2021, are nonaccrual loans ~~and nonperforming purchased receivables~~ related to ~~five~~six commercial relationships. ~~Two of these relationships, which totaled $3.3 million at the end of the third quarter of 2020, are businesses in the medical industry.~~ 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~~June 30, ~~2020~~2021 and ~~2019:~~2020.


					Writedowns		Transfers to							Writedowns		Transfers to
(In Thousands)	(In Thousands)	Balance at June 30, 2020	Additions this quarter	Payments this quarter	/Charge-offs this quarter	Transfers to OREO	Performing Status this quarter	Sales this quarter	Balance at September 30, 2020	(In Thousands)	Balance at March 31, 2021	Additions this quarter	Payments this quarter	/Charge-offs this quarter	Transfers to OREO	Performing Status this quarter	Sales this quarter	Balance at June 30, 2021
Commercial loans		$8,362	$386	($1,861)	($56)	$—	$—	$—	$6,831
Commercial real estate		5,123	—	(98)	(85)	—	—	—	4,940
Construction loans		702	—	—	—	—	—	—	702
Consumer loans		178	—	(4)	—	—	—	—	174

Nonperforming loans										Nonperforming loans	$14,463	$173	($1,422)	($110)	$—	$—	$—	$13,104
Nonperforming loans guaranteed by government	Nonperforming loans guaranteed by government	(1,635)	—	35	—	—	—	—	(1,600)	Nonperforming loans guaranteed by government	(1,382)	—	286	—	—	—	—	(1,096)
Total nonperforming loans		12,730	386	(1,928)	(141)	—	—	—	11,047
Nonperforming loans, net										Nonperforming loans, net	13,081	173	(1,136)	(110)	—	—	—	12,008
Other real estate owned	Other real estate owned	7,205	—	—	—	—	—	(243)	6,962	Other real estate owned	7,563	—	—	—	—	—	(490)	7,073
Repossessed assets	Repossessed assets	919	—	—	(140)	—	—	—	779	Repossessed assets	225	—	—	—	—	—	(225)	—
Nonperforming purchased receivables		1,226	—	(816)	—	—	—	—	410

Other real estate owned guaranteed	Other real estate owned guaranteed									Other real estate owned guaranteed
by government	by government	(1,279)	—	—	—	—	—	—	(1,279)	by government	(1,279)	—	—	—	—	—	—	(1,279)
Total nonperforming assets,	Total nonperforming assets,									Total nonperforming assets,
net of government guarantees	net of government guarantees	$20,801	$386	($2,744)	($281)	$—	$—	($243)	$17,919	net of government guarantees	$19,590	$173	($1,136)	($110)	$—	$—	($715)	$17,802


					Writedowns		Transfers to							Writedowns		Transfers to
(In Thousands)	(In Thousands)	Balance at June 30, 2019	Additions this quarter	Payments this quarter	/Charge-offs this quarter	Transfers to OREO/REPO	Performing Status this quarter	Sales this quarter	Balance at September 30, 2019	(In Thousands)	Balance at March 31, 2020	Additions this quarter	Payments this quarter	/Charge-offs this quarter	Transfers to OREO/REPO	Performing Status this quarter	Sales this quarter	Balance at June 30, 2020
Commercial loans		$11,207	$1,328	($1,414)	($22)	($231)	$—	$—	$10,868
Commercial real estate		5,041	—	(67)	—	—	—	—	4,974
Construction loans		1,492	—	(19)	—	—	—	—	1,473
Consumer loans		340	7	(213)	(7)	—	—	—	127

Nonperforming loans										Nonperforming loans	$15,074	$1,563	($773)	($804)	($695)	$—	$—	$14,365
Nonperforming loans guaranteed by government	Nonperforming loans guaranteed by government	(1,139)	(797)	1	—	—	—	—	(1,935)	Nonperforming loans guaranteed by government	(1,671)	(54)	90	—	—	—	—	(1,635)
Total nonperforming loans		16,941	538	(1,712)	(29)	(231)	—	—	15,507
Nonperforming loans, net										Nonperforming loans, net	13,403	1,509	(683)	(804)	(695)	—	—	12,730
Other real estate owned	Other real estate owned	7,043	—	—	—	—	—	—	7,043	Other real estate owned	7,205	—	—	—	—	—	—	7,205
Repossessed assets	Repossessed assets	1,182	231	—	—	—	—	(1,182)	231	Repossessed assets	231	695	(7)	—	—	—	—	919
Nonperforming purchased receivables										Nonperforming purchased receivables	—	1,226	—	—	—	—	—	1,226
Other real estate owned guaranteed	Other real estate owned guaranteed									Other real estate owned guaranteed
by government	by government	(1,279)	—	—	—	—	—	—	(1,279)	by government	(1,279)	—	—	—	—	—	—	(1,279)
Total nonperforming assets,	Total nonperforming assets,									Total nonperforming assets,
net of government guarantees	net of government guarantees	$23,887	$769	($1,712)	($29)	($231)	$—	($1,182)	$21,502	net of government guarantees	$19,560	$3,430	($690)	($804)	($695)	$—	$—	$20,801

Potential problem loans: Potential problem loans are loans which are currently performing in accordance with contractual terms but that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, or impaired loans. These loans are closely monitored and their performance is reviewed by management on a regular basis. At ~~September~~June 30, ~~2020,~~2021, management had identified potential problem loans of ~~$7.6~~$5.4 million as compared to potential problem loans of ~~$9.0~~$6.1 million at December 31, ~~2019.~~2020. The decrease in potential problem loans from December 31, ~~2019~~2020 to ~~September~~June 30, ~~2020~~2021 is primarily the result of ~~$3.2~~one $3.9 million inrelationship moving to nonaccrual as well as paydowns and ~~the addition of a government guarantee on one loan totaling $1.4 million. Three commercial relationships totaling $1.1 million as of December 31, 2019, net of government guarantees, were transferred~~credit risk upgrades to ~~nonaccrual status, and there were four new~~existing potential problem loans ~~during~~in the first ~~nine~~six months of ~~2020 totaling $4.3 million, net~~2021 which were only partially offset by additions to potential problem loans in the first six months of ~~government guarantees.~~2021.

Troubled debt restructurings (“TDRs”): TDRs are those loans for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower, have been granted due to the borrower’s weakened financial condition. Interest on TDRs will be accrued at the restructured rates when it is anticipated that no loss of original principal will occur, and the interest can be collected, which is generally after a period of six months. The Company had ~~$2.4~~$2.3 million in loans

classified as TDRs that were performing and ~~$6.1~~$3.9 million in TDRs included in nonaccrual loans at ~~September~~June 30, ~~2020~~2021 for a total of approximately ~~$8.5~~$6.2 million. There are $2.5 million in government guarantees associated with TDRs, so total TDRs, net of government guarantees, are ~~$5.9~~$3.8 million at ~~September~~June 30, ~~2020.~~2021. At December 31, ~~2019~~2020 there were ~~$1.4 million~~$832,000 in loans classified as TDRs, net of government guarantees that were performing and ~~$8.7~~$4.5 million in TDRs included in nonaccrual loans for a total of ~~$10.1~~$5.3 million. See Note 4 of the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion of TDRs.

RESULTS OF OPERATIONS

Income Statement

Net Income

Net income for the ~~third~~second quarter of ~~2020 increased $4.3~~2021 decreased $1.6 million ~~or 57%,~~ to ~~$11.9~~$8.3 million as compared to ~~$7.5~~$9.9 million for the same period in ~~2019. Net income for the first nine months of 2020 increased $6.7 million, or 41%, to $22.8 million compared to $16.1 million for the first nine months of 2019.~~2020. The ~~increase~~decrease in net income ~~in both periods~~ is ~~primarily due~~attributable to ~~an increase~~a $2.3 million decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production that was only partially offset by a $662,000 increase in net income in the Community Banking segment. The increase in net income in the Community Banking segment in the three months ended June 30, 2021, as compared to the same period a ~~result~~year ago is primarily due an increase in net interest income from PPP fees and a decrease in the provision for credit losses, and these changes were only partially offset by an increase in the provision for income taxes.

Net income for the first six months of 2021 increased ~~production.~~$9.6 million to $20.5 million as compared to $10.9 million for the same period in 2020. The increase in net income is attributable to a $7.0 million increase in net income in the Community Banking segment due an increase in net interest income from PPP fees and a decrease in the provision for credit losses, and similar to the second quarter comparison discussed above, these changes were only partially offset by an increase in the provision for income taxes. Net income in the Home Mortgage Lending segment increased $2.6 million in the first six months of 2021 as compared to the same period in 2020, primarily due to increases in production and net mortgage servicing income.

Net Interest Income/Net Interest Margin

Net interest income for the ~~third~~second quarter of ~~2020~~2021 increased ~~$2.0~~$1.7 million, or ~~12%~~10%, to ~~$18.3~~$19.2 million as compared to ~~$16.3~~$17.5 million for the ~~third~~second quarter of ~~2019.~~2020. Net interest margin decreased 7050 basis points to ~~3.90%~~3.48% in the ~~third~~second quarter of ~~2020~~2021 as compared to ~~4.60%~~3.98% in the ~~third~~second quarter of ~~2019.~~2020. Net interest income for the first ~~nine months~~half of ~~2020~~2021 increased ~~$3.4~~$5.5 million, or 7%17%, to ~~$51.4~~$38.7 million as compared to ~~$48.0~~$33.1 million for the first ~~nine months~~half of ~~2019. Net interest margin decreased 66 basis points to 4.05% in the first nine months of 2020 as compared to 4.71% in the first nine months of 2019.~~2020. The increase in net interest income in the ~~third~~second quarter and first ~~nine months~~six-months of ~~2020~~2021 compared to the same periods of ~~2019~~2020 was primarily the result of higher average earning asset balances, an increase in loan fee income due in large part to full recognition of the deferred PPP loan fees upon loan forgiveness through the SBA, and reduced interest expense. During the three and six-month periods ending June 30, 2021, Northrim received $133.0 million and $238 million, respectively, in loan forgiveness through the SBA compared to none in the same periods in 2020. Total net PPP fee income including accretion and full fee recognition upon loan forgiveness was $2.6 million and $5.9 million during the three and six-month periods ending June 30, 2021, respectively, compared to $1.3 million in both the three and six-month periods ending June 30, 2020. PPP fee income for 2020 included only fee accretion. As of June 30, 2021, there was $1.0 million of net PPP fee income from round one remaining and $10.0 million remaining from round two for total net deferred fees on PPP loans ~~and loans held for sale due to increased balances.~~of $11.0 million. The decrease in net interest margin in the ~~third~~second quarter and ~~the~~ first ~~nine~~six months of ~~2020~~2021 as compared to the same periods a year ago was primarily the result of ~~the reduction~~lower interest rates and a less favorable mix of earning assets due to significant increases in short-term ~~interest rates in 2020 and~~investments, which is the ~~impact~~lowest yielding type of earning asset for the ~~SBA PPP loans on the resulting yields in the loan portfolio.~~Company. Changes in net interest margin in the three and ~~nine months~~six-month periods ended ~~September~~June 30, ~~2020~~2021 as compared to the same period in the prior year are detailed below:


	Three Months Ended ~~September~~June 30, ~~2020~~2021 vs. ~~September~~June 30, ~~2019~~2020
Nonaccrual interest adjustments	~~0.19~~0.01	%
Impact of SBA Paycheck Protection Program loans	~~(0.33)~~0.22	%
Interest rates and loan fees	~~(0.61)~~(0.27)	%
Volume and mix of interest-earning assets	~~0.05~~ (0.46)	%
Change in net interest margin	~~(0.70)~~(0.50)	%


	~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021 vs. ~~September~~June 30, ~~2019~~2020
Nonaccrual interest adjustments	~~0.08~~0.02	%
Impact of SBA Paycheck Protection Program loans	~~(0.18)~~0.14	%
Interest rates and loan fees	~~(0.53)~~(0.41)	%
Volume and mix of interest-earning assets	~~(0.03)~~(0.21)	%
Change in net interest margin	~~(0.66)~~(0.46)	%

5153

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~~June 30, ~~2020~~2021 and ~~2019:~~2020:


(Dollars in Thousands)	(Dollars in Thousands)	Three Months Ended September 30,																		(Dollars in Thousands)	Three Months Ended June 30,
									Interest income/																			Interest income/
		Average Balances				Change			expense		Change			Average Yields/Costs							Average Balances				Change			expense		Change			Average Yields/Costs
		2020		2019		$	%		2020	2019	$	%		2020		2019		Change			2021		2020		$	%		2021	2020	$	%		2021		2020		Change
Loans1,2	Loans1,2	$1,465,839		$1,020,186		$445,653	44	%	$17,734	$15,154	$2,580	17	%	4.81	%	5.89	%	(1.08)	%	Loans1,2	$1,541,701		$1,342,717		$198,984	15	%	$18,200	$16,584	$1,616	10	%	4.74	%	4.97	%	(0.23)	%
Loans held for sale	Loans held for sale	122,994		74,181		48,813	66	%	957	709	248	35	%	3.10	%	3.79	%	(0.69)	%	Loans held for sale	111,228		111,475		(247)	—	%	763	870	(107)	(12)	%	2.75	%	3.14	%	(0.39)	%

Short-term investments3	Short-term investments3	60,504		58,754		1,750	3	%	17	313	(296)	(95)	%	0.11	%	2.11	%	(2.00)	%	Short-term investments3	208,067		51,448		156,619	304	%	61	31	30	97	%	0.12	%	0.24	%	(0.12)	%
Long-term investments4	Long-term investments4	217,599		253,364		(35,765)	(14)	%	1,086	1,661	(575)	(35)	%	1.99	%	2.60	%	(0.61)	%	Long-term investments4	354,260		256,500		97,760	38	%	1,229	1,519	(290)	(19)	%	1.39	%	2.38	%	(0.99)	%
Total investments	Total investments	278,103		312,118		(34,015)	(11)	%	1,103	1,974	(871)	(44)	%	1.58	%	2.51	%	(0.93)	%	Total investments	562,327		307,948		254,379	83	%	1,290	1,550	(260)	(17)	%	0.92	%	2.02	%	(1.10)	%
Interest-earning assets	Interest-earning assets	1,866,936		1,406,485		460,451	33	%	19,794	17,837	1,957	11	%	4.22	%	5.03	%	(0.81)	%	Interest-earning assets	2,215,256		1,762,140		453,116	26	%	20,253	19,004	1,249	7	%	3.67	%	4.34	%	(0.67)	%
Nonearning assets	Nonearning assets	172,853		169,907		2,946	2	%												Nonearning assets	173,164		186,583		(13,419)	(7)	%
Total	Total	$2,039,789		$1,576,392		$463,397	29	%												Total	$2,388,420		$1,948,723		$439,697	23	%

Interest-bearing demand	Interest-bearing demand	$409,758		$288,781		$120,977	42	%	$156	$167	($11)	(7)	%	0.15	%	0.23	%	(0.08)	%	Interest-bearing demand	$561,570		$379,851		$181,719	48	%	$128	$156	($28)	(18)	%	0.09	%	0.17	%	(0.08)	%
Savings deposits	Savings deposits	266,588		234,130		32,458	14	%	168	285	(117)	(41)	%	0.25	%	0.48	%	(0.23)	%	Savings deposits	311,929		246,379		65,550	27	%	126	176	(50)	(28)	%	0.16	%	0.29	%	(0.13)	%
Money market deposits	Money market deposits	218,965		209,147		9,818	5	%	153	303	(150)	(50)	%	0.28	%	0.57	%	(0.29)	%	Money market deposits	256,215		214,532		41,683	19	%	112	164	(52)	(32)	%	0.18	%	0.31	%	(0.13)	%
Time deposits	Time deposits	181,882		138,311		43,571	32	%	843	610	233	38	%	1.84	%	1.75	%	0.09	%	Time deposits	186,315		176,782		9,533	5	%	513	835	(322)	(39)	%	1.10	%	1.90	%	(0.80)	%
Total interest-bearing deposits	Total interest-bearing deposits	1,077,193		870,369		206,824	24	%	1,320	1,365	(45)	(3)	%	0.49	%	0.62	%	(0.13)	%	Total interest-bearing deposits	1,316,029		1,017,544		298,485	29	%	879	1,331	(452)	(34)	%	0.27	%	0.53	%	(0.26)	%
Borrowings	Borrowings	23,574		19,749		3,825	19	%	180	166	14	8	%	3.04	%	3.33	%	(0.29)	%	Borrowings	25,032		73,349		(48,317)	(66)	%	182	216	(34)	(16)	%	2.92	%	1.18	%	1.74	%
Total interest-bearing liabilities	Total interest-bearing liabilities	1,100,767		890,118		210,649	24	%	1,500	1,531	(31)	(2)	%	0.54	%	0.68	%	(0.14)	%	Total interest-bearing liabilities	1,341,061		1,090,893		250,168	23	%	1,061	1,547	(486)	(31)	%	0.32	%	0.57	%	(0.25)	%
Demand deposits and other noninterest-bearing liabilities	Demand deposits and other noninterest-bearing liabilities	725,585		479,372		246,213	51	%												Demand deposits and other noninterest-bearing liabilities	809,971		652,989		156,982	24	%
Equity	Equity	213,437		206,902		6,535	3	%												Equity	237,388		204,841		32,547	16	%
Total	Total	$2,039,789		$1,576,392		$463,397	29	%												Total	$2,388,420		$1,948,723		$439,697	23	%
Net interest income	Net interest income								$18,294	$16,306	$1,988	12	%							Net interest income								$19,192	$17,457	$1,735	10	%
Net interest margin	Net interest margin													3.90	%	4.60	%	(0.70)	%	Net interest margin													3.48	%	3.98	%	(0.50)	%
Average loans to average interest-earning assets	Average loans to average interest-earning assets	78.52	%	72.53	%															Average loans to average interest-earning assets	69.59	%	76.20	%
Average loans to average total deposits	Average loans to average total deposits	83.75	%	78.01	%															Average loans to average total deposits	74.01	%	82.88	%
Average non-interest deposits to average total deposits	Average non-interest deposits to average total deposits	38.45	%	33.45	%															Average non-interest deposits to average total deposits	36.82	%	37.19	%
Average interest-earning assets to average interest-bearing liabilities	Average interest-earning assets to average interest-bearing liabilities	169.60	%	158.01	%															Average interest-earning assets to average interest-bearing liabilities	165.19	%	161.53	%

1Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled ~~$2.2~~$3.4 million and ~~$841,000~~$2.0 million in the ~~third~~second quarter of ~~2020~~2021 and ~~2019,~~2020, respectively.

2Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were ~~$13.9~~$13.8 million and ~~$17.8~~$14.6 million in the ~~third~~second quarter of ~~2020~~2021 and ~~2019,~~2020, respectively.

3Consists of interest bearing deposits in other banks.

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

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the three-month periods ending September 30, 2020 and 2019. Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates:

(In Thousands) Three Months Ended September 30, 2020 vs. 2019
Increase (decrease) due to
Volume Rate Total
Interest Income:
   Loans $2,658 ($78) $2,580
   Loans held for sale 342 (94) 248
   Short-term investments 9 (305) (296)
   Long-term investments (219) (356) (575)
          Total interest income $2,790 ($833) $1,957
Interest Expense:
   Interest-bearing deposits $282 ($327) ($45)
   Borrowings 28 (14) 14
          Total interest expense $310 ($341) ($31)

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

(Dollars in Thousands) Nine Months Ended September 30,
Interest income/
Average Balances Change expense Change Average Yields/Costs
2020 2019 $ % 2020 2019 $ % 2020 2019 Change
Loans1,2
$1,289,838 $1,004,157 $285,681 28 % $49,237 $44,607 $4,630 10 % 5.10 % 5.94 % (0.84) %
Loans held for sale 95,050 52,379 42,671 81 % 2,267 1,586 681 43 % 3.19 % 4.05 % (0.86) %
Short-term investments3
60,011 35,394 24,617 70 % 284 591 (307) (52) % 0.63 % 2.23 % (1.60) %
Long-term investments4
252,594 271,645 (19,051) (7) % 4,349 5,237 (888) (17) % 2.30 % 2.58 % (0.28) %
   Total investments 312,605 307,039 5,566 2 % 4,633 5,828 (1,195) (21) % 1.98 % 2.54 % (0.56) %
   Interest-earning assets 1,697,493 1,363,575 333,918 24 % 56,137 52,021 4,116 8 % 4.42 % 5.10 % (0.68) %
Nonearning assets 177,811 166,548 11,263 7 %
          Total $1,875,304 $1,530,123 $345,181 23 %
Interest-bearing demand $370,270 $261,295 $108,975 42 % $476 $313 $163 52 % 0.17 % 0.16 % 0.01 %
Savings deposits 247,605 234,177 13,428 6 % 581 830 (249) (30) % 0.31 % 0.47 % (0.16) %
Money market deposits 213,201 207,350 5,851 3 % 574 846 (272) (32) % 0.36 % 0.55 % (0.19) %
Time deposits 176,046 127,094 48,952 39 % 2,504 1,488 1,016 68 % 1.90 % 1.57 % 0.33 %
   Total interest-bearing deposits 1,007,122 829,916 177,206 21 % 4,135 3,477 658 19 % 0.55 % 0.56 % (0.01) %
Borrowings 39,645 38,618 1,027 3 % 561 512 49 10 % 1.89 % 1.77 % 0.12 %
   Total interest-bearing liabilities 1,046,767 868,534 178,233 21 % 4,696 3,989 707 18 % 0.60 % 0.61 % (0.01) %
Demand deposits and other noninterest-bearing liabilities 619,772 452,772 167,000 37 %
Equity 208,765 208,817 (52) — %
          Total $1,875,304 $1,530,123 $345,181 23 %
Net interest income $51,441 $48,032 $3,409 7 %
Net interest margin 4.05 % 4.71 % (0.66) %
Average loans to average interest-earning assets 75.98 % 73.64 %
Average loans to average total deposits 81.79 % 80.48 %
Average non-interest deposits to average total deposits 36.14 % 33.48 %
Average interest-earning assets to average interest-bearing liabilities 162.17 % 157.00 %

1Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $5.1 million and $2.4 million in the first nine months of 2020 and 2019, respectively.

2Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were $14.4 million and $17.2 million in the first six months of 2020 and 2019, respectively.

3~~Consists of interest bearing deposits in other banks.~~

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

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the ~~nine-month~~three-month periods ending ~~September~~June 30, ~~2020~~2021 and ~~2019.~~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)	(In Thousands)	Nine Months Ended September 30, 2020 vs. 2019			(In Thousands)	Three Months Ended June 30, 2021 vs. 2020
		Increase (decrease) due to				Increase (decrease) due to
		Volume	Rate	Total		Volume	Rate	Total
Interest Income:	Interest Income:				Interest Income:
Loans	Loans	$4,751	($122)	$4,629	Loans	$2,362	($746)	$1,616
Loans held for sale	Loans held for sale	925	(243)	682	Loans held for sale	(2)	(105)	(107)
Short-term investments	Short-term investments	123	(430)	(307)	Short-term investments	52	(22)	30
Long-term investments	Long-term investments	(363)	(525)	(888)	Long-term investments	545	(835)	(290)
Total interest income	Total interest income	$5,436	($1,320)	$4,116	Total interest income	$2,957	($1,708)	$1,249

Interest Expense:	Interest Expense:				Interest Expense:
Interest-bearing deposits	Interest-bearing deposits	$785	($20)	$765	Interest-bearing deposits	$322	($774)	($452)
Borrowings	Borrowings	13	36	49	Borrowings	27	(61)	(34)
Total interest expense	Total interest expense	$798	$16	$814	Total interest expense	$349	($835)	($486)

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


(Dollars in Thousands)	Six Months Ended June 30,
								Interest income/
	Average Balances				Change			expense		Change			Average Yields/Costs
	2021		2020		$	%		2021	2020	$	%		2021		2020		Change
Loans1,2	$1,517,438		$1,200,870		$316,568	26	%	$36,842	$31,503	$5,339	17	%	4.90	%	5.28	%	(0.38)	%
Loans held for sale	112,897		80,925		31,972	40	%	1,545	1,310	235	18	%	2.76	%	3.26	%	(0.50)	%

Short-term investments3	164,712		59,762		104,950	176	%	99	267	(168)	(63)	%	0.12	%	0.90	%	(0.78)	%
Long-term investments4	326,671		270,284		56,387	21	%	2,363	3,263	(900)	(28)	%	1.46	%	2.43	%	(0.97)	%
Total investments	491,383		330,046		161,337	49	%	2,462	3,530	(1,068)	(30)	%	1.01	%	2.15	%	(1.14)	%
Interest-earning assets	2,121,718		1,611,841		509,877	32	%	40,849	36,343	4,506	12	%	3.88	%	4.53	%	(0.65)	%
Nonearning assets	171,870		180,316		(8,446)	(5)	%
Total	$2,293,588		$1,792,157		$501,431	28	%

Interest-bearing demand	$516,228		$350,308		$165,920	47	%	$246	$320	($74)	(23)	%	0.10	%	0.18	%	(0.08)	%
Savings deposits	314,709		238,009		76,700	32	%	255	413	(158)	(38)	%	0.16	%	0.35	%	(0.19)	%
Money market deposits	251,140		210,288		40,852	19	%	225	421	(196)	(47)	%	0.18	%	0.40	%	(0.22)	%
Time deposits	179,778		173,096		6,682	4	%	1,102	1,661	(559)	(34)	%	1.24	%	1.93	%	(0.69)	%
Total interest-bearing deposits	1,261,855		971,701		290,154	30	%	1,828	2,815	(987)	(35)	%	0.29	%	0.58	%	(0.29)	%
Borrowings	25,066		47,769		(22,703)	(48)	%	336	381	(45)	(12)	%	2.70	%	1.60	%	1.10	%
Total interest-bearing liabilities	1,286,921		1,019,470		267,451	26	%	2,164	3,196	(1,032)	(32)	%	0.34	%	0.63	%	(0.29)	%
Demand deposits and other noninterest-bearing liabilities	772,548		566,284		206,264	36	%
Equity	234,119		206,403		27,716	13	%
Total	$2,293,588		$1,792,157		$501,431	28	%
Net interest income								$38,685	$33,147	$5,538	17	%
Net interest margin													3.68	%	4.14	%	(0.46)	%
Average loans to average interest-earning assets	71.52	%	74.50	%
Average loans to average total deposits	76.27	%	80.62	%
Average non-interest deposits to average total deposits	36.57	%	34.77	%
Average interest-earning assets to average interest-bearing liabilities	164.87	%	158.11	%

1Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $7.6 million and $2.9 million in the first six months of 2021 and 2020, respectively.

2Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were $12.2 million and $14.7 million in the first six months of 2021 and 2020, respectively.

3Consists of interest bearing deposits in other banks.

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

The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the six-month periods ending June 30, 2021 and 2020. Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates:


(In Thousands)	Six Months Ended June 30, 2021 vs. 2020
	Increase (decrease) due to
	Volume	Rate	Total
Interest Income:
Loans	$9,724	($4,385)	$5,339
Loans held for sale	386	(151)	235
Short-term investments	500	(668)	(168)
Long-term investments	1,697	(2,597)	(900)
Total interest income	$12,307	($7,801)	$4,506

Interest Expense:
Interest-bearing deposits	$1,745	($2,732)	($987)
Borrowings	(445)	400	(45)
Total interest expense	$1,300	($2,332)	($1,032)

Provision for ~~Loan~~Credit Losses

The Company adopted ASU 2016-13 effective January 1, 2021. The provision for loan losses increased to $567,000 for the third quarter of 2020 and $3.0 million for the first nine months of 2020 compared to a benefit for loan losses of $2.1 million in the third quarter of 2019 and a benefit for loan losses of $1.0 million for the first nine months of 2019. While credit quality has continued to improve as nonperforming loans and adversely classified loans have decreased in 2020 as compared to the prior year, the increase in the provision for loan losses for both periodsloss expense is the ~~result~~amount of ~~management's assessment of risk associated with~~expense that, based on our judgment, is required to maintain the ~~COVID-19 pandemic, the reduction in oil prices and a slowing Alaska economy, as well as growth in the unguaranteed portion~~ACL at an appropriate level under CECL. The determination of the ~~loan portfolio. The ratio~~amount of the ~~Allowance~~ACL is complex and involves a high degree of judgment and subjectivity. Refer to ~~total nonperforming loans, net of government guarantees was 196% at September 30, 2020 and 137% at December 31, 2019.~~

~~See "Analysis of Allowance for Loan Losses" under the "Financial Condition-Balance Sheet Overview" and~~ Note 51 of the ~~Notes~~notes to Consolidated Financial Statements included in Item 1 of this report for ~~more information~~detailed discussion regarding ACL methodologies for loans, available for sale debt securities, held to maturity securities, loans held for investment, unfunded commitments, and purchased receivables.

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


	Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	2021	2020	2021	2020
Credit loss expense on loans held for investment	($161)	$404	($2,066)	$2,464
Credit loss expense on unfunded commitments	(266)	—	151	—
Credit loss expense on available for sale debt securities	—	—	—	—
Credit loss expense on held to maturity securities	—	—	—	—
Credit loss expense on purchased receivables	—	—	—	—
Total credit loss expense	($427)	$404	($1,915)	$2,464

As noted above, the provision for credit losses was recorded in accordance with CECL in 2021. The provision for credit losses in 2020, prior to adoption of CECL, was recorded under the incurred loss model. Despite the fact that two different methodologies were used in the calculation of the provision for credit losses in 2021 versus 2020, in general the decrease in the provision for credit losses on loans for the three and six-month periods ending June 30, 2021 as compared to the same periods in 2020 is primarily the result of improvement in economic assumptions used to estimate credit losses. The ongoing impacts of the CECL methodology will be dependent upon changes in ~~the Company's Allowance.~~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~~June 30, ~~2020, increased $11.1~~2021, decreased $3.4 million, or ~~105%~~19%, to ~~$21.6~~$14.1 million as compared to ~~$10.5~~$17.5 million for the same period in ~~2019,~~2020, primarily due to a $3.9 million decrease in mortgage banking income in the ~~$10.4~~second quarter of 2021 compared to the same quarter in 2020. The decrease in mortgage banking income in the three-month period ended June 30, 2021 as compared to the same period in 2020 was primarily due to decreased refinance activity due to changes in the mortgage interest rates that was only partially offset by increased mortgages for home purchases. Additionally, there was a decrease in purchased receivable income due to customers reportedly using PPP funds instead of selling receivables. These decreases were only partially offset by an increase in bankcard fees due to lower transaction volume in the second quarter of 2020 resulting from quarantine restrictions related to the COVID-19 pandemic, an increase in service charges on deposits due to customer accommodations related to the impacts of COVID-19 that lowered service changes on deposits in the second quarter of 2020, and an increase in interest rate swap income.

Other operating income for the six-month period ended June 30, 2021, increased $6.1 million, or 25%, to $30.0 million as compared to $24.0 million for the same period in 2020, primarily due to a $5.1 million increase in mortgage banking income in the ~~third quarter~~second half of ~~2020~~2021 compared to the same ~~quarter~~period in ~~2019. This~~2020. The increase in mortgage banking income in the ~~three months~~six-month period ended ~~September~~June 30, ~~2020~~2021 as compared to the same period in ~~2019~~2020 was primarily due to increased home purchase activity that was only partially offset by lower refinance activity ~~and home purchases~~ due to changes in the mortgage interest rates. Additionally, there was a $94,000 unrealized gain on marketable securities recognized in the ~~Company recognized $726,000~~first half of 2021 compared to a $722,000 unrealized loss in the same period in 2020. Bankcard fees, service charges on deposits, and interest rate swap ~~fee~~ income also increased in the ~~third quarter~~first half of 2021 compared to 2020 due to the cessation of COVID-19 quarantine restrictions and higher transaction volume as compared to the same period in 2020. ~~This increase was~~These increases were only partially offset by a decrease in purchased receivable income due to customers reportedly using PPP funds instead of selling ~~receivables, and a decrease in service charges on deposit accounts due to customer accommodations related to the impacts of COVID19 as compared to the third quarter of 2019.~~receivables.

Other operating income for the first nine months of 2020 increased $18.0 million, or 65%, to $45.6 million as compared to $27.6 million for the same period in 2019, primarily due to a $20.0 million increase in mortgage banking income. Similar to the third quarter, this increase in mortgage banking income was primarily due to increased refinance activity and home purchases due to changes in the mortgage interest rates. This increase in the first nine months of 2020 was only partially offset by decreases in purchased receivable income, due to customers reportedly using PPP funds instead of selling receivables, a decrease in service charges on deposit accounts due to customer accommodations related to the impacts of COVID19 as compared to the first nine months of 2019, and the recognition of a $347,000 unrealized loss on marketable securities in the first nine months of 2020 compared to a $782,000 unrealized gain on marketable securities for the same period in 2019.

Other Operating Expense

Other operating expense for the ~~third~~second quarter of ~~2020 increased $4.2 million,~~2021 decreased $338,000, or ~~22%~~1%, to ~~$23.5~~$22.3 million as compared to the same period in ~~2019~~2020 primarily due to ~~higher~~lower salaries and other personnel expense ~~and other miscellaneous operating expenses~~ related to mortgage banking operations, which fluctuate with production volumes. This decrease was only partially offset by an increase in occupancy expense as a result of miscellaneous repairs and maintenance and tenant improvements at several of the Company's locations and data processing expense.

Other operating expense for the first ~~nine months~~half of ~~2020~~2021 increased ~~$8.7~~$2.2 million, or ~~16%~~5%, to ~~$65.0~~$43.7 million from ~~$56.2~~$41.5 million infor the same period in ~~2019~~2020 primarily due to higher salaries and other personnel expense ~~and other miscellaneous operating expenses~~ related to mortgage banking operations, which fluctuate with production volumes. Additionally, data processing ~~costs~~and occupancy expenses increased in the ~~Community Banking segment were higher~~first half of 2021 as compared to 2020 due to ~~charges for additional products~~miscellaneous repairs and maintenance, IT maintenance and services, and ~~insurance expense in~~tenant improvements at several of the ~~Community Banking segment increased because of higher FDIC insurance due to the increase in total assets.~~Company's locations.

Income Taxes

~~The provision for income taxes for~~For the ~~third~~second quarter and first half of ~~2020 increased $2.0 million, or 97%,~~2021, Northrim recorded a higher effective tax rate as compared to the same ~~period~~periods in 2019. The provision for income taxes in the first nine months of 2020 increased $1.9 million, or 44%, as compared to the first nine months of 2019. The increase in the three-month period ending September 30, 2020 as ~~compared to the same period~~a result of a decrease in 2019 was primarily due to the increase in pretax income. The effective tax rate increased to 25% in the three-month period ending September 30, 2020 as compared to 21% in the same period in 2019, and the effective tax rate increased to 22% in the nine-month period ending September 30, 2020 as compared to 21% in the same period in 2019. The increased rate in both the three and nine-month periods ending September 30, 2020 was primarily due to decreased tax credits and tax exempt interest income as a percentage of ~~net~~pre-tax income ~~which was only partially offset by~~in 2021, as well as the reversal of a $454,000 accrual ~~for a potential increase in~~of tax expense ~~related to an audit that was performed in 2018 by the State of Alaska for tax years 2014-2016. The Company has appealed the State of Alaska's decision on this matter and reversed this accrual~~ in the second quarter of ~~2020 because~~2020. In the ~~Company believes that it is more likely than not that the court will rule~~second quarter of 2021, Northrim recorded $3.1 million in state and federal income tax expense for an effective tax rate of 26.9%, compared to $3.4 million, or 21.7% in the ~~Company's favor.~~first quarter of 2021 and $2.0 million, or 16.9% in the second quarter a year ago. For the first half of 2021, Northrim recorded $6.4 million in state and federal income tax expense, for an effective tax rate of 23.9% compared to $2.3 million and 17.1% for the same period in 2020.

FINANCIAL CONDITION

Balance Sheet Overview

Portfolio Investments

Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, at ~~September~~June 30, ~~2020 decreased 21%~~2021 increased 38%, or ~~$60.2~~$100.1 million, to ~~$223.9~~$366.8 million from ~~$284.1~~$266.7 million at December 31, ~~2019~~2020 as proceeds from ~~sales, maturities, and security calls~~an increase in deposits that were ~~used for loan fundings~~not lent out were invested in the first ~~nine~~six months of ~~2020.~~2021.

5658

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


		September 30, 2020			December 31, 2019				June 30, 2021			December 31, 2020
		Dollar Amount	Percent of Total		Dollar Amount	Percent of Total			Dollar Amount	Percent of Total		Dollar Amount	Percent of Total
(In Thousands)	(In Thousands)							(In Thousands)
		Balance	% of total		Balance	% of total			Balance	% of total		Balance	% of total
U.S. Treasury and government sponsored entities	U.S. Treasury and government sponsored entities	$157,552	70.4	%	$211,852	74.6	%	U.S. Treasury and government sponsored entities	$253,351	69.1	%	$174,601	65.5	%
Municipal securities	Municipal securities	2,336	1.0	%	3,297	1.2	%	Municipal securities	852	0.2	%	856	0.3	%

Corporate bonds	Corporate bonds	27,215	12.2	%	35,066	12.3	%	Corporate bonds	55,487	15.1	%	40,492	15.2	%
Collateralized loan obligations	Collateralized loan obligations	28,266	12.6	%	25,923	9.1	%	Collateralized loan obligations	47,541	13.0	%	41,684	15.6	%
Preferred stock	Preferred stock	8,534	3.8	%	7,945	2.8	%	Preferred stock	9,588	2.6	%	9,052	3.4	%
Total portfolio investments	Total portfolio investments	$223,903			$284,083			Total portfolio investments	$366,819			$266,685

Loans and Lending Activities

~~Our~~The following table presents the concentration distribution of the loan ~~products include short~~portfolio, net of deferred fees and medium-term commercial loans, commercial credit lines, construction and real estate loans, and consumer loans. From our inception, we have emphasized commercial, land development and home construction, and commercial real estate lending. This typecosts, as of lending has generally provided us with market opportunities and higher net interest margins than other types of lending. However, it also involves greater risks, including greater exposure to changes in local economic conditions, than certain other types of lending.the dates indicated:

~~Portfolio loans~~


	June 30, 2021			December 31, 2020
	Dollar Amount	Percent of Total		Dollar Amount	Percent of Total
(In Thousands)
Commercial & industrial loans	$609,214	41.0	%	$612,254	42.2	%
Commercial real estate:
Owner occupied properties	260,879	17.5	%	233,320	16.2	%
Non-owner occupied and multifamily properties	410,572	27.7	%	392,452	27.2	%
Residential real estate:
1-4 family residential properties secured by first liens	33,661	2.3	%	33,415	2.3	%
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	17,793	1.2	%	18,236	1.3	%
1-4 family residential construction loans	34,958	2.3	%	32,500	2.3	%
Other construction, land development and raw land loans	79,431	5.3	%	83,463	5.8	%
Obligations of states and political subdivisions in the US	17,331	1.2	%	15,318	1.1	%
Agricultural production, including commercial fishing	15,558	1.0	%	12,968	0.9	%
Consumer loans	5,156	0.3	%	5,734	0.4	%
Other loans	3,415	0.2	%	4,390	0.3	%
Total loans	$1,487,968			$1,444,050

Loans increased by ~~$449.3~~$43.9 million, or ~~43%~~3%, to ~~$1.493~~$1.488 billion at ~~September~~June 30, ~~2020~~2021 from ~~$1.043~~$1.444 billion at December 31, ~~2019,~~2020, primarily as a result of increased commercial real estate loans. Commercial real estate loans ~~due to~~increased $45.7 million, or 7% during the ~~Company's participation~~six-month period ending June 30, 2021. As shown in the table above, 1-4 family residential construction loans, obligations of states and political subdivisions, and agriculture production, including commercial fishing also increased in the first six months of 2021 while the remaining loan segments decreased slightly, as compared to year end 2020. Management believes that the significant outreach that the Company has done throughout the SBA ~~PPP.~~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 ~~below~~above and totaled ~~$375.6~~$300.9 million at ~~September~~June 30, ~~2020~~2021 and ~~zero~~$304.6 million at December 31, ~~2019. Commercial loans net of SBA PPP loans increased $47.9 million, or 12%, in the first nine months of~~ 2020. As shown in the table below, real estate construction other, real estate term owner occupied and real estate term non-owner occupied loans also increased in the first nine months of 2020. These increases were partially offset by smaller decreases in consumer loans and real estate construction one-to-four family loans in the first nine months of 2020. Real estate construction one-to-four family loans, which are mostly residential housing construction loans decreased slightly to 3% of portfolio loans at September 30, 2020 compared to 4% at December 31, 2019.

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

September 30, 2020 December 31, 2019
Dollar Amount Percent of Total Dollar Amount Percent of Total
(In Thousands)
Commercial $836,178 56.2 % $412,690 39.5 %
Real estate construction one-to-four family 37,958 2.5 % 38,818 3.7 %
Real estate construction other 82,661 5.5 % 61,808 5.9 %
Real estate term owner occupied 148,993 10.0 % 138,891 13.3 %
Real estate term non-owner occupied 320,693 21.5 % 312,960 30.0 %
Real estate term other 43,539 2.9 % 42,506 4.1 %
Consumer secured by 1st deeds of trust 14,050 0.9 % 16,198 1.6 %
Consumer other 23,133 1.5 % 24,585 2.4 %
Subtotal $1,507,205 $1,048,456
Less: Unearned origination fee,
net of origination costs (14,485) (1.0) % (5,085) (0.5) %
Total loans $1,492,720 $1,043,371

5759

The above table includes $375.6 million SBA PPP loans within the Commercial loan segment. Additionally, unearned origination fee, net of origination costs includes $8.8 million associated with SBA PPP loans.

Information about loans directly exposed to the oil and gas industry

The Company defines "direct exposure" to the oil and gas industry as companies that it has identified as significantly reliant upon activity related to the oil and gas industry, such as oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry. The Company estimates that ~~$66.0~~$65.0 million, or approximately 4% of loans as of ~~September~~June 30, ~~2020~~2021 have direct exposure to the oil and gas industry as compared to ~~$79.2~~$65.1 million, or approximately 8%4% of loans as of December 31, ~~2019.~~2020. The Company's exposure as a percent of the total loan portfolio excluding SBA PPP loans as of ~~September~~June 30, 2021 was 5% and as of December 31, 2020 was 6%. The Company has no loans to oil producers or exploration companies as of ~~September~~June 30, ~~2020~~2021 or December 31, ~~2019,~~2020, but the totals noted include a loan related to construction of an oil drilling rig. The balance of this loan was ~~$6.8~~$6.7 million and ~~$14.2~~$3.0 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~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 ~~$63.6~~$67.3 million and ~~$31.1~~$63.5 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The portion of the Company's ~~Allowance~~ACL that related to the loans with direct exposure to the oil and gas industry was estimated at ~~$1.3~~$1.4 million as of ~~September~~June 30, ~~2020~~2021 and ~~$1.6~~$1.2 million as of December 31, ~~2019.~~2020.

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

(In Thousands) Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deeds of trust Consumer other Total
September 30, 2020
AQR Pass $45,211 $— $— $4,048 $— $— $— $2,261 $51,520
AQR Special Mention 4,304 — — 1,633 6,687 — — — 12,624
AQR Substandard 1,904 — — — — — — — 1,904
Total $51,419 $— $— $5,681 $6,687 $— $— $2,261 $66,048
December 31, 2019
AQR Pass $62,345 $— $— $4,153 $— $— $— $361 $66,859
AQR Special Mention 450 — — 1,900 6,916 — — — 9,266
AQR Substandard 3,070 — — — — — — — 3,070
Total $65,865 $— $— $6,053 $6,916 $— $— $361 $79,195


(In Thousands)	June 30, 2021	December 31, 2020
Commercial & industrial loans	$45,492	$41,016
Commercial real estate:
Owner occupied properties	11,617	11,296
Non-owner occupied and multifamily properties	6,357	6,606







Consumer loans	—	2,256
Other loans	1,509	3,948
Total	$64,975	$65,122

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

~~In addition, at September~~At June 30, ~~2020,~~2021, the Company had ~~$62.6~~$93.7 million, or 4%6% of portfolio loans, in the healthcare sector, $82.3 million, or 5% of portfolio loans, in the tourism sector, ~~$54.2~~$57.8 million, or 4% of portfolio loans, in the aviation (non-tourism) sector, ~~$83.2~~$40.8 million, or 6%3% in the restaurant sector, $37.9 million, or 3% of portfolio loans, in the fishing sector, $36.3 million, or 2% of portfolio loans, in the retail sector, and $36.4 million, or 2% of portfolio loans, in the accommodations sector. At June 30, 2021, the Company had $93.7 million, or 8% of total loans excluding SBA PPP loans, in the healthcare sector, ~~$23.0~~$82.3 million, or ~~2%, in retail loans and $27.1 million, or 2% in the restaurant sector, and $38.9 million, or 3% in the accommodations sector. At September 30, 2020, the Company had $62.6 million, or 6%~~7% of portfolio loans excluding SBA PPP loans, in the tourism sector, ~~$54.2~~$57.8 million, or 5% of portfolio loans excluding SBA PPP loans, in the aviation (non-tourism) sector, ~~$83.2~~$40.8 million, or ~~7% of total loans excluding SBA PPP loans, in the healthcare sector, $23.0 million, or 2% of total loans excluding SBA PPP loans, in retail loans and $27.1 million, or 2%~~3% of total loans excluding SBA PPP loans in the restaurant sector, ~~and $38.9~~

$37.9 million, or 3% of total loans excluding SBA PPP loans, in the fishing sector, $36.4 million, or 3% of total loans excluding SBA PPP loans in the accommodations ~~sector.The~~sector, and $36.3 million, or 3% of total loans excluding SBA PPP loans, in retail loans.

The portion of the Company's ~~Allowance~~ACL that related to the loans with exposure to these industries is estimated at the following amounts as of ~~September~~June 30, ~~2020:~~

(In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Restaurant Accommodations Total
Allowance $1,224 $1,062 $1,548 $432 $515 $753 $5,534
2021:

~~Analysis of Allowance for Loan Losses~~

The Company maintains an Allowance to reflect management's assessment of probable, estimable losses inherent in the loan portfolio. The Allowance is increased by provisions for loan losses and loan recoveries and decreased by loan charge-

offs. The size of the Allowance is determined through quarterly assessments of probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the Allowance includes the following key elements:

•~~A specific allocation for impaired loans.~~ Management determines the fair value of the majority of these loans based on the underlying collateral values. This analysis is based upon a specific analysis for each impaired loan, including external appraisals on loans secured by real property, management’s assessment of the current market, recent payment history, and an evaluation of other sources of repayment. In-house evaluations of fair value are used in the impairment analysis in some situations. Inputs to the in-house evaluation process include information about sales of comparable properties in the appropriate markets and changes in tax assessed values. The Company obtains appraisals on real and personal property that secure its loans during the loan origination process in accordance with regulatory guidance and its loan policy. The Company obtains updated appraisals on loans secured by real or personal property based upon its assessment of changes in the current market or particular projects or properties, information from other current appraisals, and other sources of information. Appraisals may be adjusted downward by the Company based on its evaluation of the facts and circumstances on a case by case basis. External appraisals may be discounted when management believes that the absorption period used in the appraisal is unrealistic, when expected liquidation costs exceed those included in the appraisal, or when management’s evaluation of deteriorating market conditions warrants an adjustment. Additionally, the Company may also adjust appraisals in the above circumstances between appraisal dates. The Company uses the information provided in these updated appraisals along with its evaluation of all other information available on a particular property as it assesses the collateral coverage on its performing and nonperforming loans and the impact that may have on the adequacy of its Allowance. The specific allowance for impaired loans, as well as the overall Allowance, may increase based on the Company’s assessment of updated appraisals. See Note 11 of the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion of the Company’s estimation of impaired loans measured at fair value.

When the Company determines that a loss has occurred on an impaired loan, a charge-off equal to the difference between carrying value and fair value is recorded. If a specific allowance is deemed necessary for a loan, and then that loan is partially charged off, the loan remains classified as a nonperforming loan after the charge-off is recognized.

•~~A general allocation~~ - The Company has identified segments and classes of loans not considered impaired for purposes of establishing the general allocation allowance. The Company disaggregates the loan portfolio into segments and classes based on its assessment of how different pools of loans with like characteristics in the portfolio behave over time. This determination is based on historical experience and management’s assessment of how current facts and circumstances are expected to affect the loan portfolio.

The Company first disaggregates the loan portfolio into the following eight segments: commercial, real estate construction one-to-four family, real estate construction other, real estate term owner occupied, real estate term non-owner occupied, real estate term other, consumer secured by 1st deeds of trust, and other consumer loans.

After division of the loan portfolio into segments, the Company then further disaggregates each of the segments into classes. The Company has a total of five classes, which are based off of the Company's loan risk grading system known as the AQR system. The risk ratings are discussed in Note 5 to the Consolidated Financial Statements included in Item 1 of this report. There are five loan classes: pass (pass AQR grades, which are grades 1 – 6), special mention, substandard, doubtful, and loss. There have been no changes to these loan classes in 2020.

After the portfolio has been disaggregated into segments and classes, the Company calculates a general reserve for each segment and class based on the average loss history for each segment and class. The Company utilizes a lookback period of five years in the calculation of average historical loss rates.

After the Company calculates a general allocation using our loss history, the general reserve is then adjusted for qualitative factors by segment and class. Qualitative factors are based on management’s assessment of current trends that may cause losses inherent in the current loan portfolio to differ significantly from historical losses. Some factors that management considers in determining the qualitative adjustment to the general reserve include our concentration of large borrowers; national and local economic trends,including impacts related to COVID-19; general business conditions; trends in local real estate markets; economic, political, and industry specific factors that affect resource development in Alaska; effects of various political activities; peer group data; and internal factors such as underwriting policies and expertise of the Company’s employees.

•~~An unallocated reserve~~ - The unallocated portion of the Allowance provides for other credit losses inherent in our loan portfolio that may not have been contemplated in the specific and general components of the Allowance, and it acknowledges the inherent imprecision of all loss prediction models. The unallocated component is reviewed periodically based on trends in credit losses and overall economic conditions. At September 30, 2020 and December 31, 2019, the unallocated allowance as a percentage of the total Allowance was 10% and 11%, respectively.


(In Thousands)	Tourism	Aviation (non-tourism)	Healthcare	Retail	Fishing	Restaurant	Accommodations	Total
ACL	$940	$591	$1,046	$352	$348	$450	$376	$4,103

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

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2020 2019 2020 2019
Balance at beginning of period $20,653 $20,518 $19,088 $19,519
Charge-offs:
Commercial 56 22 1,011 195
Real estate term owner occupied 85 — 85 —
Consumer other — 7 14 11
Total charge-offs 141 29 1,110 206
Recoveries:
Commercial 600 709 656 801
Real estate term other 1 1 2 28
Consumer other 3 13 16 20
Total recoveries 604 723 674 849
Net, (recoveries) charge-offs (463) (694) 436 (643)
Provision for loan losses 567 (2,075) 3,031 (1,025)
Balance at end of period $21,683 $19,137 $21,683 $19,137


	Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	2021	2020	2021	2020
Balance at beginning of period	$14,764	$21,017	$21,136	$19,088
Cumulative effect of adoption of ASU 2016-13	—	—	(4,511)	—
Charge-offs:
Commercial & industrial loans	110	804	273	955










Consumer loans	—	—	—	—
Other loans	—	—	—	14
Total charge-offs	110	804	273	969
Recoveries:
Commercial & industrial loans	27	17	212	29
Commercial real estate:
Owner occupied properties	2	—	4	—

Residential real estate:

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	10	11	20	20


Obligations of states and political subdivisions in the US	—	—	20	20
Agricultural production, including commercial fishing	7	7	—	—
Consumer loans	—	1	15	15
Other loans	—	—	2	6
Total recoveries	46	36	253	70
Net, charge-offs	64	768	20	899
(Benefit) provision for credit losses	(161)	404	(2,066)	2,464
Balance at end of period	$14,539	$20,653	$14,539	$20,653

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


	Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	2021	2020	2021	2020
Balance at beginning of period	$1,833	$159	$187	$152
Cumulative effect of adoption of ASU 2016-13	—	—	1,229	—
Adjusted balance, beginning of period	1,833	159	1,416	152
(Benefit) provision for credit losses	(266)	8	151	15
Balance at end of period	$1,567	$167	$1,567	$167

While management believes that it uses the best information available to determine the ~~Allowance,~~ACL, unforeseen market conditions and other events could result in adjustment to the ~~Allowance,~~ACL, and net income could be significantly affected if circumstances differed substantially from the assumptions used in making the final determination of the ~~Allowance.~~ACL. Moreover, bank regulators frequently monitor banks' loan loss allowances, and if regulators were to determine that the Company’s ~~Allowance~~ACL is inadequate, they may require the Company to increase the ~~Allowance,~~ACL, which may adversely impact the Company’s net income and financial condition.

Deposits

Deposits are the Company’s primary source of funds. Total deposits increased ~~$433.8~~$321.5 million, or ~~32%~~18%, to ~~$1.806~~$2.146 billion as of ~~September~~June 30, ~~2020~~2021 compared to ~~$1.372~~$1.825 billion as of December 31, ~~2019.~~2020. This increase is primarily due to funding PPP loans, but is also due to new ~~client~~customer relationships as a result of the Company's significant PPP efforts during the ~~second~~first six months of 2021 and ~~third quarters~~the last nine months of 2020. The following table summarizes the Company's composition of deposits as of the periods indicated:


		September 30, 2020			December 31, 2019				June 30, 2021			December 31, 2020
(In thousands)	(In thousands)	Balance	% of total		Balance	% of total		(In thousands)	Balance	% of total		Balance	% of total
Demand deposits	Demand deposits	$697,363	38	%	$451,896	33	%	Demand deposits	$798,231	37	%	$643,825	35	%
Interest-bearing demand	Interest-bearing demand	427,811	24	%	320,264	23	%	Interest-bearing demand	582,669	27	%	459,095	25	%
Savings deposits	Savings deposits	272,624	15	%	229,918	17	%	Savings deposits	322,645	15	%	308,725	17	%
Money market deposits	Money market deposits	227,106	13	%	205,801	15	%	Money market deposits	258,116	12	%	237,705	13	%
Time deposits	Time deposits	181,229	10	%	164,472	12	%	Time deposits	184,777	9	%	175,631	10	%
Total deposits	Total deposits	$1,806,133			$1,372,351			Total deposits	$2,146,438			$1,824,981

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing ~~90%~~91% of total deposits at ~~September~~June 30, ~~2020~~2021 and ~~88%~~90% of total deposits at December 31, ~~2019.~~

2020.

The only deposit category with stated maturity dates is certificates of deposit. At ~~September~~June 30, ~~2020,~~2021, the Company had ~~$181.2~~$184.8 million in certificates of deposit as compared to certificates of deposit of ~~$164.5~~$175.6 million at December 31, ~~2019.~~2020. At ~~September~~June 30, ~~2020, $150.7~~2021, $128.6 million, or ~~83%~~70%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to ~~$90.5~~$175.6 million, or ~~55%~~73%, of total certificates of deposit at December 31, ~~2019.~~2020. The aggregate amount of certificates of deposit in amounts of $100,000 and greater at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, was ~~$137.9~~$144.7 million and ~~$118.9~~$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~~June 30, ~~2020:~~2021:


		Time Certificates of Deposit				Time Certificates of Deposit
		of $100,000 or More				of $100,000 or More
			Percent of Total Deposits				Percent of Total Deposits
(In Thousands)	(In Thousands)	Amount			(In Thousands)	Amount
Amounts maturing in:	Amounts maturing in:				Amounts maturing in:
Three months or less	Three months or less	$28,617	21	%	Three months or less	$58,628	41	%
Over 3 through 6 months	Over 3 through 6 months	47,907	35	%	Over 3 through 6 months	30,979	21	%
Over 6 through 12 months	Over 6 through 12 months	43,414	31	%	Over 6 through 12 months	24,907	17	%
Over 12 months	Over 12 months	17,967	13	%	Over 12 months	30,156	21	%
Total	Total	$137,905	100	%	Total	$144,670	100	%

There were no depositors with deposits representing 10% or more of total deposits at ~~September~~June 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

Borrowings

FHLB: The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). As a member, the Bank is eligible to obtain advances from the FHLB. FHLB advances are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Bank’s assets. At ~~September~~June 30, ~~2020,~~2021, our maximum borrowing line from the FHLB was ~~$937.3 million,~~$1.097 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements. The Company has outstanding advances of ~~$13.7~~$14.7 million as of ~~September~~June 30, ~~2020~~2021 which were originated to match fund low income housing projects that qualify for long term fixed interest rates. ~~The first advance is a $2.0 million FHLB Community Investment Program advance which was originated on March 22, 2013. It has an~~These advances have original terms of either 18 ~~year term~~or 20 years with a 30 year amortization ~~period, which mirrors the term of the term real estate loan made to the borrower,~~periods and a fixed rate of 3.12%. The second advance is a $2.2 million FHLB Community Investment Cash Advance Program advance that was originated in the second quarter of 2016. This advance has a 20 year term with a 30 year amortization period, which mirrors the term of the term real estate loan made to the borrower, and a fixed interest rate of 2.61%. The third advance is a $3.0 million FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2017. This advance has a 20 year term with a 30 year amortization period and a fixed interest rate of 3.25%, which mirrors the term of the loan maderates ranging from 1.23% to the borrower. The fourth advance is a $1.0 million FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2019. This advance has a 20 year term with a 30 year amortization period and a fixed interest rate of 2.69%, which mirrors the term of the loan made to the borrower. The fifth advance is a $769,000 FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2019. This advance has a 20 year term with a 30 year amortization period and a fixed interest rate of 2.69%, which mirrors the term of the loan made to the borrower. The sixth advance is a $2.2 million FHLB Community Investment Cash Advance Program advance that was originated in the second quarter of 2020. This advance has a 18 year term with a 30 year amortization period and a fixed interest rate of 1.63%, which mirrors the term of the loan made to the borrower. The seventh advance is a $762,000 FHLB Community Investment Cash Advance Program advance that was originated in the second quarter of 2020. This advance has a 18 year term with a 16.8 year amortization period and a fixed interest rate of 1.23%, which mirrors the term of the loan made to the borrower. The last advance is a $2.0 million FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2020. This advance has a 18 year term with a 30 year amortization period and a fixed interest rate of 1.41%, which mirrors the term of the loan made to the borrower. All of these FHLB advances are included in borrowings.3.25%.

Federal Reserve Bank: The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding ~~$85.2~~$77.7 million of loans as collateral to secure advances made through the discount window on ~~September~~June 30, ~~2020.~~2021. There were no discount window advances outstanding at ~~September~~June 30, ~~2020~~2021 or December 31, ~~2019, respectively. The Company utilized the Federal Reserve Bank's PPPLF to fund SBA PPP loans during the second quarter of 2020, but has repaid those funds in full as~~

~~of June 30, 2020. This advance had an interest rate of 0.35%. The average balance outstanding of PPPLF was zero and $15.0 million during the three and nine-month periods ending September 30,~~ 2020, respectively.

Other Short-term Borrowings:Securities sold under agreements to repurchase were zero for September 30, 2020 and December 31, 2019, respectively. The average balance outstanding of securities sold under agreements to repurchase during the three-month periods ending September 30, 2020 and 2019 was zero and $470,000, respectively, and zero and $20.3 million, respectively, in the nine-month periods ending September 30, 2020 and 2019. The maximum outstanding at any month-end was zero and $864,000, respectively, during the three-month periods ending September 30, 2020 and 2019 and zero and $36.6 million, respectively, for the nine-month periods ending September 30, 2020 and 2019. The securities sold under agreements to repurchase were held by the FHLB under the Company’s control.

The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to ~~15%~~35% of total assets or ~~$312.4~~$852.9 million at ~~September~~June 30, ~~2020~~2021 and ~~$244.7~~$736.0 million at December 31, ~~2019. As of April 7, 2020, the State of Alaska increased this limit to 35% of total assets.~~2020.

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

Long-term Borrowings. The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of ~~September~~June 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

Liquidity and Capital Resources

The Company is a single bank holding company and its primary ongoing source of liquidity is from dividends received from the Bank. Such dividends arise from the cash flow and earnings of the Bank. Banking regulations and regulatory authorities may limit the amount of, or require the Bank to obtain certain approvals before paying, dividends to the Company. Given that the Bank currently meets and the Bank anticipates that it will continue to meet, all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards, the Company expects to continue to receive dividends from the Bank during the remainder of ~~2020.~~2021.

The Company manages its liquidity through its Asset and Liability Committee. Our primary sources of funds are customer deposits and advances from the FHLB. These funds, together with loan repayments, loan sales, other borrowed funds, retained earnings, and equity are used to make loans, to acquire securities and other assets, and to fund deposit flows and continuing operations. The primary sources of demands on our liquidity are customer demands for withdrawal of deposits and borrowers' demands that we advance funds against unfunded lending commitments. Our total unfunded commitments to fund loans and letters of credit at ~~September~~June 30, ~~2020~~2021 were ~~$361.2~~$393.9 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. Additionally, as noted above, our total deposits at ~~September~~June 30, ~~2020~~2021 were ~~$1.806~~$2.146 billion.

As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 "Financial Statements" of this report, net cash ~~used~~provided by operating activities was ~~$27.0~~$68.5 million for the first ~~nine~~six months of ~~2020,~~2021, primarily due to cash provided by proceeds from the sale of loans held for sale, ~~being more than~~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 ~~$390.7~~$152.0 million for the same period, primarily due to ~~increases~~purchases of available for sale securities and an increase in ~~loans, in particular PPP~~ loans. This use of cash was only partially offset by proceeds from the ~~maturity~~maturities and calls of securities available for sale. Net cash provided by financing activities in the same period was ~~$423.4~~$314.5 million, primarily due to increases in deposits largely due to funding PPP loans that was done via deposit into customer accounts. ~~This increase was only partially offset by the repurchase of common stock and cash dividends paid to shareholders.~~

The sources by which we meet the liquidity needs of our customers are current assets and borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB. As customers withdraw funds from deposit accounts that were obtained from the Company via PPP loans, the Company may need to borrow funds to meet an immediate liquidity need. At ~~September~~June 30, ~~2020,~~2021, our funds available for borrowing under our existing lines of credit were ~~$1.001~~$1.161 billion. Additionally, the Company ~~can obtain~~could have obtained additional nonrecourse borrowings under the Federal Reserve Bank's ~~newly created~~ PPPLF until July 30, 2021, as a source of additional liquidity in order to meet liquidity needs created by the origination of PPP loans without excessive usage of the Company's other existing liquidity sources. The Company had ~~$261.1~~$292.3 million in PPP loans eligible to be pledged for the PPPLF program as of ~~September~~June 30, ~~2020.~~2021. The Company has

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

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

The Company issued ~~1,946~~17,308 shares of its common stock in the first ~~nine~~six months of ~~2020~~2021 and repurchased ~~281,451~~61,399 shares of its common stock under the Company's previously announced repurchase program. The Company did not repurchase any shares of its common stock in the second quarter of 2021. At ~~September~~June 30, ~~2020,~~2021, the Company had ~~6,279,304~~6,206,913 shares of its common stock outstanding.

Capital Requirements and Ratios

We are subject to minimum capital requirements. Federal banking agencies have adopted regulations establishing minimum requirements for the capital adequacy of banks and bank holding companies. The requirements address both risk-based capital and leverage capital. We believe as of ~~September~~June 30, ~~2020,~~2021, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

The table below illustrates the capital requirements in effect for the periods noted for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements. Management intends to maintain capital ratios for the Bank in ~~2020,~~2021, exceeding the FDIC’s requirements for the “well-capitalized” classification. The capital ratios for the Company exceed those for the Bank primarily because the $10 million trust preferred securities offering completed in the fourth quarter of 2005 is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our financial statements. The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital. As a result, the Company has $10 million more in regulatory capital than the Bank at both ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, which explains most of the difference in the capital ratios for the two entities.


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


September 31, 2020
June 30, 2021								June 30, 2021
Total risk-based capital	Total risk-based capital	8.00%		10.00%				15.36%			13.37%			Total risk-based capital	8.00%			10.00%			15.45%		12.65%
Tier 1 risk-based capital	Tier 1 risk-based capital	6.00%		8.00%		14.11%			12.12%	Tier 1 risk-based capital		6.00%				8.00%			14.54%			11.73%
Common equity tier 1 capital	Common equity tier 1 capital	4.50%	6.50%		13.46%		12.13%	Common equity tier 1 capital	4.50%				6.50%				13.93%			11.75%
Leverage ratio	Leverage ratio	4.00%	5.00%		10.31%		8.85%	Leverage ratio	4.00%				5.00%				9.77%			7.88%
December 31, 2019
December 31, 2020								December 31, 2020
Total risk-based capital	Total risk-based capital	8.00%	10.00%		15.63%		13.24%	Total risk-based capital	8.00%				10.00%				15.46%			13.13%
Tier 1 risk-based capital	Tier 1 risk-based capital	6.00%	8.00%		14.38%		11.98%	Tier 1 risk-based capital	6.00%				8.00%				14.20%			11.88%
Common equity tier 1 capital	Common equity tier 1 capital	4.50%	6.50%		13.69%		11.98%	Common equity tier 1 capital	4.50%				6.50%				13.57%			11.89%
Leverage ratio	Leverage ratio	4.00%	5.00%		12.41%		10.36%	Leverage ratio	4.00%				5.00%				10.25%			8.55%

See Note 24 of the Consolidated Financial Statements in Part II. Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 for a detailed discussion of the capital ratios. The requirements for "well- capitalized" come from the Prompt Corrective Action rules. See Part I. Item 1 - Business - Supervision and Regulation in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. These rules apply to the Bank but not to the Company. Under the rules of the Federal Reserve Bank, a bank holding company such as the Company is generally defined to be "well capitalized" if its Tier 1 risk-based capital ratio is 8.0% or more and its total risk-based capital ratio is 10.0% or more.

6364

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~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company’s commitments to extend credit and to provide letters of credit which are not reflected on its balance sheet amounted to ~~$361.2~~$393.9 million and ~~$301.9~~$377.4 million, respectively. Additionally, the Company had commitments to originate loans held for sale of ~~$257.3~~$174.0 million and ~~$48.8~~$150.3 million, as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Since many of the commitments are expected to expire without being drawn upon, these total commitment amounts do not necessarily represent future cash requirements. The Company has established reserves of ~~$179,000~~$1.6 million and ~~$152,000~~$187,000 at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 respectively, for losses related to these commitments that are recorded in other liabilities on the consolidated balance sheet.

Capital Expenditures and Commitments

The Company has capital commitments related to a ~~new~~ branch remodel and a branch relocation in ~~Fairbanks.~~Anchorage. At ~~September~~June 30, ~~2020~~2021 the Company considers these commitments to be immaterial.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our assessment of market risk as of ~~September~~June 30, ~~2020~~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, ~~2019.~~2020.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934). Our principal executive and financial officers supervised and participated in this evaluation. Based on this evaluation, our principal executive and financial officers each concluded that as of ~~September~~June 30, ~~2020,~~2021, the disclosure controls and procedures are effective in timely alerting them to material information required to be included in the periodic reports to the Securities and Exchange Commission. The design of any system of controls is based in part upon various assumptions about the likelihood of future events, and there can be no assurance that any of our plans, products, services or procedures will succeed in achieving their intended goals under future conditions.

Changes in Internal Control over Disclosure and Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15-d-15(f) of the Securities Exchange Act of 1934) that occurred during the quarterly period ended ~~September~~June 30, ~~2020~~2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

During the normal course of its business, the Company is a party to various debtor-creditor legal actions, disputes, claims, and litigation related to the conduct of its banking business. These include cases filed as a plaintiff in collection and foreclosure cases, and the enforcement of creditors’ rights in bankruptcy proceedings. Management does not expect that the

6465

resolution of these matters will have a material effect on the Company’s business, financial position, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

The disclosure below supplements the risk factors previously disclosed under Part I. Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Changes in income tax laws and interpretations, or in accounting standards, could materially affect our financial condition or results of operations.

On March 31, 2021, President Biden unveiled his infrastructure plan, which includes a proposal to increase the federal corporate income tax rate from 21% to 28% as part of a package of tax reforms to help fund the spending proposals in the plan. The ~~COVID-19 pandemic has adversely impacted our business and financial results, and~~Biden plan is in the ~~ultimate impact will depend on future developments,~~legislative process, which ~~are highly uncertain and cannot be predicted, including~~is expected to proceed this year due to the ~~scope and duration~~Democratic Party's majority in both houses of Congress. If adopted as proposed, the increase of the ~~pandemic and actions taken by governmental authorities~~corporate income tax rate would adversely affect our results of operations in ~~response to the pandemic.~~future periods.

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Although the number of persons unemployed has improved, approximately 12.6 million Americans currently remained unemployed largely due to the COVID-19 outbreak. In addition, ~~stock markets have experienced significant volatility~~further changes in ~~value and, in particular, bank stocks have significantly declined in value. Governments, businesses, and the public are taking unprecedented actions to contain the spread~~income tax laws could be enacted, or interpretations of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have resulted in material decreases in oil and gas prices, disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. These developments as a consequence of the COVID-19 pandemic are materially impacting our business and the businesses of our customers and are expected to have a materialexisting income tax laws could change, causing an adverse effect on our financial condition or results ~~for 2020. If these effects continue for a prolonged period or result in sustained economic stress or recession, such effects could have a material adverse impact on us in a number~~ of ~~ways related~~operations. Similarly, our accounting policies and methods are fundamental to ~~credit, collateral, customer demand, loan funding, operations, interest rate risk, and human capital, as described in more detail below.~~

~~• Credit Risk~~

~~Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of~~how we report our borrower’s business. Concern about the spread of COVID-19 has caused and is likely to continue to cause volatility in oil and gas prices, business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and ~~credit risk~~results of ~~our customers. Further, in~~operations. Some of these policies require the ~~event~~use of ~~delinquencies, regulatory changes~~estimates and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitments to extend credit to customers. During the current challenging economic environment, our customers are more dependent on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the pandemic, we are participating in the PPP program under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at lower interest rates as compared to the loans to customers that we would have otherwise extended credit.

~~• Strategic Risk~~

~~Our success may be affected by a variety of external factors~~assumptions that may affect the ~~price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to~~

economic conditions and the various responses of governmental and nongovernmental authorities. In recent months, the COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. For example, in our markets, state and local governments previously acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in loan originations.

~~• Operational Risk~~

Current and future restrictions on our employees’ access to our branches and other facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers. Moreover, we rely on many third parties in our business operations, including appraisers of the real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. For example, loan origination could be delayed due to the limited availability of real estate appraisers for the collateral. Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, mortgage and UCC filings in those counties. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

~~• Liquidity Risk~~

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings and other sources could have a substantial negative effect on our liquidity and severely constrain our financial flexibility. Our primary source of funding is deposits gathered through our network of branch offices. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or the economy in general. During the COVID-19 outbreak, our deposits have increased significantly, primarily due to the Company’s PPP efforts during the second and third quarter of 2020. 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. Our ability to borrow could be impaired by factors that are not specific to us or our region, such as a disruption in the financial markets, including those caused by COVID-19, or negative views and expectations about the prospects for the financial services industry and unstable credit markets.

~~• Interest Rate Risk~~

Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on mostvalue of our assets, ~~and~~ liabilities, and financial results. Periodically, new accounting standards are issued or existing standards are revised, changing the ~~market value of all interest-earning assets~~methods for preparing our financial statements. These changes are not within our control and ~~interest-bearing liabilities, which in turn could have a material adverse effect on~~may significantly impact our ~~net income, operating results, or~~ financial ~~condition.~~

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertaincondition and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. In addition, the effects could have a material impact on our results of ~~operations and heighten many of our known risks described in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.~~operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)-(b) Not applicable

(c) ~~The~~There were no stock repurchases by the Company ~~repurchased 88,742 shares of its common stock~~ during the three-month period ending ~~September 30, 2020.~~

Total Number of Shares (or Units) Purchased Average Price Paid per Shares (or Unit) Total Number of Shares (or Units) Purchased as Part of the Publicly Announced Plans or Programs Maximum Number (1) (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Period (a) (b) (c) (d)
Month No. 1
July 1, 2020 - July 31, 2020 — $— — 134,291
Month No. 2
August 1, 2020 - August 31, 2020 — $— — 134,291
Month No. 3
September 1, 2020 - September 30, 2020 88,742 $26.66 88,742 45,549
Total 88,742 $26.66 88,742 45,549

(1) In August 2004, the Company publicly announced its board of director's (the "Board") authorization to increase the stock in its repurchase program (the "Plan") by an additional 304,283, or 5%, of total shares outstanding. As a result, the total shares available under the Plan at that time increased to 385,855 shares. On June 8, 2007, the Company publicly announced the Board’s authorization to increase the stock in its repurchase program by an additional 305,029 shares, or 5% of total shares outstanding, bringing the total shares available and authorized for repurchase under the Plan at that time to 342,242 shares. In 2007, the Company repurchased shares, bringing the total shares available and authorized for repurchase under the Plan to 227,242 shares. In the third quarter of 2017, the Company repurchased 58,341 shares, bringing the total shares available and authorized for repurchase under the Plan to 168,901. In the fourth quarter of 2018, the Company repurchased 15,468 shares, bringing the total shares available and authorized for repurchase under the Plan to 153,433. In the first quarter of 2019, the Company repurchased 6,110 shares, bringing the total shares available and authorized for repurchase under the Plan to 147,323 as of March 31, 2019. In April 2019, the Company publicly announced its Board's authorization to increase the stock in the Plan by an additional 193,678, or approximately 3%, of total shares outstanding. As a result, the total shares available under the Plan at that time increased to 340,000 shares, or 5% of total shares outstanding. In the second quarter of 2019, the Company repurchased 149,373 shares, bringing the total shares available and authorized for repurchase under the Plan to 192,193 as of June 30, 2019. In the third quarter of 2019, the Company repurchased 192,193 shares, bringing the total shares available and authorized for repurchase under the Plan to zero as of September 30, 2019. On January 27, 2020, the Board authorized the repurchase of up to an additional 327,000 shares of its common stock. In the first quarter of 2020, the Company repurchased 192,709 shares, bringing the total number of shares available and authorized for repurchase under the Plan to 134,291. As of March 31, 2020, the Company had suspended all stock repurchasing activity. The Company resumed its stock repurchase program on August 28, 2020. In the third quarter of 2020, the Company repurchased 88,742 shares, bringing the total number of shares available and authorized for repurchase under the Plan to 45,549.2021.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

6866

ITEM 5. OTHER INFORMATION

(a) Not applicable

(b) There have been no material changes to the procedures by which shareholders may nominate directors to the Company’s board of directors.

ITEM 6. EXHIBITS


31.1			Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)
31.2			Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
32.1			Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2			Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350


101.INS			Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH			Inline XBRL Taxonomy Extension Schema Document
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB			Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document
104			The cover page for the Company's Quarterly Report on 10-Q for the quarter ended ~~September~~June 30, ~~2020~~2021 - formatted in Inline XBRL (included in Exhibit 101)

6967

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NORTHRIM BANCORP, INC.


~~November 3, 2020~~August 4, 2021	By	/s/ Joseph M. Schierhorn
		Joseph M. Schierhorn
		Chairman, President, Chief Executive Officer and Chief Operating Officer
		(Principal Executive Officer)


~~November 3, 2020~~August 4, 2021	By	/s/ Jed W. Ballard
		Jed W. Ballard
		Executive Vice President, Chief Financial Officer
		(Principal Financial and Accounting Officer)

7068


(In Thousands)	Proceeds	Gross Gains	Gross Losses
Three Months Ended September 30, 2020
Available for sale securities	$0	$0	$0
Three Months Ended September 30, 2019
Available for sale securities	$0	$0	$0
Nine Months Ended September 30, 2020
Available for sale securities	$0	$0	$0
Nine Months Ended September 30, 2019
Available for sale securities	$4,219	$23	$0


(In Thousands)	30-59 Days Past Due Still Accruing	60-89 Days Past Due Still Accruing	Greater Than 90 Days Still Accruing	Total Past Due	Nonaccrual	Current	Total
September 30, 2020
Commercial	$0	$0	$0	$0	$6,831	$829,347	$836,178
Real estate construction one-to-four family	0	0	0	0	702	37,256	37,958
Real estate construction other	0	0	0	0	0	82,661	82,661
Real estate term owner occupied	0	1,421	0	1,421	3,764	143,808	148,993
Real estate term non-owner occupied	0	691	0	691	0	320,002	320,693
Real estate term other	0	0	0	0	1,176	42,363	43,539
Consumer secured by 1st deed of trust	236	0	0	236	65	13,749	14,050
Consumer other	0	0	0	0	109	23,024	23,133
Subtotal	$236	$2,112	$0	$2,348	$12,647	$1,492,210	$1,507,205
Less: Unearned origination fees, net of origination costs							(14,485)
Total							$1,492,720
December 31, 2019
Commercial	$270	$0	$0	$270	$9,153	$403,267	$412,690
Real estate construction one-to-four family	0	0	0	0	1,349	37,469	38,818
Real estate construction other	0	0	0	0	0	61,808	61,808
Real estate term owner occupied	338	0	0	338	3,489	135,064	138,891
Real estate term non-owner occupied	0	0	0	0	0	312,960	312,960
Real estate term other	26	0	0	26	1,176	41,304	42,506
Consumer secured by 1st deed of trust	750	0	0	750	68	15,380	16,198
Consumer other	150	0	0	150	121	24,314	24,585
Subtotal	$1,534	$0	$0	$1,534	$15,356	$1,031,566	$1,048,456
Less: Unearned origination fees, net of origination costs							(5,085)
Total							$1,043,371


(In Thousands)	Recorded Investment	Unpaid Principal Balance	Related Allowance
September 30, 2020
With no related allowance recorded


Commercial - AQR substandard	$8,668	$8,872	$—
Commercial - AQR doubtful	308	308	—
Real estate construction one-to-four family - AQR substandard	702	702	—




Real estate term owner occupied - AQR substandard	7,430	7,515	—
Real estate term non-owner occupied - AQR pass	177	177	—

Real estate term non-owner occupied - AQR substandard	613	613	—
Real estate term other - AQR pass	322	322	—
Real estate term other - AQR substandard	1,176	1,176	—
Consumer secured by 1st deeds of trust - AQR pass	116	116	—

Consumer secured by 1st deeds of trust - AQR substandard	148	148	—

Consumer other - AQR substandard	84	88	—
Subtotal	$19,744	$20,037	$—


With an allowance recorded

Commercial - AQR substandard	$202	$202	$41






Subtotal	$202	$202	$41


Total


Commercial - AQR substandard	$8,870	$9,074	$41
Commercial - AQR doubtful	308	308	—
Real estate construction one-to-four family - AQR substandard	702	702	—




Real estate term owner-occupied - AQR substandard	7,430	7,515	—
Real estate term non-owner occupied - AQR pass	177	177	—

Real estate term non-owner occupied - AQR substandard	613	613	—
Real estate term other - AQR pass	322	322	—
Real estate term other - AQR substandard	1,176	1,176	—
Consumer secured by 1st deeds of trust - AQR pass	116	116	—

Consumer secured by 1st deeds of trust - AQR substandard	148	148	—

Consumer other - AQR substandard	84	88	—
Total	$19,946	$20,239	$41


Total


Commercial - AQR substandard	$16,078	$16,143	$17
Real estate construction one-to-four family -AQR substandard	1,349	1,349	—

Real estate term owner occupied - AQR substandard	5,104	5,104	—
Real estate term non-owner occupied - AQR pass	178	178	—


Real estate term other - AQR pass	417	417	—
Real estate term other - AQR substandard	1,176	1,176	—
Consumer secured by 1st deeds of trust - AQR pass	122	122	—
Consumer secured by 1st deeds of trust - AQR substandard	159	163	—
Consumer other - AQR substandard	90	94	—
Total	$24,673	$24,746	$17


With an allowance recorded


Commercial - AQR substandard	$226	$8	$391	$0








Consumer secured by 1st deeds of trust - AQR substandard	0	0	74	0

Subtotal	$226	$8	$465	$0


Total


Commercial - AQR substandard	$8,790	$50	$18,007	$107
Commercial - AQR doubtful	308	0	0	0



Real estate construction one-to-four family - AQR substandard	488	0	1,482	0





Real estate term owner-occupied - AQR substandard	6,998	47	5,896	34


Real estate term non-owner occupied - AQR pass	177	3	242	4

Real estate term non-owner occupied - AQR substandard	619	19	0	0
Real estate term other - AQR pass	348	6	438	8

Real estate term other - AQR substandard	1,228	0	1,198	0

Consumer secured by 1st deeds of trust - AQR pass	117	3	125	3

Consumer secured by 1st deeds of trust - AQR substandard	269	0	167	2



Consumer other - AQR substandard	84	0	93	0
Total Impaired Loans	$19,426	$128	$27,648	$158


With an allowance recorded

Commercial - AQR substandard	$1,794	$8	$715	$0





Real estate term other - AQR substandard	0	0	218	0


Consumer secured by 1st deeds of trust - AQR substandard	0	0	97	0

Subtotal	$1,794	$8	$1,030	$0


Total
Commercial - AQR pass	$0	$0	$711	$35

Commercial - AQR substandard	11,693	146	17,920	292
Commercial - AQR doubtful	103	0	0	0



Real estate construction one-to-four family - AQR substandard	808	0	2,109	0






Real estate term owner-occupied - AQR substandard	6,586	125	5,896	83


Real estate term non-owner occupied - AQR pass	177	10	269	15

Real estate term non-owner occupied - AQR substandard	312	20	307	0
Real estate term other - AQR pass	380	20	457	24

Real estate term other - AQR substandard	1,194	0	1,216	0

Consumer secured by 1st deeds of trust - AQR pass	119	9	127	9

Consumer secured by 1st deeds of trust - AQR substandard	149	3	312	5
Consumer secured by 1st deeds of trust - AQR loss	44	0	0	0


Consumer other - AQR substandard	87	0	63	0
Total Impaired Loans	$21,652	$333	$29,387	$463


Three Months Ended September 30,	Commercial	Real estate construction one-to-four family	Real estate construction other	Real estate term owner occupied	Real estate term non-owner occupied	Real estate term other	Consumer secured by 1st deed of trust	Consumer other	Unallocated	Total
2020
Balance, beginning of period	$7,366	$690	$1,215	$2,533	$5,421	$702	$258	$447	$2,021	$20,653
Charge-Offs	(56)	0	0	(85)	0	0	0	0	0	(141)
Recoveries	600	0	0	0	0	1	0	3	0	604
Provision (benefit)	285	10	58	21	61	55	(2)	(7)	86	567
Balance, end of period	$8,195	$700	$1,273	$2,469	$5,482	$758	$256	$443	$2,107	$21,683
Balance, end of period:
Individually evaluated
for impairment	$41	$0	$0	$0	$0	$0	$0	$0	$0	$41
Balance, end of period:
Collectively evaluated
for impairment	$8,154	$700	$1,273	$2,469	$5,482	$758	$256	$443	$2,107	$21,642
2019
Balance, beginning of period	$7,123	$739	$1,112	$2,281	$6,231	$761	$322	$486	$1,463	$20,518
Charge-Offs	(22)	0	0	0	0	0	0	(7)	0	(29)
Recoveries	709	0	0	0	0	1	0	13	0	723
Provision (benefit)	(1,340)	(122)	(101)	(299)	(703)	(48)	(49)	(62)	649	(2,075)
Balance, end of period	$6,470	$617	$1,011	$1,982	$5,528	$714	$273	$430	$2,112	$19,137
Balance, end of period:
Individually evaluated
for impairment	$97	$0	$0	$0	$0	$0	$5	$0	$0	$102
Balance, end of period:
Collectively evaluated
for impairment	$6,373	$617	$1,011	$1,982	$5,528	$714	$268	$430	$2,112	$19,035


(In Thousands)	Three Months Ended September 30, 2020 vs. 2019
	Increase (decrease) due to
	Volume	Rate	Total
Interest Income:
Loans	$2,658	($78)	$2,580
Loans held for sale	342	(94)	248
Short-term investments	9	(305)	(296)
Long-term investments	(219)	(356)	(575)
Total interest income	$2,790	($833)	$1,957

Interest Expense:
Interest-bearing deposits	$282	($327)	($45)
Borrowings	28	(14)	14
Total interest expense	$310	($341)	($31)


	Total Number of Shares (or Units) Purchased	Average Price Paid per Shares (or Unit)	Total Number of Shares (or Units) Purchased as Part of the Publicly Announced Plans or Programs	Maximum Number (1) (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Period	(a)	(b)	(c)	(d)
Month No. 1
July 1, 2020 - July 31, 2020	—	$—	—	134,291
Month No. 2
August 1, 2020 - August 31, 2020	—	$—	—	134,291
Month No. 3
September 1, 2020 - September 30, 2020	88,742	$26.66	88,742	45,549
Total	88,742	$26.66	88,742	45,549