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, ~~2021~~2022

☐ 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 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, 2021~~August 5, 2022 was ~~6,139,502.~~5,681,089.


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	4539
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6557
Item 4.	Controls and Procedures	6558

Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	6558
Item 1A.	Risk Factors	6658
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6658
Item 3.	Defaults Upon Senior Securities	6759
Item 4.	Mine Safety Disclosures	6759
Item 5.	Other Information	6860
Item 6.	Exhibits	6860
SIGNATURES		6961

PART I. FINANCIAL INFORMATION

These consolidated financial statements should be read in conjunction with the consolidated 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, ~~2020.~~2021.

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS

NORTHRIM BANCORP, INC.

Consolidated Balance Sheets

(Unaudited)


		September 30, 2021	December 31, 2020		June 30, 2022	December 31, 2021
(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	$34,216	$23,304	Cash and due from banks	$24,035	$20,805
Interest bearing deposits in other banks	Interest bearing deposits in other banks	458,063	92,661	Interest bearing deposits in other banks	312,888	625,022
Investment securities available for sale, at fair value	Investment securities available for sale, at fair value	379,122	247,633	Investment securities available for sale, at fair value	612,027	426,684
Marketable equity securities	Marketable equity securities	8,551	9,052	Marketable equity securities	9,122	8,420
Investment securities held to maturity, at amortized cost	Investment securities held to maturity, at amortized cost	20,000	10,000	Investment securities held to maturity, at amortized cost	29,750	20,000
Total portfolio investments		407,673	266,685
Investment in Federal Home Loan Bank stock	Investment in Federal Home Loan Bank stock	3,110	2,551	Investment in Federal Home Loan Bank stock	3,824	3,107

Loans held for sale	Loans held for sale	106,224	146,178	Loans held for sale	63,080	73,650

Loans	Loans	1,450,657	1,444,050	Loans	1,405,709	1,413,886
Allowance for credit losses		(13,816)	(21,136)
Allowance for credit losses, loans				Allowance for credit losses, loans	(11,537)	(11,739)
Net loans	Net loans	1,436,841	1,422,914	Net loans	1,394,172	1,402,147
Purchased receivables, net	Purchased receivables, net	20,118	13,922	Purchased receivables, net	15,277	6,987
Mortgage servicing rights, at fair value	Mortgage servicing rights, at fair value	13,080	11,218	Mortgage servicing rights, at fair value	16,301	13,724
Other real estate owned, net	Other real estate owned, net	5,912	7,289	Other real estate owned, net	5,638	5,638
Premises and equipment, net	Premises and equipment, net	37,610	38,102	Premises and equipment, net	37,106	37,164
Operating lease right-of-use assets	Operating lease right-of-use assets	11,371	12,440	Operating lease right-of-use assets	9,875	11,001
Goodwill	Goodwill	15,017	15,017	Goodwill	15,017	15,017
Other intangible assets, net	Other intangible assets, net	1,002	1,029	Other intangible assets, net	980	992
Other assets	Other assets	59,709	68,488	Other assets	62,062	54,361
Total assets	Total assets	$2,609,946	$2,121,798	Total assets	$2,611,154	$2,724,719
LIABILITIES	LIABILITIES			LIABILITIES
Deposits:	Deposits:			Deposits:
Demand	Demand	$868,810	$643,825	Demand	$830,156	$887,824
Interest-bearing demand	Interest-bearing demand	644,035	459,095	Interest-bearing demand	666,283	692,683
Savings	Savings	330,465	308,725	Savings	349,208	348,164
Money market	Money market	278,529	237,705	Money market	319,843	314,996
Certificates of deposit less than $250,000	Certificates of deposit less than $250,000	99,587	92,047	Certificates of deposit less than $250,000	96,630	100,851
Certificates of deposit $250,000 and greater	Certificates of deposit $250,000 and greater	75,115	83,584	Certificates of deposit $250,000 and greater	73,270	77,113
Total deposits	Total deposits	2,296,541	1,824,981	Total deposits	2,335,390	2,421,631

Borrowings	Borrowings	14,605	14,817	Borrowings	14,302	14,508
Junior subordinated debentures	Junior subordinated debentures	10,310	10,310	Junior subordinated debentures	10,310	10,310
Operating lease liabilities	Operating lease liabilities	11,334	12,378	Operating lease liabilities	9,846	10,965
Other liabilities	Other liabilities	34,682	37,737	Other liabilities	26,017	29,488
Total liabilities	Total liabilities	2,367,472	1,900,223	Total liabilities	2,395,865	2,486,902
SHAREHOLDERS' EQUITY	SHAREHOLDERS' EQUITY			SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding	Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding	—	—	Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding	—	—
Common stock, $1 par value, 10,000,000 shares authorized, 6,177,300 and 6,251,004 issued and outstanding at September 30, 2021 and December 31, 2020, respectively		6,177	6,251
Common stock, $1 par value, 10,000,000 shares authorized, 5,681,089 and 6,014,813 issued and outstanding at June 30, 2022 and December 31, 2021, respectively				Common stock, $1 par value, 10,000,000 shares authorized, 5,681,089 and 6,014,813 issued and outstanding at June 30, 2022 and December 31, 2021, respectively	5,681	6,015
Additional paid-in capital	Additional paid-in capital	38,929	41,808	Additional paid-in capital	17,716	31,162
Retained earnings	Retained earnings	198,284	173,498	Retained earnings	211,232	204,046
Accumulated other comprehensive (loss) income, net of tax		(916)	18
Accumulated other comprehensive loss, net of tax				Accumulated other comprehensive loss, net of tax	(19,340)	(3,406)
Total shareholders' equity	Total shareholders' equity	242,474	221,575	Total shareholders' equity	215,289	237,817
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$2,609,946	$2,121,798	Total liabilities and shareholders' equity	$2,611,154	$2,724,719

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)	2021	2020	2021	2020	(In Thousands, Except Per Share Data)	2022	2021	2022	2021
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	$19,900	$18,691	$58,287	$51,504	Interest and fees on loans and loans held for sale	$19,807	$18,963	$38,075	$38,387
Interest on investment securities available for sale	Interest on investment securities available for sale	828	940	2,421	3,951	Interest on investment securities available for sale	1,926	815	3,061	1,593
Dividends on marketable equity securities	Dividends on marketable equity securities	115	122	328	336	Dividends on marketable equity securities	113	126	225	213
Interest on investment securities held to maturity	Interest on investment securities held to maturity	262	—	773	—	Interest on investment securities held to maturity	352	265	625	511
Dividends on Federal Home Loan Bank stock	Dividends on Federal Home Loan Bank stock	28	24	74	62	Dividends on Federal Home Loan Bank stock	28	23	56	46
Interest on deposits in other banks	Interest on deposits in other banks	149	17	248	284	Interest on deposits in other banks	766	61	1,008	99
Total Interest Income		21,282	19,794	62,131	56,137
Total Interest and Dividend Income						Total Interest and Dividend Income	22,992	20,253	43,050	40,849
Interest Expense	Interest Expense					Interest Expense
Interest expense on deposits	Interest expense on deposits	667	1,320	2,495	4,135	Interest expense on deposits	599	879	1,174	1,828

Interest expense on borrowings	Interest expense on borrowings	89	84	237	277	Interest expense on borrowings	87	88	173	148
Interest expense on junior subordinated debentures	Interest expense on junior subordinated debentures	94	96	282	284	Interest expense on junior subordinated debentures	94	94	187	188
Total Interest Expense	Total Interest Expense	850	1,500	3,014	4,696	Total Interest Expense	780	1,061	1,534	2,164
Net Interest Income	Net Interest Income	20,432	18,294	59,117	51,441	Net Interest Income	22,212	19,192	41,516	38,685
(Benefit) provision for credit losses		(1,106)	567	(3,021)	3,031
Net Interest Income After (Benefit) Provision for Credit Losses		21,538	17,727	62,138	48,410
Provision (benefit) for credit losses						Provision (benefit) for credit losses	463	(427)	313	(1,915)
Net Interest Income After Provision (Benefit) for Credit Losses						Net Interest Income After Provision (Benefit) for Credit Losses	21,749	19,619	41,203	40,600
Other Operating Income	Other Operating Income					Other Operating Income
Mortgage banking income	Mortgage banking income	9,893	17,932	34,875	37,824	Mortgage banking income	5,900	11,360	12,882	24,982
Bankcard fees	Bankcard fees	878	770	2,497	2,094	Bankcard fees	927	879	1,731	1,619
Purchased receivable income	Purchased receivable income	530	516	1,637	2,112	Purchased receivable income	566	575	968	1,107
Service charges on deposit accounts	Service charges on deposit accounts	345	269	943	802	Service charges on deposit accounts	402	308	776	598
Interest rate swap income		195	726	390	743
Gain on sale of marketable equity securities, net	Gain on sale of marketable equity securities, net	36	—	67	98	Gain on sale of marketable equity securities, net	—	31	—	31
Unrealized gain (loss) on marketable equity securities		(67)	375	27	(347)
Keyman life insurance proceeds						Keyman life insurance proceeds	—	—	2,002	—
Unrealized (loss) gain on marketable equity securities						Unrealized (loss) gain on marketable equity securities	(810)	178	(1,232)	94

Other income	Other income	848	1,040	2,250	2,270	Other income	822	801	1,503	1,597
Total Other Operating Income	Total Other Operating Income	12,658	21,628	42,686	45,596	Total Other Operating Income	7,807	14,132	18,630	30,028
Other Operating Expense	Other Operating Expense					Other Operating Expense
Salaries and other personnel expense	Salaries and other personnel expense	15,756	16,418	45,401	44,311	Salaries and other personnel expense	15,401	14,917	29,507	29,645
Data processing expense	Data processing expense	2,198	1,851	6,439	5,653	Data processing expense	2,311	2,206	4,303	4,241
Occupancy expense	Occupancy expense	1,707	1,648	5,236	4,923	Occupancy expense	1,748	1,869	3,474	3,529
Marketing expense						Marketing expense	814	672	1,239	1,076
Professional and outside services	Professional and outside services	703	884	1,969	2,206	Professional and outside services	708	642	1,430	1,266
Marketing expense		533	302	1,609	1,581
Insurance expense	Insurance expense	322	315	965	928	Insurance expense	516	329	1,082	643
OREO expense, net rental income and gains on sale						OREO expense, net rental income and gains on sale	19	47	7	11
Intangible asset amortization expense	Intangible asset amortization expense	9	12	27	36	Intangible asset amortization expense	6	9	12	18
OREO (income) expense, net		(378)	23	(367)	8

Other operating expense	Other operating expense	1,684	2,053	4,918	5,321	Other operating expense	1,715	1,645	3,285	3,234
Total Other Operating Expense	Total Other Operating Expense	22,534	23,506	66,197	64,967	Total Other Operating Expense	23,238	22,336	44,339	43,663
Income Before Provision for Income Taxes	Income Before Provision for Income Taxes	11,662	15,849	38,627	29,039	Income Before Provision for Income Taxes	6,318	11,415	15,494	26,965
Provision for income taxes	Provision for income taxes	2,785	3,994	9,224	6,251	Provision for income taxes	1,523	3,070	3,473	6,439

Net Income	Net Income	$8,877	$11,855	$29,403	$22,788	Net Income	$4,795	$8,345	$12,021	$20,526
Earnings Per Share, Basic	Earnings Per Share, Basic	$1.43	$1.87	$4.73	$3.57	Earnings Per Share, Basic	$0.83	$1.34	$2.05	$3.30
Earnings Per Share, Diluted	Earnings Per Share, Diluted	$1.42	$1.84	$4.69	$3.52	Earnings Per Share, Diluted	$0.83	$1.33	$2.03	$3.27
Weighted Average Shares Outstanding, Basic	Weighted Average Shares Outstanding, Basic	6,196,260	6,338,465	6,207,681	6,391,164	Weighted Average Shares Outstanding, Basic	5,750,873	6,206,913	5,844,455	6,213,392
Weighted Average Shares Outstanding, Diluted	Weighted Average Shares Outstanding, Diluted	6,265,602	6,413,221	6,274,634	6,467,991	Weighted Average Shares Outstanding, Diluted	5,805,870	6,277,265	5,902,287	6,280,369

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) 2021 2020 2021 2020
Net income $8,877 $11,855 $29,403 $22,788
Other comprehensive income (loss), net of tax:
   Securities available for sale:
         Unrealized (losses) gains arising during the period ($533) $54 ($2,141) $477
Derivatives and hedging activities:
     Unrealized (losses) gains arising during the period 162 245 835 (1,622)
Income tax benefit (expense) related to reclassifications and unrealized gains
      and losses 106 (85) 372 479
Other comprehensive (loss) gain, net of tax (265) 214 (934) (666)
Comprehensive income $8,612 $12,069 $28,469 $22,122


	Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	2022	2021	2022	2021
Net income	$4,795	$8,345	$12,021	$20,526
Other comprehensive income (loss), net of tax:
Securities available for sale:
Unrealized holding (losses) arising during the period	($7,715)	($90)	($24,017)	($1,608)



Derivatives and hedging activities:
Unrealized holding (losses) gains arising during the period	827	(587)	1,754	673
Income tax benefit related to unrealized gains and losses	1,958	189	6,329	266
Other comprehensive (loss), net of tax	(4,930)	(488)	(15,934)	(669)
Comprehensive (loss) income	($135)	$7,857	($3,913)	$19,857

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, 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 income, net of tax		—	—		—		—		(2,136)					(2,136)
Cumulative effect of adoption of accounting principles related to equity compensation expense		—	—		139		(139)		—					—

Other comprehensive loss, net of tax															Other comprehensive loss, net of tax	—			—		—			—			(488)		(488)
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)

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)
Balance as of June 30, 2021															Balance as of June 30, 2021	6,207			$6,207		$39,871			$191,791			($651)		$237,218
Cash dividend on common stock ($0.38 per share)															Cash dividend on common stock ($0.38 per share)	—			—		—			(2,384)			—		(2,384)
Stock-based compensation expense	Stock-based compensation expense	—	—		237		—		—					237	Stock-based compensation expense	—			—		232			—			—		232

Repurchase of common stock	Repurchase of common stock	(89)	(89)		(2,277)		—		—					(2,366)	Repurchase of common stock	(30)			(30)		(1,174)			—			—		(1,204)
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		—		214					214	Other comprehensive loss, net of tax	—			—		—			—			(265)		(265)
Net income	Net income	—	—		—		11,855		—					11,855	Net income	—			—		—			8,877			—		8,877
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)		—	—		—		(2,208)		—					(2,208)
Balance as of September 30, 2021															Balance as of September 30, 2021	6,177			$6,177		$38,929			$198,284			($916)		$242,474
Cash dividend on common stock ($0.38 per share)															Cash dividend on common stock ($0.38 per share)	—			—		—			(2,352)			—		(2,352)
Stock-based compensation expense	Stock-based compensation expense	—	—		226		—		—					226	Stock-based compensation expense	—			—		332			—			—		332
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)	Exercise of stock options and vesting of restricted stock units, net	26			26		(169)			—			—		(143)
Repurchase of common stock	Repurchase of common stock	(45)	(45)		(1,255)		—		—					(1,300)	Repurchase of common stock	(188)			(188)		(7,930)			—			—		(8,118)
Other comprehensive income, net of tax		—	—		—		—		253					253
Other comprehensive loss, net of tax															Other comprehensive loss, net of tax	—			—		—			—			(2,490)		(2,490)
Net income	Net income	—	—		—		10,100		—					10,100	Net income	—			—		—			8,114			—		8,114
Balance as of December 31, 2020		6,251	$6,251		$41,808		$173,498		$18					$221,575
Balance as of December 31, 2021															Balance as of December 31, 2021	6,015			$6,015		$31,162			$204,046			($3,406)		$237,817

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, 2021		6,251		$6,251					$41,808			td73,498										td8				td21,575
Cash dividend on common stock ($0.37 per share)		—	—			—			(2,313)		—						(2,313)
Balance as of January 1, 2022															Balance as of January 1, 2022	6,015			$6,015			$31,162			$204,046			($3,406)		$237,817
Cash dividend on common stock ($0.41 per share)															Cash dividend on common stock ($0.41 per share)	—			—		—			(2,471)			—		(2,471)
Stock-based compensation expense	Stock-based compensation expense	—	—		280		—		—					280	Stock-based compensation expense	—			—		187			—			—		187
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)	Repurchase of common stock	(133)			(133)		(5,790)			—			—		(5,923)
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		—		(181)					(181)	Other comprehensive loss, net of tax	—			—		—			—			(11,004)		(11,004)
Cumulative effect of adoption of ASU 2016-13		—	—		—		2,400		—					2,400

Net income	Net income	—	—		—		12,181		—					12,181	Net income	—			—		—			7,226			—		7,226
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)		—	—		—		(2,320)		—					(2,320)
Balance as of March 31, 2022															Balance as of March 31, 2022	5,882			$5,882		$25,559			$208,801			($14,410)		$225,832
Cash dividend on common stock ($0.41 per share)															Cash dividend on common stock ($0.41 per share)	—			—		—			(2,364)			—		(2,364)
Stock-based compensation expense	Stock-based compensation expense	—	—		229		—		—					229	Stock-based compensation expense	—			—		190			—			—		190

Repurchase of common stock															Repurchase of common stock	(201)			(201)		(8,033)			—			—		(8,234)
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	—	—		—		—		(488)					(488)	Other comprehensive loss, net of tax	—			—		—			—			(4,930)		(4,930)
Net income	Net income	—	—		—		8,345		—					8,345	Net income	—			—		—			4,795			—		4,795
Balance as of June 30, 2021		6,207	$6,207		$39,871		$191,791		($651)					$237,218
Cash dividend on common stock ($0.38 per share)		—	—		—		(2,384)		—					(2,384)
Stock-based compensation expense		—	—		232		—		—					232
Exercise of stock options and vesting of restricted stock units, net		—	—		—		—		—					—
Repurchase of common stock		(30)	(30)		(1,174)		—		—					(1,204)
Other comprehensive income, net of tax		—	—		—		—		(265)					(265)
Net income		—	—		—		8,877		—					8,877
Balance as of September 30, 2021		6,177	$6,177		$38,929		$198,284		($916)					$242,474
Balance as of June 30, 2022															Balance as of June 30, 2022	5,681			$5,681		$17,716			$211,232			($19,340)		$215,289

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)	2021	2020	(In Thousands)	2022	2021
Operating Activities:	Operating Activities:			Operating Activities:
Net income	Net income	$29,403	$22,788	Net income	$12,021	$20,526
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:			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	(67)	(98)	Gain on sale of securities, net	—	(31)
Loss on disposal of premises and equipment		—	22

Depreciation and amortization of premises and equipment	Depreciation and amortization of premises and equipment	2,473	2,337	Depreciation and amortization of premises and equipment	1,585	1,632
Amortization of software	Amortization of software	868	821	Amortization of software	587	574
Intangible asset amortization	Intangible asset amortization	27	36	Intangible asset amortization	12	18
Amortization of investment security premium, net of discount accretion	Amortization of investment security premium, net of discount accretion	367	(24)	Amortization of investment security premium, net of discount accretion	347	223
Unrealized (gain) loss on marketable equity securities		(27)	347
Deferred tax expense (benefit)		587	(477)
Unrealized loss (gain) on marketable equity securities				Unrealized loss (gain) on marketable equity securities	1,232	(94)
Deferred tax (benefit) expense				Deferred tax (benefit) expense	—	958
Stock-based compensation	Stock-based compensation	741	717	Stock-based compensation	377	509

Deferred loan fees and amortization, net of costs	Deferred loan fees and amortization, net of costs	3,128	9,399	Deferred loan fees and amortization, net of costs	(3,247)	5,710
(Benefit) provision for credit losses		(3,021)	3,031
(Benefit) provision for purchased receivables		—	(7)
Provision (benefit) for credit losses				Provision (benefit) for credit losses	313	(1,915)

Additions to home mortgage servicing rights carried at fair value	Additions to home mortgage servicing rights carried at fair value	(4,896)	(3,032)	Additions to home mortgage servicing rights carried at fair value	(2,115)	(3,193)
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	3,034	4,363	Change in fair value of home mortgage servicing rights carried at fair value	(462)	1,576
Change in fair value of commercial servicing rights carried at fair value	Change in fair value of commercial servicing rights carried at fair value	134	180	Change in fair value of commercial servicing rights carried at fair value	48	76
Gain on sale of loans	Gain on sale of loans	(29,222)	(30,701)	Gain on sale of loans	(8,569)	(21,265)
Proceeds from the sale of loans held for sale	Proceeds from the sale of loans held for sale	939,618	883,899	Proceeds from the sale of loans held for sale	353,737	648,901
Origination of loans held for sale	Origination of loans held for sale	(870,442)	(913,469)	Origination of loans held for sale	(334,598)	(587,277)
Gain on sale of other real estate owned	Gain on sale of other real estate owned	(577)	(176)	Gain on sale of other real estate owned	—	(189)

Proceeds from keyman life insurance				Proceeds from keyman life insurance	(2,002)	—
Net changes in assets and liabilities:	Net changes in assets and liabilities:			Net changes in assets and liabilities:
Decrease (increase) in accrued interest receivable		433	(3,512)
(Increase) decrease in other assets		5,875	(6,443)
Increase (decrease) in other liabilities		(3,139)	2,980
Net Cash Provided (Used) by Operating Activities		75,297	(27,019)
(Increase) in accrued interest receivable				(Increase) in accrued interest receivable	(1,271)	132
Decrease in other assets				Decrease in other assets	3,324	6,277
(Decrease) in other liabilities				(Decrease) in other liabilities	(6,010)	(4,698)
Net Cash Provided by Operating Activities				Net Cash Provided by Operating Activities	15,309	68,450
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	(259,016)	(89,173)	Purchases of investment securities available for sale	(214,703)	(173,968)
Purchases of marketable equity securities	Purchases of marketable equity securities	(493)	(1,439)	Purchases of marketable equity securities	(1,937)	(493)
Purchases of FHLB stock	Purchases of FHLB stock	(571)	(5,884)	Purchases of FHLB stock	(727)	(570)
Purchases of investment securities held to maturity	Purchases of investment securities held to maturity	(10,000)	—	Purchases of investment securities held to maturity	(9,750)	(10,000)
Proceeds from sales/calls/maturities of securities available for sale	Proceeds from sales/calls/maturities of securities available for sale	125,092	150,544	Proceeds from sales/calls/maturities of securities available for sale	5,000	82,575
Proceeds from sales of marketable equity securities	Proceeds from sales of marketable equity securities	1,017	502	Proceeds from sales of marketable equity securities	—	47

Proceeds from redemption of FHLB stock	Proceeds from redemption of FHLB stock	12	5,514	Proceeds from redemption of FHLB stock	10	7
(Increase) decrease in purchased receivables, net	(Increase) decrease in purchased receivables, net	(6,196)	10,860	(Increase) decrease in purchased receivables, net	(8,290)	1,422
Increase in loans, net		(9,990)	(459,346)
Decrease (increase) in loans, net				Decrease (increase) in loans, net	11,116	(49,921)
Proceeds from sale of other real estate owned	Proceeds from sale of other real estate owned	2,228	419	Proceeds from sale of other real estate owned	—	679

Proceeds from keyman life insurance				Proceeds from keyman life insurance	2,002	—
Purchases of software	Purchases of software	(76)	(96)	Purchases of software	(14)	(76)

Purchases of premises and equipment	Purchases of premises and equipment	(1,981)	(2,552)	Purchases of premises and equipment	(1,527)	(1,732)
Net Cash (Used) by Investing Activities	Net Cash (Used) by Investing Activities	(159,974)	(390,651)	Net Cash (Used) by Investing Activities	(218,820)	(152,030)
Financing Activities:	Financing Activities:			Financing Activities:
Increase in deposits		471,560	433,782
(Decrease) increase in deposits				(Decrease) increase in deposits	(86,241)	321,457

(Decrease) increase in borrowings		(212)	4,846
(Decrease) in borrowings				(Decrease) in borrowings	(206)	(137)
Repurchase of common stock	Repurchase of common stock	(3,416)	(8,676)	Repurchase of common stock	(14,157)	(2,212)
Proceeds from the issuance of common stock	Proceeds from the issuance of common stock	5	8	Proceeds from the issuance of common stock	—	5

Cash dividends paid	Cash dividends paid	(6,946)	(6,585)	Cash dividends paid	(4,789)	(4,613)
Net Cash Provided by Financing Activities		460,991	423,375
Net Cash (Used) Provided by Financing Activities				Net Cash (Used) Provided by Financing Activities	(105,393)	314,500
Net Change in Cash and Cash Equivalents	Net Change in Cash and Cash Equivalents	376,314	5,705	Net Change in Cash and Cash Equivalents	(308,904)	230,920


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	645,827	115,965
Cash and Cash Equivalents at End of Period	Cash and Cash Equivalents at End of Period	$492,279	$101,129	Cash and Cash Equivalents at End of Period	$336,923	$346,885

Supplemental Information:	Supplemental Information:			Supplemental Information:
Income taxes paid	Income taxes paid	$4,577	$1,940	Income taxes paid	$40	$1,852
Interest paid	Interest paid	$2,950	$4,580	Interest paid	$1,471	$2,132

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

Loans made to facilitate sales of other real estate owned		$1,012	$—

Non-cash lease liability arising from obtaining right of use assets	Non-cash lease liability arising from obtaining right of use assets	$79	$370	Non-cash lease liability arising from obtaining right of use assets	$—	$79
Cash dividends declared but not paid	Cash dividends declared but not paid	$71	$73	Cash dividends declared but not paid	$46	$45

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, ~~2021~~2022 are not necessarily indicative of the results anticipated for the year ending December 31, ~~2021.~~2022. 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, ~~2020.~~2021.

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, ~~2020.~~2021. 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 September 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 ACL 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 96% of the amortized cost basis of total loan pools at September 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 DCF. The analysis of collateral dependent loans includes appraisals on loans secured by real property, management’s assessment of the current market, recent payment history and an evaluation of other sources of repayment.

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 September 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 ACL 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 ACL. 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 ACL are recorded as provision for (or reversal of) credit loss expense.2022.

Reclassification of Prior ~~Year~~Period 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 2021~~

In June 2016, the Financial Accounting Standards Board ("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. Under ASU 2016-13 financial institutions and other organizations will 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 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 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. 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.

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 $2.4 million upon adoption of ASU 2016-13. The transition adjustment includes a decrease in the ACL on loans of $4.5 million, a decrease in the ACL on purchased receivables of $73,000, and an increase in the ACL on unfunded commitments of $1.2 million, net of the corresponding net decrease in deferred tax assets of $954,000.

Accounting pronouncements to be implemented in future periods

In March 2020, the 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. 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 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 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~~ceased the publication of one-week and two-month LIBOR, ~~after December 31, 2021, with the exception~~as well as all non-US Dollar LIBOR tenors as of ~~certain tenors of U.S. dollar (USD)~~January 1, 2022. 1-month, 3-month, 6-month, and 12-month US Dollar LIBOR ~~that it proposed would~~will continue to be published through and will 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 1-month, 3-month, and 12-month US Dollar LIBOR, such as commercial loans, derivatives, debt securities, and junior subordinated debentures. As of ~~September~~June 30, ~~2021,~~2022, we had approximately ~~$191.8~~$179.1 million of assets, including ~~$119.5~~$101.0 million in commercial loans and ~~$72.3~~$78.1 million in debt securities, and $10.0 million of liabilities in the form of our junior subordinated debentures linked to USD LIBOR. These amounts exclude derivative assets and liabilities on our consolidated balance sheet. As of ~~September~~June 30, ~~2021,~~2022, the notional amount of our USD LIBOR-linked interest rate derivative contracts was ~~$154.8~~$150.8 million. Of this amount, ~~$72.4~~$70.0 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers. An additional ~~$72.4~~$70.8 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 ~~$82.4~~$80.0 million, including an interest rate swap agreement for $10.0 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 transition away from LIBOR to alternative reference rate products, and (v) prepare and disseminate internal and external communications regarding the LIBOR transition.

ASU 2021-01 is not expected to have a material impact on the Company's consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). The amendments in ASU 2022-02 eliminate the accounting guidance for troubled debt restructurings ("TDRs") by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs which includes an assessment of whether the creditor has granted a concession, an entity must evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6. ASU 2022-02 is effective for the Company for fiscal years beginning after December 15, 2022. The Company may elect to apply the updated guidance on TDR recognition and measurement by using a modified retrospective transition method, which would result in a cumulative-effect adjustment to retained earnings, or to adopt the amendments prospectively. The Company intends to elect to adopt the updated guidance on TDR recognition and measurement prospectively; therefore the guidance will be applied to modifications occurring after the date of adoption. The amendments on TDR disclosures and vintage disclosures must be adopted prospectively. The Company does not believe that ASU 2022-02 will have a material impact on the Company's consolidated financial statements.

~~2. Cash and Cash Equivalents~~

The Company is no longer 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 Company is required to maintain a $300,000 and $250,000 balance with a correspondent bank for outsourced servicing of ATMs as of September 30, 2021 and December 31, 2020, respectively.~~

1511

As of September 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.

3.2. Investment Securities

Marketable Equity Securities

The Company held marketable equity securities with fair values of ~~$8.6~~$9.1 million and ~~$9.1~~$8.4 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 September 30,		Nine Months Ended September 30,			Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	(In Thousands)	2021	2020	2021	2020	(In Thousands)	2022	2021	2022	2021
Unrealized gain (loss) on marketable equity securities		($67)	$375	$27	($347)
Unrealized (loss) gain on marketable equity securities						Unrealized (loss) gain on marketable equity securities	($810)	$178	($1,232)	$94
Gain on sale of marketable equity securities, net	Gain on sale of marketable equity securities, net	36	—	67	98	Gain on sale of marketable equity securities, net	—	31	—	31
Total	Total	($31)	$375	$94	($249)	Total	($810)	$209	($1,232)	$125

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 ~~ACL~~the Allowance for Credit Losses ("ACL") 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:


(In Thousands)	(In Thousands)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Allowance for Credit Losses	Fair Value	(In Thousands)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Allowance for Credit Losses	Fair Value
September 30, 2021
June 30, 2022							June 30, 2022
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	$300,674	$465	($1,315)	$—	$299,824	U.S. Treasury and government sponsored entities	$546,885	$115	($25,661)	$—	$521,339
Municipal securities	Municipal securities	820	30	—	—	850	Municipal securities	820	—	(13)	—	807

Corporate bonds	Corporate bonds	34,969	462	(20)	—	35,411	Corporate bonds	32,709	2	(708)	—	32,003
Collateralized loan obligations	Collateralized loan obligations	43,038	23	(24)	—	43,037	Collateralized loan obligations	59,432	—	(1,554)	—	57,878
Total securities available for sale	Total securities available for sale	$379,501	$980	($1,359)	$—	$379,122	Total securities available for sale	$639,846	$117	($27,936)	$—	$612,027


(In Thousands)	(In Thousands)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value	(In Thousands)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
September 30, 2021
June 30, 2022						June 30, 2022
Securities held to maturity	Securities held to maturity					Securities held to maturity
Corporate bonds	Corporate bonds	$20,000	$—	($736)	$19,264	Corporate bonds	$29,750	$—	($3,379)	$26,371
Allowance for credit losses	Allowance for credit losses	—	—	—	—	Allowance for credit losses	—	—	—	—
Total securities held to maturity, net of ACL	Total securities held to maturity, net of ACL	$20,000	$—	($736)	$19,264	Total securities held to maturity, net of ACL	$29,750	$—	($3,379)	$26,371


(In Thousands)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Allowance for Credit Losses	Fair Value
December 31, 2021
Securities available for sale
U.S. Treasury and government sponsored entities	$345,514	$333	($4,367)	$—	$341,480
Municipal securities	820	20	—	—	840

Corporate bonds	32,721	302	(77)	—	32,946
Collateralized loan obligations	51,431	9	(22)	—	51,418
Total securities available for sale	$430,486	$664	($4,466)	$—	$426,684

1612

(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 — 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 $— $— $10,000
Total securities held to maturity $10,000 $— $— $10,000


(In Thousands)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
December 31, 2021
Securities held to maturity
Corporate bonds	$20,000	$—	($836)	$19,164
Allowance for credit losses	—	—	—	—
Total securities held to maturity, net of ACL	$20,000	$—	($836)	$19,164

Gross unrealized losses on 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, ~~2021~~2022 and December 31, ~~2020~~2021 were as follows:


		Less Than 12 Months		More Than 12 Months		Total			Less Than 12 Months		More Than 12 Months		Total
(In Thousands)	(In Thousands)	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	(In Thousands)	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
September 30, 2021:
June 30, 2022								June 30, 2022
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	$276,140	($1,315)	$—	$—	$276,140	($1,315)	U.S. Treasury and government sponsored entities	$372,559	($18,154)	$102,375	($7,507)	$474,934	($25,661)
Corporate bonds	Corporate bonds	$5,013	($20)	$—	$—	$5,013	($20)	Corporate bonds	28,584	(708)	—	—	28,584	(708)
Collateralized loan obligations	Collateralized loan obligations	4,976	(24)	—	—	4,976	(24)	Collateralized loan obligations	57,878	(1,554)	—	—	57,878	(1,554)

Municipal securities								Municipal securities	807	(13)	—	—	807	(13)

Total	Total	$286,129	($1,359)	$—	$—	$286,129	($1,359)	Total	$459,828	($20,429)	$102,375	($7,507)	$562,203	($27,936)

December 31, 2020:
December 31, 2021:								December 31, 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	$31,270	($47)	$—	$—	$31,270	($47)	U.S. Treasury and government sponsored entities	$292,845	($4,012)	$21,743	($355)	$314,588	($4,367)
Corporate bonds	Corporate bonds	3,198	(5)	—	—	3,198	(5)	Corporate bonds	4,953	(77)	—	—	4,953	(77)
Collateralized loan obligations	Collateralized loan obligations	23,670	(118)	2,967	(24)	26,637	(142)	Collateralized loan obligations	29,470	(22)	—	—	29,470	(22)

Total	Total	$58,138	($170)	$2,967	($24)	$61,105	($194)	Total	$327,268	($4,111)	$21,743	($355)	$349,011	($4,466)

Management evaluates available for sale debt securities in unrealized loss 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 cost, the financial condition and near-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 ~~September~~June 30, ~~2021,~~2022, the Company had 3379 available for sale securities in an unrealized loss position without an ACL. At ~~September~~June 30, ~~2021,~~2022, the Company had 24 held to maturity securities in an unrealized loss position without an ACL. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will 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 decline. Accordingly, as of ~~September~~June 30, ~~2021,~~2022, 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 conditions, and therefore no losses have been recognized in the Company's Consolidated Statements of Income.

At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020, $59.3~~2021, $54.7 million and ~~$77.9~~$59.5 million in securities were pledged for deposits and borrowings, respectively.

The amortized cost and estimated fair values of debt securities at ~~September~~June 30, ~~2021,~~2022, 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) Amortized Cost Fair Value
US Treasury and government sponsored entities
Within 1 year $4,998 $5,076
1-5 years 285,356 284,446
5-10 years 10,320 10,302
Total $300,674 $299,824
Corporate bonds
Within 1 year $2,240 $2,242
1-5 years $37,696 $37,993
5-10 years 15,033 15,013
Total $54,969 $55,248
Collateralized loan obligations
5-10 years $43,038 $43,037
Total $43,038 $43,037
Municipal securities
1-5 years $820 $850
Total $820 $850


(In Thousands)	Amortized Cost	Fair Value
US Treasury and government sponsored entities

1-5 years	$546,885	$521,339

Total	$546,885	$521,339






Corporate bonds

1-5 years	$40,694	$38,967
5-10 years	21,765	21,258
Total	$62,459	$60,225
Collateralized loan obligations
1-5 years	$5,000	$4,786
5-10 years	26,940	26,405
Over 10 years	27,492	26,687
Total	$59,432	$57,878
Municipal securities

1-5 years	$820	$807

Total	$820	$807

There were no proceeds from sales of investment securities for the three and ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.

A summary of interest income for the three and ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, 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)	2021	2020	2021	2020	(In Thousands)	2022	2021	2022	2021
US Treasury and government sponsored entities	US Treasury and government sponsored entities	$552	$680	$1,568	$2,839	US Treasury and government sponsored entities	$1,432	$516	$2,238	$1,016

Other	Other	272	237	840	1,040	Other	489	294	814	568
Total taxable interest income	Total taxable interest income	$824	$917	$2,408	$3,879	Total taxable interest income	$1,921	$810	$3,052	$1,584
Municipal securities	Municipal securities	$4	$23	$13	$72	Municipal securities	$5	$5	$9	$9
Total tax-exempt interest income	Total tax-exempt interest income	$4	$23	$13	$72	Total tax-exempt interest income	$5	$5	$9	$9
Total	Total	$828	$940	$2,421	$3,951	Total	$1,926	$815	$3,061	$1,593

1814

4.3. 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

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~~

The following table presents amortized cost and unpaid principal balance of loans for the periods indicated:


		September 30, 2021			December 31, 2020				June 30, 2022			December 31, 2021
(In Thousands)	(In Thousands)	Amortized Cost	Unpaid Principal	Difference	Amortized Cost	Unpaid Principal	Difference	(In Thousands)	Amortized Cost	Unpaid Principal	Difference	Amortized Cost	Unpaid Principal	Difference
Commercial & industrial loans	Commercial & industrial loans	$504,305	$513,482	($9,177)	$612,254	$619,304	($7,050)	Commercial & industrial loans	$394,841	$397,154	($2,313)	$448,338	$454,106	($5,768)
Commercial real estate:	Commercial real estate:							Commercial real estate:
Owner occupied properties	Owner occupied properties	292,021	293,346	(1,325)	233,320	234,363	(1,043)	Owner occupied properties	313,174	314,761	(1,587)	300,200	301,623	(1,423)
Non-owner occupied and multifamily properties	Non-owner occupied and multifamily properties	443,258	446,688	(3,430)	392,452	394,860	(2,408)	Non-owner occupied and multifamily properties	446,592	449,987	(3,395)	435,311	438,631	(3,320)
Residential real estate:	Residential real estate:							Residential real estate:
1-4 family residential properties secured by first liens	1-4 family residential properties secured by first liens	29,548	29,627	(79)	33,415	33,510	(95)	1-4 family residential properties secured by first liens	37,298	37,346	(48)	32,542	32,602	(60)
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	18,749	18,626	123	18,236	18,114	122	1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	21,953	21,821	132	19,610	19,489	121
1-4 family residential construction loans	1-4 family residential construction loans	36,386	36,591	(205)	32,500	32,760	(260)	1-4 family residential construction loans	43,915	44,215	(300)	36,222	36,542	(320)
Other construction, land development and raw land loans	Other construction, land development and raw land loans	73,313	73,832	(519)	83,463	84,351	(888)	Other construction, land development and raw land loans	87,163	87,669	(506)	88,094	88,604	(510)
Obligations of states and political subdivisions in the US	Obligations of states and political subdivisions in the US	17,470	17,636	(166)	15,318	15,274	44	Obligations of states and political subdivisions in the US	24,005	24,152	(147)	16,403	16,565	(162)
Agricultural production, including commercial fishing	Agricultural production, including commercial fishing	27,573	27,692	(119)	12,968	13,093	(125)	Agricultural production, including commercial fishing	29,482	29,638	(156)	27,959	28,082	(123)
Consumer loans	Consumer loans	5,014	4,973	41	5,734	5,794	(60)	Consumer loans	4,092	4,054	38	4,801	4,763	38
Other loans	Other loans	3,020	3,035	(15)	4,390	4,407	(17)	Other loans	3,194	3,208	(14)	4,406	4,422	(16)
Total	Total	1,450,657	1,465,528	(14,871)	1,444,050	1,455,830	(11,780)	Total	1,405,709	1,414,005	(8,296)	1,413,886	1,425,429	(11,543)
Allowance for credit losses	Allowance for credit losses	(13,816)			(21,136)			Allowance for credit losses	(11,537)			(11,739)
		$1,436,841	$1,465,528	($14,871)	$1,422,914	$1,455,830	($11,780)		$1,394,172	$1,414,005	($8,296)	$1,402,147	$1,425,429	($11,543)

The difference between the amortized cost and unpaid principal balance is ~~primarily~~ net deferred origination fees totaling ~~$14.9~~$8.3 million and ~~$11.7~~$11.5 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020, respectively, and premiums and discounts associated with acquired loans totaling $9,000 and $47,000 at September 30,~~ 2021, ~~and December 31, 2020,~~ respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled ~~$6.3~~$5.3 million and ~~$7.1~~$5.5 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, and was included in other assets in the Consolidated Balance Sheets.

Amortized cost in the above table includes ~~$203.4~~$31.9 million and ~~$304.6~~$118.2 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, in ~~PPP~~Paycheck Protection Program ("PPP") loans administered by the U.S. Small Business Administration ("SBA") within the Commercial & industrial loan segment.

2015

Allowance for Credit Losses

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

Three Months Ended September 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance
(In Thousands)
2021
Commercial & industrial loans $4,291 ($332) $— $23 $3,982
Commercial real estate:
Owner occupied properties 3,340 151 — 2 3,493
Non-owner occupied and multifamily properties 3,841 35 — — 3,876
Residential real estate:
1-4 family residential properties secured by first liens 630 (154) — — 476
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 340 (42) — 9 307
1-4 family residential construction loans 231 (47) — — 184
Other construction, land development and raw land loans 1,670 (391) — — 1,279
Obligations of states and political subdivisions in the US 39 (3) — — 36
Agricultural production, including commercial fishing 57 32 — 5 94
Consumer loans 94 (11) — — 83
Other loans 6 — — — 6
Total $14,539 ($762) $— $39 $13,816

Three Months Ended September 30, Beginning Balance Provision (benefit) Charge-offs Recoveries Ending Balance
(In Thousands)
2020
Commercial $7,366 $285 ($56) $600 $8,195
Real estate construction 1-4 family 690 10 — — 700
Real estate construction other 1,215 58 — — 1,273
Real estate term owner occupied 2,533 21 (85) — 2,469
Real estate term non-owner occupied 5,421 61 — — 5,482
Real estate term other 702 55 — 1 758
Consumer secured by 1st deed of trust 258 (2) — — 256
Consumer other 447 (7) — 3 443
Unallocated 2,021 86 — — 2,107
Total $20,653 $567 ($141) $604 $21,683


Three Months Ended June 30,	Beginning Balance	Credit Loss Expense (Benefit)	Charge-offs	Recoveries	Ending Balance
	(In Thousands)
2022
Commercial & industrial loans	$2,901	$123	($166)	$103	$2,961
Commercial real estate:
Owner occupied properties	2,513	60	—	—	2,573
Non-owner occupied and multifamily properties	3,063	44	—	—	3,107
Residential real estate:
1-4 family residential properties secured by first liens	510	110	—	—	620
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	301	17	—	9	327
1-4 family residential construction loans	210	21	—	—	231
Other construction, land development and raw land loans	1,550	(88)	—	—	1,462
Obligations of states and political subdivisions in the US	52	7	—	—	59
Agricultural production, including commercial fishing	128	(8)	—	7	127
Consumer loans	75	(12)	—	1	64
Other loans	7	(1)	—	—	6
Total	$11,310	$273	($166)	$120	$11,537
2021
Commercial & industrial loans	$4,269	$105	($110)	$27	$4,291
Commercial real estate:
Owner occupied properties	3,366	(28)	—	2	3,340
Non-owner occupied and multifamily properties	3,704	137	—	—	3,841
Residential real estate:
1-4 family residential properties secured by first liens	813	(183)	—	—	630
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	342	(12)	—	10	340
1-4 family residential construction loans	260	(29)	—	—	231
Other construction, land development and raw land loans	1,821	(151)	—	—	1,670
Obligations of states and political subdivisions in the US	36	3	—	—	39
Agricultural production, including commercial fishing	46	4	—	7	57
Consumer loans	104	(10)	—	—	94
Other loans	3	3	—	—	6
Total	$14,764	($161)	($110)	$46	$14,539

2116

Nine Months Ended September 30, Beginning Balance Impact of adopting ASC 326 Credit Loss Expense (Benefit) 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 (328) (273) 235 3,982
Commercial real estate:
Owner occupied properties — 3,579 (92) — 6 3,493
Non-owner occupied and multifamily properties — 4,944 (1,068) — — 3,876
Residential real estate:
1-4 family residential properties secured by first liens — 673 (197) — — 476
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — 419 (141) — 29 307
1-4 family residential construction loans — 454 (270) — — 184
Other construction, land development and raw land loans — 1,994 (715) — — 1,279
Obligations of states and political subdivisions in the US — 44 (8) — — 36
Agricultural production, including commercial fishing — 49 25 — 20 94
Consumer loans — 118 (37) — 2 83
Other loans — 3 3 — — 6
Total $21,136 ($4,511) ($2,828) ($273) $292 $13,816

Nine Months Ended September 30, Beginning Balance Provision (benefit) Charge-offs Recoveries Ending Balance
(In Thousands)
2020
Commercial $6,604 $1,946 ($1,011) $656 $8,195
Real estate construction 1-4 family $643 $57 $— $— $700
Real estate construction other 1,017 256 — — 1,273
Real estate term owner occupied 2,188 366 (85) — 2,469
Real estate term non-owner occupied 5,180 302 — — 5,482
Real estate term other 671 85 — 2 758
Consumer secured by 1st deed of trust 270 (14) — — 256
Consumer other 436 5 (14) 16 443
Unallocated 2,079 28 — — 2,107
Total $19,088 $3,031 ($1,110) $674 $21,683

The Company adopted ASU 2016-13 effective January 1, 2021. Upon adoption, the Company established an ACL of $16.6 million. As of September 30, 2021 the ACL decreased to $13.8 million. The Company primarily uses a DCF method to estimate ACL for loans. The Company utilizes and forecasts unemployment in Alaska as the primary loss driver in the DCF model. 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.


Six Months Ended June 30,	Beginning Balance	Credit Loss Expense (Benefit)	Charge-offs	Recoveries	Ending Balance
	(In Thousands)
2022
Commercial & industrial loans	$3,027	$279	($461)	$116	$2,961
Commercial real estate:
Owner occupied properties	3,176	(603)	—	—	2,573
Non-owner occupied and multifamily properties	2,930	177	—	—	3,107
Residential real estate:
1-4 family residential properties secured by first liens	439	181	—	—	620
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	215	91	—	21	327
1-4 family residential construction loans	120	111	—	—	231
Other construction, land development and raw land loans	1,635	(173)	—	—	1,462
Obligations of states and political subdivisions in the US	32	27	—	—	59
Agricultural production, including commercial fishing	91	21	—	15	127
Consumer loans	67	(4)	—	1	64
Other loans	7	(1)	—	—	6
Total	$11,739	$106	($461)	$153	$11,537
2021
Commercial & industrial loans	$4,348	$4	($273)	$212	$4,291
Commercial real estate:
Owner occupied properties	3,579	(243)	—	4	3,340
Non-owner occupied and multifamily properties	4,944	(1,103)	—	—	3,841
Residential real estate:
1-4 family residential properties secured by first liens	673	(43)	—	—	630
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	419	(99)	—	20	340
1-4 family residential construction loans	454	(223)	—	—	231
Other construction, land development and raw land loans	1,994	(324)	—	—	1,670
Obligations of states and political subdivisions in the US	44	(5)	—	—	39
Agricultural production, including commercial fishing	49	(7)	—	15	57
Consumer loans	118	(26)	—	2	94
Other loans	3	3	—	—	6
Total	$16,625	($2,066)	($273)	$253	$14,539

At ~~September~~June 30, ~~2021,~~2022, as compared to ~~January 1,~~March 31, 2022 and December 31, 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~~In the ~~forecasts used to calculate~~second quarter, the ~~September 30, 2021~~ ACL ~~management expects unemployment to remain consistent with actual levels observed~~increased because an increase in ~~Alaska as of August 2021. This rate is above pre-pandemic levels over~~loan balances more than offset the decrease in the forecast ~~period, but is lower than rates previously projected by management.~~

~~Management's projections~~ for ~~economic indicators as~~unemployment, changes in the characteristics of ~~September 30, 2021 improved slightly as compared to~~loans, and a decrease in the ACL for loans individually evaluated. In the six months ending June 30, ~~2021. The Company also applies qualitative factors in our CECL model, and these factors also improved in~~2022, the ~~third quarter~~ACL decreased as compared to the ~~second quarter~~same six month period of 2021 ~~due to increases~~because the decrease in ~~oil prices~~the forecast for unemployment and ~~improvement~~changes in ~~loan portfolio quality trends. Additionally,~~ the ~~ACL for individually impaired~~characteristics of loans ~~decreased during the third quarter of 2021 due to pay downs. These factors, which decreased the ACL during the third quarter of 2021,~~ were only partially offset by ~~an increase~~increases in loan balances.

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 — 679 679
Real estate construction other — $79,403 79,403 — 1,179 1,179
Real estate term owner occupied 6,962 $155,762 162,724 — 2,625 2,625
Real estate term non-owner occupied 770 $306,477 307,247 — 5,133 5,133
Real estate term other 1,467 $44,763 46,230 — 779 779
Consumer secured by 1st deed of trust 259 $15,289 15,548 — 261 261
Consumer other 82 $22,168 22,250 — 400 400
Unallocated — — — — 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 — — — 702 702
Real estate construction other — — — — —
Real estate term owner occupied — — — 6,962 7,047
Real estate term non-owner occupied — — — 771 771
Real estate term other — — — 1,467 1,467
Consumer secured by 1st deed of trust — — — 258 258
Consumer other — — — 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 nine-month periods ended September 30, 2020:

Three Months Ended September 30, 2020 Nine Months Ended September 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 — 970 —
Real estate construction other — — — —
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 — 88 —
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.


September 30, 2021		2021	2020	2019	2018	2017	Prior	Total
June 30, 2022									June 30, 2022	2022	2021	2020	2019	2018	Prior	Total
		(In Thousands)								(In Thousands)
Commercial & industrial loans	Commercial & industrial loans								Commercial & industrial loans
Pass	Pass	$252,274	$75,997	$41,196	$38,516	$23,534	$52,902	$484,419	Pass	$97,229	$126,148	$50,617	$21,259	$29,661	$57,889	$382,803
Classified	Classified	6,334	521	3,591	3,795	548	5,097	19,886	Classified	2,689	5,459	—	119	2,950	821	12,038
Total commercial & industrial loans	Total commercial & industrial loans	$258,608	$76,518	$44,787	$42,311	$24,082	$57,999	$504,305	Total commercial & industrial loans	$99,918	$131,607	$50,617	$21,378	$32,611	$58,710	$394,841

Commercial real estate:	Commercial real estate:								Commercial real estate:
Owner occupied properties	Owner occupied properties								Owner occupied properties
Pass	Pass	$56,599	$94,373	$39,839	$15,415	$14,763	$62,377	$283,366	Pass	$35,493	$70,745	$81,000	$38,694	$13,415	$65,980	$305,327
Classified	Classified	—	1,432	—	532	—	6,691	8,655	Classified	—	—	1,331	—	498	6,018	7,847
Total commercial real estate owner occupied properties	Total commercial real estate owner occupied properties	$56,599	$95,805	$39,839	$15,947	$14,763	$69,068	$292,021	Total commercial real estate owner occupied properties	$35,493	$70,745	$82,331	$38,694	$13,913	$71,998	$313,174

Non-owner occupied and multifamily properties	Non-owner occupied and multifamily properties								Non-owner occupied and multifamily properties
Pass	Pass	$66,449	$79,472	$67,466	$34,569	$20,273	$164,676	$432,905	Pass	$26,141	$82,850	$74,798	$56,709	$33,807	$161,854	$436,159
Classified	Classified	—	—	—	—	10,353	—	10,353	Classified	—	—	—	277	6	10,150	10,433
Total commercial real estate non-owner occupied and multifamily properties	Total commercial real estate non-owner occupied and multifamily properties	$66,449	$79,472	$67,466	$34,569	$30,626	$164,676	$443,258	Total commercial real estate non-owner occupied and multifamily properties	$26,141	$82,850	$74,798	$56,986	$33,813	$172,004	$446,592

Residential real estate:	Residential real estate:								Residential real estate:
1-4 family residential properties secured by first liens	1-4 family residential properties secured by first liens								1-4 family residential properties secured by first liens
Pass	Pass	$3,744	$7,979	$3,816	$642	$1,774	$9,571	$27,526	Pass	$8,410	$9,846	$6,490	$3,402	$494	$8,373	$37,015
Classified	Classified	—	1,318	486	—	—	218	2,022	Classified	—	—	—	—	90	193	283
Total residential real estate 1-4 family residential properties secured by first liens	Total residential real estate 1-4 family residential properties secured by first liens	$3,744	$9,297	$4,302	$642	$1,774	$9,789	$29,548	Total residential real estate 1-4 family residential properties secured by first liens	$8,410	$9,846	$6,490	$3,402	$584	$8,566	$37,298

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens								1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens
Pass	Pass	$3,041	$2,609	$3,817	$4,038	$264	$4,705	$18,474	Pass	$3,219	$5,467	$2,570	$2,861	$3,447	$4,109	$21,673
Classified	Classified	—	—	—	261	—	14	275	Classified	—	—	—	—	270	10	280
Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens		$3,041	$2,609	$3,817	$4,299	$264	$4,719	$18,749

1-4 family residential construction loans
Pass		$19,068	$1,564	$4,329	$112	$—	$11,204	$36,277
Classified		—	—	—	—	109	—	109
Total residential real estate 1-4 family residential construction loans		$19,068	$1,564	$4,329	$112	$109	$11,204	$36,386

Other construction, land development and raw land loans
Pass		$27,179	$20,869	$10,849	$3,697	$144	$5,881	$68,619
Classified		—	—	—	3,171	—	1,523	4,694
Total other construction, land development and raw land loans		$27,179	$20,869	$10,849	$6,868	$144	$7,404	$73,313

Obligations of states and political subdivisions in the US
Pass		$52	$3,112	$3,150	$373	$2,740	$8,043	$17,470

2518


Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens									Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	$3,219	$5,467	$2,570	$2,861	$3,717	$4,119	$21,953

1-4 family residential construction loans									1-4 family residential construction loans
Pass									Pass	$21,804	$8,522	$441	$481	$—	$12,558	$43,806
Classified									Classified	—	—	—	—	—	109	109
Total residential real estate 1-4 family residential construction loans									Total residential real estate 1-4 family residential construction loans	$21,804	$8,522	$441	$481	$—	$12,667	$43,915

Other construction, land development and raw land loans									Other construction, land development and raw land loans
Pass									Pass	$5,651	$41,340	$19,578	$9,402	$3,396	$5,945	$85,312
Classified									Classified	—	—	—	—	369	1,482	1,851
Total other construction, land development and raw land loans									Total other construction, land development and raw land loans	$5,651	$41,340	$19,578	$9,402	$3,765	$7,427	$87,163

Obligations of states and political subdivisions in the US									Obligations of states and political subdivisions in the US
Pass									Pass	$285	$9,669	$2,667	$1,864	$282	$9,238	$24,005
Classified	Classified	—	—	—	—	—	—	—	Classified	—	—	—	—	—	—	—
Total obligations of states and political subdivisions in the US	Total obligations of states and political subdivisions in the US	$52	$3,112	$3,150	$373	$2,740	$8,043	$17,470	Total obligations of states and political subdivisions in the US	$285	$9,669	$2,667	$1,864	$282	$9,238	$24,005

Agricultural production, including commercial fishing	Agricultural production, including commercial fishing								Agricultural production, including commercial fishing
Pass	Pass	$16,235	$6,598	$1,130	$1,150	$781	$1,679	$27,573	Pass	$3,549	$18,683	$3,764	$678	$1,073	$1,735	$29,482
Classified	Classified	—	—	—	—	—	—	—	Classified	—	—	—	—	—	—	—
Total agricultural production, including commercial fishing	Total agricultural production, including commercial fishing	$16,235	$6,598	$1,130	$1,150	$781	$1,679	$27,573	Total agricultural production, including commercial fishing	$3,549	$18,683	$3,764	$678	$1,073	$1,735	$29,482

Consumer loans	Consumer loans								Consumer loans
Pass	Pass	$854	$936	$693	$427	$318	$1,786	$5,014	Pass	$770	$499	$541	$397	$306	$1,570	$4,083
Classified	Classified	—	—	—	—	—	—	—	Classified	—	—	—	—	—	9	9
Total consumer loans	Total consumer loans	$854	$936	$693	$427	$318	$1,786	$5,014	Total consumer loans	$770	$499	$541	$397	$306	$1,579	$4,092

Other loans	Other loans								Other loans
Pass	Pass	$495	$1,692	$439	$165	$—	$229	$3,020	Pass	$568	$1,143	$1,598	$408	$—	($523)	$3,194
Classified	Classified	—	—	—	—	—	—	—	Classified	—	—	—	—	—	—	—
Total other loans	Total other loans	$495	$1,692	$439	$165	$—	$229	$3,020	Total other loans	$568	$1,143	$1,598	$408	$—	($523)	$3,194

Total loans	Total loans								Total loans
Pass	Pass	$445,990	$295,201	$176,724	$99,104	$64,591	$323,053	$1,404,663	Pass	$203,119	$374,912	$244,064	$136,155	$85,881	$328,728	$1,372,859
Classified	Classified	6,334	3,271	4,077	7,759	11,010	13,543	45,994	Classified	2,689	5,459	1,331	396	4,183	18,792	32,850
Total loans	Total loans	$452,324	$298,472	$180,801	$106,863	$75,601	$336,596	$1,450,657	Total loans	$205,808	$380,371	$245,395	$136,551	$90,064	$347,520	$1,405,709

Total pass loans	Total pass loans	$445,990	$295,201	$176,724	$99,104	$64,591	$323,053	$1,404,663	Total pass loans	$203,119	$374,912	$244,064	$136,155	$85,881	$328,728	$1,372,859
Government guarantees	Government guarantees	(203,664)	(22,169)	(16,800)	(5,212)	(409)	(1,537)	(249,791)	Government guarantees	(4,441)	(62,412)	(11,051)	(13,290)	(3,117)	(4,898)	(99,209)
Total pass loans, net of government guarantees	Total pass loans, net of government guarantees	$242,326	$273,032	$159,924	$93,892	$64,182	$321,516	$1,154,872	Total pass loans, net of government guarantees	$198,678	$312,500	$233,013	$122,865	$82,764	$323,830	$1,273,650

Total classified loans	Total classified loans	$6,334	$3,271	$4,077	$7,759	$11,010	$13,543	$45,994	Total classified loans	$2,689	$5,459	$1,331	$396	$4,183	$18,792	$32,850
Government guarantees	Government guarantees	(1,501)	(1,289)	—	—	(9,570)	(1,123)	(13,483)	Government guarantees	(2,420)	(4,913)	(1,198)	—	—	(9,818)	(18,349)
Total classified loans, net government guarantees	Total classified loans, net government guarantees	$4,833	$1,982	$4,077	$7,759	$1,440	$12,420	$32,511	Total classified loans, net government guarantees	$269	$546	$133	$396	$4,183	$8,974	$14,501

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


December 31, 2021	2021	2020	2019	2018	2017	Prior	Total
	(In Thousands)
Commercial & industrial loans
Pass	$227,376	$54,478	$29,846	$37,339	$23,205	$44,554	$416,798
Classified	18,853	714	3,564	3,118	517	4,774	31,540
Total commercial & industrial loans	$246,229	$55,192	$33,410	$40,457	$23,722	$49,328	$448,338

Commercial real estate:
Owner occupied properties
Pass	$81,533	$83,975	$39,254	$14,841	$14,452	$57,717	$291,772
Classified	—	1,399	—	522	—	6,507	8,428


Total commercial real estate owner occupied properties	$81,533	$85,374	$39,254	$15,363	$14,452	$64,224	$300,200

Non-owner occupied and multifamily properties
Pass	$77,205	$77,961	$61,147	$34,307	$19,833	$154,561	$425,014
Classified	—	—	—	10	10,286	1	10,297
Total commercial real estate non-owner occupied and multifamily properties	$77,205	$77,961	$61,147	$34,317	$30,119	$154,562	$435,311

Residential real estate:
1-4 family residential properties secured by first liens
Pass	$7,756	$8,023	$3,689	$531	$1,466	$8,812	$30,277
Classified	417	1,077	472	90	—	209	2,265
Total residential real estate 1-4 family residential properties secured by first liens	$8,173	$9,100	$4,161	$621	$1,466	$9,021	$32,542

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens
Pass	$5,806	$2,535	$3,229	$3,464	$259	$4,046	$19,339
Classified	—	—	—	259	—	12	271
Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	$5,806	$2,535	$3,229	$3,723	$259	$4,058	$19,610

1-4 family residential construction loans
Pass	$21,409	$1,056	$1,707	$62	$—	$11,879	$36,113
Classified	—	—	—	—	109	—	109
Total residential real estate 1-4 family residential construction loans	$21,409	$1,056	$1,707	$62	$109	$11,879	$36,222

Other construction, land development and raw land loans
Pass	$39,624	$26,458	$11,044	$3,315	$139	$5,544	$86,124
Classified	—	—	—	460	—	1,510	1,970
Total other construction, land development and raw land loans	$39,624	$26,458	$11,044	$3,775	$139	$7,054	$88,094

Obligations of states and political subdivisions in the US
Pass	$4,120	$812	$1,875	$343	$2,733	$6,520	$16,403
Classified	—	—	—	—	—	—	—
Total obligations of states and political subdivisions in the US	$4,120	$812	$1,875	$343	$2,733	$6,520	$16,403

Agricultural production, including commercial fishing
Pass	$19,970	$3,929	$810	$1,118	$741	$1,391	$27,959
Classified	—	—	—	—	—	—	—
Total agricultural production, including commercial fishing	$19,970	$3,929	$810	$1,118	$741	$1,391	$27,959

Consumer loans
Pass	$873	$815	$653	$403	$291	$1,766	$4,801
Classified	—	—	—	—	—	—	—
Total consumer loans	$873	$815	$653	$403	$291	$1,766	$4,801

Other loans
Pass	$2,028	$1,645	$430	$95	$—	$208	$4,406
Classified	—	—	—	—	—	—	—
Total other loans	$2,028	$1,645	$430	$95	$—	$208	$4,406

Total loans
Pass	$487,700	$261,687	$153,684	$95,818	$63,119	$296,998	$1,359,006
Classified	19,270	3,190	4,036	4,459	10,912	13,013	54,880
Total loans	$506,970	$264,877	$157,720	$100,277	$74,031	$310,011	$1,413,886

Total pass loans	$487,700	$261,687	$153,684	$95,818	$63,119	$296,998	$1,359,006
Government guarantees	(145,713)	(12,725)	(14,429)	(3,299)	(306)	(6,562)	(183,034)
Total pass loans, net of government guarantees	$341,987	$248,962	$139,255	$92,519	$62,813	$290,436	$1,175,972

Total classified loans	$19,270	$3,190	$4,036	$4,459	$10,912	$13,013	$54,880


Government guarantees	(7,201)	(1,259)	—	—	—	(10,571)	(19,031)
Total classified loans, net government guarantees	$12,069	$1,931	$4,036	$4,459	$10,912	$2,442	$35,849

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 — 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

2621

Past Due Loans: The following tables present an aging of contractually past due ~~loans:~~loans as of the periods presented:


(In Thousands)	(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	(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
September 30, 2021
June 30, 2022									June 30, 2022
Commercial & industrial loans	Commercial & industrial loans	$266	$19	$4,227	$4,512	$499,793	$504,305	$—	Commercial & industrial loans	$246	$132	$387	$765	$394,076	$394,841	$—
Commercial real estate:	Commercial real estate:								Commercial real estate:
Owner occupied properties	Owner occupied properties	—	—	1,219	1,219	290,802	292,021	—	Owner occupied properties	737	0	1,076	1,813	311,361	313,174	—
Non-owner occupied and multifamily properties	Non-owner occupied and multifamily properties	—	—	—	—	443,258	443,258	—	Non-owner occupied and multifamily properties	—	—	—	—	446,592	446,592	—
Residential real estate:	Residential real estate:								Residential real estate:
1-4 family residential properties secured by first liens	1-4 family residential properties secured by first liens	—	168	—	168	29,380	29,548	—	1-4 family residential properties secured by first liens	65	—	147	212	37,086	37,298	—
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	44	—	139	183	18,566	18,749	—	1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	—	—	133	133	21,820	21,953	—
1-4 family residential construction loans	1-4 family residential construction loans	—	—	109	109	36,277	36,386	—	1-4 family residential construction loans	—	—	109	109	43,806	43,915	—
Other construction, land development and raw land loans	Other construction, land development and raw land loans	—	—	1,545	1,545	71,768	73,313	—	Other construction, land development and raw land loans	—	—	1,546	1,546	85,617	87,163	—
Obligations of states and political subdivisions in the US	Obligations of states and political subdivisions in the US	—	—	—	—	17,470	17,470	—	Obligations of states and political subdivisions in the US	—	—	—	—	24,005	24,005	—
Agricultural production, including commercial fishing	Agricultural production, including commercial fishing	—	—	—	—	27,573	27,573	—	Agricultural production, including commercial fishing	—	—	—	—	29,482	29,482	—
Consumer loans	Consumer loans	—	—	—	—	5,014	5,014	—	Consumer loans	—	—	—	—	4,092	4,092	—
Other loans	Other loans	—	—	—	—	3,020	3,020	—	Other loans	—	—	—	—	3,194	3,194	—
Total	Total	$310	$187	$7,239	$7,736	$1,442,921	$1,450,657	$—	Total	$1,048	$132	$3,398	$4,578	$1,401,131	$1,405,709	$—
December 31, 2020
December 31, 2021									December 31, 2021
Commercial & industrial loans	Commercial & industrial loans	$242	$229	$2,675	$3,146	$609,108	$612,254	$—	Commercial & industrial loans	$206	$51	$469	$726	$447,612	$448,338	$—
Commercial real estate:	Commercial real estate:								Commercial real estate:
Owner occupied properties	Owner occupied properties	2,203	—	2,459	4,662	228,658	233,320	449	Owner occupied properties	12	—	1,176	1,188	299,012	300,200	—
Non-owner occupied and multifamily properties	Non-owner occupied and multifamily properties	—	—	—	—	392,452	392,452	—	Non-owner occupied and multifamily properties	—	—	—	—	435,311	435,311	—
Residential real estate:	Residential real estate:								Residential real estate:
1-4 family residential properties secured by first liens	1-4 family residential properties secured by first liens	446	—	—	446	32,969	33,415	—	1-4 family residential properties secured by first liens	—	—	90	90	32,452	32,542	—
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	38	—	139	177	18,059	18,236	—	1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	—	—	139	139	19,471	19,610	—
1-4 family residential construction loans	1-4 family residential construction loans	—	—	702	702	31,798	32,500	—	1-4 family residential construction loans	—	—	109	109	36,113	36,222	—
Other construction, land development and raw land loans	Other construction, land development and raw land loans	—	—	1,545	1,545	81,918	83,463	—	Other construction, land development and raw land loans	—	—	1,636	1,636	86,458	88,094	—
Obligations of states and political subdivisions in the US	Obligations of states and political subdivisions in the US	—	—	—	—	15,318	15,318	—	Obligations of states and political subdivisions in the US	—	—	—	—	16,403	16,403	—
Agricultural production, including commercial fishing	Agricultural production, including commercial fishing	—	—	—	—	12,968	12,968	—	Agricultural production, including commercial fishing	—	—	—	—	27,959	27,959	—
Consumer loans	Consumer loans	—	—	272	272	5,462	5,734	—	Consumer loans	—	—	—	—	4,801	4,801	—
Other loans	Other loans	—	—	—	—	4,390	4,390	—	Other loans	—	—	—	—	4,406	4,406	—
Total	Total	$2,929	$229	$7,792	$10,950	$1,433,100	$1,444,050	$449	Total	$218	$51	$3,619	$3,888	$1,409,998	$1,413,886	$—

Nonaccrual loans: Nonaccrual loans net of government guarantees totaled ~~$11.5~~$7.3 million and ~~$9.6~~$10.7 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The following table presents loans on nonaccrual status and loans on nonaccrual status

for which there was no related ~~allowance~~ACL. All loans with no ACL are individually evaluated for credit ~~losses:~~losses in the Company's Current Expected Credit Losses methodology.


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
(In Thousands)	(In Thousands)	Nonaccrual	Nonaccrual With No ACL	Nonaccrual	Nonaccrual With No ACL	(In Thousands)	Nonaccrual	Nonaccrual With No ACL	Nonaccrual	Nonaccrual With No ACL

Commercial & industrial loans	Commercial & industrial loans	$4,974	$1,179	$3,848	$3,513	Commercial & industrial loans	$3,496	$3,496	$4,350	$4,298
Commercial real estate:	Commercial real estate:					Commercial real estate:
Owner occupied properties	Owner occupied properties	3,640	3,640	4,620	4,582	Owner occupied properties	2,352	2,348	3,506	3,506

Residential real estate:	Residential real estate:					Residential real estate:
1-4 family residential properties secured by first liens	1-4 family residential properties secured by first liens	1,950	1,464	160	160	1-4 family residential properties secured by first liens	219	219	1,778	1,778
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	275	275	242	221	1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	280	207	271	215
1-4 family residential construction loans	1-4 family residential construction loans	109	109	702	702	1-4 family residential construction loans	109	109	109	109
Other construction, land development and raw land loans	Other construction, land development and raw land loans	1,545	1,545	1,545	1,545	Other construction, land development and raw land loans	1,545	1,545	1,636	1,636

Consumer loans	Consumer loans	—	—	3	—	Consumer loans	—	—	—	—

Total nonaccrual loans	Total nonaccrual loans	12,493	8,212	11,120	10,723	Total nonaccrual loans	8,001	7,924	11,650	11,542
Government guarantees on nonaccrual loans	Government guarantees on nonaccrual loans	(1,017)	(1,017)	(1,483)	(1,483)	Government guarantees on nonaccrual loans	(683)	(683)	(978)	(978)
Net nonaccrual loans	Net nonaccrual loans	$11,476	$7,195	$9,637	$9,240	Net nonaccrual loans	$7,318	$7,241	$10,672	$10,564

There was no interest on nonaccrual loans reversed through interest income during ~~three~~three-month period ending June 30, 2022 and ~~nine-month periods~~$2,000 in interest on nonaccrual loans reversed through interest income during the six-month period ending ~~September~~June 30, ~~2021.~~2022. There was no interest on nonaccrual loans reversed through interest income during the ~~three-month period~~three and six-month periods ending ~~September~~June 30, ~~2020 and $12,000 in interest on nonaccrual loans reversed through interest income during the nine-month period ending September 30, 2020, respectively.~~2021.

There was no interest earned on nonaccrual loans with a principal balance during the three and ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, respectively. However, the Company recognized interest income of ~~$198,000~~$873,000 and ~~$780,000~~$232,000 in the three-month periods ending ~~September~~June 30, 2022 and 2021, respectively, and ~~2020~~$930,000 and ~~$565,000 and $986,000~~$366,000 in the ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.

2823

Troubled Debt Restructurings: Loans classified as TDRs totaled ~~$7.0~~$8.9 million and ~~$7.9~~$10.6 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 Coronavirus Aid, Relief, and Economic Security ("CARES") Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and ~~the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency.~~December 31, 2021. 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. 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:


Loan Modifications due to COVID-19 as of September 30, 2021
Loan Modifications due to COVID-19 as of June 30, 2022					Loan Modifications due to COVID-19 as of June 30, 2022
(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	$49,888	$7,533	$57,421	Portfolio loans	$23,573	$—	$23,573
Number of modifications	Number of modifications	21	3	24	Number of modifications	5	—	5


Loan Modifications due to COVID-19 as of December 31, 2020
Loan Modifications due to COVID-19 as of December 31, 2021					Loan Modifications due to COVID-19 as of December 31, 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	$43,379	$22,165	$65,544	Portfolio loans	$49,219	$—	$49,219
Number of modifications	Number of modifications	23	11	34	Number of modifications	16	—	16

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~~There were no newly restructured loans that occurred during the ~~nine~~six months ended ~~September~~June 30, ~~2021 and restructured loans that occurred prior to 2021 that are still included in portfolio loans.~~2022. As discussed above, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 between March 1, 2020 and December 31, 2021 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, ~~2020.~~2019. The disclosed loan restructurings were not related to COVID-19 modifications.

Accrual Status Nonaccrual Status Total Modifications
(In Thousands)
New Troubled Debt Restructurings
   Commercial & industrial loans $— $249 $249
   Commercial real estate:
   Owner occupied properties — 360 360
   Other construction, land development and raw land loans — 578 578
Subtotal $— $1,187 $1,187
Existing Troubled Debt Restructurings $2,382 $3,467 $5,849
Total $2,382 $4,654 $7,036


	Accrual Status	Nonaccrual Status	Total Modifications
(In Thousands)






Existing Troubled Debt Restructurings	$3,008	$5,844	$8,852
Total	$3,008	$5,844	$8,852

2924

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

September 30, 2021
Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications
(In Thousands)
Pre-Modification Outstanding Recorded Investment:
Commercial & industrial loans 1 $— $254 $— $— $254
Commercial real estate:
Owner occupied properties 1 — 360 — — 360
Other construction, land development and raw land loans 1 — 577 — — 360
Total 3 $— $1,191 $— $— $974
Post-Modification Outstanding Recorded Investment:
Commercial & industrial loans 1 $— $249 $— $— $249
Commercial real estate:
Owner occupied properties 1 — 360 — — 360
Other construction, land development and raw land loans 1 — 577 — — 577
Total 3 $— $1,186 $— $— $1,186

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


		June 30, 2021
	Number of Contracts	Rate Modification	Term Modification	Payment Modification	Combination Modification	Total Modifications
(In Thousands)
Pre-Modification Outstanding Recorded Investment:
Commercial - AQR substandard	1	$—	$254	$—	$—	$254
Total	1	$—	$254	$—	$—	$254
Post-Modification Outstanding Recorded Investment:
Commercial - AQR substandard	1	$—	$251	$—	$—	$251
Total	1	$—	$251	$—	$—	$251

The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs. There were no in charge-offs in the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 on loans that were newly classified as TDRs during the same period.

~~As of December 31, 2020, all TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment.~~ There were no ~~TDRs with specific impairment at December 31, 2020.~~

~~The Company had no TDRs~~loans that ~~defaulted within twelve months of restructure and~~ defaulted during the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, ~~and 2020, respectively.~~respectively, that were restructured in the previous twelve months.

5.4. Purchased Receivables

Purchased receivables are carried at their principal amount outstanding, net of an ~~allowance for credit losses,~~ACL, and have a maturity of less than one year. There were no purchased receivables past due at ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020,~~2021, and there were no restructured purchased receivables at ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020.~~

2021.

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. There were no nonperforming purchased receivables as of ~~September~~June 30, ~~2021 and~~2022 or December 31, ~~2020, respectively.~~2021.

There was no activity and no balance in the ACL for purchased receivables as of June 30, 2022 or December 31, 2021.

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


(In Thousands)	(In Thousands)	September 30, 2021	December 31, 2020	(In Thousands)	June 30, 2022	December 31, 2021
Purchased receivables	Purchased receivables	$20,118	$13,995	Purchased receivables	$15,277	$6,987
Allowance for credit losses - purchased receivables	Allowance for credit losses - purchased receivables	—	(73)	Allowance for credit losses - purchased receivables	—	—
Total	Total	$20,118	$13,922	Total	$15,277	$6,987

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

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2021 2020 2021 2020
Balance, beginning of period $— $93 $— $94
Charge-offs — — — —
Recoveries — — — —
Charge-offs net of recoveries — — — —
Benefit for purchased receivables — (6) — (7)
Balance, end of period $— $87 $— $87

6.5. 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, ~~2021~~2022 and ~~2020:~~2021:


		Three Months Ended September 30,		Nine Months Ended September 30,			Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	(In Thousands)	2021	2020	2021	2020	(In Thousands)	2022	2021	2022	2021

Balance, beginning of period	Balance, beginning of period	$12,835	$10,721	$11,218	$11,920	Balance, beginning of period	$15,422	$11,657	$13,724	$11,218
Additions for new MSR capitalized	Additions for new MSR capitalized	1,703	1,373	4,896	3,032	Additions for new MSR capitalized	1,128	1,745	2,115	3,193
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)	(928)	(699)	(1,092)	(2,291)	Due to changes in model inputs of assumptions (1)	(225)	16	967	(164)
Other (2)	Other (2)	(530)	(806)	(1,942)	(2,072)	Other (2)	(24)	(583)	(505)	(1,412)
Balance, end of period	Balance, end of period	$13,080	$10,589	$13,080	$10,589	Balance, end of period	$16,301	$12,835	$16,301	$12,835

(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, ~~2021~~2022 and December 31, ~~2020:~~2021:


(In Thousands)	(In Thousands)	September 30, 2021		December 31, 2020		(In Thousands)	June 30, 2022		December 31, 2021

Balance of mortgage loans serviced for others	Balance of mortgage loans serviced for others	$750,327		$683,117		Balance of mortgage loans serviced for others	$818,266		$772,764
MSR as a percentage of serviced loans	MSR as a percentage of serviced loans	1.74	%	1.64	%	MSR as a percentage of serviced loans	1.99	%	1.78	%

The Company recognized servicing fees of ~~$745,000~~$804,000 and ~~$671,000~~$707,000 during the three-month periods ending ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$2.2~~$1.6 million and $2$1.4 million during the ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, 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, ~~2021~~2022 and December 31, ~~2020:~~2021:


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

Constant prepayment rate	Constant prepayment rate	12.31	%	13.05	%	Constant prepayment rate	7.37	%	11.80	%
Discount rate	Discount rate	8.00	%	7.75	%	Discount rate	9.25	%	8.00	%

Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 were as follows:


(In Thousands)	(In Thousands)			September 30, 2021		December 31, 2020		(In Thousands)			June 30, 2022		December 31, 2021
Aggregate portfolio principal balance	Aggregate portfolio principal balance			$750,327		$683,117		Aggregate portfolio principal balance			$818,266		$772,764
Weighted average rate of note	Weighted average rate of note			3.36	%	3.62	%	Weighted average rate of note			3.28	%	3.31	%

September 30, 2021		Base		1.0% Adverse Rate Change		2.0% Adverse Rate Change
June 30, 2022								June 30, 2022	Base		1.0% Adverse Rate Change		2.0% Adverse Rate Change
Constant prepayment rate	Constant prepayment rate	12.31	%	24.63	%	36.19	%	Constant prepayment rate	7.37	%	14.75	%	22.12	%
Discount rate	Discount rate	8.00	%	7.00	%	6.00	%	Discount rate	9.25	%	8.25	%	7.25	%
Fair value MSR	Fair value MSR	$13,080		$9,134		$6,894		Fair value MSR	$16,301		$12,424		$9,885
Percentage of MSR	Percentage of MSR	1.74	%	1.22	%	0.92	%	Percentage of MSR	1.99	%	1.52	%	1.21	%

December 31, 2020
December 31, 2021								December 31, 2021
Constant prepayment rate	Constant prepayment rate	13.05	%	26.11	%	38.97	%	Constant prepayment rate	11.80	%	23.59	%	34.57	%
Discount rate	Discount rate	7.75	%	6.75	%	5.75	%	Discount rate	8.00	%	7.00	%	6.00	%
Fair value MSR	Fair value MSR	$11,218		$7,455		$5,404		Fair value MSR	$13,724		$9,612		$7,256
Percentage of MSR	Percentage of MSR	1.64	%	1.09	%	0.79	%	Percentage of MSR	1.78	%	1.24	%	0.94	%

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 rights asset ("CSR") has a carrying value ~~$1.3~~$1.1 million at both ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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~~$254.5 million and ~~$274.6~~$259.8 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Key assumptions used in measuring the fair value of the CSR as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 include a constant prepayment rate of ~~9.66%~~16.08% and a discount rate of ~~9.46%~~9.94%.

7.6. Leases

The Company's lease commitments consist primarily of agreements to lease land and office facilities that it occupies to operate several of its retail branch locations that are classified as operating leases and are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities. As of ~~September~~June 30, ~~2021,~~2022, the Company has operating lease ROU assets of ~~$11.4~~$9.9 million and operating lease liabilities of ~~$11.3~~$9.8 million. As of December 31, ~~2020,~~2021, the Company had operating lease ROU assets of ~~$12.4~~$11.0 million and operating lease liabilities of ~~$12.4~~$11.0 million. The Company did not have any agreements that are classified as finance leases as of ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020.~~2021.

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)		2021	2020	2021		2020		(In Thousands)		2022	2021	2022		2021
Lease Cost	Lease Cost								Lease Cost
		Operating lease cost(1)	$688	$710	$2,106		$2,111			Operating lease cost(1)	$672	$702	$1,353		$1,418
		Short term lease cost(1)	7	9	20		26			Short term lease cost(1)	5	6	17		13
		Total lease cost	$695	$719	$2,126		$2,137			Total lease cost	$677	$708	$1,370		$1,431

Other information	Other information								Other information
		Operating leases - operating cash flows			$1,970		$2,012			Operating leases - operating cash flows			$1,278		$1,323
		Weighted average lease term - operating leases, in years			10.55		10.85			Weighted average lease term - operating leases, in years			10.79		10.80
		Weighted average discount rate - operating leases			3.19	%	3.30	%		Weighted average discount rate - operating leases			3.26	%	3.30	%
(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
2021 (Three months)		$644
2022		2,477
2022 (Six months)			2022 (Six months)	$1,224
2023	2023	2,068	2023	2,109
2024	2024	1,920	2024	1,961
2025	2025	1,817	2025	1,858
2026			2026	721
Thereafter	Thereafter	4,926	Thereafter	4,266
Total minimum lease payments	Total minimum lease payments	$13,852	Total minimum lease payments	$12,139
Less: amount of lease payment representing interest	Less: amount of lease payment representing interest	(2,518)	Less: amount of lease payment representing interest	(2,293)
Present value of future minimum lease payments	Present value of future minimum lease payments	$11,334	Present value of future minimum lease payments	$9,846

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8.7. 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 under regulatory guidelines, 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 ~~$8.3 million~~$569,000 as of ~~September~~June 30, ~~2021~~2022 and ~~$10.7~~$8.2 million as of December 31, ~~2020~~2021 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 ~~$224.0~~$213.0 million and ~~$196.0~~$212.6 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. At ~~September~~June 30, ~~2021,~~2022, the notional amount of interest rate swaps is made up of 2019 variable to fixed rate swaps to commercial loan customers totaling ~~$112.0~~$106.5 million, and 2019 fixed to variable rate swaps with a counterparty totaling ~~$112.0~~$106.5 million. Changes in fair value from these 2019 interest rate swaps offset each other in the first ~~nine~~six months of ~~2021.~~2022. The Company recognized ~~$195,000~~$87,000 and ~~$726,000~~$90,000 in fee income related to interest rate swaps in the ~~three-month~~three and six-month periods ending ~~September~~June 30, ~~2021~~2022, respectively, and ~~2020,~~$103,000 and ~~$390,000 and $743,000~~$195,000 in fee income related to interest rate swaps in the ~~nine-month~~three and six-month periods ending ~~September~~June 30, 2021, ~~and 2020,~~ 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 ~~1.49%~~3.20% as of ~~September~~June 30, ~~2021.~~2022. The Company pledged ~~$2.9 million~~$130,000 in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of ~~September~~June 30, ~~2021~~2022 and $2.9 million as of December 31, ~~2020.~~2021. Changes in the fair value of this interest rate swap are reported in other comprehensive income on the Consolidated Statements of Income. The unrealized ~~loss~~gain on this interest rate swap was ~~$0.9 million~~$798,000 as of ~~September~~June 30, ~~2021~~2022 and the unrealized loss was ~~$1.7~~$1.0 million as of December 31, ~~2020.~~2021.

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 ~~$169.4~~$116.2 million and ~~$150.3~~$81.6 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 designated as hedging instruments.

3429

The following table presents the fair value of derivatives not designated as hedging instruments at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

(In Thousands)

Asset Derivatives

(In Thousands)

Asset Derivatives

September 30, 2021

December 31, 2020

June 30, 2022

December 31, 2021

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Interest rate swaps

Other assets

$6,132

$7,387

Interest rate swaps

Other assets

$8,316

$6,030

Interest rate lock commitments

Other assets

3,248

4,034

Interest rate lock commitments

Other assets

2,567

1,387

Retail interest rate contracts

Other assets

126

—

Retail interest rate contracts

Other assets

—

166

Total

$9,506

$11,421

Total

$10,883

$7,583

(In Thousands)

Liability Derivatives

(In Thousands)

Liability Derivatives

September 30, 2021

December 31, 2020

June 30, 2022

December 31, 2021

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Interest rate swaps

Other liabilities

$6,132

$7,387

Interest rate swaps

Other liabilities

$8,316

$6,030

Retail interest rate contracts

Other liabilities

—

880

Retail interest rate contracts

Other liabilities

376

—

Total

$6,132

$8,267

Total

$8,692

$6,030

The following table presents the net gains (losses) of derivatives not designated as hedging instruments for periods 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	2021	2020	2021	2020	(In Thousands)	Income Statement Location	2022	2021	2022	2021
Retail interest rate contracts	Retail interest rate contracts	Mortgage banking income	($413)	($1,823)	$1,400	($6,525)	Retail interest rate contracts	Mortgage banking income	$391	($1,187)	$2,951	$1,813
Interest rate lock commitments	Interest rate lock commitments	Mortgage banking income	199	1,781	(802)	5,372	Interest rate lock commitments	Mortgage banking income	829	369	349	(1,001)
Total	Total		($214)	($42)	$598	($1,153)	Total		$1,220	($818)	$3,300	$812

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.

3530

The following table summarizes the derivatives that have a right of offset as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


September 30, 2021					Gross amounts not offset in the Statement of Financial Position
June 30, 2022								June 30, 2022				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	$8,316	$—	$8,316	$—	$—	$8,316

Liability Derivatives								Liability Derivatives
Interest rate swaps								Interest rate swaps	$8,316	$—	$8,316	$—	$569	$7,747
Retail interest rate contracts								Retail interest rate contracts	376	—	376	—	—	376

December 31, 2021								December 31, 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	(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	$6,132	$—	$6,132	$—	$—	$6,132	Interest rate swaps	$6,030	$—	$6,030	$—	$—	$6,030
Retail interest rate contracts	Retail interest rate contracts	126	—	126	—	—	126	Retail interest rate contracts	166	—	166	—	—	166

Liability Derivatives	Liability Derivatives							Liability Derivatives
Interest rate swaps	Interest rate swaps	$6,132	$—	$6,132	$—	$6,132	$—	Interest rate swaps	$6,030	$—	$6,030	$—	$6,030	$—

December 31, 2020					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		$7,387	$—	$7,387	$—	$—	$7,387

Liability Derivatives
Interest rate swaps		$7,387	$—	$7,387	$—	$7,387	$—
Retail interest rate contracts		880	—	880	—	—	880

9.8. 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 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, ~~2021,~~2022, 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~~Other Real Estate Owned ("OREO") at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the 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.

3732

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


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
(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	$492,279	$492,279	$115,965	$115,965	Cash, due from banks and deposits in other banks	$336,923	$336,923	$645,827	$645,827
Investment securities available for sale	Investment securities available for sale	121,787	121,787	58,865	58,865	Investment securities available for sale	313,082	313,082	141,531	141,531
Marketable equity securities	Marketable equity securities	8,551	8,551	9,052	9,052	Marketable equity securities	9,122	9,122	8,420	8,420

Level 2 inputs:	Level 2 inputs:					Level 2 inputs:
Investment securities available for sale	Investment securities available for sale	256,485	256,485	188,768	188,768	Investment securities available for sale	298,945	298,945	285,153	285,153
Investment in Federal Home Loan Bank stock	Investment in Federal Home Loan Bank stock	3,110	3,110	2,551	2,551	Investment in Federal Home Loan Bank stock	3,824	3,824	3,107	3,107
Loans held for sale	Loans held for sale	106,224	106,224	146,178	146,178	Loans held for sale	63,080	63,080	73,650	73,650
Accrued interest receivable	Accrued interest receivable	7,546	7,546	7,979	7,979	Accrued interest receivable	8,117	8,117	6,846	6,846
Interest rate swaps	Interest rate swaps	6,132	6,132	7,387	7,387	Interest rate swaps	8,316	8,316	6,030	6,030

Retail interest rate contracts						Retail interest rate contracts	—	—	166	166

Level 3 inputs:	Level 3 inputs:					Level 3 inputs:
Investment securities held to maturity	Investment securities held to maturity	20,000	19,264	10,000	10,000	Investment securities held to maturity	29,750	26,371	20,000	19,164
Loans	Loans	1,450,657	1,419,567	1,444,051	1,414,179	Loans	1,405,709	1,342,962	1,413,886	1,396,486
Purchased receivables, net	Purchased receivables, net	20,118	20,118	13,922	13,922	Purchased receivables, net	15,277	15,277	6,987	6,987
Interest rate lock commitments	Interest rate lock commitments	3,248	3,248	4,034	4,034	Interest rate lock commitments	2,567	2,567	1,387	1,387
Mortgage servicing rights	Mortgage servicing rights	13,080	13,080	11,218	11,218	Mortgage servicing rights	16,301	16,301	13,724	13,724
Commercial servicing rights	Commercial servicing rights	1,278	1,278	1,310	1,310	Commercial servicing rights	1,069	1,069	1,084	1,084

Financial liabilities:	Financial liabilities:					Financial liabilities:
Level 2 inputs:	Level 2 inputs:					Level 2 inputs:
Deposits	Deposits	$2,296,541	$2,297,426	$1,824,981	$1,826,990	Deposits	$2,335,390	$2,332,869	$2,421,631	$2,422,215

Borrowings	Borrowings	14,605	14,809	14,817	15,538	Borrowings	14,302	12,907	14,508	14,727
Accrued interest payable	Accrued interest payable	129	129	65	65	Accrued interest payable	94	94	31	31
Interest rate swaps	Interest rate swaps	7,032	7,032	9,122	9,122	Interest rate swaps	8,316	8,316	6,985	6,985
Retail interest rate contracts		—	—	880	880

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

Junior subordinated debentures	Junior subordinated debentures	10,310	9,833	10,310	10,475	Junior subordinated debentures	10,310	9,578	10,310	9,727

3833

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, 2021
June 30, 2022						June 30, 2022
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	$299,824	$102,014	$197,810	$—	U.S. Treasury and government sponsored entities	$521,339	$281,079	$240,260	$—
Municipal securities	Municipal securities	850	—	850	—	Municipal securities	807	—	807	—

Corporate bonds	Corporate bonds	35,411	19,773	15,638	—	Corporate bonds	32,003	32,003	—	—
Collateralized loan obligations	Collateralized loan obligations	43,037	—	43,037	—	Collateralized loan obligations	57,878	—	57,878	—
Total available for sale securities	Total available for sale securities	$379,122	$121,787	$257,335	$—	Total available for sale securities	$612,027	$313,082	$298,945	$—
Marketable equity securities	Marketable equity securities	$8,551	$8,551	$—	$—	Marketable equity securities	$9,122	$9,122	$—	$—
Total marketable equity securities	Total marketable equity securities	$8,551	$8,551	$—	$—	Total marketable equity securities	$9,122	$9,122	$—	$—
Interest rate swaps	Interest rate swaps	6,132	—	6,132	—	Interest rate swaps	$8,316	$—	$8,316	$—
Interest rate lock commitments	Interest rate lock commitments	3,248	—	—	3,248	Interest rate lock commitments	2,567	—	—	2,567
Mortgage servicing rights	Mortgage servicing rights	13,080	—	—	13,080	Mortgage servicing rights	16,301	—	—	16,301
Commercial servicing rights	Commercial servicing rights	1,278	—	—	1,278	Commercial servicing rights	1,069	—	—	1,069
Retail interest rate contracts		126	—	126	—

Total other assets	Total other assets	$23,864	$—	$6,258	$17,606	Total other assets	$28,253	$—	$8,316	$19,937
Liabilities:	Liabilities:					Liabilities:
Interest rate swaps	Interest rate swaps	$7,032	$—	$7,032	$—	Interest rate swaps	$8,316	$—	$8,316	$—

Retail interest rate contracts						Retail interest rate contracts	376	—	376	—
Total other liabilities	Total other liabilities	$7,032	$—	$7,032	$—	Total other liabilities	$8,692	$—	$8,692	$—
December 31, 2020
December 31, 2021						December 31, 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	$174,601	$37,548	$137,053	$—	U.S. Treasury and government sponsored entities	$341,480	$115,686	$225,794	$—
Municipal securities	Municipal securities	856	—	856	—	Municipal securities	840	—	840	—

Corporate bonds	Corporate bonds	30,492	21,317	9,175	—	Corporate bonds	32,946	25,845	7,101	—
Collateralized loan obligations	Collateralized loan obligations	41,684	—	41,684	—	Collateralized loan obligations	51,418	—	51,418	—
Total available for sale securities	Total available for sale securities	$247,633	$58,865	$188,768	$—	Total available for sale securities	$426,684	$141,531	$285,153	$—
Marketable equity securities	Marketable equity securities	$9,052	$9,052	$—	$—	Marketable equity securities	$8,420	$8,420	$—	$—
Total marketable securities	Total marketable securities	$9,052	$9,052	$—	$—	Total marketable securities	$8,420	$8,420	$—	$—
Interest rate swaps	Interest rate swaps	7,387	—	7,387	—	Interest rate swaps	$6,030	$—	$6,030	$—
Interest rate lock commitments	Interest rate lock commitments	4,034	—	—	4,034	Interest rate lock commitments	1,387	—	—	1,387
Mortgage servicing rights	Mortgage servicing rights	11,218	—	—	11,218	Mortgage servicing rights	13,724	—	—	13,724
Commercial servicing rights	Commercial servicing rights	1,310	—	—	1,310	Commercial servicing rights	1,084	—	—	1,084
Retail interest rate contracts						Retail interest rate contracts	166	—	166	—
Total other assets	Total other assets	$23,949	$—	$7,387	$16,562	Total other assets	$22,391	$—	$6,196	$16,195
Liabilities:	Liabilities:					Liabilities:
Interest rate swaps	Interest rate swaps	$9,122	$—	$9,122	$—	Interest rate swaps	$6,985	$—	$6,985	$—
Retail interest rate contracts		880	—	880	—

Total other liabilities	Total other liabilities	$10,002	$—	$10,002	$—	Total other liabilities	$6,985	$—	$6,985	$—

3934

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, ~~2021~~2022 and ~~2020:~~2021:

(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, 2021
Interest rate lock commitments $3,044 ($867) $7,428 ($6,357) $3,248 $3,248
Mortgage servicing rights 12,835 (1,458) 1,703 — 13,080 —
Commercial servicing rights 1,292 (58) 44 — 1,278 —
Total $17,171 ($2,383) $9,175 ($6,357) $17,606 $3,248
Three Months Ended September 30, 2020
Interest rate lock commitments $4,653 ($1,784) $15,329 ($11,679) $6,519 $6,519
Mortgage servicing rights 10,721 (1,505) 1,373 — 10,589 —
Commercial servicing rights 1,162 (101) 225 — 1,286 —
Total $16,536 ($3,390) $16,927 ($11,679) $18,394 $6,519


(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
Nine Months Ended September 30, 2021
Three Months Ended June 30, 2022								Three Months Ended June 30, 2022
Interest rate lock commitments	Interest rate lock commitments	$4,034	($2,881)	$23,879	($21,784)	$3,248	$3,248	Interest rate lock commitments	$965	($520)	$3,863	($1,741)	$2,567	$2,567
Mortgage servicing rights	Mortgage servicing rights	11,218	(3,034)	4,896	—	13,080	—	Mortgage servicing rights	15,422	(249)	1,128	—	16,301	—
Commercial servicing rights	Commercial servicing rights	1,310	(134)	102	—	1,278	—	Commercial servicing rights	1,091	(22)	—	—	1,069	—
Total	Total	$16,562	($6,049)	$28,877	($21,784)	$17,606	$3,248	Total	$17,478	($791)	$4,991	($1,741)	$19,937	$2,567
Nine 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	$810	($4,923)	$40,441	($29,809)	$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	11,920	(4,363)	3,032	—	10,589	—	Mortgage servicing rights	11,657	(567)	1,745	—	12,835	—
Commercial servicing rights	Commercial servicing rights	1,214	(180)	252	—	1,286	—	Commercial servicing rights	1,327	(53)	18	—	1,292	—
Total	Total	$13,944	($9,466)	$43,725	($29,809)	$18,394	$6,519	Total	$15,697	($1,487)	$8,946	($5,985)	$17,171	$3,044


(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, 2022
Interest rate lock commitments	$1,387	($1,029)	$8,212	($6,004)	$2,567	$2,567
Mortgage servicing rights	13,724	462	2,115	—	16,301	—
Commercial servicing rights	1,084	(48)	33	—	1,069	—
Total	$16,195	($615)	$10,360	($6,004)	$19,937	$2,567
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	—	12,835	—
Commercial servicing rights	1,310	(76)	58	—	1,292	—
Total	$16,562	($3,666)	$19,702	($15,427)	$17,171	$3,044

There were no changes in unrealized gains and losses for the three and ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 included in other comprehensive income for recurring Level 3 fair value measurements.

4035

As of and for the periods ending ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020, except for certain assets as shown in the following table,~~2021, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis. For loans individually measured for ~~impairment,~~credit losses, 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) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
September 30, 2021
Loans measured for impairment $4,282 $— $— $4,282
Total $4,282 $— $— $4,282
December 31, 2020
Loans measured for impairment $308 $— $— $308
Total $308 $— $— $308

The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2021~~2022 and ~~2020:~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2021 2020 2021 2020
Loans measured for impairment ($122) $10 $650 $24
Total loss from nonrecurring measurements ($122) $10 $650 $24
2021:


	Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	2022	2021	2022	2021
Loans individually measured for credit losses	($89)	($213)	$—	$772


Total loss from nonrecurring measurements	($89)	($213)	$—	$772

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, ~~2021~~2022 and December 31, ~~2020:~~2021:

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average Rate Range

~~September~~June 30, ~~2021~~2022

~~Loans measured for impairment~~

~~In-house valuation of collateral~~

~~Discount rate~~

~~10% - 100%~~

Interest rate lock commitment

External pricing model

Pull through rate

~~92.46~~91.85

Mortgage servicing rights

Discounted cash flow

Constant prepayment rate

~~9.93%~~7.34% - ~~14.02%~~8.73%

Discount rate

89.25

Commercial servicing rights

Discounted cash flow

Constant prepayment rate

~~7.38%~~12.30% - ~~9.94%~~16.57%

Discount rate

~~9.46~~9.94

December 31, ~~2020~~2021

~~Loans measured for impairment~~

~~In-house valuation of collateral~~

~~Discount rate~~

Interest rate lock commitment

External pricing model

Pull through rate

~~90.65~~93.27

Mortgage servicing rights

Discounted cash flow

Constant prepayment rate

~~7.77%~~9.25% - ~~13.17%~~14.21%

Discount rate

~~0.00% - 7.75%~~8.00%

Commercial servicing rights

Discounted cash flow

Constant prepayment rate

~~7.38%~~12.30% - ~~9.94%~~16.57%

Discount rate

~~9.46~~9.94

4236

~~10.~~9. 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, ~~2021,~~2022, the Community Banking segment operated 17 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, 2021				Three Months Ended June 30, 2022
(In Thousands)	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated

Interest income	Interest income	$20,541	$741	$21,282	Interest income	$22,369	$623	$22,992
Interest expense	Interest expense	813	37	850	Interest expense	766	14	780
Net interest income	Net interest income	19,728	704	20,432	Net interest income	21,603	609	22,212
Benefit for credit losses		(1,106)	—	(1,106)
Provision for credit losses					Provision for credit losses	463	—	463
Other operating income	Other operating income	2,765	9,893	12,658	Other operating income	1,907	5,900	7,807

Other operating expense	Other operating expense	14,849	7,685	22,534	Other operating expense	16,415	6,823	23,238
Income before provision for income taxes	Income before provision for income taxes	8,750	2,912	11,662	Income before provision for income taxes	6,632	(314)	6,318
Provision for income taxes	Provision for income taxes	1,955	830	2,785	Provision for income taxes	1,605	(82)	1,523
Net income	Net income	$6,795	$2,082	$8,877	Net income	$5,027	($232)	$4,795

Three Months Ended September 30, 2020
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Interest income $18,821 $973 $19,794
Interest expense 1,433 67 1,500
Net interest income 17,388 906 18,294
Provision for credit losses 567 — 567
Other operating income 3,696 17,932 21,628
Other operating expense 14,353 9,153 23,506
Income before provision for income taxes 6,164 9,685 15,849
Provision for income taxes 1,249 2,745 3,994
Net income $4,915 $6,940 $11,855


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

Interest income	$19,476	$777	$20,253
Interest expense	1,008	53	1,061
Net interest income	18,468	724	19,192
Benefit for credit losses	(427)	—	(427)
Other operating income	2,772	11,360	14,132

Other operating expense	14,551	7,785	22,336
Income before provision for income taxes	7,116	4,299	11,415
Provision for income taxes	1,850	1,220	3,070
Net income	$5,266	$3,079	$8,345

4337


		Nine Months Ended September 30, 2021				Six Months Ended June 30, 2022
(In Thousands)	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated

Interest income	Interest income	$59,816	$2,315	$62,131	Interest income	$42,019	$1,031	$43,050
Interest expense	Interest expense	2,886	128	3,014	Interest expense	1,507	27	1,534
Net interest income	Net interest income	56,930	2,187	59,117	Net interest income	40,512	1,004	41,516
Provision for credit losses	Provision for credit losses	(3,021)	—	(3,021)	Provision for credit losses	313	—	313
Other operating income	Other operating income	7,811	34,875	42,686	Other operating income	5,748	12,882	18,630

Other operating expense	Other operating expense	43,064	23,133	66,197	Other operating expense	31,246	13,093	44,339
Income before provision for income taxes	Income before provision for income taxes	24,698	13,929	38,627	Income before provision for income taxes	14,701	793	15,494
Provision for income taxes	Provision for income taxes	5,257	3,967	9,224	Provision for income taxes	3,246	227	3,473
Net income	Net income	$19,441	$9,962	$29,403	Net income	$11,455	$566	$12,021


		Nine Months Ended September 30, 2020				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	$53,818	$2,319	$56,137	Interest income	$39,275	$1,574	$40,849
Interest expense	Interest expense	4,520	176	4,696	Interest expense	2,073	91	2,164
Net interest income	Net interest income	49,298	2,143	51,441	Net interest income	37,202	1,483	38,685
Provision for credit losses		3,031	—	3,031
Benefit for credit losses					Benefit for credit losses	(1,915)	—	(1,915)
Other operating income	Other operating income	7,772	37,824	45,596	Other operating income	5,046	24,982	30,028

Other operating expense	Other operating expense	42,078	22,889	64,967	Other operating expense	28,215	15,448	43,663
Income before provision for income taxes	Income before provision for income taxes	11,961	17,078	29,039	Income before provision for income taxes	15,948	11,017	26,965
Provision for income taxes	Provision for income taxes	1,391	4,860	6,251	Provision for income taxes	3,302	3,137	6,439
Net income	Net income	$10,570	$12,218	$22,788	Net income	$12,646	$7,880	$20,526


September 30, 2021
June 30, 2022					June 30, 2022
(In Thousands)	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated

Total assets	Total assets	$2,467,842	$142,104	$2,609,946	Total assets	$2,511,565	$99,589	$2,611,154
Loans held for sale	Loans held for sale	$—	$106,224	$106,224	Loans held for sale	$—	$63,080	$63,080


December 31, 2020
December 31, 2021					December 31, 2021
(In Thousands)	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated	(In Thousands)	Community Banking	Home Mortgage Lending	Consolidated

Total assets	Total assets	$1,935,871	$185,927	$2,121,798	Total assets	$2,615,433	$109,286	$2,724,719
Loans held for sale	Loans held for sale	$—	$146,178	$146,178	Loans held for sale	$—	$73,650	$73,650

4438

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

This discussion should be read in conjunction with the unaudited consolidated financial statements of Northrim BanCorp, Inc. (the “Company”) and the notes thereto presented elsewhere in this report and with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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~~government initiatives on the regulatory landscape, natural resource extraction industries, capital markets, and the response to and management of the COVID-19 pandemic, including the effectiveness of previously-enacted fiscal stimulus from the federal government and a potential infrastructure bill; the timing of Paycheck Protection Program ("PPP") loan forgiveness; the impact of interest rates, inflation, supply-chain constraints, trade policies and tensions, including tariffs, and potential geopolitical ~~instability;~~instability, including the ware in Ukraine; the general condition of, and changes in, the Alaska economy; our ability to maintain or expand our market share or net interest margin; our ability to maintain asset quality; our ability to implement our marketing and growth strategies; and our ability to execute our business plan. Further, actual results may be affected by competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Part II. Item 1A Risk Factors of this report and Part I. Item 1A in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, as well as in our other filings with the Securities and Exchange Commission. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition, you should note that forward looking statements are made only as of the date of this report and that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements, other than as required by law.

~~Critical Accounting Policies~~

Our critical accounting policies are described in detail in Part II. Item 7, Management’s Discussion and Analysis, and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. As of January 1, 2021, the Company implemented ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13" or "CECL"), and due to the significance of the implementation, the following Allowance for Credit Losses Policy has been updated from the policies disclosed in our prior year financial statements. The Company's critical accounting policies also include valuation of goodwill and other intangible assets, the valuation of other real estate owned ("OREO"), and the valuation of mortgage servicing rights. There have been no other material changes to the valuation techniques or models, that affect our estimates during 2021.

4539

~~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.~~

Update on Economic Conditions

The Alaska economy ~~is slowly recovering~~has seen continued job growth and personal income gains. A strong rebound in ~~2021 from~~tourism activity, coupled with high oil prices has benefited the ~~effect of the global pandemic.~~state. Management believes that the national focus on supply chain issues and the desire for more domestic production should improve the demand for Alaska’s vast natural resources. Like the rest of the nation, Alaska’s housing market saw large price increases over the last year. However, we expect the rapidly rising ~~oil prices, an improvement in tourism, and strong liquidity levels~~interest rate environment to temper the Alaska housing market in the ~~private sector from government stimulus programs have helped Alaska rebound from the economic lows seen in 2020. The housing market remains strong with average sales prices and the number~~second half of units sold up significantly, while home foreclosure and delinquency rates continue to improve. Rising prices are starting to stress affordability levels for homes and supply chain disruptions are expected to moderate construction activity in the short run.2022.

The Alaska Department of Labor ("DOL") has released data through ~~August~~May of ~~2021. They report~~2022. The DOL reports total payroll jobs in Alaska ~~have grown by 13,600~~increased 2.9% or 8,900 jobs compared to ~~August~~May of ~~2020. This is a total~~2021. The Leisure and Hospitality sector showed the fastest year over year increase of ~~308,900 jobs or an improvement of 4.4% over the prior 12 months.~~12.4%. Tourism related jobs were the hardest hit from the pandemic travel restrictions, but were also the quickest to rebound. The Oil and ~~have also been the fastest to recover. According to the DOL, the Leisure~~Gas sector has benefited from high energy prices and ~~Hospitality sector~~ added ~~5,600~~600 jobs ~~between August of 2020 and August~~since May of 2021, an increase of 19.9%. However, this is still 10,800 jobs less than August of 2019. Trade, Transport, and Utilities have added 14.3% more jobs than August of 2020 and Manufacturing, which is primarily seafood processing, is 11.3% highera 9.1% increase. Other sectors showing improvement over the last 12 ~~months. Oil~~months include Trade, Warehousing, and ~~Gas direct jobs continued~~Utilities (+6.8%), Other Services (+4.8%); Financial Activities (+2.8%), and Professional and Business Services (+2.6%). The only private sectors to decline ~~in the last 12 months, down 400~~year over year were Manufacturing (-2.9%) and Information (-2.1%). The Government sector was up slightly by 0.6%, an increase of 500 jobs compared to August of 2020 and down 3,300 jobs from August of 2019. Education and Health Care are the only private sector industries to surpass the August 2019 job levels in August of 2021 according to the DOL report.through May 2022 year-over-year.

Alaska’s ~~revised~~ Gross State Product (“GSP”) ~~for 2020~~, was ~~$49.8~~estimated to be $58 billion ~~compared to $54.5 billion in 2019, according to~~at the end of 2021 by the Federal Bureau of Economic Analysis ("BEA"). ~~The national average for the second quarter~~This was a ~~6.7%~~0.3% increase ~~according to an October 1,~~in 2021 over 2020 figures. The BEA ~~report.~~

also calculated Alaska’s seasonally adjusted personal income ~~for the second quarter~~was $49 billion in 2021, an improvement of ~~2021 was $47.7 billion compared to $48.5 billion for the second quarter of 2020, according to the BEA. There was a tremendous loss of jobs in 2020 that reduced wage earnings last year.~~5.9% over 2020. This was ~~more than compensated for by~~largely a ~~significant amount~~result of COVID related government transfer ~~payments.~~payments and an improvement in employment leading to higher wage income last year.

The price of Alaska ~~like~~North Slope crude oil began 2021 averaging $55.56 a barrel in January and climbed steadily throughout the ~~rest~~year due to rising global demand to a monthly average high of $84.36 in October 2021. 2022 began with a monthly average of $86.50 a barrel in January and surpassed $100 in March after the ~~U.S., experienced a decline~~war in ~~government transfer payments~~Ukraine began. Prices increased in the second quarter of ~~2021. However, wage earnings are growing here and across the country as~~2022, reaching a ~~recovery~~monthly average of $120.17 a barrel in ~~jobs continues in 2021.~~June.

Alaska North Slope (“ANS”) crude oil began 2020 at $65.48 a barrel. Prices fell quickly at the beginning of 2020, responding to fears that COVID-19 would devastate the global economy and reduce the demand for travel. The low month was April of 2020, when ANS averaged $16.54 a barrel. However, by June of last year the oil markets stabilized and for the last six months of 2020 the average monthly price remained between $40.42 and $50.32. ANS prices continued to rise throughout 2021 and averaged over $70 a barrel in June, July and August. The monthly average for September has not yet been posted by the Alaska Department of Revenue, but the daily spot price was $82.94 on October 8, 2021.

Alaska’s home mortgage delinquency ~~and foreclosure levels continue~~level continues to be better than most of the nation. According to the Mortgage Bankers Association, Alaska’s ~~foreclosure~~delinquency rate ~~improved from 0.63% at the end of 2019 to 0.45% at the end of 2020. In~~in the first quarter of ~~2021~~2022 was 3.49% compared to the ~~foreclosure rate improved slightly to 0.41% and again in the second quarter to 0.36%. The comparable~~ national average rate ~~was higher than Alaska at 0.51% in the second quarter~~ of 2021. We believe that the foreclosure rates are somewhat misleading because the recently ended federal moratorium on foreclosure activity on occupied homes led to declining foreclosure numbers, even though job losses strained the economy and borrowers' ability to pay.

3.84%.

The Mortgage Bankers Association survey reported that the ~~percentage of delinquent~~ mortgage ~~loans at the end of 2019~~foreclosure rate in Alaska ~~was 2.9%. This increased to 6.2% at the end of 2020 after the effects of COVID-19 impacted jobs. In~~in the first quarter of ~~2021 it improved to 5.4% in Alaska and again in the second quarter to 5.1%. According~~2022 was identical to the ~~survey, the comparable delinquency~~national average rate ~~for the entire country remains higher than Alaska at 5.5% in the second quarter~~ of ~~2021.~~0.53%.

According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose ~~5.8%~~6.9% in ~~2020~~2021 to ~~$396,741.~~$424,148. In the first ~~nine~~six months of ~~2021, the average sales price has increased~~2022 prices climbed another 7.5% to ~~$426,445.~~$456,052. Average sales prices in the Matanuska Susitna Borough rose ~~9.9%~~15.6% in ~~2020 to $301,049, continuing a decade of consecutive price gains. In~~2021 and another 11% in the first ~~nine~~six months of ~~2021 prices have risen 15.1%~~2022 to ~~$346,353.~~$386,429. These two markets represent where the vast majority of the Bank’s residential lending activity occurs. Prices also increased 13.9% in the Fairbanks North Star Borough, 13.4% in the Kenai Peninsula Borough, and 13.8% in the Kodiak Island Borough in 2021.

The number of housing units sold in Anchorage was up significantly in ~~2020~~2021 by ~~19.6%~~11.2%, ~~climbing from 2,719 homes sold~~following an increase of 19.5% in ~~2019 to 3,251 last year,~~2020, 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 11.7% in 2021 and 9.7% in ~~2020 to 2,135 units sold compared to 1,946 in 2019. The Matanuska Susitna Borough also had stronger than normal sales in the second half of~~ 2020. Through the third quarter of 2021 there have been 2,647 home sales in Anchorage, or 15.9% more than in the first nine months of 2020. The Matanuska Susitna Borough had 1,719 sales through the third quarter of 2021, an increase of 13.2% over the same time period in 2020.

~~We believe that the low interest rate environment has been a major factor. According to~~The Board of Governors of the Federal Reserve ~~Bank~~System increased its benchmark interest rate target from near zero as of ~~St. Louis,~~December 31, 2021 to 2.25%-2.50% as of July 31, 2022. Similarly, the ~~average 30~~Prime rate of interest has increased from 3.25% as of December 31, 2022 to 5.50% as of July 31, 2022. The two and ten year ~~fixed rate mortgage in the U.S. hit an all-time record low last year. Rates began 2020 at 3.7% in the first week~~Treasury rates were 2.89% and 2.67% as of ~~January~~July 31, 2022, up from 0.73% and ~~fell one percent~~1.52% as of December 31, 2021, respectively. Management agrees with sentiment from industry experts that rates will continue to ~~2.7% by~~rise through the end of 2022 and into the ~~year. Rates began to rise slightly in 2021 and finished the third quarter at 3%.~~first half of 2023.

~~COVID-19 Issues:~~

•~~Industry Exposure:~~ Northrim has identified various industries that may be adversely impacted by the COVID-19 pandemic and the volatility in oil prices that has occurred over the last 18 months. Though the industries affected may change through the progression of the pandemic, the following sectors for which the Company has exposure, as a percent of the total loan portfolio as of September 30, 2021 are being impacted: Healthcare (7%), Tourism (6%), Oil and Gas (4%), Aviation (non-tourism) (4%), Accommodations (4%), Retail (3%), Fishing (4%), and Restaurants (3%). The Company's exposure as a percent of the total loan portfolio excluding U.S. Small Business Administration ("SBA") PPP loans as of September 30, 2021 are: Healthcare (8%), Tourism (7%), Oil and Gas (5%), Aviation (non-tourism) (5%), Accommodations (4%), Retail (3%), Fishing (5%), and Restaurants (3%).

4840

Highlights and Summary of Performance - Second Quarter of 2022

The Company reported net income and diluted earnings per share of $4.8 million and $0.83, respectively, for the second quarter of 2022 compared to net income and diluted earnings per share of $8.3 million and $1.33, respectively, for the second quarter of 2021. The Company reported net income and diluted earnings per share of $12.0 million and $2.03, respectively, for the first six months of 2022 compared to net income and diluted earnings per share of $20.5 million and $3.27, respectively, for the first six months of 2021. The decrease in net income for the three and six-month periods ending June 30, 2022 compared to the same periods last year is primarily attributable to a decrease in net income in the Home Mortgage Lending segment as a result of decreased production and yields on sold loans, as well as a higher provision for credit losses and higher other operating expenses in the Community Banking segment that were only partially offset by higher net interest income. Increases in interest rates drove the decrease in production in the Home Mortgage Lending segment and the increase in net interest income.

•Total revenue in the second quarter of 2022, which includes net interest income plus other operating income, decreased 10% to $30.0 million from $33.3 million in the second quarter a year ago, primarily due to a $5.5 million decrease in mortgage banking income and a $988.0 thousand increase in unrealized loss on marketable equity securities. These decreases were only partially offset by a $3.0 million increase in net interest income. Total revenue in the six-months ending June 30, 2022 decreased 12% to $60.1 million from $68.7 million in the same period a year ago, primarily due to a $12.1 million decrease in mortgage banking income and a $1.3 million increase in unrealized loss on marketable securities.

•Net interest income in the second quarter of 2022 increased 16% to $22.2 million compared to $19.2 million in the second quarter of 2021. Net interest income excluding PPP interest and fees in the second quarter of 2022 increased 33% to $20.8 million, compared to $15.6 million in the second quarter of 2021. Net interest income in the six-months ending June 30, 2022 increased 7% to $41.5 million compared to $38.7 million in the same period a year ago. Net interest income excluding PPP interest and fees in the six-months ending June 30, 2022 increased 22% to $37.8 million compared to $30.9 million in the same period a year ago.

•Net interest margin was 3.67% for the second quarter of 2022, a 19 basis point increase from the second quarter of 2021 primarily due to the higher yields on portfolio loans and investments and on interest bearing deposits in other banks. Net interest margin was 3.42% for the six-months ending June 30, 2022, a 26 basis point decrease from the same period a year ago primarily due to the a change in the mix of earning assets that was only partially offset by higher yields. Average interest bearing deposits in other banks increased to 19% of average interest-earning assets in the six-months ending June 30, 2022, compared to 8% in the same period a year ago.

•Loans were $1.41 billion at June 30, 2022, down 1% from December 31, 2021 primarily as a result of PPP forgiveness which was only partially offset by core loan growth. Loans excluding the impact from PPP, were $1.37 billion at June 30, 2022, up 6% from $1.30 billion at December 31, 2021. As of June 30, 2022, 76% of core portfolio loans are adjustable rate and are subject to rate increases as the prime rate and other indices increase.

•The Company booked a provision for credit losses of $463,000 and $313,000 for the three- and six-month periods ending June 30, 2022, respectively, compared to a benefit of $427,000 and a benefit of $1.9 million in the same periods in 2021. The increase in the provision for credit losses in both periods in 2022 compared to the same periods in the prior year are primarily the result of core loan growth.

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

•At June 30, 2022, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements.

•During the second quarter of 2022, the Company repurchased 200,619 shares of its common stock under the previously announced share repurchase program at an average price of $41.04 per share. There are no shares remaining of the 300,000 previously authorized for repurchase.

•~~Customer Accommodations:~~ ~~The Company has implemented several forms of assistance to help our customers~~Other financial measures are shown in the event that they experience financial hardship as a result of COVID-19 in addition to our participation in PPP lending. The provisions of the CARES Act included an election to not apply the guidance on accounting for certain troubled debt restructurings related to COVID-19 and allow certain accommodations to borrowers. These accommodations include interest only and deferral options on loan payments, as well as the waiver of various fees related to loans, deposits and other services. The Company has elected to adopt these provisions of the CARES Act. The number of loans with modifications has decreased since December 31, 2020, with approximately 82% of the modifications at September 30, 2021, representing three relationships. The outstanding principal balance of loan modifications due to the impacts of COVID-19 for the periods indicated were as follows:table below:

Loan Modifications due to COVID-19 as of September 30, 2021
(Dollars in thousands) Interest Only Full Payment Deferral Total
Portfolio loans $49,888 $7,533 $57,421
Number of modifications 21 3 24


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Return on average assets, annualized	0.74	%	1.40	%	0.93	%	1.80	%
Return on average shareholders' equity, annualized	8.58	%	14.10	%	10.51	%	17.68	%
Dividend payout ratio	49.30	%	27.80	%	40.22	%	22.57	%

Loan Modifications due to COVID-19 as of December 31, 2020
(Dollars in thousands) Interest Only Full Payment Deferral Total
Portfolio loans $43,379 $22,165 $65,544
Number of modifications 23 11 34

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

•~~Branch Operations:~~ ~~As of September 30, 2021, branch operations have returned to pre-pandemic levels, while a number of customer and employee safety measures continue to be implemented.~~

•~~Remote Workers:~~ As of September 30, 2021, approximately 51% of the Company's employees are working remotely either on a full- or part-time basis directly due to the pandemic caused by COVID-19. These employees primarily hold non-customer facing positions within the Company. Prior to the pandemic, less than 8% of the Company's employees worked remotely. The increase in the number of employees that work remotely has had no material impact on the Company's operations.

•Growth and Paycheck Protection Program:

•~~Over the last 18 months,~~In 2020 and 2021, Northrim funded a total of nearly 5,800 PPP loans totaling $612.6 million to both existing and new customers. Of this amount, 745 loans totaling $33 million were originated during the second quarter of 2021 and 2,125 loans totaling $204.0 million were originated during the first quarter of 2021, through the second round of PPP funding. No additional PPP loans were originated in the third quarter of 2021.

•~~As of September 30, 2021, PPP has resulted in 2,341 new customers totaling $68.0 million in non-PPP loans, and $125.6 million in new deposit balances.~~

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

•As of ~~September~~June 30, ~~2021,~~2022, PPP has resulted in 2,344 new customers totaling $69.7 million in non-PPP loans, and $132.4 million in new deposit balances.

•As of June 30, 2022, Northrim customers had received forgiveness through the ~~SBA~~U.S, Small Business Administration ("SBA") on ~~3,439~~5,407 PPP loans totaling ~~$405.8~~$582.0 million, of which ~~1,118~~417 PPP loans totaling ~~$102.4 million were forgiven in the third quarter of 2021, and 617 PPP loans totaling $133~~$33.7 million were forgiven in the second quarter of 2022, 537 PPP loans totaling $56.9 million were forgiven in the first quarter of 2022, and 4,451 PPP loans totaling $491.4 million were forgiven in 2021. Of the PPP loans forgiven in the ~~third~~second quarter of ~~2021, 578~~2022, 414 loans totaling ~~$35.2~~$33.4 million related to PPP round two.

•~~The Company initially utilized~~ As of June 30, 2022, approximately 99% of the ~~Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") to fund~~number of PPP round one loans ~~but paid back those funds in full during~~funded and 88% of the ~~second quarter~~number of ~~2020 and has since~~PPP round two loans funded ~~the SBA PPP loans through core deposits and maturity of long-term investments.~~have been forgiven.

~~Highlights and Summary of Performance - Third Quarter of 2021~~Credit Quality

•Customer Accommodations: The Company ~~reported net income and diluted earnings per share~~implemented several forms of ~~$8.9 million and $1.42, respectively, for the third quarter of 2021 compared~~assistance to net income and diluted earnings per share of $11.9 million and $1.84, respectively, for the third quarter of 2020. The Company reported net income and diluted earnings per share of $29.4 million and $4.69, respectively, for the first nine months of 2021 compared to $22.8 million and $3.52, respectively, for the same period in 2020. The decrease in net income for the three-month period ending September 30, 2021 compared to the same period last year is primarily attributable to a decrease in net incomehelp our customers in the ~~Home Mortgage Lending segment,~~event that they experienced financial hardship as a result of ~~decreased production.~~COVID-19 in addition to our participation in PPP lending. As of June 30, 2022, remaining accommodations include interest only and deferral options on loan payments. The ~~increase in net income~~total outstanding principal balance of loan modifications due to the impacts of COVID-19 for the nine-month period ending September 30, 2021 compared to the same period last year is attributable to increased net income in the Community Banking segment mostly due to fee income from PPP loans and a reduction in the ACL. This increase in the Community Banking segment was only partially offset by a decrease in net income in the Home Mortgage Lending segment, which resulted primarily from decreased production in the second and third quarters of 2021 compared to 2020.

•Total revenue in the third quarter of 2021, which includes net interest income plus other operating income, decreased 17% to $33.1 million from $39.9 million in the third quarter a year ago, primarily due to a $8.0 million decrease in mortgage banking income which was only partially offset by a $2.1 million increase in net interest income. Total revenue in the first nine months of 2021 increased 5% to $101.8 million from $97.0 million compared to the same period a year ago, primarily due to a $7.7 million increase in net interest income which was only partially offset by a $2.9 million decrease in mortgage banking income. The increases in net interest income in both periods ~~in 2021 compared to the same periods in 2020 are mainly due to increased loan balances and fees on PPP loans.~~indicated were as follows:

•The Company booked a benefit for credit losses of $1.1 million for the three-month period ending September 30, 2021, compared to a provision of $567,000 in the same period in 2020. For the first nine months of 2021, the Company booked a benefit for credit losses of $3.0 million compared to a provision of $3.0 million in the same period in 2020. The provisions for both periods in 2021 were recorded using the CECL accounting standard and reflect expected lifetime credit losses on loans and off-balance sheet unfunded loan commitments. The decrease in the provision for credit losses in both periods of 2021 compared to the same periods in 2020 is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses, which was only partially offset by increases in loan balances, net of government guarantees.


Loan Modifications due to COVID-19 as of June 30, 2022
(Dollars in thousands)	Interest Only	Full Payment Deferral	Total
Portfolio loans	$23,573	$—	$23,573
Number of modifications	5	—	5
Number of relationships	2	—	2

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

•At September 30, 2021, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements. During the third quarter of 2021, the Company repurchased 29,613 shares of its common stock under the previously announced share repurchase program with 221,988 shares remaining of the 313,000 authorized for repurchase.


Loan Modifications due to COVID-19 as of December 31, 2021
(Dollars in thousands)	Interest Only	Full Payment Deferral	Total
Portfolio loans	$49,219	$—	$49,219
Number of modifications	16	—	16
Number of relationships	6	—	6

~~Other financial measures~~The $23.6 million in COVID-19 loan accommodations as of June 30, 2022 are ~~shown~~scheduled to return to normal principal and interest payments in ~~the table below:~~2022.

Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Return on average assets, annualized 1.40 % 2.31 % 1.66 % 1.62 %
Return on average shareholders' equity, annualized 14.47 % 22.10 % 16.57 % 14.58 %
Dividend payout ratio 26.86 % 18.95 % 23.86 % 29.22 %

~~Credit Quality~~

Nonperforming assets: Nonperforming assets, net of government guarantees at ~~September~~June 30, ~~2021~~2022 decreased ~~$180,000,~~22%, or 1%$3.3 million to ~~$16.1~~$11.7 million as compared to ~~$16.3~~$15.0 million at December 31, ~~2020. OREO,~~2021. Other Real Estate Owned ("OREO"), net of government guarantees, ~~decreased $1.4 million to $4.6~~remained at $4.4 million at ~~September~~June 30, ~~2021~~2022 as compared to ~~$6.0 million at~~ December 31, 2020 due to the sale of one property in the second quarter of 2021 and one property in the third quarter of 2021, which was only partially offset by the addition of one OREO property in the first quarter of 2021. Nonperforming loans, net of government guarantees ~~increased $1.4~~decreased $3.4 million, or ~~14%~~32% to ~~$11.5~~$7.3 million as of ~~September~~June 30, ~~2021~~2022 from ~~$10~~$10.7 million as of December 31, ~~2020,~~2021, primarily due to the ~~addition~~transfer of ~~two relationships~~one relationship back to accrual status in the first ~~three~~six months of ~~2021 which were only partially offset by~~2022 as well as payoffs and pay downs in the ~~second and third quarters~~first half of ~~2021. $9.3~~2022. $5.9 million, or ~~82%~~74% of nonperforming assets at ~~September~~June 30, ~~2021,~~2022, are nonaccrual loans related to ~~six~~five commercial relationships. ~~While it is too early to determine the effect that the COVID-19 pandemic will ultimately have on our non-performing assets, significant increases may occur in subsequent quarters.~~

The following table summarizes nonperforming asset activity for the three-month periods ending ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.

Writedowns Transfers to
(In Thousands) Balance at June 30, 2021 Additions this quarter Payments this quarter /Charge-offs
this quarter Transfers to OREO Performing Status
this quarter Sales this quarter Balance at September 30, 2021
Nonperforming loans $13,104 $— ($611) $— $— $— $— $12,493
Nonperforming loans guaranteed by government (1,096) — 79 — — — — (1,017)
   Nonperforming loans, net 12,008 — (532) — — — — 11,476
Other real estate owned 7,073 — — — — — (1,161) 5,912
Other real estate owned guaranteed
by government (1,279) — — — — — — (1,279)
   Total nonperforming assets,
   net of government guarantees $17,802 $— ($532) $— $— $— ($1,161) $16,109


					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/REPO	Performing Status this quarter	Sales this quarter	Balance at September 30, 2020	(In Thousands)	Balance at March 31, 2022	Additions this quarter	Payments this quarter	/Charge-offs this quarter	Transfers to OREO	Performing Status this quarter	Sales this quarter	Balance at June 30, 2022

Nonperforming loans	Nonperforming loans	$14,365	$386	($1,963)	($141)	$—	$—	$—	$12,647	Nonperforming loans	$9,609	$22	($1,464)	($166)	$—	$—	$—	$8,001
Nonperforming loans guaranteed by government	Nonperforming loans guaranteed by government	(1,635)	—	35	—	—	—	—	(1,600)	Nonperforming loans guaranteed by government	(907)	—	224	—	—	—	—	(683)
Nonperforming loans, net	Nonperforming loans, net	12,730	386	(1,928)	(141)	—	—	—	11,047	Nonperforming loans, net	8,702	22	(1,240)	(166)	—	—	—	7,318
Other real estate owned	Other real estate owned	7,205	—	—	—	—	—	(243)	6,962	Other real estate owned	5,638	—	—	—	—	—	—	5,638
Repossessed assets		919	—	—	(140)	—	—	—	779
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	$13,061	$22	($1,240)	($166)	$—	$—	$—	$11,677


				Writedowns		Transfers to
(In Thousands)	Balance at March 31, 2021	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, 2021




Nonperforming loans	$14,463	$173	($1,422)	($110)	$—	$—	$—	$13,104
Nonperforming loans guaranteed by government	(1,382)	—	286	—	—	—	—	(1,096)
Nonperforming loans, net	13,081	173	(1,136)	(110)	—	—	—	12,008
Other real estate owned	7,563	—	—	—	—	—	(490)	7,073
Repossessed assets	225	—	—	—	—	—	(225)	—

Other real estate owned guaranteed
by government	(1,279)	—	—	—	—	—	—	(1,279)
Total nonperforming assets,
net of government guarantees	$19,590	$173	($1,136)	($110)	$—	$—	($715)	$17,802

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, ~~2021,~~2022, management had identified potential problem loans of ~~$4.7~~$1.4 million as compared to potential problem loans of ~~$6.1~~$2.1 million at December 31, ~~2020.~~2021. The decrease in potential problem loans from December 31, ~~2020~~2021 to ~~September~~June 30, ~~2021~~2022 is primarily the result of one ~~$3.9 million~~ relationship ~~moving to nonaccrual as well as pay downs and credit risk upgrades to existing potential problem loans~~payoff in the first ~~nine months~~half of ~~2021~~2022 which ~~were~~was only partially offset by ~~additions to potential problem loans~~the addition of one relationship in the first ~~nine~~six months of ~~2021.~~2022.

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~~$3.0 million in loans classified as TDRs that were performing and ~~$4.7~~$5.8 million in TDRs included in nonaccrual loans at ~~September~~June 30, ~~2021~~2022 for a total of approximately ~~$7.0~~$8.9 million. There are ~~$2.4~~$3.1 million in government guarantees associated with TDRs, resulting in total TDRs, net of government guarantees, of ~~$4.6~~$5.8 million at ~~September~~June 30, ~~2021.~~2022. At December 31, ~~2020~~2021 there were ~~$832,000~~$773,000 in loans classified as TDRs, net of government guarantees that were performing and ~~$4.5~~$6.5 million in TDRs included in nonaccrual loans for a total of ~~$5.3~~$7.3 million. See Note 43 of the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion of TDRs.

5143

RESULTS OF OPERATIONS

Income Statement

Net Income

Net income for the ~~third~~second quarter of ~~2021~~2022 decreased ~~$3.0~~$3.6 million to ~~$8.9~~$4.8 million as compared to ~~$11.9~~$8.3 million for the same period in ~~2020.~~2021. The decrease in net income is mostly attributable to a ~~$4.9~~$3.3 million decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production ~~that was only partially offset by~~and a ~~$1.9 million increase~~$239,000 decrease in net income in the Community Banking segment. The ~~increase~~decrease in net income in the Community Banking segment in the three months ended ~~September~~June 30, ~~2021,~~2022, as compared to the same period a year ago is primarily due to an increase ~~in net interest income from PPP fees and a decrease~~ in the provision for credit losses and ~~these changes~~other operating expenses which were only partially offset by ~~an increase in the provision for income taxes.~~increased net interest income.

Net income for the ~~nine months~~first half of ~~2021 increased $6.6~~2022 decreased $8.5 million to ~~$29.4~~$12.0 million as compared to ~~$22.8~~$20.5 million for the same period in ~~2020.~~2021. The ~~increase~~decrease in net income is mostly attributable to a ~~$8.9~~$7.3 million ~~increase~~decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production and a $1.2 million decrease in net income in the Community Banking segment. The decrease in net income in the Community Banking segment in the six-month period ended June 30, 2022, as compared to the same period a year ago is primarily due to an increase ~~in net interest income from PPP fees and a decrease~~ in the provision for credit losses and ~~similar to the third quarter comparison discussed above, these changes~~other operating expenses. These decreases were only partially offset by ana $2.8 million increase in ~~the provision for~~net interest income ~~taxes. Net income in the Home Mortgage Lending segment decreased $2.3~~and $2.0 million in life insurance proceeds received in connection with the ~~first nine months~~death of ~~2021 as compared to~~ the ~~same period in 2020, primarily due to a decrease in production.~~Company’s former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021.

Net Interest Income/Net Interest Margin

Net interest income for the ~~third~~second quarter of ~~2021~~2022 increased ~~$2.1~~$3.0 million, or ~~12%~~16%, to ~~$20.4~~$22.2 million as compared to ~~$18.3~~$19.2 million for the ~~third~~second quarter of ~~2020.~~2021. Net interest margin ~~decreased 45~~increased 19 basis points to ~~3.45%~~3.67% in the ~~third~~second quarter of ~~2021~~2022 as compared to ~~3.90%~~3.48% in the ~~third~~second quarter of ~~2020.~~2021. Net interest income for the first ~~nine months~~half of ~~2021~~2022 increased ~~$7.7~~$2.8 million, or ~~15%~~7%, to ~~$59.1~~$41.5 million as compared to ~~$51.4~~$38.7 million for the first ~~nine months~~half of ~~2020.~~2021. Net interest margin decreased 4526 basis points to ~~3.60%~~3.42% in the first ~~nine months~~half of ~~2021~~2022 as compared to ~~4.05%~~3.68% in the ~~same period in 2020.~~ first half of 2021.

The increase in net interest income in the ~~third~~second quarter and first ~~nine-months~~six-months of ~~2021~~2022 compared to the same periods ~~of 2020~~in 2021 was primarily the result of ~~higher average earning asset balances, an increase~~increased interest on loans, investments, and interest bearing deposits in other banks and decreased interest expense which was only partially offset by a decrease in loan fee income due in large part to ~~full~~decreased recognition of the deferred PPP loan fees upon loan forgiveness through the ~~SBA, and reduced interest expense.~~SBA. During the three and ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2021,~~2022, Northrim received ~~$102.4~~$33.7 million and ~~$339.4~~$90.6 million, respectively, in PPP loan forgiveness through the SBA, compared to ~~none~~$133.0 million and $238.0 million, respectively, in the same periods in ~~2020.~~2021. Total net PPP fee income including accretion and full fee recognition upon loan forgiveness was ~~$3.0~~$1.3 million and ~~$8.9~~$2.6 million during the ~~three and nine-month~~three-month periods ending ~~September~~June 30, 2022 and 2021, respectively, ~~compared to $1.4~~and $3.4 million and ~~$2.7~~$5.9 million induring the ~~three and nine-month~~six-month periods ending ~~September~~June 30, ~~2020. PPP fee income for 2020 included only fee accretion.~~2022 and 2021, respectively. As of ~~September~~June 30, ~~2021,~~2022, there was ~~$197,000~~$1.1 million of ~~net PPP fee income from round one remaining and $7.9 million remaining from round two for total~~ net deferred fees remaining on PPP loans mostly from the second round of ~~$8.1 million.~~ PPP loan originations.

The ~~decrease~~increase in net interest margin in the ~~third~~second quarter ~~and first nine months~~ of ~~2021~~2022 as compared to the same ~~periods~~period a year ago was primarily the result of ~~lower interest rates and~~higher yields on earning-assets which was only partially offset by a less favorable mix of earning assets due to significant increases in short-term investments, which is the lowest yielding type of earning asset for the Company. The decrease in the net interest margin in the first half of 2022 compared to the same period a year ago is primarily due to the less favorable mix of earning assets, which was only partially offset by higher yields. Changes in net interest margin in the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2021~~2022 as compared to the same ~~period~~periods in the prior year are detailed below:


	Three Months Ended ~~September~~June 30, ~~2021~~2022 vs. ~~September~~June 30, ~~2020~~2021
Nonaccrual interest adjustments	~~(0.07)~~(0.04)	%
Impact of SBA Paycheck Protection Program loans	~~0.61~~0.11	%
Interest rates and loan fees	~~(0.18)~~0.35	%
Volume and mix of interest-earning assets	~~(0.81)~~(0.23)	%
Change in net interest margin	~~(0.45)~~0.19	%


	~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 vs. ~~September~~June 30, ~~2020~~2021
Nonaccrual interest adjustments	~~(0.01)~~0.05	%
Impact of SBA Paycheck Protection Program loans	~~0.19~~0.09	%
Interest rates and loan fees	~~(0.33)~~0.07	%
Volume and mix of interest-earning assets	~~(0.30)~~(0.47)	%
Change in net interest margin	~~(0.45)~~(0.26)	%

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, ~~2021~~2022 and ~~2020:~~2021. Average yields or costs are not calculated on a tax-equivalent basis.


(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
		2021		2020		$	%		2021	2020	$	%		2021		2020		Change			2022		2021		$	%		2022	2021	$	%		2022		2021		Change
Loans1,2		$1,469,072		$1,465,839		$3,233	—	%	$19,173	$17,734	$1,439	8	%	5.18	%	4.81	%	0.37	%
Interest-bearing deposits in other banks1																				Interest-bearing deposits in other banks1	$382,015		$208,067		$173,948	84	%	$766	$61	$705	1,156	%	0.80	%	0.12	%	0.68	%
Taxable long-term investments2																				Taxable long-term investments2	588,741		353,404		235,337	67	%	2,415	1,225	1,190	97	%	1.65	%	1.39	%	0.26	%
Non-taxable long-term investments2																				Non-taxable long-term investments2	812		856		(44)	(5)	%	4	4	—	—	%	1.98	%	1.87	%	0.11	%
Loans held for sale	Loans held for sale	99,716		122,994		(23,278)	(19)	%	727	957	(230)	(24)	%	2.89	%	3.10	%	(0.21)	%	Loans held for sale	59,677		111,228		(51,551)	(46)	%	620	763	(143)	(19)	%	4.17	%	2.75	%	1.42	%

Short-term investments3		390,004		60,504		329,500	545	%	149	17	132	776	%	0.15	%	0.11	%	0.04	%
Long-term investments4		389,631		217,599		172,032	79	%	1,233	1,086	147	14	%	1.26	%	1.99	%	(0.73)	%
Total investments		779,635		278,103		501,532	180	%	1,382	1,103	279	25	%	0.70	%	1.58	%	(0.88)	%
Interest-earning assets		2,348,423		1,866,936		481,487	26	%	21,282	19,794	1,488	8	%	3.60	%	4.22	%	(0.62)	%
Loans3,4																				Loans3,4	1,398,149		1,541,701		(143,552)	(9)	%	19,187	18,200	987	5	%	5.50	%	4.74	%	0.76	%
Interest-earning assets5																				Interest-earning assets5	2,429,394		2,215,256		214,138	10	%	22,992	20,253	2,739	14	%	3.80	%	3.67	%	0.13	%
Nonearning assets	Nonearning assets	170,317		172,853		(2,536)	(1)	%												Nonearning assets	172,655		173,164		(509)	—	%
Total	Total	$2,518,740		$2,039,789		$478,951	23	%												Total	$2,602,049		$2,388,420		$213,629	9	%

Interest-bearing demand	Interest-bearing demand	$609,718		$409,758		$199,960	49	%	$117	$156	($39)	(25)	%	0.08	%	0.15	%	(0.07)	%	Interest-bearing demand	$669,848		$561,570		$108,278	19	%	$167	$128	$39	30	%	0.10	%	0.09	%	0.01	%
Savings deposits	Savings deposits	326,733		266,588		60,145	23	%	122	168	(46)	(27)	%	0.15	%	0.25	%	(0.10)	%	Savings deposits	349,108		311,929		37,179	12	%	118	126	(8)	(6)	%	0.14	%	0.16	%	(0.02)	%
Money market deposits	Money market deposits	267,723		218,965		48,758	22	%	97	153	(56)	(37)	%	0.14	%	0.28	%	(0.14)	%	Money market deposits	322,384		256,215		66,169	26	%	103	112	(9)	(8)	%	0.13	%	0.18	%	(0.05)	%
Time deposits	Time deposits	176,287		181,882		(5,595)	(3)	%	331	843	(512)	(61)	%	0.74	%	1.84	%	(1.10)	%	Time deposits	172,617		186,315		(13,698)	(7)	%	211	513	(302)	(59)	%	0.49	%	1.10	%	(0.61)	%
Total interest-bearing deposits	Total interest-bearing deposits	1,380,461		1,077,193		303,268	28	%	667	1,320	(653)	(49)	%	0.19	%	0.49	%	(0.30)	%	Total interest-bearing deposits	1,513,957		1,316,029		197,928	15	%	599	879	(280)	(32)	%	0.16	%	0.27	%	(0.11)	%
Borrowings	Borrowings	24,962		23,574		1,388	6	%	183	180	3	2	%	2.91	%	3.04	%	(0.13)	%	Borrowings	24,675		25,032		(357)	(1)	%	181	182	(1)	(1)	%	2.94	%	2.92	%	0.02	%
Total interest-bearing liabilities	Total interest-bearing liabilities	1,405,423		1,100,767		304,656	28	%	850	1,500	(650)	(43)	%	0.24	%	0.54	%	(0.30)	%	Total interest-bearing liabilities	1,538,632		1,341,061		197,571	15	%	780	1,061	(281)	(26)	%	0.20	%	0.32	%	(0.12)	%
Demand deposits and other noninterest-bearing liabilities		869,864		725,585		144,279	20	%
Non-interest bearing demand deposits																				Non-interest bearing demand deposits	808,186		766,954		41,232	5	%
Other liabilities																				Other liabilities	839,250		809,971		(11,953)	(28)	%
Equity	Equity	243,453		213,437		30,016	14	%												Equity	224,167		237,388		(13,221)	(6)	%
Total	Total	$2,518,740		$2,039,789		$478,951	23	%												Total	$2,602,049		$2,388,420		$213,629	9	%
Net interest income	Net interest income								$20,432	$18,294	$2,138	12	%							Net interest income								$22,212	$19,192	$3,020	16	%
Net interest margin	Net interest margin													3.45	%	3.90	%	(0.45)	%	Net interest margin													3.67	%	3.48	%	0.19	%
Average loans to average interest-earning assets	Average loans to average interest-earning assets	62.56	%	78.52	%															Average loans to average interest-earning assets	57.55	%	69.59	%
Average loans to average total deposits	Average loans to average total deposits	66.55	%	83.75	%															Average loans to average total deposits	60.21	%	74.01	%
Average non-interest deposits to average total deposits	Average non-interest deposits to average total deposits	37.46	%	38.45	%															Average non-interest deposits to average total deposits	34.80	%	36.82	%
Average interest-earning assets to average interest-bearing liabilities	Average interest-earning assets to average interest-bearing liabilities	167.10	%	169.60	%															Average interest-earning assets to average interest-bearing liabilities	157.89	%	165.19	%

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

2Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock. Taxable long-term investments consist of U.S. treasury and government sponsored entities, corporate bonds, collateral loan obligations, marketable equity securities, and Federal Home Loan Bank stock. Non-taxable long-term investments consist of municipal securities.

3Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled ~~$3.9~~$2.3 million and ~~$2.2~~$3.4 million in the ~~third~~second quarter of ~~2021~~2022 and ~~2020,~~2021, respectively.

24Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were ~~$12.7~~$8.8 million and ~~$13.9~~$13.8 million in the ~~third~~second quarter of ~~2021~~2022 and ~~2020,~~2021, respectively.

35~~Consists~~The Company does not have any fed funds sold or securities purchased with agreements to resell to disclose as part of ~~interest bearing deposits~~its total interest-earning assets in ~~other banks.~~

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

5446

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~~June 30, ~~2021~~2022 and ~~2020.~~2021. 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:~~rates. The Company did not have any fed funds sold or securities purchased with agreements to resell for the three-month periods ending June 30, 2022 and 2021.


(In Thousands)	(In Thousands)	Three Months Ended September 30, 2021 vs. 2020			(In Thousands)	Three Months Ended June 30, 2022 vs. 2021
		Increase (decrease) due to				Increase (decrease) due to
		Volume	Rate	Total		Volume	Rate	Total
Interest Income:	Interest Income:				Interest Income:
Short-term investments					Short-term investments	$91	$614	$705
Taxable long-term investments					Taxable long-term investments	1,039	151	1,190
Nontaxable long-term investments					Nontaxable long-term investments	—	—	—
Loans held for sale					Loans held for sale	(439)	296	(143)
Loans	Loans	$513	$926	$1,439	Loans	(1,299)	2,286	987
Loans held for sale		(172)	(58)	(230)
Short-term investments		128	4	132
Long-term investments		737	(590)	147
Total interest income	Total interest income	$1,206	$282	$1,488	Total interest income	($608)	$3,347	$2,739

Interest Expense:	Interest Expense:				Interest Expense:
Interest-bearing demand					Interest-bearing demand	$26	$13	$39
Savings deposits					Savings deposits	14	(22)	(8)
Money market deposits					Money market deposits	25	(34)	(9)
Time deposits					Time deposits	(41)	(261)	(302)
Interest-bearing deposits	Interest-bearing deposits	$302	($955)	($653)	Interest-bearing deposits	24	(304)	(280)
Borrowings	Borrowings	10	(7)	3	Borrowings	(2)	1	(1)
Total interest expense	Total interest expense	$312	($962)	($650)	Total interest expense	$22	($303)	($281)

5547

The following table compares average balances and rates as well as margins on earning assets for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2021~~2022 and ~~2020:~~2021. Average yields or costs are not calculated on a tax-equivalent basis.


(Dollars in Thousands)	(Dollars in Thousands)	Nine Months Ended September 30,																		(Dollars in Thousands)	Six Months Ended June 30,
									Interest income/																			Interest income/
		Average Balances				Change			expense		Change			Average Yields/Costs							Average Balances				Change			expense		Change			Average Yields/Costs
		2021		2020		$	%		2021	2020	$	%		2021		2020		Change			2022		2021		$	%		2022	2021	$	%		2022		2021		Change
Loans1,2		$1,501,139		$1,289,838		$211,301	16	%	$56,015	$49,237	$6,778	14	%	4.99	%	5.10	%	(0.11)	%
Interest-bearing deposits in other banks1																				Interest-bearing deposits in other banks1	$459,843		$164,712		$295,131	179	%	$1,008	$99	$909	918	%	0.44	%	0.12	%	0.32	%
Taxable long-term investments2																				Taxable long-term investments2	56,173		112,897		(56,724)	(50)	%	1,025	1,545	(520)	(34)	%	3.68	%	2.76	%	0.92	%
Non-taxable long-term investments2																				Non-taxable long-term investments2	539,741		325,815		213,926	66	%	3,958	2,354	1,604	68	%	1.48	%	1.46	%	0.02	%
Loans held for sale	Loans held for sale	108,455		95,050		13,405	14	%	2,272	2,267	5	—	%	2.80	%	3.19	%	(0.39)	%	Loans held for sale	822		856		(34)	(4)	%	9	9	—	—	%	2.21	%	2.12	%	0.09	%

Short-term investments3		240,635		60,011		180,624	301	%	248	284	(36)	(13)	%	0.14	%	0.63	%	(0.49)	%
Long-term investments4		347,888		252,594		95,294	38	%	3,596	4,349	(753)	(17)	%	1.38	%	2.30	%	(0.92)	%
Total investments		588,523		312,605		275,918	88	%	3,844	4,633	(789)	(17)	%	0.87	%	1.98	%	(1.11)	%
Interest-earning assets		2,198,117		1,697,493		500,624	29	%	62,131	56,137	5,994	11	%	3.78	%	4.42	%	(0.64)	%
Loans3,4																				Loans3,4	1,389,050		1,517,438		(128,388)	(8)	%	37,050	36,842	208	1	%	5.38	%	4.90	%	0.48	%
Interest-earning assets5																				Interest-earning assets5	2,445,629		2,121,718		323,911	15	%	43,050	40,849	2,201	5	%	3.55	%	3.88	%	(0.33)	%
Nonearning assets	Nonearning assets	171,350		177,811		(6,461)	(4)	%												Nonearning assets	164,611		171,870		(7,259)	(4)	%
Total	Total	$2,369,467		$1,875,304		$494,163	26	%												Total	$2,610,240		$2,293,588		$316,652	14	%

Interest-bearing demand	Interest-bearing demand	$547,734		$370,270		$177,464	48	%	$362	$476	($114)	(24)	%	0.09	%	0.17	%	(0.08)	%	Interest-bearing demand	$672,694		$516,228		$156,466	30	%	$282	$246	$36	15	%	0.08	%	0.10	%	(0.02)	%
Savings deposits	Savings deposits	318,761		247,605		71,156	29	%	377	581	(204)	(35)	%	0.16	%	0.31	%	(0.15)	%	Savings deposits	350,823		314,709		36,114	11	%	246	255	(9)	(4)	%	0.14	%	0.16	%	(0.02)	%
Money market deposits	Money market deposits	256,729		213,201		43,528	20	%	323	574	(251)	(44)	%	0.17	%	0.36	%	(0.19)	%	Money market deposits	321,580		251,140		70,440	28	%	205	225	(20)	(9)	%	0.13	%	0.18	%	(0.05)	%
Time deposits	Time deposits	178,601		176,046		2,555	1	%	1,433	2,504	(1,071)	(43)	%	1.07	%	1.90	%	(0.83)	%	Time deposits	174,898		179,778		(4,880)	(3)	%	441	1,102	(661)	(60)	%	0.51	%	1.24	%	(0.73)	%
Total interest-bearing deposits	Total interest-bearing deposits	1,301,825		1,007,122		294,703	29	%	2,495	4,135	(1,640)	(40)	%	0.26	%	0.55	%	(0.29)	%	Total interest-bearing deposits	1,519,995		1,261,855		258,140	20	%	1,174	1,828	(654)	(36)	%	0.16	%	0.29	%	(0.13)	%
Borrowings	Borrowings	25,031		39,645		(14,614)	(37)	%	519	561	(42)	(7)	%	2.77	%	1.89	%	0.88	%	Borrowings	24,726		25,066		(340)	(1)	%	360	336	24	7	%	2.94	%	2.70	%	0.24	%
Total interest-bearing liabilities	Total interest-bearing liabilities	1,326,856		1,046,767		280,089	27	%	3,014	4,696	(1,682)	(36)	%	0.30	%	0.60	%	(0.30)	%	Total interest-bearing liabilities	1,544,721		1,286,921		257,800	20	%	1,534	2,164	(630)	(29)	%	0.20	%	0.34	%	(0.14)	%
Demand deposits and other noninterest-bearing liabilities		805,343		619,772		185,571	30	%
Non-interest bearing demand deposits																				Non-interest bearing demand deposits	801,481		727,589		73,892	10	%
Other liabilities																				Other liabilities	33,436		44,959		(11,523)	(26)	%
Equity	Equity	237,268		208,765		28,503	14	%												Equity	230,602		234,119		(3,517)	(2)	%
Total	Total	$2,369,467		$1,875,304		$494,163	26	%												Total	$2,610,240		$2,293,588		$316,652	14	%
Net interest income	Net interest income								$59,117	$51,441	$7,676	15	%							Net interest income								$41,516	$38,685	$2,831	7	%
Net interest margin	Net interest margin													3.60	%	4.05	%	(0.45)	%	Net interest margin													3.42	%	3.68	%	(0.26)	%
Average loans to average interest-earning assets	Average loans to average interest-earning assets	68.29	%	75.98	%															Average loans to average interest-earning assets	56.80	%	71.52	%
Average loans to average total deposits	Average loans to average total deposits	72.77	%	81.79	%															Average loans to average total deposits	59.83	%	76.27	%
Average non-interest deposits to average total deposits	Average non-interest deposits to average total deposits	36.89	%	36.14	%															Average non-interest deposits to average total deposits	34.52	%	36.57	%
Average interest-earning assets to average interest-bearing liabilities	Average interest-earning assets to average interest-bearing liabilities	165.66	%	162.17	%															Average interest-earning assets to average interest-bearing liabilities	158.32	%	164.87	%

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

3Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled ~~$11.5~~$5.3 million and ~~$5.1~~$16.2 million in the first ~~nine~~six months of ~~2021~~2022 and ~~2020,~~2021, respectively.

24Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were ~~$12.3~~$9.9 million and ~~$14.4~~$12.2 million in the first ~~nine~~six months of ~~2021~~2022 and ~~2020,~~2021, respectively.

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

5648

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~~six-month periods ending ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. 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:~~rates. The Company did not have any fed funds sold or securities purchased with agreements to resell for the six-month periods ending June 30, 2022 and 2021.


(In Thousands)	(In Thousands)	Nine Months Ended September 30, 2021 vs. 2020			(In Thousands)	Six Months Ended June 30, 2022 vs. 2021
		Increase (decrease) due to				Increase (decrease) due to
		Volume	Rate	Total		Volume	Rate	Total
Interest Income:	Interest Income:				Interest Income:
Short-term investments					Short-term investments	$367	$542	$909
Taxable long-term investments					Taxable long-term investments	1,354	250	1,604
Nontaxable long-term investments					Nontaxable long-term investments	—	—	—
Loans held for sale					Loans held for sale	(1,549)	1,029	(520)
Loans	Loans	$7,603	($825)	$6,778	Loans	(6,666)	6,874	208
Loans held for sale		35	(30)	5
Short-term investments		317	(353)	(36)
Long-term investments		1,554	(2,307)	(753)
Total interest income	Total interest income	$9,509	($3,515)	$5,994	Total interest income	($6,494)	$8,695	$2,201

Interest Expense:	Interest Expense:				Interest Expense:
Interest-bearing demand					Interest-bearing demand	$68	($32)	$36
Savings deposits					Savings deposits	27	(36)	(9)
Money market deposits					Money market deposits	54	(74)	(20)
Time deposits					Time deposits	(31)	(630)	(661)
Interest-bearing deposits	Interest-bearing deposits	$979	($2,619)	($1,640)	Interest-bearing deposits	118	(772)	(654)
Borrowings	Borrowings	(248)	206	(42)	Borrowings	(5)	29	24
Total interest expense	Total interest expense	$731	($2,413)	($1,682)	Total interest expense	$113	($743)	($630)

Provision for Credit Losses

~~The Company adopted ASU 2016-13 effective January 1, 2021.~~ The provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the ~~ACL~~Allowance for Credit Losses ("ACL") at an appropriate level under ~~CECL.~~the Current Expected Credit Losses ("CECL") model. The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to Consolidated Financial Statements included in Item 1 of this report for detailed discussion regarding ACL methodologies for loans, available for sale debt securities, held to maturity securities, loans held for investment, unfunded commitments, and purchased receivables.

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


		Three Months Ended September 30,		Nine Months Ended September 30,			Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	(In Thousands)	2021	2020	2021	2020	(In Thousands)	2022	2021	2022	2021
Credit loss expense on loans held for investment	Credit loss expense on loans held for investment	($762)	$567	($2,828)	$3,031	Credit loss expense on loans held for investment	$273	($161)	$106	($2,066)
Credit loss expense on unfunded commitments	Credit loss expense on unfunded commitments	(344)	—	(193)	—	Credit loss expense on unfunded commitments	190	(266)	207	151
Credit loss expense on available for sale debt securities	Credit loss expense on available for sale debt securities	—	—	—	—	Credit loss expense on available for sale debt securities	—	—	—	—
Credit loss expense on held to maturity securities	Credit loss expense on held to maturity securities	—	—	—	—	Credit loss expense on held to maturity securities	—	—	—	—
Credit loss expense on purchased receivables	Credit loss expense on purchased receivables	—	—	—	—	Credit loss expense on purchased receivables	—	—	—	—
Total credit loss expense		($1,106)	$567	($3,021)	$3,031
Total credit loss (benefit) expense						Total credit loss (benefit) expense	$463	($427)	$313	($1,915)

~~As noted above, the provision for credit losses was recorded in accordance with CECL in 2021.~~ The provision for credit losses in 2020, prior to adoption of CECL, was recorded under the incurred loss model. Despite the fact that a different methodology was used in the calculation of the provision for credit losses in 2021 versus 2020, in general the decreaseincrease in the provision for credit losses on loans for the three and ~~nine-month~~six-month periods ending ~~September~~June 30, ~~2021~~2022 as compared to the same periods in ~~2020~~2021 is primarily the result of ~~improvement~~increased unguaranteed loan balances in ~~economic assumptions used~~the three and six-month periods ending June 30, 2022 as compared to ~~estimate credit losses.~~the same periods in 2021 that were only partially offset by a decrease in the estimated loss rates due to lower forecasted unemployment rates. During the same periods in 2021, decreases in estimated loss rates were higher than the decreases in 2022 due to larger decreases in the forecasted unemployment rates. The ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration.

5749

Other Operating Income

Other operating income for the three-month period ended ~~September~~June 30, ~~2021,~~2022, decreased ~~$9.0~~$6.3 million, or ~~41%~~45%, to ~~$12.7~~$7.8 million as compared to ~~$21.6~~$14.1 million for the same period in ~~2020,~~2021, primarily due to ~~an $8.0~~a $5.5 million decrease in mortgage banking income in the ~~third~~second quarter of ~~2021~~2022 compared to the same quarter in ~~2020.~~2021. The decrease in mortgage banking income in the three-month period ended ~~September~~June 30, ~~2021~~2022 as compared to the same period in ~~2020~~2021 was primarily due to decreased production volume due to decreased refinance activity ~~due to changes~~resulting from increases in the mortgage interest ~~rates and decreased mortgages for home purchases.~~rates. Additionally, there was a ~~decrease~~$988.0 thousand increase in ~~interest rate swap income and~~ unrealized ~~gain~~loss on marketable securities. These decreases were only partially offset by small increases in bankcard fees and service charges on deposit accounts due to an increase in bankcard fees due to lower transaction volume in the third quarter of 2020 resulting from quarantine restrictions related to the COVID-19 pandemic and an increase in service charges on deposits due to customer accommodations related to the impacts of COVID-19 that lowered service changes on deposits in the third quarter of 2020.customers.

Other operating income for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2021,~~2022, decreased ~~$2.9~~$11.4 million, or 6%38%, to ~~$42.7~~$18.6 million as compared to ~~$45.6~~$30.0 million for the same period in ~~2020,~~2021, primarily due to a ~~$2.9~~$12.1 million decrease in mortgage banking income in the first ~~nine months~~half of ~~2021~~2022 compared to the same period in ~~2020. The decrease in mortgage banking income in the nine-month period ended September 30,~~ 2021 ~~as compared to~~for 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.~~reason outlined above. Additionally, there was a ~~decrease~~$1.3 million increase in ~~interest rate swap income due to fewer of these transactions and purchased receivable income decreased due to customers reportedly using PPP funds instead of selling receivables.~~unrealized loss on marketable securities. These decreases were only partially offset by $2.0 million in life insurance proceeds received in connection with the death of the Company’s former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021, as well as small increases in bankcard fees and service charges on ~~deposits~~deposit accounts due to ~~the cessation of COVID-19 quarantine restrictions and higher transaction volume as compared to the same period in 2020, as well as~~ an increase in ~~unrealized gain on marketable securities in the first nine months of 2021 compared to 2020.~~customers.

Other Operating Expense

Other operating expense for the ~~third~~second quarter of ~~2021 decreased $972,000,~~2022 increased $902,000, or 4%, to ~~$22.5~~$23.2 million as compared to ~~$23.5~~$22.3 million for the same period in ~~2020~~2021 primarily due to ~~lower~~higher salaries and other personnel expense related to the community banking segment that was only partially offset by a decrease in salaries and other personnel expense related to mortgage banking operations, which fluctuate with production volumes. ~~OREO~~Additionally, insurance expense ~~net of renal income and gains on sale also decreased~~increased in the ~~third~~second quarter of 2022 as compared to the second quarter of 2021 ~~as compared to 2020~~ due to ~~a gain on the sale of one OREO property~~higher FDIC insurance premiums primarily due to growth in the ~~third quarter of 2021. These decreases were only partially offset by an increase in data processing expense primarily related to increased customer and transaction volume.~~Company's balance sheet.

Other operating expense for the first ~~nine months~~half of ~~2021~~2022 increased ~~$1.2 million,~~$676,000, or 2%, to ~~$66.2~~$44.3 million ~~from $65.0~~as compared to $43.7 million for the same period in ~~2020~~2021 primarily due to higher ~~salaries and other personnel~~insurance expense due to higher FDIC insurance premiums primarily due to growth in the ~~Community Banking segment due to salary increases~~Company's balance sheet. Additionally, marketing expense and ~~a higher accrual for profit sharing expense. Additionally, data processing and occupancy expenses~~professional fees increased in the first ~~nine months~~half of ~~2021~~2022 as compared to ~~2020~~2021 due to timing differences of advertising and sponsorships and increased ~~customer and transaction volume, miscellaneous repairs and maintenance, and tenant improvements at several of~~investment management fees attributable to the Company's locations. These increases were only partially offset by lower salary and other personnel expense related to mortgage banking operations, which fluctuate with production volumes, and a decreasegrowth in ~~OREO expense, net of renal income and gains on sale due to a gain on the sale of one OREO property noted above that occurred in the third quarter of 2021.~~our investment portfolio.

Income Taxes

For the first nine months of 2021, Northrim recorded $9.2 million in state and federal income tax expense, for an effective tax rate of 23.9% compared to $6.3 million and 21.5% for the same period in 2020. Northrim recorded a higher effective tax rate for the first nine months of 2021 as compared to the same period in 2020 as a result of a decrease in tax credits and tax exempt interest income as a percentage of pre-tax income in 2021, as well as the reversal of a $454,000 accrual of tax expense in the second quarter and first half of 2020. In the third quarter of 2021, Northrim recorded $2.8 million in state and federal income tax expense for an effective tax rate of 23.9%, compared to $4.0 million, or 25.2% in the third quarter of 2020.2022, Northrim recorded a lower effective tax rate ~~for the third quarter of 2021~~ as compared to the same ~~period~~periods in ~~2020~~2021 as a result of an increase in tax credits and tax exempt interest income as a percentage of pre-tax income in ~~2021 as~~2022. In the second quarter of 2022, Northrim recorded $1.5 million in state and federal income tax expense, for an effective tax rate of 24.11% compared to ~~2020.~~

$3.1 million and 26.89% for the same period in 2021. For the first half of 2022, Northrim recorded $3.5 million in state and federal income tax expense, for an effective tax rate of 22.42% compared to $6.4 million in state and federal income tax expense, for an effective tax rate of 23.88% for the same period in 2021.

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, ~~2021~~2022 increased ~~53%~~43%, or ~~$141.0~~$195.8 million, to ~~$407.7~~$650.9 million from ~~$266.7~~$455.1 million at December 31, ~~2020~~2021 as proceeds from an increase in deposits that were not lent out were invested in the first ~~nine~~six months of ~~2021.~~2022.

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


		September 30, 2021			December 31, 2020				June 30, 2022			December 31, 2021
		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	$299,824	73.5	%	$174,601	65.5	%	U.S. Treasury and government sponsored entities	$521,338	80.1	%	$341,480	75.0	%
Municipal securities	Municipal securities	850	0.2	%	856	0.3	%	Municipal securities	807	0.1	%	840	0.2	%

Corporate bonds	Corporate bonds	55,411	13.6	%	40,492	15.2	%	Corporate bonds	61,753	9.5	%	52,946	11.6	%
Collateralized loan obligations	Collateralized loan obligations	43,037	10.6	%	41,684	15.6	%	Collateralized loan obligations	57,878	8.9	%	51,418	11.3	%
Preferred stock	Preferred stock	8,551	2.1	%	9,052	3.4	%	Preferred stock	9,122	1.4	%	8,420	1.9	%
Total portfolio investments	Total portfolio investments	$407,673			$266,685			Total portfolio investments	$650,898			$455,104

Loans and Lending Activities

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

September 30, 2021 December 31, 2020
Dollar Amount Percent of Total Dollar Amount Percent of Total
(In Thousands)
Commercial & industrial loans $504,305 34.7 % $612,254 42.2 %
Commercial real estate:
Owner occupied properties 292,021 20.1 % 233,320 16.2 %
Non-owner occupied and multifamily properties 443,258 30.7 % 392,452 27.2 %
Residential real estate:
1-4 family residential properties secured by first liens 29,548 2.0 % 33,415 2.3 %
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 18,749 1.3 % 18,236 1.3 %
1-4 family residential construction loans 36,386 2.5 % 32,500 2.3 %
Other construction, land development and raw land loans 73,313 5.1 % 83,463 5.8 %
Obligations of states and political subdivisions in the US 17,470 1.2 % 15,318 1.1 %
Agricultural production, including commercial fishing 27,573 1.9 % 12,968 0.9 %
Consumer loans 5,014 0.3 % 5,734 0.4 %
Other loans 3,020 0.2 % 4,390 0.3 %
Total loans $1,450,657 $1,444,050


	June 30, 2022			December 31, 2021
	Dollar Amount	Percent of Total		Dollar Amount	Percent of Total
(In Thousands)
Commercial & industrial loans	$394,841	28.1	%	$448,338	31.7	%
Commercial real estate:
Owner occupied properties	313,174	22.3	%	300,200	21.2	%
Non-owner occupied and multifamily properties	446,592	31.7	%	435,311	30.8	%
Residential real estate:
1-4 family residential properties secured by first liens	37,298	2.7	%	32,542	2.3	%
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	21,953	1.6	%	19,610	1.4	%
1-4 family residential construction loans	43,915	3.1	%	36,222	2.6	%
Other construction, land development and raw land loans	87,163	6.2	%	88,094	6.2	%
Obligations of states and political subdivisions in the US	24,005	1.7	%	16,403	1.2	%
Agricultural production, including commercial fishing	29,482	2.1	%	27,959	2.0	%
Consumer loans	4,092	0.3	%	4,801	0.3	%
Other loans	3,194	0.2	%	4,406	0.3	%
Total loans	$1,405,709			$1,413,886

Loans ~~increased~~decreased by ~~$6.6~~$8.2 million, or ~~0.5%~~1%, to ~~$1.451~~$1.406 billion at ~~September~~June 30, ~~2021~~2022 from ~~$1.444~~$1.414 billion at December 31, ~~2020,~~2021, primarily as a result of ~~increased commercial real estate~~decreased SBA PPP loans. ~~Commercial real estate~~Loans excluding PPP loans increased ~~$109.5~~$78.2 million, or ~~17% during the nine-month period ending September~~6% to $1.374 billion at June 30, ~~2021 as compared to~~2022 from $1.296 billion at December 31, 2020. As shown in the table above, 1-4 family residential construction loans, obligations of states and political subdivisions, and agriculture production, including commercial fishing also increased in the first nine months of 2021 while the remaining loan segments decreased slightly, as compared to year end 2020.2021. Management believes that the significant outreach that the Company has done throughout the SBA PPP lending cycle to both existing customers and new PPP loan customers has contributed to growth in our market share for non-PPP lending relationships. PPP loans are included in commercial and industrial loans in the table above and totaled ~~$203.4~~$31.9 million at ~~September~~June 30, ~~2021~~2022 and ~~$304.6~~$118.2 million at December 31, ~~2020.~~

~~Information about loans directly exposed to the oil and gas industry~~2021.

Information about loan concentrations

The Company defines "direct exposure" to the oil and gas industry as companies that it has identified as significantly reliant upon activity related to the oil and gas industry, such as oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry. The Company estimates that ~~$61.6~~$59.2 million, or approximately 4% of loans as of ~~September~~June 30, ~~2021~~2022 have direct exposure to the oil and gas industry as compared to ~~$65.1~~$63.6 million, or approximately 4%5% of loans as of December 31, 2020. The Company's exposure as a percent of the total loan portfolio excluding SBA PPP loans as of September 30, 2021 was 5% and as of December 31, 2020 was 6%. The Company has no loans to oil producers or exploration companies as of September 30, 2021 or December 31, 2020, but the totals noted include a loan related to construction of an oil drilling rig. The balance of this loan was $3.9 million and $3.0 million at September 30, 2021 and December 31, 2020, respectively, and is classified as an Asset Quality Rating ("AQR") system pass loan in both periods.2021. The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were ~~$70.5~~$68.1 million and ~~$63.5~~$66.4 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The portion of the Company's

ACL that related to the loans with direct exposure to the oil and gas industry was estimated at ~~$1.3 million~~$466,000 as of ~~September~~June 30, ~~2021~~2022 and ~~$1.2 million~~$684,000 as of December 31, ~~2020.~~2021.

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


(In Thousands)	(In Thousands)	September 30, 2021	December 31, 2020	(In Thousands)	June 30, 2022	December 31, 2021
Commercial & industrial loans	Commercial & industrial loans	$42,201	$41,016	Commercial & industrial loans	$41,370	$45,338
Commercial real estate:	Commercial real estate:			Commercial real estate:
Owner occupied properties	Owner occupied properties	11,178	11,296	Owner occupied properties	10,066	10,244
Non-owner occupied and multifamily properties	Non-owner occupied and multifamily properties	6,696	6,606	Non-owner occupied and multifamily properties	6,296	6,564

Consumer loans		—	2,256

Other loans	Other loans	1,480	3,948	Other loans	1,465	1,495
Total	Total	$61,555	$65,122	Total	$59,197	$63,641

~~Supplemental information about significant COVID-19 exposure~~The Company monitors other concentrations within the loan portfolio depending on ~~directly impacted industries~~

trends in the current and future estimated economic conditions. At ~~September~~June 30, ~~2021,~~2022, the Company had ~~$99.8~~$121.3 million, or 9% of portfolio loans, in the Healthcare sector, $96.6 million, or 7% of portfolio loans, in the ~~healthcare~~Tourism sector, ~~$83.4 million, or 6% of portfolio loans, in the tourism sector, $59.5~~$63.1 million, or 4% of portfolio loans, in the ~~aviation (non-tourism)~~Retail sector, ~~$42.0 million, or 3% in the restaurant sector, $64.2~~$59.9 million, or 4% of portfolio loans, in the ~~fishing~~Accommodations sector, ~~$40.2 million, or 3% of portfolio loans, in the retail sector, and $52.9~~$58.5 million, or 4% of portfolio loans, in the ~~accommodations sector. At September 30, 2021, the Company had $99.8~~Fishing sector, $51.1 million, or 8%4% in the Restaurant sector, and $50.0 million, or 4% of ~~total loans excluding SBA PPP~~portfolio loans, in the ~~healthcare sector, $83.4 million, or 7% of portfolio loans excluding SBA PPP loans, in the tourism sector, $59.5 million, or 5% of portfolio loans excluding SBA PPP loans, in the aviation~~Aviation (non-tourism) sector, $42.0 million, or 3% of total loans excluding SBA PPP loans in the restaurant sector, $64.2 million, or 5% of total loans excluding SBA PPP loans, in the fishing sector, $52.9 million, or 4% of

~~total loans excluding SBA PPP loans in the accommodations sector, and $40.2 million, or 3% of total loans excluding SBA PPP loans, in retail loans.~~

sector.

The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of ~~September~~June 30, ~~2021:~~2022:


(In Thousands)	Tourism	Aviation (non-tourism)	Healthcare	Retail	Fishing	Restaurant	Accommodations	Total
ACL	$683	$325	$945	$529	$365	$406	$459	$3,712

(In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurant Accommodations Total
ACL $897 $532 $1,084 $500 $576 $474 $568 $4,631

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


		Three Months Ended September 30,		Nine Months Ended September 30,			Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	(In Thousands)	2021	2020	2021	2020	(In Thousands)	2022	2021	2022	2021
Balance at beginning of period	Balance at beginning of period	$14,539	$20,653	$21,136	$19,088	Balance at beginning of period	$11,310	$14,764	$11,739	$21,136
Cumulative effect of adoption of ASU 2016-13	Cumulative effect of adoption of ASU 2016-13	—	—	(4,511)	—	Cumulative effect of adoption of ASU 2016-13	—	—	—	(4,511)
Charge-offs:	Charge-offs:					Charge-offs:
Commercial & industrial loans	Commercial & industrial loans	—	56	273	1,011	Commercial & industrial loans	(166)	(110)	(461)	(273)
Commercial real estate:
Owner occupied properties		—	85	—	85

Other loans		—	—	—	14

Total charge-offs	Total charge-offs	—	141	273	1,110	Total charge-offs	(166)	(110)	(461)	(273)
Recoveries:	Recoveries:					Recoveries:
Commercial & industrial loans	Commercial & industrial loans	23	600	235	629	Commercial & industrial loans	103	27	116	212
Commercial real estate:	Commercial real estate:					Commercial real estate:
Owner occupied properties	Owner occupied properties	2	—	6	—	Owner occupied properties	—	2	—	4

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	9	3	29	23	1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	9	10	21	20

Agricultural production, including commercial fishing	Agricultural production, including commercial fishing	5	—	20	—	Agricultural production, including commercial fishing	7	7	15	15
Consumer loans	Consumer loans	—	1	2	16	Consumer loans	1	—	1	2
Other loans		—	—	—	6

Total recoveries	Total recoveries	39	604	292	674	Total recoveries	120	46	153	253
Net, charge-offs	Net, charge-offs	(39)	(463)	(19)	436	Net, charge-offs	(46)	(64)	(308)	(20)
(Benefit) provision for credit losses	(Benefit) provision for credit losses	(762)	567	(2,828)	3,031	(Benefit) provision for credit losses	273	(161)	106	(2,066)
Balance at end of period	Balance at end of period	$13,816	$21,683	$13,816	$21,683	Balance at end of period	$11,537	$14,539	$11,537	$14,539

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

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2021 2020 2021 2020
Balance at beginning of period $1,567 $167 $187 $152
Cumulative effect of adoption of ASU 2016-13 — — 1,229 —
Adjusted balance, beginning of period 1,567 167 1,416 152
(Benefit) provision for credit losses (344) 12 (193) 27
Balance at end of period $1,223 $179 $1,223 $179


	Three Months Ended June 30,		Six Months Ended June 30,
(In Thousands)	2022	2021	2022	2021
Balance at beginning of period	$1,113	$1,833	$1,096	$187
Cumulative effect of adoption of ASU 2016-13	—	—	—	1,229
Adjusted balance, beginning of period	1,113	1,833	1,096	1,416
(Benefit) provision for credit losses	190	(266)	207	151
Balance at end of period	$1,303	$1,567	$1,303	$1,567

While management believes that it uses the best information available to determine the ACL, unforeseen market conditions and other events could result in adjustment to the ACL, and net income could be significantly affected if

circumstances differed substantially from the assumptions used in making the final determination of the ACL. Moreover, bank regulators frequently monitor banks' loan loss allowances, and if regulators were to determine that the Company’s ACL is inadequate, they may require the Company to increase the ACL, which may adversely impact the Company’s net income and financial condition.

Deposits

Deposits are the Company’s primary source of funds. Total deposits ~~increased $471.6~~decreased $86.2 million, or ~~26%~~4%, to ~~$2.297~~$2.335 billion as of ~~September~~June 30, ~~2021~~2022 compared to ~~$1.825~~$2.422 billion as of December 31, ~~2020. This increase is~~2021, primarily due to ~~funding PPP loans, but is also due to new customer relationships as~~the drawdown of a ~~result of the Company's significant PPP efforts during~~large temporary deposit in the first ~~nine months~~quarter of ~~2021 and the last nine months of 2020.~~2022. The following table summarizes the Company's composition of deposits as of the periods indicated:


		September 30, 2021			December 31, 2020				June 30, 2022			December 31, 2021
(In thousands)	(In thousands)	Balance	% of total		Balance	% of total		(In thousands)	Balance	% of total		Balance	% of total
Demand deposits	Demand deposits	$868,810	38	%	$643,825	35	%	Demand deposits	$830,156	35	%	$887,824	37	%
Interest-bearing demand	Interest-bearing demand	644,035	28	%	459,095	25	%	Interest-bearing demand	666,283	29	%	692,683	29	%
Savings deposits	Savings deposits	330,465	14	%	308,725	17	%	Savings deposits	349,208	15	%	348,164	14	%
Money market deposits	Money market deposits	278,529	12	%	237,705	13	%	Money market deposits	319,843	14	%	314,996	13	%
Time deposits	Time deposits	174,702	8	%	175,631	10	%	Time deposits	169,900	7	%	177,964	7	%
Total deposits	Total deposits	$2,296,541			$1,824,981			Total deposits	$2,335,390			$2,421,631

The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing ~~92%~~93% of total deposits at ~~September~~June 30, ~~2021~~2022 and ~~90%~~93% of total deposits at December 31, ~~2020.~~2021.

The only deposit category with stated maturity dates is certificates of deposit. At ~~September~~June 30, ~~2021,~~2022, the Company had ~~$174.7~~$169.9 million in certificates of deposit as compared to certificates of deposit of ~~$175.6~~$178.0 million at December 31, ~~2020.~~2021. At ~~September~~June 30, ~~2021, $101.2~~2022, $133.1 million, or ~~58%~~78%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to ~~$175.6~~$118.5 million, or ~~73%~~67%, of total certificates of deposit at December 31, ~~2020.~~2021. The aggregate amount of certificates of deposit in amounts of ~~$100,000~~$250,000 and greater at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, was ~~$135.9~~$73.3 million and ~~$133.3~~$77.1 million, respectively. The following table sets forth the amount outstanding of deposits in amounts of ~~$100,000~~$250,000 and greater by time remaining until maturity and percentage of total deposits as of ~~September~~June 30, ~~2021:~~

Time Certificates of Deposit
of $100,000 or More
Percent of Total Deposits
(In Thousands) Amount
Amounts maturing in:
Three months or less $22,111 16 %
Over 3 through 6 months 20,202 15 %
Over 6 through 12 months 37,551 28 %
Over 12 months 56,075 41 %
Total $135,939 100 %
2022:

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


	Time Certificates of Deposit
	of $250,000 or More
		Percent of Total Deposits
(In Thousands)	Amount
Amounts maturing in:
Three months or less	$11,681	16	%
Over 3 through 6 months	14,653	20	%
Over 6 through 12 months	29,479	40	%
Over 12 months	17,457	24	%
Total	$73,270	100	%

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, ~~2021,~~2022, our maximum borrowing line from the FHLB was ~~$1.167~~$1.169 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements. The Company has outstanding advances of ~~$14.6~~$14.3 million as of ~~September~~June 30, ~~2021~~2022 which were originated to match fund low income housing projects that qualify for long term fixed interest rates. These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23% to 3.25%.

Federal Reserve Bank: The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding ~~$60.4~~$50.5 million of loans as collateral to secure advances made through the discount window on ~~September~~June 30, ~~2021.~~2022. There were no discount window advances outstanding at ~~September~~either June 30, ~~2021~~2022 or December 31, ~~2020, respectively.~~2021.

Other Short-term Borrowings: The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or ~~$907.6~~$909.4 million at ~~September~~June 30, ~~2021~~2022 and ~~$736.0~~$948.0 million at December 31, ~~2020.~~2021.

At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.

Long-term Borrowings. The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020.~~2021.

Liquidity and Capital Resources

The Company is a single bank holding company and its primary ongoing source of liquidity is from dividends received from the Bank. Such dividends arise from the cash flow and earnings of the Bank. Banking regulations and regulatory authorities may limit the amount of, or require the Bank to obtain certain approvals before paying, dividends to the Company. Given that the Bank currently meets and the Bank anticipates that it will continue to meet, all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards, the Company expects to continue to receive dividends from the Bank during the remainder of ~~2021.~~2022. Other available sources of liquidity for the bank holding company include the issuance of debt and the issuance of common or preferred stock. As of June 30, 2022, the Company has 10.0 million authorized shares of common stock, of which 5.7 million are issued and outstanding, leaving 4.3 million shares available for issuance. Additionally, the Company has 2.5 million authorized shares of preferred stock available for issuance.

The ~~Company~~Bank manages its liquidity through its Asset and Liability Committee. ~~Our~~The Bank's primary ~~sources~~source of funds are customer ~~deposits and advances from the FHLB.~~deposits. These funds, together with loan repayments, loan sales, ~~other~~maturity of investment securities, borrowed funds, and 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'~~borrowers’ demands that we advance funds against unfunded lending commitments.

The Company had cash and cash equivalents of $336.9 million, or 13% of total assets at June 30, 2022 compared to $645.8 million, or 24% of total assets as of December 31, 2021. The decrease in cash and cash equivalents is primarily due to an increase in available for sale securities and a decrease in deposits, but is still elevated as compared to historical norms. The Company had other comprehensive losses, net of tax, of $4.9 million and $15.9 million for the three and six-month periods ending June 30, 2022 primarily due to unrealized holding losses on available for sale securities due to increases in interest rates. Management does not believe that liquidation of these securities, which would result in realized losses, will occur prior to maturity of these securities. Furthermore, management expects that the Company's elevated level of liquidity will continue through 2022 and potentially into subsequent years. Accordingly, management has invested in slightly longer term investment securities as compared to the last several years. As of June 30, 2022, the weighted average maturity of available for sale securities is 3.6 years compared to 4.1 years at December 31, 2021 and 2.6 years at December 31, 2020. At June 30, 2022, no available for sale securities mature within one year, $137.0 million mature within one to two years, and $178.4 million mature within two to three years. Our total unfunded commitments to fund loans and letters of credit at ~~September~~June 30, ~~2021~~2022 were ~~$371.9~~$415.8 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. ~~Additionally,~~At June 30, 2022, certificates of deposit totaling $133.1 million are scheduled to mature over the next 12 months and may be withdrawn from the Bank. Similar to loans, we do not expect that these maturing certificates of deposit, or other non-maturity deposits, to be withdrawn from the Bank in a manner that will strain liquidity; however, unforeseen future circumstances or events may cause higher than anticipated withdrawal of deposits or draws of unfunded commitments to fund new loans. Management believes that cash requirements to fund future non-deposit liabilities, including operating lease liabilities, other liabilities, or borrowings as ~~noted above,~~of June 30, 2022, are not material to the Company's liquidity position as of June 30, 2022.

The Company has other available sources of liquidity to fund unforeseen liquidity needs. These include borrowings available through our ~~total deposits at September~~correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB. At June 30, ~~2021~~2022, our liquid assets were ~~$2.297~~$578.8 million and our funds available for borrowing under our existing lines of credit were $1.224 billion. Given these sources of liquidity and our expectations for customer demands for cash and for our operating cash needs, we believe our sources of liquidity to be sufficient in the foreseeable future.

As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 "Financial Statements" of this report, net cash provided by operating activities was ~~$75.3~~$15.3 million for the first ~~nine~~six months of ~~2021,~~2022, primarily due to cash provided by proceeds from the sale of loans held for sale, which were only partially offset by cash used in connection with the origination of loans held for sale. Net cash used by investing activities was ~~$160.0~~$218.8 million for the same period, primarily due to purchases of available for sale and held to maturity securities ~~and increases~~as well as an increase in ~~loans and~~ purchased receivables. This use of cash was only partially offset by ~~proceeds from the maturities and calls of securities available for sale.~~a decrease in loans, mostly attributable to SBA PPP forgiveness. Net cash ~~provided~~used by financing activities in the same period was ~~$461.0~~$105.4 million, primarily due to ~~increases~~a decrease in ~~deposits largely due to funding PPP loans that was done via deposit into customer accounts.~~deposits.

~~The sources by which we meet the liquidity needs of~~Throughout 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 fromhistory, the Company via PPP loans, the Company may need to borrow funds to meet an immediate liquidity need. At September 30, 2021, our funds available for borrowing under our existing lines of credit were $1.219 billion. The Company has ~~not obtained any other new borrowing lines or other new sources of liquidity other than the PPPLF program resulting from anticipated liquidity challenges from COVID-19.~~

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

~~The Company issued 17,308~~its shares of ~~its~~ common stock in the ~~first nine months of 2021 and~~open market. The Company repurchased ~~91,012~~333,724 shares of its common stock under the Company's previously announced repurchase ~~program.~~programs in the first six months of 2022. At June 30, 2022, there are no shares remaining of the shares previously authorized for repurchase. The Company ~~repurchased 29,613~~may elect to continue to repurchase our stock from time-to-time depending upon market conditions, but we can make no assurances that we will continue this program or that we will authorize additional shares ~~of its common stock in the third quarter of 2021. At September 30, 2021, the Company had 6,177,300 shares of its common stock outstanding.~~for repurchase.

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, ~~2021,~~2022, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.

The table below illustrates the capital requirements in effect for the periods noted for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements. Management intends to maintain capital ratios for the Bank in ~~2021,~~2022, 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, ~~2021~~2022 and December 31, ~~2020,~~2021, which explains most of the difference in the capital ratios for the two entities.

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

September 30, 2021
Total risk-based capital 8.00% 10.00% 15.00% 12.18%
Tier 1 risk-based capital 6.00% 8.00% 14.17% 11.34%
Common equity tier 1 capital 4.50% 6.50% 13.59% 11.36%
Leverage ratio 4.00% 5.00% 9.48% 7.57%
December 31, 2020
Total risk-based capital 8.00% 10.00% 15.46% 13.13%
Tier 1 risk-based capital 6.00% 8.00% 14.20% 11.88%
Common equity tier 1 capital 4.50% 6.50% 13.57% 11.89%
Leverage ratio 4.00% 5.00% 10.25% 8.55%


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


June 30, 2022
Total risk-based capital	8.00%	10.00%	13.45%	11.46%
Tier 1 risk-based capital	6.00%	8.00%	12.74%	10.74%
Common equity tier 1 capital	4.50%	6.50%	12.20%	10.76%
Leverage ratio	4.00%	5.00%	8.84%	7.44%

See Note 2423 of the Consolidated Financial Statements in Part II. Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 for a detailed discussion of the capital ratios. The requirements for "well- capitalized" come from the Prompt Corrective Action rules. See Part I. Item 1 - Business - Supervision and Regulation in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. These rules apply to the Bank but not to the Company. Under the rules of the Federal Reserve Bank, a bank holding company such as the Company is generally defined to be "well capitalized" if its Tier 1 risk-based capital ratio is 8.0% or more and its total risk-based capital ratio is 10.0% or more.

~~Off-Balance Sheet Items~~

The Company is a party to financial instruments with off-balance sheet risk. Among the off-balance sheet items entered into in the ordinary course of business are commitments to extend credit, commitments to originate loans held for sale and the issuance of letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheet. Certain commitments are collateralized. We apply the same credit standards to these commitments as in all of our lending activities and include these commitments in our lending risk evaluations. As of September 30, 2021 and December 31, 2020, the Company’s commitments to extend credit and to provide letters of credit which are not reflected on its balance sheet amounted to $371.9 million and $377.4 million, respectively. Additionally, the Company had commitments to originate loans held for sale of $169.4 million and $150.3 million, as of September 30, 2021 and December 31, 2020, respectively. Since many of the commitments are expected to expire without being drawn upon, these total commitment amounts do not necessarily represent future cash requirements. The Company has established reserves of $1.2 million and $187,000 at September 30, 2021 and December 31, 2020 respectively, for losses related to these commitments that are recorded in other liabilities on the consolidated balance sheet.

~~Capital Expenditures and Commitments~~

~~The Company has capital commitments related to a branch remodel in Anchorage. At September 30, 2021 the Company considers these commitments to be immaterial.~~Critical Accounting Policies

Our critical accounting policies are described in detail in Part II. 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, 2021. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments as a result of the need to make "critical accounting estimates", which are estimates that involve estimation uncertainty that has had or is reasonably likely to have a material impact on the Company's financial condition or results of operations. The Company's critical accounting policies include allowance for credit losses, valuation of goodwill and other intangible assets, the valuation of OREO, the valuation of mortgage servicing rights, and fair value. There have been no material changes to the valuation techniques or models, that affect our estimates during 2022 except as noted below.

Allowance for Credit Losses Policy: For loan pools that utilize the discounted cash flow ("DCF") method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default. 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. As of December 31, 2021, management utilized and forecasted Alaska unemployment as a loss driver for all of the loan pools that utilized the DCF method. Management also utilized and forecasted either one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlated to expected future losses. Additionally, the Company's regression models for PD as of December 31, 2021 utilized the Company's actual historical loan level default data.

As of January 1, 2022, management utilizes and forecasts U.S. unemployment as the sole loss driver for all of the loan pools that utilize the DCF method. The Company's regression models for PD as of January 1, 2022 utilize peer historical loan level default data. Peers for this purpose include banks in the United States with total assets between $1 billion and $5 billion whose loan portfolios share certain characteristics with the Company's loan portfolio. Peers differ by loan segment; a bank is included in the peer group for each loan segment under the following circumstances:

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

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

•The percentage of total charge offs for the loan segment during the recessionary period from the fourth quarter of 2008 to the fourth quarter of 2012 is within 1 standard deviation of the Company's data.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our assessment of market risk as of ~~September~~June 30, ~~2021~~2022 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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, ~~2021,~~2022, 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, ~~2021~~2022 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

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

For information regarding risk factors, please refer to Part I. Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, as updated by the Company's periodic filings with the SEC. These risk factors have not changed materially as of ~~September~~June 30, ~~2021.~~2022.

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

(a)-(b) Not applicable

(c) The Company repurchased ~~29,613~~200,619 shares of its common stock during the three-month period ending ~~September~~June 30, ~~2021.~~2022.

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, 2021 - July 31, 2021 — $— — 251,601
Month No. 2
August 1, 2021 - August 31, 2021 2,347 $39.81 2,347 249,254
Month No. 3
September 1, 2021 - September 30, 2021 27,266 $40.71 27,266 221,988
Total 29,613 $40.64 29,613 221,988


	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
April 1, 2022 - April 30, 2022	57,333	$42.30	57,333	143,286
Month No. 2
May 1, 2022 - May 31, 2022	77,219	$40.23	77,219	66,067
Month No. 3
June 1, 2022 - June 30, 2022	66,067	$40.89	66,067	0
Total	200,619	$41.04	200,619	0

(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. In the fourth quarter of 2020, the Company repurchased 45,549 shares, bringing the total shares available and authorized for repurchase to zero as of December 31, 2020. On February 1, 2021, the Company publicly announced its Board's authorization to repurchase up to an additional 313,000 shares of its common stock. In the first quarter of 2021, the Company repurchased 61,399 shares, bringing the total shares

available and authorized for repurchase under the Plan to 251,601. In the third quarter of 2021, the Company repurchased 29,613 shares, bringing the total shares available and authorized for repurchase under the Plan to 221,988. In the fourth quarter of 2021, the Company repurchased 188,264 shares, bringing the total shares available and authorized for repurchase under the Plan to 33,724. On January 28, 2022, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 300,000 shares of common stock. In the first quarter of 2022, the Company repurchased 133,105 shares, bringing the total shares remaining available and authorized for repurchase under the Plan to 200,619. In the second quarter of 2022, the Company repurchased 200,619 shares, bringing the total shares available and authorized for repurchase to zero as of June 30, 2022.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

6759

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, ~~2021~~2022 - formatted in Inline XBRL (included in Exhibit 101)

6860

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, 2021~~August 5, 2022	By	/s/ Joseph M. Schierhorn
		Joseph M. Schierhorn
		Chairman, President, Chief Executive Officer and Chief Operating Officer
		(Principal Executive Officer)


~~November 3, 2021~~August 5, 2022	By	/s/ Jed W. Ballard
		Jed W. Ballard
		Executive Vice President, Chief Financial Officer
		(Principal Financial and Accounting Officer)

6961


Three Months Ended September 30,	Beginning Balance	Provision (benefit)	Charge-offs	Recoveries	Ending Balance
	(In Thousands)
2020
Commercial	$7,366	$285	($56)	$600	$8,195
Real estate construction 1-4 family	690	10	—	—	700
Real estate construction other	1,215	58	—	—	1,273
Real estate term owner occupied	2,533	21	(85)	—	2,469
Real estate term non-owner occupied	5,421	61	—	—	5,482
Real estate term other	702	55	—	1	758
Consumer secured by 1st deed of trust	258	(2)	—	—	256
Consumer other	447	(7)	—	3	443
Unallocated	2,021	86	—	—	2,107
Total	$20,653	$567	($141)	$604	$21,683


Nine Months Ended September 30,	Beginning Balance	Impact of adopting ASC 326	Credit Loss Expense (Benefit)	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	(328)	(273)	235	3,982
Commercial real estate:
Owner occupied properties	—	3,579	(92)	—	6	3,493
Non-owner occupied and multifamily properties	—	4,944	(1,068)	—	—	3,876
Residential real estate:
1-4 family residential properties secured by first liens	—	673	(197)	—	—	476
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens	—	419	(141)	—	29	307
1-4 family residential construction loans	—	454	(270)	—	—	184
Other construction, land development and raw land loans	—	1,994	(715)	—	—	1,279
Obligations of states and political subdivisions in the US	—	44	(8)	—	—	36
Agricultural production, including commercial fishing	—	49	25	—	20	94
Consumer loans	—	118	(37)	—	2	83
Other loans	—	3	3	—	—	6
Total	$21,136	($4,511)	($2,828)	($273)	$292	$13,816


(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	—	679	679
Real estate construction other	—	$79,403	79,403	—	1,179	1,179
Real estate term owner occupied	6,962	$155,762	162,724	—	2,625	2,625
Real estate term non-owner occupied	770	$306,477	307,247	—	5,133	5,133
Real estate term other	1,467	$44,763	46,230	—	779	779
Consumer secured by 1st deed of trust	259	$15,289	15,548	—	261	261
Consumer other	82	$22,168	22,250	—	400	400
Unallocated	—	—	—	—	2,107	2,107
Total	$18,028	$1,426,022	$1,444,050	$13	$21,123	$21,136


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


	Three Months Ended September 30, 2020		Nine Months Ended September 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	—	970	—
Real estate construction other	—	—	—	—
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	—	88	—
Total	$22,817	$129	$22,777	$203


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


	Time Certificates of Deposit
	of $100,000 or More
		Percent of Total Deposits
(In Thousands)	Amount
Amounts maturing in:
Three months or less	$22,111	16	%
Over 3 through 6 months	20,202	15	%
Over 6 through 12 months	37,551	28	%
Over 12 months	56,075	41	%
Total	$135,939	100	%