EDGAR 10-K Filing

Company CIK: 1163370
Filing Year: 2022
Filename: 1163370_10-K_2022_0001163370-22-000008.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
In this document, please note that references to "we", "our", "us", or the "Company" mean Northrim BanCorp, Inc. and its subsidiaries, unless the context suggests otherwise.
General
We are a publicly traded bank holding company headquartered in Anchorage, Alaska. The Company’s common stock trades on the Nasdaq Global Select Stock Market (“NASDAQ”) under the symbol, “NRIM.” The Company is regulated by the Board of Governors of the Federal Reserve System. We began banking operations in Anchorage in December 1990, and formed the Company as an Alaska corporation in connection with our reorganization into a holding company structure; that reorganization was completed effective December 31, 2001. The Company has grown to be the third largest commercial bank in Alaska in terms of deposits, with $2.4 billion in total deposits and $2.7 billion in total assets at December 31, 2021. Through our 17 banking branches and 11 mortgage origination offices, we are accessible to approximately 90% of the Alaskan population.
The Company has three direct wholly-owned subsidiaries:
•Northrim Bank (the “Bank”), a state chartered, full-service commercial bank headquartered in Anchorage, Alaska. The Bank is regulated by the Federal Deposit Insurance Corporation (the "FDIC") and the State of Alaska Department of Commerce, Community and Economic Development, Division of Banking, Securities and Corporations. The Bank has 17 branch locations in Alaska; eight in Anchorage, one in Wasilla, two in Juneau, two in Fairbanks, one in Ketchikan, one in Sitka, one in Eagle River, and one in Soldotna. Additionally, we have a loan production office in Kodiak. We operate in Washington State through Northrim Funding Services (“NFS”), a factoring business that the Bank started in 2004. We offer a wide array of commercial and consumer loan and deposit products, investment products, and electronic banking services over the Internet;
•Northrim Investment Services Company (“NISC”) was formed in November 2002. Through NISC, we own 24% of the total outstanding equity interest in Pacific Wealth Advisors, LLC (“PWA”), an investment advisory, trust, and wealth management business located in Seattle, Washington. PWA is a holding company that owns Pacific Portfolio Consulting, LLC and Pacific Portfolio Trust Company;
•Northrim Statutory Trust 2 (“NST2”), an entity that we formed in December of 2005 to facilitate a trust preferred securities offering by the Company.
The Bank has three direct wholly-owned subsidiaries:
•Northrim Capital Investments Co. (“NCIC”) is a wholly-owned subsidiary of the Bank, which holds a 100% interest in a residential mortgage holding company, Residential Mortgage Holding Company, LLC, the parent company of Residential Mortgage, LLC (collectively “RML”). RML became a wholly-owned subsidiary of NCIC on December 1, 2014. Prior to that, the Company held a 23.5% interest in RML. RML holds a 30% investment in Homestate Mortgage, LLC. In March and December of 2005, NCIC purchased ownership interests totaling 50.1% in Northrim Benefits Group, LLC (“NBG”), an insurance brokerage company that focused on the sale and servicing of employee benefit plans. In August 2017, the Company sold all of its interest in the assets of NBG.
•Northrim Building, LLC (“NBL”) is a wholly-owned subsidiary of the Bank that owns and operates the Company’s main office facility at 3111 C Street in Anchorage.
•Northrim Building LO, LLC is a wholly-owned subsidiary of the Bank that owns and operates the Company’s community branch facility at 2270 E. 37th Avenue in Anchorage.
Segments
The Company operates in two primary segments: Community Banking and Home Mortgage Lending. Measures of the revenues, profit or loss, and total assets for each of the Company's segments are included in Part II. Item 8. "Financial Statements and Supplementary Data" of this report, which is incorporated herein by reference.
Business Strategy
The Company’s primary objective is to become Alaska's most trusted financial institution by adding value for our customers, communities, and shareholders. We aspire to be Alaska's premier bank and employer of choice as a leader in financial expertise, products, and services. We value our state, and we are proud to be Alaskan. We embody Alaska's frontier spirit and values, and we support our communities. We have a sincere appreciation for our customers, and we strive to deliver superior customer first service that is reliable, ethical, and secure. We look for growth opportunities for our customers, our institution, and our employees.
Our strategy is one of value-added growth. Management believes that calculated, sustainable organic and inorganic market share growth coupled with good asset quality, an appropriate core deposit and capital base, operational efficiency, diversified sources of other operating income, and improved profitability is the most appropriate means of increasing shareholder value.
Our business strategy emphasizes commercial lending products and services through relationship banking with businesses and professional individuals. Because of our relatively small size, our experienced senior management team can be more involved with serving customers and making credit decisions, all of which are made in Alaska, allowing us to compete
more favorably with larger competitors for business lending relationships. Our business strategy also emphasizes the origination of a variety of home mortgage loan products, most of which we sell to the secondary market. We retain servicing for home mortgages that we originate and sell to the Alaska Housing Finance Corporation. We believe that there is opportunity to increase the Company’s loan portfolio, particularly in the commercial portion of the portfolio, in the Company’s current market areas through existing and new customers. We have targeted the acquisition of new customers in professional fields including physicians, dentists, accountants, and attorneys. In addition to lending products, in many cases commercial customers also require multiple deposit and affiliated services that add franchise value to the Company. We believe that these strategies will continue to benefit the Company in 2022, and we intend to continue to grow our balance sheet through increasing our market share.
The Company’s business strategy also stresses the importance of customer deposit relationships to support its lending activities. Our guiding principle is to serve our market areas by operating with a “Superior Customer First Service” philosophy, affording our customers the highest priority in all aspects of our operations. We believe that our adherence to this philosophy has created a strong core deposit franchise that provides a stable, low cost funding source for expanded growth in all of our lending areas. We have devoted significant resources to future deposit product development, expansion of electronic services for both personal and business customers, and enhancement of the Company's information security related to providing these services.
In addition to market share growth, a significant aspect of the Company’s business strategy is focused on managing the credit quality of our loan portfolio. As the Company continues to grow, management is committed to allocating more resources to the credit management function of the Bank to provide enhanced financial analysis of our largest, most complex loan relationships to further develop our processes for analyzing and managing various concentrations of credit within the overall loan portfolio. Continued success in maintaining the credit quality of our loan portfolio and managing our level of other real estate owned is a significant aspect of the Company’s strategy for attaining sustainable, long-term market growth to produce increased shareholder value.
Human Capital Resources
We believe that we provide a high level of customer service. To achieve our objective of providing “Superior Customer First Service”, in managing its human capital resources, management emphasizes the hiring and retention of competent and highly motivated employees at all levels of the organization. Management believes that a well-trained and highly motivated core of employees allows maximum personal contact with customers in order to understand and fulfill customer needs and preferences. This “Superior Customer First Service” philosophy is combined with our emphasis on personalized, local decision making. The Company continues to enhance our company-wide employee training program which focuses on Northrim culture, "Superior Customer First Service", general sales skills, and various technical areas. All applicants and employees are treated with the same high level of respect regardless of their gender, ethnicity, religion, national origin, age, marital status, political affiliation, sexual orientation, gender identity, disability or protected veteran status. The Company complies with all applicable state and local laws governing nondiscrimination in employment in every location in which the Company operates.
The Company strives to continuously evaluate our human capital polices for improvement and alignment with current best practices. The Company recently added the Juneteenth National Independence Day and Indigenous People's Day to our lineup of paid holidays for employees. Additionally, effective January 1, 2022 the Company enhanced its paid parental leave program for employees following the birth of a child or the placement of a child in connection with an adoption.
Employee Profile
We consider our relations with our employees to be highly satisfactory. We had 451 full-time equivalent employees at December 31, 2021. None of our employees are covered by a collective bargaining agreement. Of the 451 full-time equivalent employees, 321 were Community Banking employees and 130 were Home Mortgage Lending employees.
Among the Company's full-time equivalent employees as of December 31, 2021, 72% identify as women and 28% as men. Approximately 34% of the workforce identify as a member of a racial minority, 4% identify as individuals with a disability, and 2% identify as veterans. In executive and senior management positions, 56% identify as women and 44% as men as of December 31, 2021. Approximately 4% of those in executive and senior management positions identify as a member of a racial minority, 4% identify as individuals with a disability, and 4% identify as veterans.
Diversity, Equity, and Inclusion
We strive to ensure a respectful, diverse, and inclusive environment and experience for all of our employees. We support and cultivate an open and respectful environment where everyone can actively contribute, have equal access to opportunities and resources, be themselves, and realize their potential. This is reflected in our policies, which encourage individual values, strengths and protections to provide gender diversity and equality in the workplace and are reinforced through our annual anti-harassment training. As an Equal Opportunity Employer, we emphasize inclusion through hiring and compensation practices and consider a pool of diverse candidates for open positions and internal advancement opportunities and treat all our applicants with the same high level of respect regardless of their gender, ethnicity, religion, national origin, age, marital status, political affiliation, sexual orientation, gender identity, disability or protected veteran status. To address issues related to pay discrimination, we do not ask potential candidates about their current or previous compensation during the hiring process, and we incorporate equal and fair pay reviews into every employment compensation decision. Our annual Affirmative Action Plan continues to focus our diversity, equity, and inclusion efforts on increasing the number of veterans and persons with disabilities in our workforce.
Support of Human Capital in Response to COVID-19
COVID-19 acted as a catalyst for expanding workforce flexibility options at Northrim. We have increased the percentage of employees working remotely from less than 8% before the pandemic to approximately 50% of the Company's employees working remotely as of December 31, 2021 either on a full- or part-time basis, including employees that work remotely part-time and work in the office part-time, which we refer to as a "hybrid" work from home arrangement. However, these remote working schedules are no longer directly due to the COVID-19 pandemic. Like many other entities, the percentage of the Company's work force that works remotely in some fashion increased during the pandemic and is expected to stay approximately consistent with current levels in the future as the Company has adjusted to the new environment. We also offer our employees other flexible work options, such as variable work hours, condensed workweeks and part-time hours. There have been no material impacts to our operations due to the increase in these alternative working arrangements and we are pleased to provide our employees with more flexibility to accommodate their needs. In addition, Northrim provides for a strong work/life balance, including generous paid time off and paid parental leave.
The Company expanded tele-health and employee assistance program benefits to help employees manage their physical and emotional health during the pandemic. The Company's philosophy towards employee accommodations related to current and future consequences related to COVID-19 is to be as flexible as possible while balancing the Company's operational needs.
Throughout the pandemic, we have continued to follow all CDC approved COVID-19 safety measures to ensure the safety and wellness of our employees, customers and vendors. We provide employees paid time off to receive their COVID-19 vaccinations and recover from vaccination side effects that prevent them from working.
Products and Services
Community Banking
Lending Services: We have an emphasis on commercial and real estate lending. Our loan products include short and medium-term commercial loans, commercial credit lines, construction and real estate loans, and consumer loans. We emphasize providing financial services to small and medium-sized businesses and to individuals. These types of lending products have provided us with needed market opportunities and generally provide higher net interest margins compared to other types of lending such as consumer lending. However, they also involve greater risks, including greater exposure to changes in local economic conditions.
Additionally in 2021 and 2020, we originated a significant amount of Paycheck Protection Program ("PPP") loans. The Coronavirus Aid, Relief. and Economic Security ("CARES") Act established several new temporary U.S. Small Business Administration (“SBA”) loan programs to assist U.S. small businesses through the COVID-19 pandemic. One of the new loan programs is the PPP, an expansion of the SBA’s 7(a) loan program and the Economic Injury Disaster Loan Program. The American Rescue Plan Act of 2021 ("ARP Act") provided additional funding for the PPP. PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during this emergency. Eligible borrowers need to make a good faith certification that the uncertainty of current economic conditions make requesting assistance necessary to support ongoing operations. Pursuant to the provisions
of Section 1106 of the CARES Act, borrowers may apply to the Bank for loan forgiveness of all or a portion of the loan, subject to certain eligibility requirements and conditions.
Our lending operations are guided by loan policies, approval procedures, and amount limitations. Our loan policies outline the basic policies and procedures by which lending operations are conducted. Generally, the policies address our desired loan types, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations, and compliance with laws and regulations. The policies are reviewed and approved annually by the board of directors of the Bank. Our Quality Assurance Department provides a detailed financial analysis of our largest, most complex loans. In addition, the Quality Assurance Department, along with the Chief Credit Officer of the Bank, have developed processes to analyze and manage various concentrations of credit within the overall loan portfolio. The Credit Administration Department monitors the procedures and processes for both the analysis and reporting of problem loans, and also develops strategies to resolve problem loans based on the facts and circumstances for each loan. Finally, our Internal Audit Department also performs an independent review of each loan portfolio for compliance with loan policy, as well as a review of credit quality. The Internal Audit review follows the FDIC sampling guidelines, and a review of each portfolio is performed on an annual basis.
Purchase of accounts receivable: We provide short-term working capital to customers primarily in our Alaska markets as well as Washington, Oregon and some other states by purchasing their accounts receivable through NFS. Our purchased receivable activity is guided by policies that outline risk management, documentation, and approval limits. In 2022, we expect NFS to continue to penetrate these markets and to continue to contribute to the Company’s profitability.
Deposit Services: Our deposit services include business and personal noninterest-bearing checking accounts and interest-bearing time deposits, checking accounts, savings accounts, and individual retirement accounts. Our interest-bearing accounts generally earn interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits.
Several of our deposit services and products are:
•A specialized business checking account customized to account activity;
•A money market deposit account;
•A “Jump-Up” certificate of deposit (“CD”) that allows additional deposits with the opportunity to increase the rate to the current market rate for a similar term CD;
• A savings account that is priced like a money market account that allows additional deposits, quarterly withdrawals without penalty, and tailored maturity dates;
•IntraFi® Network Deposits℠ and business sweep;
•Consumer online banking, mobile app, and mobile deposit;
•Business online banking, business mobile app, and business mobile deposit; and
•Instantly issued debit cards for business and consumer accounts at account opening.
Other Services: In addition to our traditional deposit and lending services, we offer our customers several convenience services: Mobile Web and Text Banking, consumer online account opening, Personal Finance, Online Documents, Consumer Debit Cards, Business Debit Cards, My Rewards for consumer debit cards, retail lockbox services, card controls, Consumer Credit Cards, Business Credit Cards, Business Employee Purchase Cards, home equity advantage access cards, telebanking, and automated teller services. Other services include personalized checks at account opening, overdraft protection from a savings account, commercial drive-up banking at many locations, automatic transfers and payments, People Pay (a peer-to-peer payment functionality), external transfers, Bill Pay, wire transfers, direct payroll deposit, electronic tax payments, Automated Clearing House origination and receipt, remote deposit capture, account reconciliation and positive pay, merchant services, cash management programs and sweep options to meet the needs of business customers, annuity products, and long term investment portfolios.
Other Services Provided Through Affiliates and Former Affiliates Whom We Continue To Work With: Prior to August of 2017, the Company sold and serviced employee benefit plans for small and medium sized businesses in Alaska through NBG, an insurance brokerage company. In August 2017, we sold our interest in the assets of NBG, but we have continued our relationship with Acrisure, LLC, who purchased the assets of NBG, through an ongoing referral agreement. Our
affiliate PWA provides investment advisory, trust, and wealth management services for customers who are primarily located in the Pacific Northwest and Alaska. We plan to continue to leverage these affiliate relationships to strengthen our existing customer base and bring new customers into the Bank.
Significant Business Concentrations: No individual or single group of related accounts is considered material in relation to our total assets or total revenues, or to the total assets, deposits or revenues of the Bank, or in relation to our overall business. Based on classification by North American Industry Classification System ("NAICS"), there are no segments that exceed 10% of portfolio loans, except for real estate (see Note 5, Loans and Credit Quality, of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report for a breakout of real estate loans). In addition to its review of NAICS codes, the Company has also identified concentrations in various industries that may be adversely impacted by the COVID-19 pandemic and a decline in oil prices. We estimate that as of December 31, 2021 the Company had $117.0 million, or 8% of total loans, in the healthcare sector, $94.4 million, or 7% of portfolio loans, in the tourism sector, $63.6 million, or 4%, in the oil and gas sector, $59.6 million, or 4% of portfolio loans, in the aviation (non-tourism) sector, $55.8 million, or 4% of total loans in the fishing sector, $54.1 million, or 4% in the accommodations sector, and $46.6 million, or 3% in the restaurants and breweries sector and $31.9 million, or 2%, in retail loans. Additionally, approximately 33% of our loan portfolio at December 31, 2021 is attributable to 32 large borrowing relationships. Moreover, our business activities are currently focused primarily in the state of Alaska. Consequently, our results of operations and financial condition are dependent upon the general trends in the Alaska economy and, in particular, the residential and commercial real estate markets in Anchorage, Juneau, Fairbanks, the Matanuska-Susitna Valley, Ketchikan, Sitka, and to a lesser extent, the Kenai Peninsula and Kodiak.
Home Mortgage Lending
Lending Services: The Company originates 1-4 family residential mortgages throughout Alaska most of which we sell to the secondary market. Residential mortgage choices include several products from the Alaska Housing Finance Corporation ("AHFC") including first-time homebuyer, veteran's and rural community programs; Federal Housing Authority, or "FHA" loans; Veterans Affairs, or "VA" loans; Jumbo loans; and various conventional mortgages. The Company retains servicing rights on loans sold to the Alaska Housing Finance Corporation since implementing a new loan servicing program in July 2015.
Alaska Economy
Our growth and operations are impacted by the economic conditions of Alaska and the specific markets we serve. Significant changes in the Alaska economy and the markets we serve eventually could have a positive or negative impact on the Company. Alaska is strategically located on the Pacific Rim, within nine hours by air from 95% of the northern hemisphere, and Anchorage has become a worldwide air cargo and transportation link between the United States and international business in Asia and Europe. The economy of Alaska is dependent upon natural resource industries. Key sectors of the Alaska economy are the oil industry, government and military spending, and the fishing, mining, tourism, air cargo, transportation, and construction industries, as well as health services.
Recent Economic Developments
The Alaska economy showed broad improvements in 2021 as it rebounded from the pandemic lows of 2020. Management noted that a steady recovery of jobs in nearly every sector in 2021 resulted from improved independent tourism, rising oil prices, a strong housing market and consumer liquidity from government stimulus programs. We believe that the potential effects of rising interest rates, high inflation, and supply chain disruptions are the most pressing issues at the start of 2022.
The Alaska Department of Labor ("DOL") reports total payroll jobs in Alaska in December 2021 increased 2.7% or 8,000 jobs compared to December of 2020. Tourism related jobs were the hardest hit from travel restrictions and have also been the fastest to recover. According to the DOL, the Leisure and Hospitality sector improved 14% between December of 2020 and December of 2021. This is now only 4,500 jobs lower than the total of 31,400 jobs in this sector in December of 2019. Other major sectors showing improvement over the last 12 months include Oil & Gas (+9.8%); Trade, Transport, and Utilities (+3.1%); Construction (+2.8%); Financing Activities (+1.9%); Professional & Business Services (+0.8%) and Health Care (+0.8%). The Information sector was the only private sector to not show growth in 2021. It remained flat at 4,800 jobs at the end of 2020 and 2021. The Government sector was steady at 77,700 jobs. Based on the DOL report, gains in federal and local government employment offset declines in state government positions.
Alaska’s Gross State Product (“GSP”) seasonally adjusted at annualized rates for the third quarter of 2021 was $55.5 billion, compared to $49.7 billion in the third quarter of 2020, according to the Federal Bureau of Economic Analysis ("BEA")
in a report that was released December 23, 2021. Alaska’s GSP declined 0.6% in the third quarter of 2021 after increasing 1.8% in the second quarter of 2021.
Alaska’s seasonally adjusted personal income for the third quarter of 2021 was $48.5 billion compared to $46.0 billion seasonally adjusted at annualized rates in the third quarter of 2020, according to the BEA. Alaska’s personal income grew 2.4% in the third quarter of 2021, over the second quarter, primarily due to a $662 million increase in wage earnings. This resulted from inflationary pressure on salaries and an improvement in the total number of jobs. Wage gains more than offset the $413 million decrease in government transfer payments to Alaskans in the third quarter of 2021.
The price of Alaska North Slope crude oil began 2021 averaging $55.56 in January and climbed steadily throughout the year to a monthly average high of $84.36 a barrel in October. The monthly average for December 2021 was $76.02.
Alaska’s home mortgage delinquency and foreclosure levels continue to be better than most of the nation. According to the Mortgage Bankers Association, Alaska’s foreclosure rate improved from 0.63% at the end of 2019 to 0.45% at the end of 2020. The foreclosure rate continued to improve in each of the first three quarters of 2021 to 0.33% in the third quarter of 2021. The comparable national average rate was higher than Alaska at 0.46% in the third quarter of 2021. We believe that the foreclosure rates are somewhat misleading because the recently ended federal moratorium on foreclosure activity on occupied homes led to declining foreclosure numbers, even though job losses strained the economy and borrowers' ability to pay.
The Mortgage Bankers Association survey reported that the percentage of delinquent mortgage loans at the end of 2019 in Alaska was 2.9%. This increased to 6.2% at the end of 2020 after the effects of COVID-19 impacted jobs. In the first quarter of 2021 it improved to 5.4% in Alaska and again in the second quarter to 5.1%. The most recent data available is the third quarter of 2021, which improved to 4.77%. According to the survey, the comparable delinquency rate for the entire country remains higher than Alaska at 5.04% in the third quarter of 2021.
According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 6.9% in 2021 to $424,266. Average sales prices in the Matanuska Susitna Borough rose 15.6% in 2021 to $347,962, continuing a decade of consecutive price gains. These two markets represent where the vast majority of the Bank’s residential lending activity occurs.
The number of housing units sold in Anchorage was up significantly in 2021 by 11%, following an increase of 19.6% in 2020, as reported by the Alaska Multiple Listing Services. The Matanuska Susitna Borough also had strong sales activity, up 11.5% in 2021 and 9.7% in 2020.
We believe that the low interest rate environment has been a major factor in the strength of the housing market. According to the Federal Reserve Bank of St. Louis, the average 30 year fixed rate mortgage in the U.S. hit an all-time record low in 2020. Rates began 2020 at 3.7% in the first week of January and fell one percent to 2.7% by the end of the year. Rates began to rise slightly in 2021 and finished the year at 3.11%.
A material portion of our loans at December 31, 2021, were secured by real estate located in greater Anchorage, Matanuska-Susitna Valley, Fairbanks, and Southeast Alaska. In 2021, 36% of our revenue was derived from the residential housing market in the form of loan fees and interest on residential construction and land development loans and income from RML as compared to 45% and 31% in 2020 and 2019, respectively. Real estate values generally are affected by economic and other conditions in the area where the real estate is located, fluctuations in interest rates, changes in tax and other laws, and other matters outside of our control. A decline in real estate values in the greater Anchorage, Matanuska-Susitna Valley, Fairbanks, and Southeast Alaska areas could significantly reduce the value of the real estate collateral securing our real estate loans and could increase the likelihood of defaults under these loans.
Long Term Economic Factors
We believe the long-term growth of the Alaska economy will most likely be determined by large scale natural resource development projects. Several multi-billion dollar projects can potentially advance in the moderate-term. Some of these projects include copper, gold and molybdenum production at the proposed Donlin mine and continued exploration in the National Petroleum Reserve Alaska. Because of their size, we believe each of these projects faces tremendous challenges. We believe various political decisions need to be made by government regulators, issues need to be resolved in the court system, and multi-billion dollar financial commitments need to be made by the private sector if these large natural resource projects are to advance. If none of these projects moves forward in the next ten years, we believe state revenues will continue to decline with falling oil production from older fields on the North Slope of Alaska. We anticipate the decline in state revenues will likely have a negative effect on Alaska’s economy.
The oil industry plays a significant role in the economy of Alaska, but revenues for the State of Alaska are less dependent on the oil industry than they have been historically due to the implementation of a percent of market value ("POMV") concept that has balanced and created more certainty in state revenue streams. Part of the POMV concept creates an allocation of a portion of investment earnings to unrestricted revenue instead of restricted revenue. According to the State of Alaska Department of Revenue, approximately 5% of total state revenues of $29.8 billion in the fiscal year ending June 30, 2021 were generated through various taxes and royalties on the oil industry. Investment earnings were 66% of the total, and federal dollars were 26%. In the fiscal year ending June 30, 2020, approximately 20% of total state revenues of $8.7 billion were generated through various taxes and royalties on the oil industry while investment earnings and federal dollars accounted for 21% and 48%, respectively. In 2021 and 2020, investment earnings represented 65% and 66%, respectively, of unrestricted revenues. As of December 31, 2021, Alaska's Constitutional Budget Reserve was $1.1 billion and the Alaska Permanent Fund had a balance of $82 billion. Investment revenue generated by the Alaska Permanent Fund is also used to pay an annual dividend to every eligible Alaskan citizen.
Even though we believe that the implementation of the POMV concept is a positive for the state of Alaska's financial well-being, we anticipate that if oil prices drop to lower levels in the longer term it will be a concern for Alaska's long-term economic growth. However, we believe Alaska's economy is less sensitive to oil price volatility within a six- to twelve-month time frame than Alaska's state government budget. While state government revenue from oil royalties is immediately and directly impacted by a drop in oil prices, we believe that the large scale and nature of oil wells in Alaska are such that project commitments that currently exist will most likely not be disrupted by short-term price volatility.
We believe our exposure to the tourism industry diversifies the Company's customer base in the long-term. We believe this helps mitigate the effect that a decline in natural resource industries, specifically the oil industry, in Alaska would have on the Company's operations. Southeast Alaska is the primary destination for cruise ships that visit Alaska. Based on the latest information from Rain Coast Data, approximately one million cruise ship tourists have visited Southeast Alaska annually in recent years and in 2019, this increased 7% to 1.2 million. However, in 2020, there was essentially no cruise ship activity and in 2021 there were approximately 116,000 cruise ship visitors in Alaska according to the State of Alaska Department of Labor and Workforce Development.. The decrease in 2020 and 2021 is primarily due to the COVID-19 pandemic. However, the State of Alaska Department of Labor and Workforce Development reported in its January 2022 issue of Alaska Economic Trends Magazine that the cruise industry expects 1.5 million cruise ship visitors in Alaska in 2022, which would be an all time high if ships reach capacity.
Alaska’s residents are not subject to any state income or state sales taxes. For over 30 years, Alaska residents have received annual distributions payable in October of each year from the Alaska Permanent Fund Corporation, which is supported by royalties from oil production. The distribution was $1,114 per eligible resident in 2021 for an aggregate distribution of approximately $700 million. The Anchorage Economic Development Corporation estimates that, for most Anchorage households, distributions from the Alaska Permanent Fund Corporation exceed other Alaska taxes to which those households are subject.
Competition
We operate in a highly competitive and concentrated banking environment. We compete not only with other commercial banks, but also with many other financial competitors, including credit unions (including Alaska USA Federal Credit Union, one of the nation’s largest credit unions), finance companies, mortgage banks and brokers, securities firms, insurance companies, private lenders, and other financial intermediaries, many of which have a state-wide or regional presence, and in some cases, a national presence. Many of our competitors have substantially greater resources and capital than we do and offer products and services that are not offered by us. Our non-bank competitors also generally operate under fewer regulatory constraints, and in the case of credit unions, are not subject to income taxes. We estimate that credit unions in Alaska have a 42% share of total deposits held in banks and credit unions in the state as of June 30, 2021. Changes in credit union operating practices have effectively eliminated the “common bond” of membership requirement and liberalized their lending authority to include business and real estate loans on par with commercial banks. The differences in resources and regulation may make it harder for us to compete profitably, to reduce the rates that we can earn on loans and investments, to increase the rates we must offer on deposits and other funds, and adversely affect our financial condition and earnings.
As our industry becomes increasingly dependent on and oriented toward technology-driven delivery systems, permitting transactions to be conducted electronically, non-bank institutions are able to attract funds and provide lending and other financial services even without offices located in our primary service area. Some insurance companies and brokerage firms compete for deposits by offering rates that are higher than may be appropriate for the Company in relation to its asset and liability management objectives. However, we offer a wide array of deposit products and services and believe we can compete effectively through relationship based pricing and effective delivery of “Superior Customer First Service”. We also compete with full service investment firms for non-bank financial products and services offered by PWA and through retail investment advisory services and annuity investment products that we offer through a third-party vendor.
Currently, there are seven commercial banks operating in Alaska. At June 30, 2021, the date of the most recently available information, Northrim Bank had approximately a 13% share of the Alaska bank deposits, 18% in the Anchorage area, 20% in Juneau, 16% in Matanuska-Susitna, 13% in Sitka, 10% in Fairbanks, 6% in Ketchikan, and 7% in the Kenai Peninsula.
The following table sets forth market share data for the banks and credit unions having a presence in Alaska as of June 30, 2021, the most recent date for which comparative deposit information is available.
Financial institution Number of branches Total deposits (in thousands) Market share of total financial institution deposits Market share of total bank deposits
Northrim Bank(1)
17 $2,178,080 8 % 13.0 %
Wells Fargo Bank Alaska(1)
40 7,529,724 26 % 45.0 %
First National Bank Alaska(1)
27 3,910,717 14 % 23.4 %
Key Bank(1)
12 1,531,444 5 % 9.1 %
First Bank(1)
9 686,502 2 % 4.1 %
Mt. McKinley Bank(1)
5 504,085 2 % 3.0 %
Denali State Bank(1)
5 407,560 1 % 2.4 %
Total bank branches 118 $16,748,112 58 % 100 %
Credit unions(2)
84 $12,021,865 42 % NA
Total financial institution branches 202 $28,769,977 100 % 100 %
(1) FDIC Summary of Deposits as of June 30, 2021.
(2) SNL Financial Deposit Market Share Summary as of June 30, 2021.
Supervision and Regulation
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “BHC Act”) registered with and subject to examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Company’s bank subsidiary is an Alaska-state chartered commercial bank and is subject to examination, supervision, and regulation by the Alaska Department of Commerce, Community and Economic Development, Division of Banking, Securities and Corporations (the “Division”). The FDIC insures the Bank’s deposits and also examines, supervises, and regulates the Bank. The Company’s affiliated investment advisory and wealth management company, Pacific Portfolio Consulting, LLC, is subject to and regulated under the Investment Advisors Act of 1940 and applicable state investment advisor rules and regulations. The Company’s affiliated trust company, Pacific Portfolio Trust Company, is regulated as a non-depository trust company under the trust company laws of the State of Washington and is subject to supervision and examination by the Department of Financial Institutions of Washington State.
The Company’s earnings and activities are affected, among other things, by legislation, by actions of the FRB, the Division, the FDIC and other regulators, by local legislative and administrative bodies, and decisions of courts. These include limitations on the ability of the Bank to pay dividends to the Company, numerous federal and state consumer protection laws imposing requirements on the making, enforcement, and collection of consumer loans, and restrictions on and regulation of the sale of mutual funds and other uninsured investment products to customers.
Regulation of banks and the financial services industry has been undergoing major changes in recent years, including the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and several provisions were significantly changed by enactment of the Economic Growth Regulatory Relief and Consumer Protection Act in May 2018. The Dodd-Frank Act significantly modifies and expands legal and regulatory requirements imposed on banks and other financial institutions.
The Dodd-Frank Act has significantly affected the Bank and its business and operations. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance coverage to $250,000 per depositor and deposit insurance assessments paid by the Bank are now based on the Bank’s total assets. Other Dodd-Frank Act changes include: (i) tightened capital requirements for the Bank and the Company; (ii) new requirements on parties engaged in residential mortgage origination, brokerage, lending and securitization; (iii) expanded restrictions on affiliate and insider transactions; (iv) enhanced restrictions on management compensation and related governance procedures; (v) creation of a federal Consumer Financial Protection Bureau (the "CFPB") with broad authority to regulate consumer financial products and services; and (vi) restrictions and prohibitions on the ability of banking entities to engage in proprietary trading and to invest in or have certain relationships with hedge funds and private equity funds.
In December 2013, the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC, the Securities and Exchange Commission (“SEC”), and the Commodities Futures Trading Commission issued final rules to implement certain provisions of the Dodd-Frank Act commonly known as the “Volcker Rule.” The Volcker Rule, as amended on August 20, 2019, generally prohibits U.S. banks from engaging in proprietary trading and restricts those banking entities from sponsoring, investing in, or having certain relationships with hedge funds and private equity funds. The prohibitions under the Volcker Rule are subject to a number of statutory exemptions, restrictions, and definitions. The Volcker Rule has not had a material impact on the Company’s Consolidated Financial Statements, but we continue to evaluate its application to our current and future operations.
The Gramm-Leach-Bliley Act (the “GLB Act”), which was enacted in 1999, allows bank holding companies to elect to become financial holding companies, subject to certain regulatory requirements. In addition to the activities previously permitted bank holding companies, financial holding companies may engage in non-banking activities that are financial in nature, such as securities, insurance, and merchant banking activities, subject to certain limitations. The Company could utilize this structure to accommodate an expansion of its products and services in the future.
Bank holding companies, such as the Company, are subject to a variety of restrictions on the activities in which they can engage and the acquisitions they can make. The activities or acquisitions of bank holding companies, such as the Company, that are not financial holding companies, are limited to those which constitute banking, managing or controlling banks or which are closely related activities. A bank holding company is required to obtain the prior approval of the FRB for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Nonbank acquisitions and activities of a bank holding company are also generally limited to the acquisition of up to 5% of the outstanding shares of any class of voting securities of a company unless the FRB has previously determined that the nonbank activities are closely related to banking, or prior approval is obtained from the FRB.
The GLB Act also included extensive consumer privacy provisions. These provisions, among other things, limit the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated third parties. The Fair and Accurate Credit Transaction Act (“FACT Act”) requires financial institutions to develop and implement an identity theft prevention program to detect, prevent and mitigate identity theft “red flags” to reduce the risk that customer information will be misused to conduct fraudulent financial transactions. As a result of the Dodd-Frank Act, the rule-making authority for the privacy provisions of the GLB Act has been transferred to the CFPB. In addition, the states are permitted to adopt more extensive privacy protections through legislation or regulation.
There are various legal restrictions on the extent to which a bank holding company and certain of its nonbank subsidiaries can borrow or otherwise obtain credit from their banking subsidiaries or engage in certain other transactions with or involving those banking subsidiaries. With certain exceptions, federal law imposes limitations on, and requires collateral for, extensions of credit by insured depository institutions, such as the Bank, to their non-bank affiliates, such as the Company. In addition, new capital rules may affect the Company's ability to pay dividends.
Subject to certain limitations and restrictions, a bank holding company, with prior approval of the FRB, may acquire an out-of-state bank. Banks in states that do not prohibit out-of-state mergers may merge with the approval of the appropriate federal banking agency. A state bank may establish a de novo branch out of state if such branching is permitted by the other state for state banks chartered by such other state.
Among other things, applicable federal and state statutes and regulations which govern a bank’s activities relate to minimum capital requirements, required reserves against deposits, investments, loans, legal lending limits, mergers and consolidations, borrowings, issuance of securities, payment of dividends, establishment of branches and other aspects of its operations. The Division and the FDIC also have authority to prohibit banks under their supervision from engaging in what they consider to be unsafe or unsound practices.
There also are certain limitations on the ability of the Company to pay dividends to its shareholders. It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if the prospective rate of earnings retention is consistent with the organization’s current and expected future capital needs, asset quality and overall financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines a bank holding company’s ability to serve as a source of strength to its banking subsidiaries. Additionally, the Alaska Corporations Code generally prohibits the Company from making any distributions to the Company's shareholders unless the amount of the retained earnings of the Company immediately before the distribution equals or exceeds the amount of the proposed distribution. The Alaska Corporations Code also prohibits the Company from making any distribution to the Company's shareholders if the Company or a subsidiary of the Company making the distribution is, or as a result of the distribution would be, likely to be unable to meet its liabilities as they mature. Under Alaska law, the Bank is not permitted to pay or declare a dividend in an amount greater than its undivided profits.
Various federal and state statutory provisions also limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval. The FDIC or the Division could take the position that paying a dividend would constitute an unsafe or unsound banking practice. In addition, new capital rules may affect the Bank's ability to pay dividends.
Under longstanding FRB policy and under the Dodd-Frank Act, a bank holding company is required to act as a source of financial strength for its subsidiary banks. The Company could be required to commit resources to its subsidiary bank in circumstances where it might not do so, absent such requirement.
Both the Company and the Bank are required to maintain minimum levels of regulatory capital. In July 2013, federal banking regulators (including the FDIC and the FRB) adopted new capital requirement rules (the “Rules”). The Rules apply to both depository institutions (such as the Bank) and their holding companies (such as the Company). The Rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act. The Rules have applied to both the Company and the Bank since the beginning of 2015.
The Rules recognize three types, or tiers, of capital: common equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital. Common equity Tier 1 capital generally consists of retained earnings and common stock instruments (subject to certain adjustments), as well as accumulated other comprehensive income ("AOCI"), except to the extent that the Company and the Bank exercise a one-time irrevocable option to exclude certain components of AOCI. Additional Tier 1 capital generally includes noncumulative perpetual preferred stock and related surplus subject to certain adjustments and limitations. Tier 2 capital generally includes certain capital instruments (such as subordinated debt) and portions of the amounts of the allowance
for loan and lease losses, subject to certain requirements and deductions. The term "Tier 1 capital" means common equity Tier 1 capital plus additional Tier 1 capital, and the term "total capital" means Tier 1 capital plus Tier 2 capital.
The Rules generally measure an institution's capital using four capital measures or ratios. The common equity Tier 1 capital ratio is the ratio of the institution's common equity Tier 1 capital to its total risk-weighted assets. The Tier 1 capital ratio is the ratio of the institution's total Tier 1 capital to its total risk-weighted assets. The total capital ratio is the ratio of the institution's total capital to its total risk-weighted assets. The leverage ratio is the ratio of the institution's Tier 1 capital to its average total consolidated assets. To determine risk-weighted assets, assets of an institution are generally placed into a risk category and given a percentage weight based on the relative risk of that category. The percentage weights range from 0% to 1,250%. An asset's risk-weighted value will generally be its percentage weight multiplied by the asset's value as determined under generally accepted accounting principles. In addition, certain off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the risk categories. An institution's federal regulator may require the institution to hold more capital than would otherwise be required under the Rules if the regulator determines that the institution's capital requirements under the Rules are not commensurate with the institution's credit, market, operational or other risks.
Both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 4.5% as well as a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. In addition to the preceding requirements, both the Company and the Bank are required to have a “conservation buffer,” consisting of common equity Tier 1 capital, which is at least 2.5% above each of the preceding common equity Tier 1 capital ratio, the Tier 1 risk-based ratio and the total risk-based ratio. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers.
The Rules set forth the manner in which certain capital elements are determined, including but not limited to, requiring certain deductions related to mortgage servicing rights and deferred tax assets. When the federal banking regulators initially proposed new capital rules in 2012, the rules would have phased out trust preferred securities as a component of Tier 1 capital. As finally adopted, however, the Rules permit holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Company) to continue to include trust preferred securities issued prior to May 19, 2010 in Tier 1 capital, generally up to 25% of other Tier 1 capital.
The Rules made changes in the methods of calculating certain risk-based assets, which in turn affects the calculation of risk- based ratios. Higher or more sensitive risk weights are assigned to various categories of assets, among which are commercial real estate, credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or are nonaccrual, foreign exposures, certain corporate exposures, securitization exposures, equity exposures and in certain cases mortgage servicing rights and deferred tax assets.
Both the Company and the Bank were required to begin compliance with the Rules on January 1, 2015. The conservation buffer took full effect on January 1, 2019. Certain calculations under the Rules will also have phase-in periods. We believe that the current capital levels of the Company and the Bank are in compliance with the standards under the Rules including the conservation buffer.
Following the enactment of certain federal legislation in 2018, the federal banking regulators (including the FDIC and FRB) proposed a rule intended to simplify capital rules for certain community banks and their holding companies, the Community Bank Leverage Ratio ("CBLR"). Qualifying community banking organizations can elect to opt-into the CBLR and be under a new capital requirement rather than the current capital framework. To be eligible to make this election, the community banking organization would have to have less than $10 billion in assets, have a community bank leverage ratio of at least 9.00% and meet certain other criteria (including limits on off-balance sheet exposures and trading assets and liabilities). The CBLR would generally be the ratio of the organization's total bank equity capital to average assets, subject to certain adjustments. The intent of the CBLR is to simplify but not weaken capital requirements for qualifying community banks. Management has not elected to opt in to these new capital rules. However, the guidelines allow the Company to opt in to the simplification in the future should our assessment change.
In addition to the minimum capital standards, the federal banking agencies have issued regulations to implement a system of "prompt corrective action." These regulations apply to the Bank but not the Company. The regulations establish five capital categories; under the Rules, a bank generally is:
“well capitalized” if it has a total risk-based capital ratio of 10.0% or more, a Tier 1 risk-based capital ratio of 8.0% or more, a common equity Tier 1 risk-based ratio of 6.5% or more, and a leverage capital
ratio of 5.0% or more, and is not subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure;
“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more, a common equity Tier 1 risk-based ratio of 4.5% or more, and a leverage capital ratio of 4.0% or more;
“undercapitalized” if it has a total risk-based capital ratio less than 8.0%, a Tier 1 risk-based capital ratio less than 6.0%, a common equity risk-based ratio less than 4.5% or a leverage capital ratio less than 4.0%;
“significantly undercapitalized” if it has a total risk-based capital ratio less than 6.0%, a Tier 1 risk-based capital ratio less than 4.0%, a common equity risk-based ratio less than 3.0% or a leverage capital ratio less than 3.0%; and
“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.
A bank that, based upon its capital levels, is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
At each successive lower capital category, a bank is subject to increasing supervisory restrictions. For example, being “adequately capitalized” rather than “well-capitalized” affects a bank’s ability to accept brokered deposits without the prior approval of the FDIC, and may cause greater difficulty obtaining retail deposits. Banks in the “adequately capitalized” classification may have to pay higher interest rates to continue to attract those deposits, and higher deposit insurance rates for those deposits. This status also affects a bank’s eligibility for a streamlined review process for acquisition proposals.
Management intends to maintain capital ratios for the Bank in 2022 that exceed the FDIC’s requirements for the “well-capitalized” capital requirement classification. The dividends that the Bank pays to the Company will be limited to the extent necessary for the Bank to meet the regulatory requirements of a “well-capitalized” bank.
The capital ratios for the Company exceed those for the Bank primarily because the trust preferred securities offering that the Company completed in the fourth quarter of 2005 is included in the Company’s capital for regulatory purposes, although it is accounted for as a liability in the Company's consolidated financial statements. The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital (although the Company did contribute to the Bank a portion of the cash proceeds from the sale of those securities). As a result, the Company has $10 million more in regulatory capital than the Bank at December 31, 2021 and 2020, respectively, which explains most of the difference in the capital ratios for the two entities.
The Bank is required to file periodic reports with the FDIC and the Division and is subject to periodic examinations and evaluations by those regulatory authorities. These examinations must be conducted every 12 months, except that certain “well-capitalized” banks may be examined every 18 months. The FDIC and the Division may each accept the results of an examination by the other in lieu of conducting an independent examination.
In the liquidation or other resolution of a failed insured depository institution, claims for administrative expenses (including certain employee compensation claims) and deposits are afforded a priority over other general unsecured claims, including non-deposit claims, and claims of a parent company such as the Company. Such priority creditors would include the FDIC, which succeeds to the position of insured depositors to the extent it has made payments to such depositors.
The Company is also subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act of 1934”), including certain requirements under the Sarbanes-Oxley Act of 2002.
The Bank is subject to the Community Reinvestment Act of 1977 (“CRA”). The CRA requires that the Bank help meet the credit needs of the communities it serves, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution. The FDIC assigns one of four possible ratings to the Bank’s CRA performance and makes the rating and the examination reports publicly available. The four possible ratings are outstanding, satisfactory, needs
to improve and substantial noncompliance. A financial institution’s CRA rating can affect an institution’s future business. For example, a federal banking agency will take CRA performance into consideration when acting on an institution’s application to establish or move a branch, to merge or to acquire assets or assume liabilities of another institution. In its most recent CRA examination, the Bank received a “Satisfactory” rating from the FDIC.
In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that would significantly change existing CRA regulations. The proposed rules are intended to increase bank activity in low- and moderate-income communities where there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure. The proposals change four key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective method for measuring CRA performance; and (iv) revising CRA-related data collection, record keeping, and reporting. However, the FRB did not join in that proposed rulemaking. In June 2020, the OCC issued its final CRA rule, effective October 1, 2020, while the FDIC did not finalize any revisions to its CRA rule. In September 2020, the FRB issued an Advance Notice of Proposed Rulemaking (“ANPR”) that invited public comment on an approach to modernize the regulations that implement the CRA by strengthening, clarifying, and tailoring them to reflect the current banking landscape and better meet the core purpose of the CRA.
The ANPR sought feedback on ways to evaluate how banks meet the needs of low- and moderate-income communities and address inequities in credit access. In December 2021, the OCC issued a final rule to rescind its June 2020 final rule in favor of working with other agencies to put forward a joint rule. We will continue to evaluate the impact of any changes to the regulations implementing the CRA and their impact to our financial condition, results of operations, and/or liquidity, which cannot be predicted at this time.
The Company is also subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) and the Anti-Money Laundering Act of 2020 (the “AMLA”). Among other things, the USA PATRIOT Act and AMLA require the Company and the Bank to adopt and implement specific policies and procedures designed to prevent and defeat money laundering. Management believes the Company is in compliance with the USA PATRIOT Act as in effect on December 31, 2020. The AMLA was passed on January 1, 2021 and regulatory agencies are in the process of finalizing rules and regulations required by the passage of the AMLA.
On March 27, 2020, President Trump signed the CARES Act into law. The CARES Act established several new temporary SBA loan programs to assist U.S. small businesses through the COVID-19 pandemic. One of the new loan programs is the PPP, an expansion of the SBA’s 7(a) loan program and the Economic Injury Disaster Loan Program.
The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during this emergency. Eligible borrowers need to make a good faith certification that the uncertainty of current economic conditions make requesting assistance necessary to support ongoing operations. Pursuant to the provisions of Section 1106 of the CARES Act, borrowers may apply to the Bank for loan forgiveness of all or a portion of the loan, subject to certain eligibility requirements and conditions. On March 11, 2021, the ARP Act was enacted and, among others, provided additional funding for the PPP and an expansion of the program for the benefit of certain nonprofits.
The Bank is an SBA lender and began accepting applications under the PPP via its online application process on April 3, 2020. As of December 31, 2021, the Bank had 1,320 PPP loans totaling $122.7 million outstanding.
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.
The federal banking regulators regularly issue new guidance and standards, and update existing guidance and standards, regarding cybersecurity intended to enhance cyber risk management among financial institutions. Financial institutions are expected to comply with such guidance and standards and to accordingly develop appropriate security controls and risk management processes. If we fail to observe such regulatory guidance or standards, we could be subject to various regulatory sanctions, including financial penalties.
Recently, in November 2021, the federal banking agencies adopted a Final Rule, with compliance required by May 1, 2022, that requires banking organizations to notify their primary banking regulator within 36 hours of determining that a “computer-security incident” has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to carry out banking operations or deliver banking products and services to a material portion of
its customer base, its businesses and operations that would result in material loss, or that would impact the stability of the United States. State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations.
Risks and exposures related to cybersecurity attacks, including litigation and enforcement risks, are expected to be elevated for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.
A number of other federal and state consumer protection laws extensively govern the Bank’s relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, Telephone Consumer Protection Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state and territorial usury laws and laws regarding unfair and deceptive acts and practices. These and other laws subject the Bank to substantial regulatory oversight and, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, and restrict the Bank’s ability to raise interest rates.
Available Information
The Company’s annual report on Form 10-K and quarterly reports on Form 10-Q, as well as its current reports on Form 8-K and proxy statement filings (and all amendments thereto), which are filed with the SEC, are accessible free of charge at our website at http://www.northrim.com as soon as reasonably practicable after filing with the SEC. By making this reference to our website, the Company does not intend to incorporate into this report any information contained in the website. The website should not be considered part of this report.
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and you could lose all or part of your investment.
Risk Factors Summary
An investment in the Company's common stock is subject to risks inherent to the Company's business. Such risks, including those set forth in the summary of material risks in this Part I. Item 1A. should be carefully considered before purchasing our securities.
COVID-19 Pandemic Risk Factors
•The COVID-19 pandemic has materially impacted our business and financial results, and our business and financial results will likely continue to be adversely affected by the pandemic.
Interest Rate Risk Factor
•Changes in market interest rates could adversely impact the Company.
Operational, Strategic and Business Risk Factors
•Current economic conditions in the State of Alaska pose challenges for us and could adversely affect our financial condition and results of operations.
•Our concentration of operations in the Anchorage, Matanuska-Susitna Valley, Fairbanks and Southeast areas of Alaska makes us more sensitive to downturns in those areas.
•Residential mortgage lending is a market sector that experiences significant volatility and is influenced by many factors beyond our control.
•Our information systems or those of our third-party vendors may be subject to an interruption or breach in security, including as a result of cyber-attacks.
•A failure in or breach of the Company's operational systems, information systems, or infrastructure, or those of the Company's third-party vendors and other service providers, may result in financial losses, or loss of customers.
•Our business is highly reliant on third party vendors.
•We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.
•Our business, financial condition and results of operations are subject to risk from changes in customer behavior.
•If we do not comply with the agreements governing servicing of loans, if these agreements change materially, or if others allege non-compliance, our business and results of operations may be harmed.
•Certain hedging strategies that we use to manage interest rate risk may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.
•Our allowance for credit losses may be insufficient.
•We have a significant concentration in real estate lending. A downturn in real estate within our markets would have a negative impact on our results of operations.
•Real estate values may decrease leading to additional and greater than anticipated loan charge-offs and valuation writedowns on our other real estate owned (“OREO”) properties.
•We conduct substantially all of our operations through Northrim Bank, our banking subsidiary; our ability to pay dividends, repurchase our shares, or to repay our indebtedness depends upon liquid assets held by the holding company and the results of operations of our subsidiaries and their ability to pay dividends.
•There can be no assurance that the Company will continue to declare cash dividends or repurchase stock.
•We may be unable to attract and retain key employees and personnel.
•Liquidity risk could impair our ability to fund operations and jeopardize our financial conditions.
•A failure of a significant number of our borrowers, guarantors and related parties to perform in accordance with the terms of their loans would have an adverse impact on our results of operations.
Regulatory, Legislative and Legal Risk Factors
•We operate in a highly regulated environment and changes of or increases in banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.
•Changes in the FRB’s monetary or fiscal policies could adversely affect our results of operations and financial condition.
•Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Anti-Money Laundering Act of 2020, Real Estate Settlement Procedures Act, Truth-in-Lending Act or other laws and regulations could result in fines, sanctions or other adverse consequences.
Accounting, Tax and Financial Risk Factors
•Changes in income tax laws and interpretations, or in accounting standards, could materially affect our financial condition or results of operations.
•Uncertainty about the continuing availability of the London Inter-Bank Offered Rate ("LIBOR") may adversely affect our business.
General Economic and Market Risk Factors
•Natural disasters and adverse weather could negatively affect real estate property values and Bank operations.
•The soundness of other financial institutions could adversely affect us.
•The financial services business is intensely competitive and our success will depend on our ability to compete effectively.
•We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so could materially adversely affect our performance.
•Social, political, and economic instability, unrest, and other circumstances beyond our control could adversely affect our business operations.
•Climate change, severe weather, natural disasters, and other external events could significantly impact our business.
We attempt to mitigate the foregoing risks. However, if we are unable to effectively manage the impact of these and other risks, our financial condition, results of operations, our ability to make distributions to our shareholders, or the market price of our common stock could be materially impacted.
COVID-19 Pandemic Risks
The COVID-19 pandemic has materially impacted our business and financial results, and our business and financial results will likely continue to be adversely affected by the pandemic.
The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity and results of operations. The extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted and many of which are outside of our control, including the scope and duration of the pandemic, the emergence of new variants, the effectiveness of our pandemic response plans, the direct and indirect impact of the pandemic on our employees, customers, clients, counterparties and service providers, as well as other market participants, and actions taken, or that may yet be taken, or inaction, by governmental authorities and other third parties in response to the pandemic. Should the pandemic continue for a more extended period or worsen, we may face additional circumstances such as significant draws on credit lines should customers seek to increase liquidity. Furthermore, should the pandemic continue, we may experience increased rates of employee illness or unavailability, and may experience challenges recruiting new employees.
Any disruption to our ability to deliver financial products or services to, or interact with, our clients and customers could result in losses or increased operational costs, regulatory fines, penalties and other sanctions, or harm our reputation. We are also subject to litigation and reputational risk arising from our response to the COVID-19 pandemic. The length of the pandemic and the efficacy of the measures being put in place to address it are unknown as efforts to combat the virus have been complicated by viral variants and uneven access to, and acceptance and effectiveness of, vaccines globally. To the extent the pandemic adversely affects our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in this report. See the section captioned “COVID-19 Issues” in Part II. Item 7 of this report for further discussion. In addition, the effects could have a material impact on our results of operations and heighten many of our known risks described in this Part I, Section 1A “Risk Factors”.
Interest Rate Risk
Changes in market interest rates could adversely impact the Company.
Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, inflationary trends, changes in government spending and debt issuances and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee (“FOMC”). Changes in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loans and securities, and rates paid on deposits and borrowings. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. These impacts may negatively impact our ability to
attract deposits, make loans, and achieve satisfactory interest rate spreads, which could adversely affect our financial condition or results of operations. In particular, increases in interest rates will likely reduce RML’s revenues by reducing the market for refinancings, as well as the demand for RML’s other residential loan products. Additionally, increases in interest rates may impact our borrowers' ability to make loan payments, particularly in our commercial loan portfolio.
Interest rates may be affected by many factors beyond our control, including general and economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities. The FOMC announced its target to keep the federal funds rate near zero percent in January 2022. However, the FOMC also indicated that due to rising inflation it expects to raise interest rates in the near term. Market volatility in interest rates can be difficult to predict, as unexpected interest rate changes may result in a sudden impact while anticipated changes in interest rates generally impact the mortgage rate market prior to the actual rate change. Exposure to interest rate risk is managed by monitoring the repricing frequency of our rate-sensitive assets and rate-sensitive liabilities over any given period. Although we believe the current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates could potentially have an adverse effect on our business, financial condition and results of operations.
Operational, Strategic and Business Risks
Current economic conditions in the State of Alaska pose challenges for us and could adversely affect our financial condition and results of operations.
We are operating in an uncertain economic environment. The decrease in the price of oil which began in 2014 has led to a significant deficit in the budget for the State of Alaska, which was partially mitigated in 2018 by the implementation of a percent of market value approach allocating a portion of the Alaska Permanent Fund's investment earnings to help fund the state budget. However, we believe that this has addressed only part of Alaska's structural finance problem and this approach also increased Alaska's exposure to volatility in financial markets. In the longer term, relatively low oil prices are expected to negatively impact the overall economy in Alaska on a larger scale as we estimate that one third of the Alaskan economy is related to oil. Financial institutions continue to be affected by changing conditions in the real estate and financial markets, along with an arduous regulatory climate. Dramatic declines in the United States housing market from 2008 through 2012, with falling home prices and increasing foreclosures and unemployment, resulted in significant writedowns of asset values by financial institutions. While conditions have improved nationally, a return to a recessionary economy could result in financial stress on our borrowers that would adversely affect our financial condition and results of operations. Deteriorating conditions in the regional economies of Anchorage, Matanuska-Susitna Valley, Fairbanks, and the Southeast areas of Alaska served by the Company could drive losses beyond that which is provided for in our allowance for loan losses. We may also face the following risks in connection with events:
▪ Ineffective monetary policy could cause rapid changes in interest rates and asset values that would have a materially adverse impact on our profitability and overall financial condition.
▪ Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities.
▪ Regulatory scrutiny of the industry could increase, leading to harsh regulation of our industry that could lead to a higher cost of compliance, limit our ability to pursue business opportunities and increase our exposure to the judicial system and the plaintiff’s bar.
▪ Erosion in the fiscal condition of the U.S. Treasury could lead to new taxes that would limit the ability of the Company to pursue growth and return profits to shareholders.
If these conditions or similar ones develop, we could experience adverse effects on our financial condition and results of operations.
Our concentration of operations in the Anchorage, Matanuska-Susitna Valley, Fairbanks and Southeast areas of Alaska makes us more sensitive to downturns in those areas.
Substantially all of our business is derived from the Anchorage, Matanuska-Susitna Valley, Fairbanks, and Southeast areas of Alaska. The majority of our lending has been with Alaska businesses and individuals. At December 31, 2021, approximately 9% of the Bank's loans are PPP loans which are 100% guaranteed by the SBA. Of the remaining loan portfolio, excluding PPP loans, approximately 75% of loans are secured by real estate and 1% are unsecured. Approximately 24% are for general commercial uses, including professional, retail, and small businesses, and are secured by non-real estate assets. Repayment is expected from the borrowers’ cash flow or, secondarily, the collateral. Our exposure to credit loss, if any, is the outstanding amount of the loan if the collateral is proved to be of no value. These areas rely primarily upon the natural resources industries, particularly oil production, as well as tourism and government and U.S. military spending for their
economic success. In particular, the oil industry plays a significant role in the Alaskan economy. We estimate that one third of Alaska's gross state product is currently derived from the oil industry.
Our business is and will remain sensitive to economic factors that relate to these industries and local and regional business conditions. As a result, local or regional economic downturns, or downturns that disproportionately affect one or more of the key industries in regions served by the Company, may have a more pronounced effect upon our business than they might on an institution that is less geographically concentrated. The extent of the future impact of these events on economic and business conditions cannot be predicted; however, prolonged or acute fluctuations could have a material and adverse impact upon our financial condition and results of operation.
Residential mortgage lending is a market sector that experiences significant volatility and is influenced by many factors beyond our control.
The Company earns revenue from the residential mortgage lending activities primarily in the form of gains on the sale of mortgage loans that we originate and sell to the secondary market. Residential mortgage lending in general has experienced substantial volatility in recent periods primarily due to changes in interest rates and other market forces beyond our control. Interest rate changes, such as rate increases implemented by the FRB, may result in lower rate locks and closed loan volume, which may adversely impact the earnings and results of operations of RML. In addition, an increase, as is currently expected, in interest rates may materially and adversely affect our future loan origination volume and margins.
Our information systems or those of our third-party vendors may be subject to an interruption or breach in security, including as a result of cyber attacks.
The Company’s technologies, systems, networks and software, and those of other financial institutions have been, and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. These cybersecurity threats and attacks may include, but are not limited to, breaches, unauthorized access, misuse, malicious code, computer viruses and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service or other events. These types of threats may result from human error, fraud or malice on the part of external or internal parties, or from accidental technological failure. Further, to access our products and services our customers may use computers and mobile devices that are beyond our security control systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
Our business requires the collection and retention of large volumes of customer data, including payment card numbers and other personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations. The integrity and protection of that customer and company data is important to us. As customer, public, legislative and regulatory expectations and requirements regarding operational and information security have increased, our operations systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns.
Our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, payment card numbers, bank account information or other personal information or to introduce viruses or other malware through “trojan horse” programs to our customers’ computers. These communications may appear to be legitimate messages sent by the Bank or other businesses, but direct recipients to fake websites operated by the sender of the e-mail or request that the recipient send a password or other confidential information via e-mail or download a program. Despite our efforts to mitigate these threats through product improvements, use of encryption and authentication technology to secure online transmission of confidential consumer information, and customer and employee education, such attempted frauds against us or our merchants and our third-party service providers remain a serious issue. The pervasiveness of cyber security incidents in general and the risks of cyber-crime are complex and continue to evolve. In addition, due to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. In light of several recent high-profile data breaches at other companies involving customer personal and financial information, we believe the potential impact of a cyber security incident involving the Company, any exposure to consumer losses and the cost of technology investments to improve security could cause customer and/or Bank losses, damage to our brand, and increase our costs.
Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well-protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyber-attacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk. A security breach or other significant disruption could: disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers; result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers, including account numbers and other financial information; result in a violation of applicable privacy, data breach and other laws, subjecting the Bank to additional regulatory scrutiny and exposing the Bank to civil litigation, governmental fines and possible financial liability; require significant management attention and resources to remedy the damages that result; or harm our reputation or cause a decrease in the number of customers that choose to do business with us or reduce the level of business that our customers do with us. The occurrence of any such failures, disruptions or security breaches could have a negative impact on our financial condition and results of operations.
A failure in or breach of the Company's operational systems, information systems, or infrastructure, or those of the Company's third party vendors and other service providers, may result in financial losses, or loss of customers.
The Company relies heavily on communications and information systems to conduct our business. In addition, we rely on third parties to provide key components of our infrastructure, including the processing of sensitive consumer and business customer data, internet connections, and network access. These types of information and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of many of our customers. These third parties with which the Company does business or that facilitate our business activities, including exchanges, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including breakdowns or failures of their own systems or capacity constraints. Although the Company has implemented safeguards and business continuity plans, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our business and our customers, resulting in financial losses or loss of customers.
Our business is highly reliant on third party vendors.
We rely on third parties to provide services that are integral to our operations. These vendors provide services that support our operations, including the storage and processing of sensitive consumer and business customer data. The loss of these vendor relationships, or a failure of these vendors' systems, could disrupt the services we provide to our customers and cause us to incur significant expense in connection with replacing these services.
We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Many national vendors provide turn-key services to community banks, such as Internet banking and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to invest in technological improvements. We may not be able, however, to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
Our business, financial condition and results of operations are subject to risk from changes in customer behavior.
Individual, economic, political, industry-specific conditions and other factors outside of our control, such as fuel prices, energy costs, real estate values, inflation, taxes or other factors that affect customer income levels, could alter anticipated customer behavior, including borrowing, repayment, investment and deposit practices. Such a change in these practices could materially adversely affect our ability to anticipate business needs and meet regulatory requirements. Further, difficult economic conditions may negatively affect consumer confidence levels. A decrease in consumer confidence levels would likely
aggravate the adverse effects of these difficult market conditions on us, our customers and adversely affect our future loan origination volume and margins.
If we do not comply with the agreements governing servicing of loans, if these agreements change materially, or if others allege non-compliance, our business and results of operations may be harmed.
We have contractual obligations under the servicing agreements pursuant to which we service mortgage loans. Many of our servicing agreements require adherence to general servicing standards, and certain contractual provisions delegate judgment over various servicing matters to us. If the terms of these servicing agreements change, we may sustain higher costs. Our servicing practices, and the judgments that we make in our servicing of loans, could also be questioned by parties to these agreements. We could also become subject to litigation claims seeking damages or other remedies arising from alleged breaches of our servicing agreements.
Additionally, under our loan servicing program we retain servicing rights on mortgage loans originated by RML and sold to the Alaska Housing Finance Corporation. If we breach any of the representations and warranties in our servicing agreements with the Alaska Housing Finance Corporation, we may be required to repurchase any loan sold under this program and record a loss upon repurchase and/or bear any subsequent loss on the loan. We may not have any remedies available to us against third parties for such losses, or the remedies might not be as broad as the remedies available to the Alaska Housing Finance Corporation against us.
Certain hedging strategies that we use to manage interest rate risk may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.
We use derivative instruments to economically hedge the interest rate risk in our residential mortgage loan commitments. Our hedging strategies are susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition, hedging strategies rely on assumptions and projections regarding assets and general market factors. If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that would adversely impact our financial condition and results of operations.
Our allowance for credit losses may be insufficient.
We maintain allowances for credit losses on loans, securities and off-balance sheet credit exposures. The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. As a result, the determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates related to current and expected future credit risks and trends, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers and securities issuers; new information regarding existing loans, credit commitments and securities holdings; the continuation of the COVID-19 pandemic or other global pandemics; natural disasters and risks related to climate change; and identification of additional problem loans, ratings down-grades and other factors, both within and outside of our control, may require an increase in the allowances for credit losses on loans, securities and off-balance sheet credit exposures. In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in credit loss expense or the recognition of further loan charge-offs, based on judgments different than those of management. Furthermore, if any charge-offs related to loans, securities or off-balance sheet credit exposures in future periods exceed our allowances for credit losses on loans, securities or off-balance sheet credit exposures, we will need to recognize additional credit loss expense to increase the applicable allowance. Any increase in the allowance for credit losses on loans, securities and/or off-balance sheet credit exposures will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our business, financial condition and results of operations.
We have a significant concentration in real estate lending. A downturn in real estate within our markets would have a negative impact on our results of operations.
Approximately 75% of the Bank’s loan portfolio, excluding PPP loans, at December 31, 2021 consisted of loans secured by commercial and residential real estate located in Alaska. Additionally, all of the Company's loans held for sale are secured by residential real estate. A slowdown in the residential sales cycle in our major markets and a constriction in the availability of mortgage financing, such as what occurred during the financial crisis in the United States housing market from 2008 through 2012, would negatively impact residential real estate sales, which would result in customers’ inability to repay loans. This would result in an increase in our non-performing assets if more borrowers fail to perform according to loan terms and if we take possession of real estate properties. Additionally, if real estate values decline, the value of real estate collateral
securing our loans could be significantly reduced. If any of these effects continue or become more pronounced, loan losses will increase more than we expect and our financial condition and results of operations would be adversely impacted.
Further, approximately 52% of the Bank’s loan portfolio at December 31, 2021 consisted of commercial real estate loans. While our investments in these types of loans have not been as adversely impacted as residential construction and land development loans, there can be no assurance that the credit quality in these portfolios will remain stable. Commercial construction and commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers. Consequently, an adverse development with respect to one commercial loan or one credit relationship exposes us to significantly greater risk of loss compared to an adverse development with respect to a consumer loan. The credit quality of these loans may deteriorate more than expected which may result in losses that exceed the estimates that are currently included in our loan loss allowance, which could adversely affect our financial condition and results of operations.
Real estate values may decrease leading to additional and greater than anticipated loan charge-offs and valuation writedowns on our other real estate owned (“OREO”) properties.
Real estate owned by the Bank and not used in the ordinary course of its operations is referred to as “other real estate owned” or “OREO” property. We foreclose on and take title to the real estate serving as collateral for defaulted loans as part of our business. At December 31, 2021, the Bank held $5.6 million of OREO properties, most of which relate to a commercial real estate loan. Increased OREO balances lead to greater expenses as we incur costs to manage and dispose of the properties. Our ability to sell OREO properties is affected by public perception that banks are inclined to accept large discounts from market value in order to quickly liquidate properties. Any decrease in market prices may lead to OREO writedowns, with a corresponding expense in our income statement. We evaluate OREO property values periodically and writedown the carrying value of the properties if the results of our evaluations require it. Further writedowns on OREO or an inability to sell OREO properties could have a material adverse effect on our results of operations and financial condition.
We conduct substantially all of our operations through Northrim Bank, our banking subsidiary; our ability to pay dividends, repurchase our shares, or to repay our indebtedness depends upon liquid assets held by the holding company and the results of operations of our subsidiaries and their ability to pay dividends.
The Company is a separate legal entity from our subsidiaries. It receives substantially all of its revenue from dividends paid from the Bank. There are legal limitations on the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with us. Our inability to receive dividends from the Bank could adversely affect our business, financial condition, results of operations and prospects.
Our net income depends primarily upon the Bank’s net interest income, which is the income that remains after deducting from total income generated by earning assets the expense attributable to the acquisition of the funds required to support earning assets (primarily interest paid on deposits and borrowings). The amount of interest income is dependent on many factors including the volume of earning assets, the general level of interest rates, the dynamics of changes in interest rates and the levels of nonperforming loans. All of those factors affect the Bank’s ability to pay dividends to the Company. On January 1, 2019, a requirement to have a capital conservation buffer went into full effect and could adversely affect the Bank's ability to pay dividends.
Various statutory provisions restrict the amount of dividends the Bank can pay to us without regulatory approval. Under Alaska law, a bank may not declare or pay a dividend in an amount greater than its net undivided profits then on hand. In addition, the Bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet the “adequately capitalized” level in accordance with regulatory capital requirements. It is also possible that, depending upon the financial condition of the Bank and other factors, regulatory authorities could conclude that payment of dividends or other payments, including payments to us, is an unsafe or unsound practice and impose restrictions or prohibit such payments. It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if the prospective rate of earnings retention is consistent with the organization’s current and expected future capital needs, asset quality and overall financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines a bank holding company’s ability to serve as a source of strength to its banking subsidiaries.
There can be no assurance that the Company will continue to declare cash dividends or repurchase stock.
During 2021, the Company repurchased 279,276 shares of common stock at an average price of $41.30 per share under its previously announced share repurchase program. 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. The Company also paid cash dividends of $1.50 per diluted share in 2021. On February 24, 2022, the Board of Directors approved payment of a $0.41 per share dividend on the Company’s outstanding shares.
Whether we continue, and the amount and timing of, such dividends and/or stock repurchases is subject to capital availability and periodic determinations by our Board. The Company continues to evaluate the potential impact that regulatory proposals may have on our liquidity and capital management strategies, including Basel III and those required under the Dodd-Frank Act. The actual amount and timing of future dividends and share repurchases, if any, will depend on market and economic conditions, applicable SEC rules, federal and state regulatory restrictions, and various other factors. In addition, the amount we spend and the number of shares we are able to repurchase under our stock repurchase program may further be affected by a number of other factors, including the stock price and blackout periods in which we are restricted from repurchasing shares. Our dividend payments and/or stock repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends and/or repurchase stock in any particular amounts or at all. A reduction in or elimination of our dividend payments and/or stock repurchases could have a negative effect on our stock price.
We may be unable to attract and retain key employees and personnel.
We will be dependent for the foreseeable future on the services of Joseph M. Schierhorn, our Chairman of the Board, President, Chief Executive Officer, and Chief Operating Officer of the Company; and Jed W. Ballard, our Executive Vice President and Chief Financial Officer. While we maintain keyman life insurance on the lives of Messrs. Schierhorn and Ballard in the amounts of $2.4 million and $2 million, respectively, we may not be able to timely replace Mr. Schierhorn or Mr. Ballard with a person of comparable ability and experience should the need to do so arise, causing losses in excess of the insurance proceeds. The unexpected loss of key employees could have a material adverse effect on our business and possibly result in reduced revenues and earnings.
Liquidity risk could impair our ability to fund operations and jeopardize our financial conditions.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings and other sources could have a substantial negative effect on our liquidity and severely constrain our financial flexibility. Our primary source of funding is deposits gathered through our network of branch offices. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or the economy in general. Factors that could negatively impact our access to liquidity sources include:
•a decrease in the level of our business activity as a result of an economic downturn in the markets in which our loans are concentrated;
•adverse regulatory actions against us; or
•our inability to attract and retain deposits.
Our ability to borrow could be impaired by factors that are not specific to us or our region, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry and unstable credit markets. Our access to deposits may also be negatively impacted by, among other factors, continued periods of low interest rates and increased competition for deposits, including from new financial technology competitors.
A failure of a significant number of our borrowers, guarantors and related parties to perform in accordance with the terms of their loans would have an adverse impact on our results of operations.
A source of risk arises from the possibility that losses will be sustained if a significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of our allowance for loan losses, which we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance, and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially affect our financial condition and results of operations.
Regulatory, Legislative and Legal Risks
We operate in a highly regulated environment and changes of or increases in banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.
We are subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly-traded company, we are subject to regulation by the SEC and NASDAQ. Any change in applicable regulations or federal or state legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on us and our operations. Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions on our operations. Additional legislation and regulations that could significantly affect our authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to our reputation, all of which could adversely affect our business, financial condition or results of operations.
In that regard, the Dodd-Frank Act was enacted in July 2010. Among other provisions, the Dodd-Frank Act created the CFPB with broad powers to regulate consumer financial products such as credit cards and mortgages, created a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, has resulted in new capital requirements from federal banking agencies, placed new limits on electronic debit card interchange fees, and requires banking regulators, the SEC and national stock exchanges to adopt significant new corporate governance and executive compensation reforms.
Certain provisions of these new rules have phase-in periods, including a 2.5% conservation buffer, which began to be phased-in in 2016 and took full effect on January 1, 2019. Further, regulators have significant discretion and authority to prevent or remedy practices that they deem to be unsafe or unsound, or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. These powers have been utilized more frequently in recent years due to the serious national economic conditions that faced the financial system in late 2008 and early 2009. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations. Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including the FRB.
We cannot accurately predict the full effects of recent or future legislation or the various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets and on the Company. The terms and costs of these activities could materially and adversely affect our business, financial condition, results of operations and the trading price of our common stock.
Changes in the FRB’s monetary or fiscal policies could adversely affect our results of operations and financial condition.
Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The FRB has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The FRB affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. The FOMC announced its target to keep the federal funds rate near zero percent in January 2022. However, the FOMC also indicated that due to rising inflation it expects to raise interest rates in the near term. While we expect the FRB to raise short-term interest rates in 2022, we cannot predict the nature or impact of future changes in monetary and fiscal policies.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Anti-Money Laundering Act of 2020, Real Estate Settlement Procedures Act, Truth-in-Lending Act or other laws and regulations could result in fines, sanctions or other adverse consequences.
Financial institutions are required under the USA PATRIOT Act and Bank Secrecy Act to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities. Financial institutions are also obligated to file suspicious activity reports with the United States Treasury Department’s Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines or penalties, intervention or sanctions by regulators, and costly litigation or expensive additional controls and systems. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. In addition, the federal government has in place laws and regulations relating to residential and consumer lending, as well as other activities with customers, that create significant compliance burdens and financial risks. We have developed policies and continue to augment procedures and systems designed to assist in compliance with these laws and regulations; however, it is possible for such safeguards to fail or prove deficient during the implementation phase to avoid non-compliance with such laws.
Accounting, Tax and Financial Risks
Changes in income tax laws and interpretations, or in accounting standards, could materially affect our financial condition or results of operations.
Further changes in income tax laws could be enacted, or interpretations of existing income tax laws could change, causing an adverse effect on our financial condition or results of operations. Similarly, our accounting policies and methods are fundamental to how we report our financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the value of our assets, liabilities, and financial results. Periodically, new accounting standards are issued or existing standards are revised, changing the methods for preparing our financial statements. These changes are not within our control and may significantly impact our financial condition and results of operations.
Uncertainty about the continuing availability of the London Inter-Bank Offered Rate ("LIBOR") may adversely affect our business.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the LIBOR announced that after December 31, 2021 it would no longer compel banks to submit the rates required to calculate LIBOR. With this announcement there is uncertainty about the continued availability of LIBOR after 2021. If LIBOR ceases to be available or the methods of calculating LIBOR change from the current methods, financial products with interest rates tied to LIBOR may be adversely affected. Even if LIBOR remains available it is uncertain whether it will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. We have loans, derivative contracts, and other financial instruments, including debentures related to our trust preferred securities, with rates that are either directly or indirectly tied to LIBOR. If any of the foregoing were to occur, the interest rates on these instruments, as well as the revenue and expenses associated with the same, may be adversely affected. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation.
General Economic and Market Risks
Natural disasters and adverse weather could negatively affect real estate property values and Bank operations.
Real estate and real estate property values play an important role for the Bank in several ways. The Bank owns or leases many real estate properties in connection with its operations, located in Anchorage, Juneau, Fairbanks, the Matanuska-Susitna Valley, Kodiak, Ketchikan, Sitka, and the Kenai Peninsula. Real estate is also utilized as collateral for many of our loans. A natural disaster could cause property values to fall, which could require the Bank to record an impairment on its financial statements. A natural disaster could also impact collateral values, which would increase our exposure to loan defaults. Our business operations could also suffer to the extent the Bank cannot utilize its branch network due to a natural disaster or other weather-related damage.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure. There can be no assurance that any such losses would not materially and adversely affect our results of operations.
The financial services business is intensely competitive and our success will depend on our ability to compete effectively.
The financial services business in our market areas is highly competitive. It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers. We face competition both in attracting deposits and in originating loans. We compete for loans principally through the pricing of interest rates and loan fees and the efficiency and quality of services. Increasing levels of competition in the banking and financial services industries may reduce our market share or cause the prices charged for our services to fall. Improvements in technology, communications, and the internet have intensified competition. As a result, our competitive position could be weakened, which could adversely affect our financial condition and results of operations.
We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so could materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results could be materially adversely affected.
Social, political, and economic instability, unrest, and other circumstances beyond our control could adversely affect our business operations.
Our business may be adversely affected by social, political, and economic instability, unrest, or disruption in a geographic region in which we operate, regardless of cause, including legal, regulatory, and policy changes by a new presidential administration in the U.S., protests, demonstrations, strikes, riots, civil disturbance, disobedience, insurrection, or social and other political unrest.
Such events may result in restrictions, curfews, or other actions and give rise to significant changes in regional and global economic conditions and cycles, which may adversely affect our financial condition and operations. In 2020, there were protests in cities throughout the U.S. as well as globally, including in Hong Kong, in connection with civil rights, liberties, and social and governmental reform. Looting, vandalism, and fires have occurred in cities such as Seattle, Portland, Los Angeles, Washington, D.C., New York City, and Minneapolis that have led to the imposition of mandatory curfews and, in some locations, deployment of the U.S. National Guard. Government actions in an effort to protect people and property, including curfews and restrictions on business operations, may disrupt operations, harm perceptions of personal well-being, and increase the need for additional expenditures on security resources. In addition, action resulting from such social or political unrest may pose significant risks to our personnel, facilities, and operations. The effect and duration of demonstrations, protests, or other factors is uncertain, and we cannot ensure there will not be further political or social unrest in the future or that there will not be other events that could lead to social, political, and economic disruptions. If such events or disruptions persist for a prolonged period of time, our overall business and results of operations may be adversely affected.
In addition, a new U.S. President, Joseph R. Biden, was elected in November 2020. The aftermath of the November 2020 presidential election, including the January 6, 2021, violent disruption at the Capitol, has left the U.S. in what many consider to be an extremely heightened state of political and social tension, and it is unclear whether this tension will dissipate or intensify in coming months and what resulting impacts may occur to adversely affect our business operations or the safety of our employees, our customers, and the communities in which we operate.
Changes in federal policy, including tax policies, and at regulatory agencies occur over time through policy and personnel changes following elections, which lead to changes involving the level of oversight and focus on certain industries and corporate entities. The nature, timing, and economic and political effects of potential changes to the current legal and regulatory frameworks affecting the financial services industry remain highly uncertain.
Climate change, severe weather, natural disasters, and other external events could significantly impact our business.
Severe weather events of increasing strength and frequency due to climate change cannot be predicted and may be exacerbated by global climate change, natural disasters, including volcanic eruptions and earthquakes, and other adverse external events could have a significant impact on our ability to conduct business or upon third parties who perform operational services for us. In addition, there is continuing uncertainty over demand for oil and gas in part due to regulatory changes from climate change related policies. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue, or cause us to incur additional expenses. Although management has established disaster recovery policies and procedures, there can be no assurance of the effectiveness of such policies and procedures, and the occurrence of any such event could have a material adverse effect on our business, financial condition and results of operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
The following sets forth information about our Community Banking branch locations:
Locations Type Leased/Owned
Midtown Financial Center: Northrim Headquarters
3111 C Street, Anchorage, AK
Traditional Land partially leased, partially owned, building owned
SouthSide Financial Center
8730 Old Seward Highway, Anchorage, AK Traditional Land leased, building owned
Lake Otis Community Branch
2270 East 37th Avenue, Anchorage, AK Traditional Land leased, building owned
Huffman Branch
1501 East Huffman Road, Anchorage, AK In-store Leased
Jewel Lake Branch
4000 W. Dimond Boulevard, Suite No. 02, Anchorage, AK Traditional Leased
Seventh Avenue Branch
517 West Seventh Avenue, Suite 300, Anchorage, AK Traditional Leased
Eastside Community Branch
7905 Creekside Center Drive, Suite 100, Anchorage, AK Traditional Leased
West Anchorage Branch
2709 Spenard Road, Anchorage, AK Traditional Owned
Eagle River Branch
12812 Old Glenn Highway, Suite C03, Eagle River, AK Traditional Leased
Fairbanks Financial Center
360 Merhar Avenue, Fairbanks, AK Traditional Owned
Wasilla Financial Center
850 E. USA Circle, Suite A, Wasilla, AK Traditional Owned
Soldotna Financial Center
44384 Sterling Highway, Suite 101, Soldotna, AK Traditional Leased
Juneau Financial Center
2094 Jordan Avenue, Juneau, AK Traditional Leased
Juneau Downtown Branch
301 North Franklin Street, Juneau, AK Traditional Leased
Sitka Financial Center
315 Lincoln Street, Suite 206, Sitka, AK Traditional Leased
Ketchikan Financial Center
2491 Tongass Avenue, Ketchikan, AK Traditional Owned
Kodiak Loan Production Office
2011 Mill Bay Road, #1, Kodiak, AK Loan Production Leased
Fairbanks West Community Branch
3637 Airport Way, Suite 110, Fairbanks, AK Traditional Leased
The following sets forth information about our Home Mortgage Lending branch locations, operated by RML:
Locations Leased/Owned
Main Office at Calais
100 Calais Drive, Anchorage, AK Leased
ReMax/Dynamic Office
3350 Midtown Place, Suite 101, Anchorage, AK Leased
Midtown Office
101 W. Benson Boulevard, #201, Anchorage, AK Leased
Eagle River Office
12812 Old Glenn Highway, Suite C-4, Eagle River, AK Leased
Fairbanks Office
324 Old Steese Highway, Suite 7, Fairbanks, AK Leased
Fairbanks Office
711 Gaffney Road, Suite 201, Fairbanks, AK Leased
Juneau Office
8800 Glacier Highway, #232, Juneau, AK Leased
Kodiak Office
2011 Mill Bay Road, #1, Kodiak, AK Leased
Soldotna Office
44384 Sterling Highway, Suite 102, Soldotna, AK Leased
Wasilla Remax Dynamic Branch
892 E USA Circle, Suite 105, Wasilla, AK Leased
Wasilla Northrim Branch
850 E USA Circle, Suite B, Wasilla, AK Leased

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time may be involved with disputes, claims and litigation related to the conduct of its banking business. 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.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the NASDAQ Global Select Stock Market under the symbol, “NRIM.” At March 4, 2022, the number of shareholders of record of our common stock was 218. As many of our shares of common stock are held of record in "street name" by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of beneficial holders of our common stock represented by these record holders.
Repurchase of Securities
At December 31, 2021, there were 33,724 shares available under the previously announced stock repurchase program. The Company repurchased 279,276 shares in 2021 and 327,000 shares in 2020. 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. The Company intends to continue to repurchase its stock from time to time depending upon market conditions, but we can make no assurances that we will continue this program.
The Company repurchased 188,264 shares of its common stock during the three-month period ending December 31, 2021.
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
October 1, 2021 - October 31, 2021 35,810 $44.24 35,810 186,178
Month No. 2
November 1, 2021 - November 30, 2021 20,189 $44.58 20,189 165,989
Month No. 3
December 1, 2021 - December 31, 2021 132,265 $42.60 132,265 33,724
Total 188,264 $43.12 188,264 33,724
Equity Compensation Plan Information
The following table sets forth information regarding securities authorized for issuance under the Company’s equity plans as of December 31, 2021. Additional information regarding the Company’s equity plans is presented in Note 22 of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report.
Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted-Average Exercise Price of Outstanding Options,
Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity compensation plans approved by security holders1
193,034 $23.77 170,905
Total 193,034 $23.77 170,905
1Consists of the Company's 2020 Stock Incentive Plan, which replaced the 2017 Stock Incentive Plan (the "2017 Plan")
We do not have any equity compensation plans that have not been approved by our shareholders.
Stock Performance Graph
The graph shown below depicts the total return to shareholders during the period beginning after December 31, 2016, and ending December 31, 2021. The definition of total return includes appreciation in market value of the stock, as well as the actual cash and stock dividends paid to shareholders. The comparable indices utilized are the Russell 3000 Index, representing approximately 98% of the U.S. equity market, and the S&P U.S. Small Cap Banks Index, comprised of publicly traded banks with a market capitalization between $750 million to $3.3 billion, which are located in the United States. The graph assumes that the value of the investment in the Company’s common stock and each of the two indices was $100 on December 31, 2016, and that all dividends were reinvested.
Period Ending
Index 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21
Northrim BanCorp, Inc. 100.00 110.12 109.83 132.45 122.95 162.87
Russell 3000 100.00 121.13 114.78 150.39 181.8 228.45
S&P U.S. SmallCap Banks 100.00 104.33 87.06 109.22 99.19 138.09

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We have prepared this Management's Discussion and Analysis as an aid to understanding our financial results. It highlights key information as determined by management but may not contain all of the information that is important to you. It should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in Part II. Item 8 of this report. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II. Item 7 of our Annual Report on Form 10-K for fiscal year ended December 31, 2020.
This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”
Executive Overview
Net income attributable to the Company increased 14% to $37.5 million or $6.00 per diluted share for the year ended December 31, 2021, from $32.9 million, or $5.11 per diluted share, for the year ended December 31, 2020. The increase in net income is the result of an $11.6 million increase in net income in the Community Banking segment, which was only partially offset by a $7.0 million decrease in net income in the Home Mortgage Lending segment.
Highlights for the year ended December 31, 2021 are as follows:
•Net income in the Community Banking segment increased 74% or $11.6 million, to $27.2 million in 2021 as compared to 2020. This increase was primarily the result of the following:
◦Interest and fee income on PPP loans increased $7.3 million to $15.4 million in 2021 from $8.1 million in 2020. Interest income on PPP loans was $2.9 million and $2.5 million in 2021 and 2020, respectively. Loan fee income on PPP loans was $12.5 million and $5.6 million in 2021 and 2020, respectively. Loan fee income on PPP loans is largely made up of fees fully recognized upon loan forgiveness from the SBA. In 2021, $426.3 million PPP loans were forgiven compared to $65.1 million in 2020. As of December 31, 2021, there is $4.5 million in deferred PPP loan fees, net of deferred costs, remaining to be recognized. Management expects the majority of the remaining deferred fees to be recognized in 2022.
◦The provision for credit losses decreased in 2021 to a benefit of $4.1 million from a provision of $2.4 million in 2020. As of January 1, 2021, the Company implemented ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13" or "CECL"). The provision for 2021 was recorded using the CECL methodology and reflects expected lifetime credit losses on loans and off-balance sheet unfunded loan commitments. The decrease in the provision for credit losses in 2021 compared to 2020 is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses, which have improved but are not yet at pre-pandemic levels. Our nonperforming loans, net of government guarantees, increased to $10.7 million at the end of 2021 compared to $10.0 million at the end of 2020, while total adversely classified loans, net of government guarantees at December 31, 2021 increased to $13.7 million from $12.8 million at December 31, 2020. The Allowance for Credit Losses ("ACL") totaled 0.83% of total portfolio loans at December 31, 2021, compared to 1.46% at December 31, 2020. The ACL compared to nonperforming loans, net of government guarantees, was 110% at December 31, 2021 compared to 210% at the end of 2020.
◦Interest expense decreased $2.3 million to $3.8 million in 2021 from $6.1 million in 2020 due to lower interest rates.
◦The changes above where partially offset by a $3.8 million increase in tax expense in the Community Banking segment in 2021 primarily due to higher taxable income in 2021 compared to 2020.
•Net income in the Home Mortgage Lending segment decreased 40%, or $7.0 million, to $10.3 million in 2021 from $17.3 million in 2020 primarily due to a decrease in production volume to $1.118 billion in 2021 from $1.295 billion in 2020, as well as a $3.7 million decrease in the change in fair value of the interest rate lock commitments as the loan pipeline decreased at December 31, 2021 compared to December 31, 2020.
•The net interest margin decreased to 3.58% in 2021 from 4.02% in 2020 mostly due to a decrease in average yields on interest earning assets to 3.74% in 2021 compared to 4.36% in 2020 as a result of lower interest rates. Additionally, the mix of earning assets, specifically an increase in interest-bearing cash, also contributed to the decrease in the net interest margin in 2021 as compared to the prior year.
•The Company continued to maintain strong capital ratios with Tier 1 Capital to Risk Adjusted Assets of 14.08% at December 31, 2021 as compared to 14.20% at December 31, 2020.
•The aggregate cash dividends paid by the Company in 2021 rose 6% to $9.4 million from $8.8 million paid in 2020.
•The Company repurchased 279,276 shares of its common stock in 2021 at an average price of $41.30 per share.
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 year and a half, though oil prices have rebounded recently. 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 December 31, 2021 are being impacted: Healthcare (8%), Tourism (7%), Oil and Gas (4%), Aviation (non-tourism) (4%), Accommodations (4%), Fishing (4%), Restaurants and Breweries (3%) and Retail (2%). The portion of the Company's Allowance that related to the loans with exposure to these industries is estimated at the following amounts as of December 31, 2021:
(In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Restaurants and Breweries Fishing Accommodations Total
Allowance $896 $565 $1,257 $332 $486 $432 $507 $4,475
•Customer Accommodations: The Company has implemented assistance to help customers experiencing financial challenges 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 ("TDR") related to COVID-19 and allow certain accommodations to borrowers. These accommodations include interest only and deferral options on loan payments, as well as the waiver of various fees related to loans, deposits and other services. The Company has elected to adopt these provisions of the CARES Act. The outstanding principal balance of loan modifications due to the economic impacts of COVID-19 for the periods below were as follows:
Loan Modifications due to COVID-19 as of December 31, 2021
(Dollars in thousands) Interest Only Full Payment Deferral Total
Portfolio loans $49,219 $31 $49,250
Number of modifications 16 1 17
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 17 loan modifications as of December 31, 2021, have entered into more than one modification.
•Branch Operations: All branches have returned to pre-pandemic levels, while a number of customer and employee safety measure continue to be implemented.
•Growth and Paycheck Protection Program:
•Over the last two years, Northrim funded a total of nearly 5,800 PPP loans totaling $612.6 million to both existing and new customers.
•Management estimates that Northrim funded approximately 24% of the number and 32% of the value of all Alaska PPP second round loans.
•As of December 31, 2021, Northrim customers had received forgiveness through the SBA on 4,451 PPP loans totaling $491.4 million.
•The Company initially utilized the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility (the "PPPLF") to fund PPP loans, but paid those funds back in full during the second quarter of 2020 and has since funded the PPP loans through core deposits and maturity of long-term investments.
Trends in Miscellaneous Financial Data (1)
Years Ended December 31,
(In thousands, except per share data and shares outstanding amounts)
2021 2020 2019 2018 2017 2016 Five Year Compound Growth Rate
(Unaudited)
Net interest income $80,827 $70,665 $64,442 $61,208 $57,678 $56,357 7 %
Provision (benefit) for credit losses (4,099) 2,432 (1,175) (500) 3,200 2,298 NM
Other operating income 52,263 63,328 37,346 32,167 40,474 43,263 4 %
Compensation expense, RML acquisition payments - - 468 - 130 4,775 (100)
Other operating expense 89,196 89,114 76,370 69,800 71,023 71,505 5 %
Income before provision for income taxes $47,993 $42,447 $26,125 $24,075 $23,799 $21,042 18 %
Provision for income taxes 10,476 9,559 5,434 4,071 10,321 6,052 12 %
Net Income 37,517 32,888 20,691 20,004 13,478 14,990 20 %
Less: Net income attributable to
noncontrolling interest - - - - 327 579 (100)
Net income attributable to Northrim Bancorp, Inc. $37,517 $32,888 $20,691 $20,004 $13,151 $14,411 21 %
Year End Balance Sheet
Assets $2,724,719 $2,121,798 $1,643,996 $1,502,988 $1,518,596 $1,525,851 12 %
Loans 1,413,886 1,444,050 1,043,371 984,346 954,953 974,074 8 %
Deposits 2,421,631 1,824,981 1,372,351 1,228,088 1,258,283 1,267,653 14 %
Shareholders' equity 237,817 221,575 207,117 205,947 192,802 186,712 5 %
Common shares outstanding 6,014,813 6,251,004 6,558,809 6,883,216 6,871,963 6,897,890 (3) %
Average Balance Sheet
Assets $2,432,599 $1,936,047 $1,555,707 $1,493,385 $1,511,052 $1,506,522 10 %
Earning assets 2,260,778 1,758,839 1,386,557 1,346,449 1,367,203 1,361,913 11 %
Loans 1,478,318 1,339,908 1,010,098 971,548 981,001 976,613 9 %
Deposits 2,125,080 1,638,216 1,276,407 1,227,272 1,248,333 1,250,243 11 %
Shareholders' equity 239,214 211,721 208,602 201,022 193,129 181,628 6 %
Basic common shares outstanding 6,180,801 6,354,687 6,708,622 6,877,573 6,889,621 6,883,663 (2) %
Diluted common shares outstanding 6,249,313 6,431,367 6,808,209 6,981,557 6,977,910 6,974,864 (2) %
Per Common Share Data
Basic earnings $6.07 $5.18 $3.08 $2.91 $1.91 $2.09 24 %
Diluted earnings $6.00 $5.11 $3.04 $2.86 $1.88 $2.06 24 %
Book value per share $39.54 $35.45 $31.58 $29.92 $28.06 $27.07 8 %
Tangible book value per share(2)
$36.88 $32.88 $29.12 $27.57 $25.70 $24.70 8 %
Cash dividends per share $1.50 $1.38 $1.26 $1.02 $0.86 $0.78 14 %
Years Ended December 31,
2021 2020 2019 2018 2017 2016 Five Year Compound Growth Rate
(Unaudited)
Performance Ratios
Return on average assets 1.54 % 1.70 % 1.33 % 1.34 % 0.87 % 0.96 % 10 %
Return on average equity 15.68 % 15.53 % 9.92 % 9.95 % 6.81 % 7.93 % 15 %
Equity/assets 8.73 % 10.44 % 12.60 % 13.70 % 12.70 % 12.24 % (7) %
Tangible common equity/tangible assets(3)
8.19 % 9.76 % 11.73 % 12.76 % 11.75 % 11.29 % (6) %
Net interest margin 3.58 % 4.02 % 4.65 % 4.55 % 4.22 % 4.14 % (3) %
Net interest margin (tax equivalent)(4)
3.60 % 4.05 % 4.70 % 4.60 % 4.28 % 4.20 % (3) %
Non-interest income/total revenue 39.27 % 47.26 % 36.69 % 34.45 % 41.24 % 43.43 % (2) %
Efficiency ratio (5)
66.99 % 66.47 % 75.43 % 74.68 % 72.39 % 76.44 % (3) %
Dividend payout ratio 25.02 % 26.66 % 40.79 % 35.08 % 45.44 % 37.59 % (8) %
Asset Quality
Nonperforming loans, net of government guarantees $10,672 $10,048 $13,951 $14,694 $21,411 $12,936 (4) %
Nonperforming assets, net of government guarantees 15,031 16,289 19,946 22,619 28,729 19,315 (5) %
Nonperforming loans, net of government guarantees/portfolio loans 0.75 % 0.70 % 1.34 % 1.49 % 2.24 % 1.33 % (11) %
Net charge-offs (recoveries)/average loans 0.07 % 0.03 % (0.07) % 0.15 % 0.15 % 0.08 % (3) %
Allowance for credit losses/portfolio loans 0.83 % 1.46 % 1.83 % 1.98 % 2.25 % 2.02 % (16) %
Nonperforming assets, net of government guarantees/assets 0.55 % 0.77 % 1.21 % 1.50 % 1.89 % 1.27 % (15) %
Other Data
Effective tax rate (6)
22 % 23 % 21 % 17 % 43 % 29 % (5) %
Number of banking offices(7)
18 17 16 16 14 14 5 %
Number of employees (FTE) (8)
451 438 431 430 429 451 - %
1 These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.
2Tangible book value per share is a non-GAAP ratio defined as shareholders’ equity, less intangible assets, divided by common shares outstanding. Management believes that tangible book value is a useful measurement of the value of the Company’s equity because it excludes the effect of intangible assets on the Company’s equity. See reconciliation to book value per share, the most comparable GAAP measurement below.
3Tangible common equity to tangible assets is a non-GAAP ratio that represents total equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. Management believes this ratio is important as it has received more attention over the past several years from stock analysts and regulators. The most comparable GAAP measure of shareholders' equity to total assets is calculated by dividing total shareholders' equity by total assets. See reconciliation to shareholders' equity to total assets below.
4Tax-equivalent net interest margin is a non-GAAP performance measurement in which interest income on non-taxable investments and loans is presented on a tax-equivalent basis using a combined federal and state statutory rate of 28.43% in 2018 through 2021 and 41.11% in all other years presented. Management believes that tax-equivalent net interest margin is a useful financial measure because it enables investors to evaluate net interest margin excluding tax expense in order to monitor our effectiveness in growing higher interest yielding assets and
managing our costs of interest bearing liabilities over time on a fully tax equivalent basis. See reconciliation to net interest margin, the comparable GAAP measurement below.
5In managing our business, we review the efficiency ratio exclusive of intangible asset amortization, which is a non-GAAP performance measurement. Management believes that this is a useful financial measurement because we believe this presentation provides investors with a more accurate picture of our operating efficiency. The efficiency ratio is calculated by dividing other operating expense, exclusive of intangible asset amortization, by the sum of net interest income and other operating income. Other companies may define or calculate this data differently. For additional information see the "Other Operating Expense" section in Part II. Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report. See reconciliation to comparable GAAP measurement below.
6The Company’s 2017 results included the impact of the enactment of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017. The law includes significant changes to the U.S. corporate tax system, including a Federal corporate rate reduction from 35% to 21%. In 2017, the Company applied the newly enacted corporate federal income tax rate of 21%, reducing the value of the Company's net deferred tax asset, resulting in approximately a $2.7 million increase in tax expense. In 2018, the Company finalized changes related to the reduction in the federal tax rate which resulted in a $470,000 reduction in tax expense.
7Number of banking offices does not include RML locations. 2021 number of banking offices includes 17 full service branches and 1 loan production office. 2020 number of banking offices includes 16 full service branches and 1 loan production office. 2018 number of banking offices includes 15 full service branches and 1 loan production office.
8FTE includes 321, 312, 311, 320, 314, and 321 Community Banking employees in 2021, 2020, 2019, 2018, 2017 and 2016, respectively. FTE includes 130, 126, 120, 110, 115, and 130 Home Mortgage Lending employees in 2021, 2020, 2019, 2018, 2017 and 2016, respectively.
Reconciliation of Selected Non-GAAP Financial Data to GAAP Financial Measures
These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.
Reconciliation of total shareholders' equity to tangible common shareholders’ equity (Non-GAAP) and total assets to tangible assets:
(In Thousands) 2021 2020 2019 2018 2017 2016
Total shareholders' equity $237,817 $221,575 $207,117 $205,947 $192,802 $186,712
Total assets 2,724,719 2,121,798 1,643,996 1,502,988 1,518,596 1,525,851
Total shareholders' equity to total assets ratio 8.73 % 10.44 % 12.60 % 13.70 % 12.70 % 12.24 %
(In Thousands) 2021 2020 2019 2018 2017 2016
Total shareholders' equity $237,817 $221,575 $207,117 $205,947 $192,802 $186,712
Less: goodwill and other intangible assets, net 16,009 16,046 16,094 16,154 16,224 16,324
Tangible common shareholders' equity $221,808 $205,529 $191,023 $189,793 $176,578 $170,388
Total assets $2,724,719 $2,121,798 $1,643,996 $1,502,988 $1,518,596 $1,525,851
Less: goodwill and other intangible assets, net 16,009 16,046 16,094 16,154 16,224 16,324
Tangible assets $2,708,710 $2,105,752 $1,627,902 $1,486,834 $1,502,372 $1,509,527
Tangible common equity to tangible assets ratio 8.19 % 9.76 % 11.73 % 12.76 % 11.75 % 11.29 %
Reconciliation of tangible book value per share (Non-GAAP) to book value per share
(In thousands, except per share data) 2021 2020 2019 2018 2017 2016
Total shareholders' equity $237,817 $221,575 $207,117 $205,947 $192,802 $186,712
Divided by common shares outstanding 6,014,813 6,251,004 6,558,809 6,883,216 6,871,963 6,897,890
Book value per share $39.54 $35.45 $31.58 $29.92 $28.06 $27.07
(In thousands, except per share data) 2021 2020 2019 2018 2017 2016
Total shareholders' equity $237,817 $221,575 $207,117 $205,947 $192,802 $186,712
Less: goodwill and intangible assets, net 16,009 16,046 16,094 16,154 16,224 16,324
Tangible book value $221,808 $205,529 $191,023 $189,793 $176,578 $170,388
Divided by common shares outstanding 6,014,813 6,251,004 6,558,809 6,883,216 6,871,963 6,897,890
Tangible book value per share $36.88 $32.88 $29.12 $27.57 $25.70 $24.70
Reconciliation of tax-equivalent net interest margin (Non-GAAP) to net interest margin
(In Thousands) 2021 2020 2019 2018 2017 2016
Net interest income(9)
$80,827 $70,665 $64,442 $61,208 $57,678 $56,357
Divided by average interest-bearing assets 2,260,778 1,758,839 1,386,557 1,346,449 1,367,203 1,361,913
Net interest margin 3.58 % 4.02 % 4.65 % 4.55 % 4.22 % 4.14 %
(In Thousands) 2021 2020 2019 2018 2017 2016
Net interest income(9)
$80,827 $70,665 $64,442 $61,208 $57,678 $56,357
Plus: reduction in tax expense related to
tax-exempt interest income 489 613 722 726 872 808
$81,316 $71,278 $65,164 $61,934 $58,550 $57,165
Divided by average interest-bearing assets 2,260,778 1,758,839 1,386,557 1,346,449 1,367,203 1,361,913
Tax-equivalent net interest margin 3.60 % 4.05 % 4.70 % 4.60 % 4.28 % 4.20 %
Calculation of efficiency ratio
(In Thousands) 2021 2020 2019 2018 2017 2016
Net interest income(9)
$80,827 $70,665 $64,442 $61,208 $57,678 $56,357
Other operating income 52,263 63,328 37,346 32,167 40,474 43,263
Total revenue 133,090 133,993 101,788 93,375 98,152 99,620
Other operating expense 89,196 89,114 76,838 69,800 71,153 76,280
Less intangible asset amortization 37 48 60 70 100 135
Adjusted other operating expense $89,159 $89,066 $76,778 $69,730 $71,053 $76,145
Efficiency ratio 66.99 % 66.47 % 75.43 % 74.68 % 72.39 % 76.44 %
9Amount represents net interest income before provision for loan losses.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of the Company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP.
RESULTS OF OPERATIONS
Income Statement
Net Income
Our results of operations are dependent to a large degree on our net interest income. We also generate other income primarily through mortgage banking income, purchased receivables products, service charges and fees, and bankcard fees. Our operating expenses consist in large part of salaries and other personnel costs, data processing, occupancy, marketing, and professional services expenses. Interest income and cost of funds, or interest expense, and mortgage banking income are affected significantly by general economic conditions, particularly changes in market interest rates, by government policies and the actions of regulatory authorities, and by competition in our markets.
We earned net income of $37.5 million in 2021, compared to net income of $32.9 million in 2020. During these periods, net income per diluted share was $6.00 and $5.11, respectively. The following sections present discussion of the components that make up net income.
Net Interest Income / Net Interest Margin
Net interest income is the difference between interest income from loan and investment securities portfolios and interest expense on customer deposits and borrowings. Changes in net interest income result from changes in volume and spread, which in turn affect our margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Changes in net interest income are influenced by yields and the level and relative mix of interest-earning assets and interest-bearing liabilities.
Net interest income in 2021 was $80.8 million, compared to $70.7 million in 2020. The increase in 2021 as compared to 2020 was primarily the result of a $7.3 million increase in interest and fee income on PPP loans in 2021 compared to 2020. Interest income on PPP loans was $2.9 million and $2.5 million in 2021 and 2020, respectively. Loan fee income on PPP loans was $12.5 million and $5.6 million in 2021 and 2020, respectively. Loan fee income on PPP loans is largely made up of fees fully recognized upon loan forgiveness from the SBA. Interest income not related to PPP loans also increased $934,000 in 2021 as compared to 2020 due to higher net average interest-earning asset balances that was only partially offset by a decrease in interest rates. Interest expense decreased $2.1 million as a result of lower interest rates. During 2021 and 2020, net interest margins were 3.58% and 4.02%, respectively. The decrease in net interest margin in 2021 as compared to 2020 is the result of decreases in the spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities which was impacted by a decrease in interest rates, as well as a change in the mix of interest earning-assets. Average loans, the Company's highest yielding interest-earning asset, decreased to 65% of total average interest-earning assets in 2021 from 76% in the 2020. Short-term investments, the Company's lowest yielding interest-earning asset, increased to 14% of total average interest-earning assets in 2021 from 4% in the 2020.
The following table sets forth for the periods indicated information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities. Average yields or costs, net interest income, and net interest margin are also presented. Average yields or costs are not calculated on a tax-equivalent basis:
Years ended December 31, 2021 2020 2019
Average outstanding balance Interest income / expense Average Yield / Cost Average outstanding balance Interest income / expense Average Yield / Cost Average outstanding balance Interest income / expense Average Yield / Cost
(In Thousands)
Loans (1),(2)
$1,478,318 $76,392 5.17 % $1,339,908 $67,876 5.07 % $1,010,098 $59,919 5.93 %
Loans held for sale 101,752 2,849 2.80 % 105,287 3,215 3.05 % 56,344 2,231 3.96 %
Taxable long-term investments(3)
368,319 4,900 1.33 % 245,148 5,234 2.14 % 269,228 6,891 2.56 %
Non-taxable long-term investments(3)
853 18 2.11 % 2,236 82 3.67 % 4,483 120 2.68 %
Interest-bearing deposits in other banks(4)
311,536 447 0.14 % 66,260 309 0.47 % 46,404 922 1.99 %
Total interest-earning assets(5)
2,260,778 84,606 3.74 % 1,758,839 76,716 4.36 % 1,386,557 70,083 5.05 %
Noninterest-earning assets 171,821 177,208 169,150
Total $2,432,599 $1,936,047 $1,555,707
Interest-bearing demand $575,298 $484 0.08 % $387,417 $622 0.16 % $272,894 $475 0.17 %
Savings deposits 323,131 499 0.15 % 257,292 717 0.28 % 233,057 1,082 0.46 %
Money market deposits 264,344 418 0.16 % 219,024 708 0.32 % 209,246 1,142 0.55 %
Time deposits 178,215 1,676 0.94 % 176,873 3,232 1.83 % 135,005 2,262 1.68 %
Total interest-bearing deposits 1,340,988 3,077 0.23 % 1,040,606 5,279 0.51 % 850,202 4,961 0.58 %
Borrowings 24,993 702 2.81 % 35,918 772 1.37 % 33,730 680 2.02 %
Total interest-bearing liabilities 1,365,981 3,779 0.28 % 1,076,524 6,051 0.56 % 883,932 5,641 0.64 %
Noninterest-bearing demand deposits 784,092 597,610 426,205
Other liabilities 43,312 50,192 36,968
Equity 239,214 211,721 208,602
Total $2,432,599 $1,936,047 $1,555,707
Net interest income $80,827 $70,665 $64,442
Net interest margin 3.58 % 4.02 % 4.65 %
Average portfolio loans to average-earnings assets 65.39 % 76.18 % 72.85 %
Average portfolio loans to average total deposits 69.57 % 81.79 % 79.14 %
Average non-interest deposits to average total deposits 36.90 % 36.48 % 33.39 %
Average interest-earning assets to average interest-bearing liabilities 165.51 % 163.38 % 156.86 %
1Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $16.2 million, $8.9 million and $3.3 million for 2021, 2020 and 2019, respectively.
2Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loans were $12.3 million, $13.8 million, and $16.9 million in 2021, 2020 and 2019, respectively.
3Consists 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.
4Consists of interest bearing deposits in other banks and domestic CDs.
5The Company does not have any fed funds sold or securities purchased with agreements to resell to disclose as part of its total interest-earning assets in the periods presented.
The following table sets forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates. 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 rate:
2021 compared to 2020 2020 compared to 2019
Increase (decrease) due to Increase (decrease) due to
(In Thousands) Volume Rate Total Volume Rate Total
Interest Income:
Loans $7,186 $1,330 $8,516 $17,590 ($9,633) $7,957
Loans held for sale (105) (261) (366) 1,336 (352) 984
Taxable long-term investments 2,064 (2,398) (334) (580) (1,077) (1,657)
Non-taxable long-term investments (38) (26) (64) (143) 105 (38)
Interest-bearing deposits in other banks 170 (32) 138 779 (1,392) (613)
Total interest income $9,277 ($1,387) $7,890 $18,982 ($12,349) $6,633
Interest Expense:
Interest-bearing demand $229 ($367) ($138) $186 ($39) $147
Savings deposits 154 (372) (218) 104 (469) (365)
Money market deposits 125 (415) (290) 51 (485) (434)
Time deposits 25 (1,581) (1,556) 751 219 970
Interest-bearing deposits 1,236 (3,438) (2,202) 763 (445) 318
Borrowings 29 (99) (70) 9 83 92
Total interest expense $1,265 ($3,537) ($2,272) $772 ($362) $410
Provision for Credit Losses
The Company adopted ASU 2016-13 effective January 1, 2021. The provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the ACL at an appropriate level under CECL. The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to Consolidated Financial Statements included in Part II. Item 8 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:
(In Thousands) 2021 2020
Credit loss expense on loans held for investment ($3,779) $2,432
Credit loss expense on unfunded commitments (320) -
Credit loss expense on available for sale debt securities - -
Credit loss expense on held to maturity securities - -
Credit loss expense on purchased receivables - -
Total credit loss expense ($4,099) $2,432
As noted above, the provision for credit losses was recorded in accordance with CECL in 2021. The provision for credit losses in 2020, prior to adoption of CECL, was recorded under the incurred loss model. Despite the fact that a different methodology was used in the calculation of the provision for credit losses in 2021 versus 2020, in general the decrease in the provision for credit losses on loans in 2021 as compared to 2020 is primarily the result of improvement in economic assumptions used to estimate credit losses. The ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration.
See the “Loans and Lending Activity” section under “Financial Condition” and Note 5 of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report for further discussion of these decreases and changes in the Company’s ACL.
Other Operating Income
The following table details the major components of other operating income for the years ended December 31:
(In Thousands) 2021 $ Change % Change 2020 $ Change % Change 2019
Other Operating Income
Mortgage banking income $42,144 ($10,491) (20) % $52,635 $28,434 117 % $24,201
Bankcard fees 3,389 552 19 % 2,837 (139) (5) % 2,976
Purchased receivable income 2,259 (391) (15) % 2,650 (621) (19) % 3,271
Service charges on deposit accounts 1,297 195 18 % 1,102 (455) (29) % 1,557
Merchant fees 561 146 35 % 415 (52) (11) % 467
Interest rate swap income 452 (497) (52) % 949 (15) (2) % 964
Commercial servicing revenue 306 (221) (42) % 527 (97) (16) % 624
Rental income 188 (90) (32) % 278 (219) (44) % 497
Gain (loss) on sale of securities 67 (31) (32) % 98 75 100 % 23
Gain (loss) on marketable equity securities (101) (162) (266) % 61 (850) 93 % 911
Other income 1,701 (75) (4) % 1,776 (79) (4) % 1,855
Total other operating income $52,263 ($11,065) (17) % $63,328 $25,982 70 % $37,346
2021 Compared to 2020
The most significant change in other operating income in 2021 was a decrease in mortgage banking income, followed by an increase in bankcard fees and decreases in interest rate swap income and purchased receivable income.
Mortgage banking income consists of gross income from the origination and sale of mortgages as well as mortgage loan servicing fees and is the largest component of other operating income at 81% of total other operating income in 2021 and 83% in 2020. Mortgage banking income decreased in 2021 compared to 2020 mainly due to a decrease in mortgage loans originated and sold as this volume decreased to $1.1 billion in 2021 from $1.3 billion in 2020. The overall decrease in mortgage originations in 2021 as compared to the prior year is primarily the result of the changes in interest rates during the year that led to decreased refinance activity. Additionally, there was a $3.7 million decrease in the fair value of the interest rate lock commitments, which is also included in mortgage banking income, due to a decrease in the loan origination pipeline at December 31, 2021 compared to December 31, 2020.
Interest rate swap income decreased in 2021 as compared to 2020 due to a decrease in the origination of new swap contracts with commercial loan customers. The Company executed new customer swap contracts with a notional value of $15.7 million in 2021 as compared to new customer swap contracts with a notional value of $49.3 million in 2020.
Purchased receivable income decreased in 2021 as compared to 2020 due to customers reportedly using PPP funds instead of selling receivables to fund their operating cash needs.
Bankcard fees and service charges on deposit accounts increased in 2021 due to the cessation of COVID-19 quarantine restrictions, which led to higher transaction volume as compared to 2020, as well as the increase in customers.
Other Operating Expense
The following table details the major components of other operating expense for the years ended December 31:
(In Thousands) 2021 $ Change % Change 2020 $ Change % Change 2019
Other Operating Expense
Salaries and other personnel expense $60,412 ($725) (1) % $61,137 $9,820 19 % $51,317
Data processing expense 8,567 899 12 % 7,668 540 8 % 7,128
Occupancy expense 7,078 454 7 % 6,624 17 - % 6,607
Professional and outside services 2,801 (356) (11) % 3,157 626 25 % 2,531
Marketing expense 2,741 421 18 % 2,320 (53) (2) % 2,373
Insurance expense 1,593 365 30 % 1,228 671 120 % 557
Compensation expense - RML acquisition payments - - NM - (468) (100) % 468
Intangible asset amortization 37 (11) (23) % 48 (12) (20) % 60
OREO (income) expense, net rental income and gains on sale:
OREO operating expense 777 119 18 % 658 (35) (5) % 693
Rental income on OREO (524) (15) (3) % (509) (3) (1) % (506)
Gains on sale of OREO (685) (294) (75) % (391) (11) NM (380)
Subtotal (432) (190) (79) % (242) (49) 25 % (193)
Other expenses 6,399 (775) (11) % 7,174 1,184 20 % 5,990
Total other operating expense $89,196 $82 - % $89,114 $12,276 16 % $76,838
2021 Compared to 2020
Other operating expense increased by less than 1% in 2021 as compared to 2020. The largest increases where in data processing expense, occupancy expense, insurance expense, and marketing expense. These increases were only mostly offset by decreases in salary and other personnel expense, professional and outside services, and OREO expense. Data processing expense increased in 2021 compared to 2020 mostly due to increased customer and transaction volume. Occupancy expense, insurance expense, and marketing expense increased in 2021 as compared to 2020 due to miscellaneous repairs and maintenance and tenant improvements at several of the Company's locations, increased FDIC insurance costs associated with asset growth, and increased marketing expense due to higher giving in the form of increased sponsorship and charitable contributions. Decreases in salaries and other personnel expense and professional and outside services in 2021 as compared to 2020 are primarily related to mortgage banking operations, which fluctuate with production volumes. OREO expense decreased in 2021 primarily due to increased gains on sale of OREO properties as compared to 2020.
Income Taxes
The provision for income taxes increased $917,000 or 10%, to $10.5 million in 2021 as compared to 2020. The increase in 2021 is primarily due to higher pretax income. The Company's effective tax rates were relatively consistent at 21.8% and 22.5% in 2021 and 2020, respectively.
FINANCIAL CONDITION
Investment Securities
The composition of our investment securities portfolio, which includes securities available for sale and marketable equity securities, reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income. The investment securities portfolio also mitigates interest rate and credit risk inherent in the loan portfolio, while providing a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral or through repurchase agreements), and collateral for certain public funds deposits. Investment securities designated as available for sale comprised 94% of the portfolio as of December 31, 2021 and are available to meet liquidity requirements.
Our investment portfolio consists primarily of government sponsored entity securities, corporate securities, collateralized loan obligations, and municipal securities. Investment securities at December 31, 2021 increased $188.4 million, or 71%, to $455.1 million from $266.7 million at December 31, 2020. The increase at December 31, 2021 as compared to December 31, 2020 came from an increase in deposits that were not lent out were invested. The average maturity of the investment portfolio was approximately four years at December 31, 2021.
Investment securities may be pledged as collateral to secure public deposits or borrowings. At December 31, 2021 and 2020, $59.5 million and $77.9 million in securities were pledged for deposits and borrowings, respectively. Pledged securities decreased at December 31, 2021 as compared to December 31, 2020 primarily due to decreased pledges to the FHLB to support the Company's immediate borrowing capacity at December 31, 2021.
The following tables set forth the composition of our investment portfolio at December 31 for the years indicated:
(In Thousands) Amortized Cost Fair Value
Securities Available for Sale:
2021:
U.S. Treasury and government sponsored entities $345,514 $341,480
Municipal Securities 820 840
Corporate Bonds 32,721 32,946
Collateralized Loan Obligations 51,431 51,418
Total $430,486 $426,684
2020:
U.S. Treasury and government sponsored entities $173,318 $174,601
Municipal Securities 820 856
Corporate Bonds 29,951 30,492
Collateralized Loan Obligations 41,782 41,684
Total $245,871 $247,633
2019:
U.S. Treasury and government sponsored entities $210,756 $211,852
Municipal Securities 3,288 3,297
Corporate Bonds 34,764 35,066
Collateralized Loan Obligations 25,980 25,923
Total $274,788 $276,138
Marketable Equity Securities:
2021:
Preferred Stock $7,865 $8,420
Total $7,865 $8,420
2020:
Preferred Stock $8,395 $9,052
Total $8,395 $9,052
2019:
Preferred Stock $7,349 $7,945
Total $7,349 $7,945
Securities Held to Maturity:
2021:
Corporate Bonds $20,000 $19,164
Total $20,000 $19,164
2020:
Corporate Bonds $10,000 $10,000
Total $10,000 $10,000
2019:
Corporate Bonds $- $-
Total $- $-
The following table sets forth the market value, maturities, and weighted average pretax yields of our investment portfolio as of December 31, 2021:
Maturity
Within Over
(In Thousands) 1 Year 1-5 Years 5-10 Years 10 Years Total
Securities Available for Sale:
U.S. Treasury and government sponsored entities
Balance $5,041 $336,439 $- $- $341,480
Weighted average yield(1)
2.80 % 0.79 % - % - % 0.82 %
Municipal securities
Balance $- $840 $- $- $840
Weighted average yield(1)
- % 2.14 % - % - % 2.14 %
Corporate bonds
Balance $- $27,993 $4,953 $- $32,946
Weighted average yield(1)
- % 1.29 % 1.50 % - % 1.33 %
Collateralized loan obligations
Balance $- $5,000 $46,418 $- $51,418
Weighted average yield(1)
- % 1.65 % 1.39 % - % 1.42 %
Total
Balance $5,041 $370,272 $51,371 $- $426,684
Weighted average yield(1)
2.80 % 0.84 % 1.40 % - % 0.93 %
Securities Held to Maturity
Corporate bonds
Balance $- $9,919 $9,245 $- $19,164
Weighted average yield(1)
- % 5.50 % 5.00 % - % 5.25 %
Marketable Equity Securities
Preferred Stock
Balance $- $- $- $8,420 $8,420
Weighted average yield(1)
- % - % - % 5.57 % 5.57 %
(1) Weighted average yields have been calculated on an amortized cost basis and not on a tax-equivalent basis.
The Company’s investment in marketable equity securities does not have a maturity date but it has been included in the over 10 years column above.
Loans and Lending Activities
All of our loans and credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness and commitments to us, including the indebtedness of any guarantor. Generally, we are permitted to make loans to one borrower of up to 15% of the unimpaired capital and surplus of the Bank. The legal lending limit for the Bank was $30.2 million at December 31, 2021. At December 31, 2021, the Company had two relationships whose total direct and indirect commitments exceeded $30.2 million; however, no individual direct relationship exceeded the loans-to-one borrower limitation.
The Company's loans have grown significantly in recent history, in part due to PPP loans, but over the last 3 years, non-PPP loans have also increased significantly. Management attributes higher growth in loans, excluding PPP loans, in 2021 and 2020 to our ability to attract new customers through our outreach to the community. The Company's "Land and Expand" program was designed to increase both loans and deposits as we attract a broader customer base and convert new PPP customers into full banking relationships.
The following table presents growth information for loans and loans excluding PPP loans:
Years Ended December 31,
(In Thousands) 2021 2020 2019 2018 2017 2016 Five Year Compound Growth Rate
Loans $1,413,886 $1,444,050 $1,043,371 $984,346 $954,953 $974,074 8 %
Less: PPP loans 118,229 304,587 - - - - NM
Loans, excluding PPP loans $1,295,657 $1,139,463 $1,043,371 $984,346 $954,953 $974,074 6 %
Percent change, Loans excluding PPP loans 14 % 9 % 6 % 3 % (2) %
The following table sets forth the composition of our loan portfolio by loan segment as of the dates indicated:
December 31, 2021 December 31, 2020
Dollar Amount Percent of Total Dollar Amount Percent of Total
(In Thousands)
Commercial & industrial loans $448,338 31.7 % $612,254 42.2 %
Commercial real estate:
Owner occupied properties 300,200 21.2 % 233,320 16.2 %
Non-owner occupied and multifamily properties 435,311 30.8 % 392,452 27.2 %
Residential real estate:
1-4 family residential properties secured by first liens 32,542 2.3 % 33,415 2.3 %
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 19,610 1.4 % 18,236 1.3 %
1-4 family residential construction loans 36,222 2.6 % 32,500 2.3 %
Other construction, land development and raw land loans 88,094 6.2 % 83,463 5.8 %
Obligations of states and political subdivisions in the US 16,403 1.2 % 15,318 1.1 %
Agricultural production, including commercial fishing 27,959 2.0 % 12,968 0.9 %
Consumer loans 4,801 0.3 % 5,734 0.4 %
Other loans 4,406 0.3 % 4,390 0.3 %
Total portfolio loans $1,413,886 $1,444,050
The following table presents the maturity distribution of our loan portfolio and the rate sensitivity of these loans to changes in interest rates as of December 31, 2021:
By Maturity Loans Over One Year By Rate Sensitivity
(In Thousands) Within 1 Year 1-5 Years 5-15 Years Over 15 Years Total Fixed Interest Rate Floating Interest Rate
Commercial & industrial loans $92,622 $242,076 $113,054 $- $447,752 $219,834 $135,296
Commercial real estate 43,627 125,032 491,692 79,952 740,303 180,555 516,121
Residential real estate 41,142 5,228 18,803 21,103 86,276 19,862 25,272
Other construction 44,549 19,692 17,534 2,076 83,851 13,980 25,322
Consumer and other 7,631 9,320 38,743 10 55,704 12,726 35,347
Total $229,571 $401,348 $679,826 $103,141 $1,413,886 $446,957 $737,358
Loans Directly Exposed to the Oil and Gas Industry: The Company defines "direct exposure" to the oil and gas industry as companies that it has identified as significantly reliant upon activity related to the oil and gas industry, such as oil producers or drilling and exploration companies, and companies who provide oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry. The Company estimates that $63.6 million, or approximately 4% of loans as of December 31, 2021 have direct exposure to the oil and gas industry as compared to $65.1 million, or approximately 4% of loans as of December 31, 2020. The Company's exposure as a percent of the total loan portfolio excluding PPP loans as of December 31, 2021 was 5%. The Company has no loans to oil producers or drilling and exploration companies as of the end of 2021 or 2020, but the $63.6 million outstanding as of December 31, 2021 noted above does include $1.8 million related to the construction of an oil drilling rig. The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $66.4 million and $63.5 million at December 31, 2021 and 2020, respectively. The portion of the Company's allowance for loan losses that related to the loans with direct exposure to the oil and gas industry was estimated at $684,000 and $1.2 million as of December 31, 2021 and 2020, respectively.
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) December 31, 2021 December 31, 2020
Commercial & industrial loans $45,338 $41,016
Commercial real estate:
Owner occupied properties 10,244 11,296
Non-owner occupied and multifamily properties 6,564 6,606
Consumer loans - 2,256
Other loans 1,495 3,948
Total loans $63,641 $65,122
Credit Quality and Nonperforming Assets
The following table sets forth information regarding our nonperforming loans and total nonperforming assets:
December 31, December 31,
(In Thousands) 2021 2020
Nonaccrual loans $11,650 $11,120
Loans 90 days past due and accruing - 449
Total nonperforming loans 11,650 11,569
Nonperforming loans guaranteed by government (978) (1,521)
Net nonperforming loans 10,672 10,048
Other real estate owned 5,638 7,289
Repossessed assets - 231
Other real estate owned guaranteed by government (1,279) (1,279)
Net nonperforming assets $15,031 $16,289
Nonperforming loans, net of government guarantees / portfolio loans 0.75 % 0.70 %
Nonperforming loans, net of government guarantees / portfolio loans, net of government guarantees 0.88 % 0.92 %
Nonperforming assets, net of government guarantees / total assets 0.55 % 0.77 %
Nonperforming assets, net of government guarantees / total assets net of government guarantees 0.60 % 0.92 %
Performing restructured loans $3,291 $2,355
Performing restructured loans guaranteed by government (2,518) (1,523)
Net performing restructured loans $773 $832
Nonperforming loans plus performing restructured loans, net of government guarantees $11,445 $10,880
Nonperforming loans plus performing restructured loans, net of government
guarantees / portfolio loans 0.81 % 0.75 %
Nonperforming loans plus performing restructured loans, net of government
guarantees / portfolio loans, net of government guarantees 0.94 % 0.99 %
Nonperforming assets plus performing restructured loans, net of government
guarantees / total assets 0.58 % 0.81 %
Nonperforming assets plus performing restructured loans, net of government
guarantees / total assets, net of government guarantees 0.63 % 0.97 %
Adversely classified loans, net of government guarantees $13,739 $12,768
Special mention loans, net of government guarantees $22,110 $19,063
Loans 30-89 days past due and accruing, net of government guarantees /portfolio loans - 0.05 %
Loans 30-89 days past due and accruing, net of government guarantees /
portfolio loans, net of government guarantees - 0.07 %
Allowance for credit losses / portfolio loans 0.83 % 1.46 %
Allowance for credit losses / portfolio loans, net of government guarantees 0.97 % 1.93 %
Allowance for credit losses / nonperforming loans, net of government
guarantees 110 % 210 %
Gross loan charge-offs for the quarter $1,179 $11
Gross loan recoveries for the quarter ($53) $64
Net loan (recoveries) charge-offs for the quarter $1,126 ($53)
Net loan (recoveries) charge-offs year-to-date $1,107 $384
Net loan (recoveries) charge-offs for the quarter / average loans, for the quarter 0.08 % - %
Net loan (recoveries) charge-offs year-to-date / average loans,
year-to-date annualized 0.07 % 0.03 %
The Company’s nonperforming loans, net of government guarantees increased in 2021 to $10.7 million as compared to $10.0 million in 2020. This increase was mostly due to several additions to nonaccrual loans which were only partially offset by principal paydowns and charge-offs on nonaccrual loans in 2021. There was interest income of $1.6 million and $924,000 recognized in net income for 2021 and 2020, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero. The Company had three relationships that each represented more than 10% of nonaccrual loans as of December 31, 2021.
The Company had $773,000 and $832,000 in loans classified as TDRs, net of government guarantees that were performing as of December 31, 2021 and 2020, respectively. Additionally, there were $6.5 million and $5.5 million in TDRs included in nonaccrual loans at December 31, 2021 and 2020 for total TDRs, net of government guarantees of $7.3 million and $5.3 million at December 31, 2021 and 2020, respectively. The increase in TDRs at December 31, 2021 as compared to 2020 was primarily due additions to TDRs that were only partially offset by payoffs and paydowns on loans classified as TDRs in 2021. See Note 5 of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report for further discussion of TDRs.
At December 31, 2021, management had identified potential problem loans of $2.1 million as compared to potential problem loans of $6.1 million at December 31, 2020. Potential problem loans are loans which are currently performing 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. The $4.0 million decrease in potential problem loans at December 31, 2021 from December 31, 2020 was primarily the result of one $3.9 million relationship moving to nonaccrual as well as paydowns and credit risk upgrades to existing potential problem loans that were partially offset by the addition of new potential problem loans in 2021.
The Company acquired a vessel totaling $231,000 in the third quarter of 2019 through foreclosure proceedings related to one lending relationship that was sold in the second quarter of 2021.
The following summarizes OREO activity for the periods indicated:
(In Thousands) 2021 2020 2019
Balance, beginning of the year $7,289 $7,043 $7,962
Transfers from loans 274 652 -
Proceeds from the sale of other real estate owned (2,610) (797) (1,299)
Gain on sale of other real estate owned, net 685 391 380
Balance, end of year 5,638 7,289 7,043
Government guarantees (1,279) (1,279) (1,279)
Balance, end of year, net of government guarantees $4,359 $6,010 $5,764
The Company made a $1.0 million loan in 2021 to facilitate the sale of OREO in 2021, but did not make any loans to facilitate the sale of OREO in 2020. Our underwriting policies and procedures for loans to facilitate the sale of OREO are no different than our standard loan policies and procedures.
Allowance for Credit Losses
The Company adopted ASU 2016-13 effective January 1, 2021. 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 Part II. Item 8 of this report for detailed discussion regarding the ACL methodology for loans and unfunded commitments.
The following tables show the allocation of the ACL and the percent of loans in each category to total loans and the ratio of net loan charge-offs to average loans outstanding by loan segment for the years indicated:
% of Loans(1)
Net loan charge-offs (recoveries) to average loans
(In Thousands) Amount
Commercial & industrial loans $3,027 33 % 0.21 %
Commercial real estate:
Owner occupied properties 3,176 21 % - %
Non-owner occupied and multifamily properties 2,930 31 % - %
Residential real estate:
1-4 family residential properties secured by first liens 439 2 % - %
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 215 1 % (0.21) %
1-4 family residential construction loans 120 3 % - %
Other construction, land development and raw land loans 1,635 6 % - %
Obligations of states and political subdivisions in the US 32 1 % - %
Agricultural production, including commercial fishing 91 2 % (0.15) %
Consumer loans 67 - % (0.27) %
Other loans 7 - % - %
Total $11,739 100 % 0.07 %
1Represents percentage of this category of loans to total portfolio loans.
% of Loans(1)
Net loan charge-offs (recoveries) to average loans
(In Thousands) Amount
Commercial $7,973 39 % 0.04 %
Real estate construction one-to-four family 679 3 % - %
Real estate construction other 1,179 6 % - %
Real estate term owner occupied 2,625 11 % 0.06 %
Real estate term non-owner occupied 5,133 21 % - %
Real estate term other 779 3 % - %
Consumer secured by 1st deed of trust 261 1 % - %
Consumer other 400 2 % (0.04) %
Unallocated 2,107 - % - %
Total $21,136 86 % 0.03 %
1Represents percentage of this category of loans to total portfolio loans.
As of December 31, 2021, and 2020, loans acquired in connection with our acquisition of Alaska Pacific on April 1, 2014 are included in the Company's ACL using the same methodology as all other loans as described in Note 1 of the notes to Consolidated Financial Statements included in Part II. Item 8 of this report due to the amount of time that has passed since the loans were purchased. The purchase discount related to acquired credit impaired loans was zero and $328,000 as of December 31, 2021 and 2020, respectively.
The provision for credit losses in 2021 as compared to 2020 decreased $6.5 million to a benefit for credit losses of $4.1 million compared to a provision of $2.4 million in 2020. This decrease is primarily due to improvement in economic assumptions. The Company determined that an ACL of $11.7 million, or 0.83% of portfolio loans, is appropriate as of December 31, 2021 based on our analysis of the current credit quality of the portfolio and current economic conditions. The provision for credit losses in 2020 as compared to 2019 increased $3.6 million to a provision for credit losses of $2.4 million compared to a benefit of $1.2 million in 2019. This increase is primarily due to management's assessment of risk associated with the economic impacts of the COVID-19 pandemic, the reduction in oil prices and a slowing Alaska economy, as well as growth in the unguaranteed portion of the loan portfolio.
As noted above, the ACL was recorded in accordance with CECL in 2021. The allowance for loan losses in 2020, prior to adoption of CECL, was recorded under the incurred loss model. Despite the fact that a different methodology was used in the calculation of the provision for credit losses in 2021 versus 2020, in general the decrease in the ACL on loans as of December 31, 2021 compared to December 31, 2020 is primarily the result of improvement in economic assumptions used to estimate credit losses following the economy's recovery from the COVID-19 pandemic. 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.
The following table sets forth information regarding changes in the ACL for unfunded commitments for the years indicated:
(In Thousands) 2021 2020
Balance at beginning of period $187 $152
Impact of adopting ASC 326 1,229 -
Adjusted balance, beginning of period 1,416 152
(Benefit) provision for credit losses (320) 35
Balance at end of period $1,096 $187
While management believes that it uses the best information available to determine the ACL, unforeseen market conditions and other events could result in an 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.
Purchased Receivables
Purchased receivable balances decreased at December 31, 2021 to $7.0 million from $13.9 million at December 31, 2020, and year-to-date average purchased receivable balances were $12.4 million and $14.5 million in 2021 and 2020, respectively. Purchased receivable income was $2.3 million and $2.7 million in 2021 and 2020, respectively. Purchased receivable income in 2021 decreased from 2020 due to customers reportedly using PPP loans to fund liquidity needs instead of selling receivables.
The following table sets forth information regarding changes in the purchased receivable ACL for the years indicated:
(In Thousands) 2021 2020 2019
Balance at beginning of year $73 $94 $190
Charge-offs - - -
Recoveries - - -
Charge-offs net of recoveries - - -
Reserve for (recovery from) purchased receivables - (21) (96)
Balance at end of year $- $73 $94
Ratio of net charge-offs (recoveries) to average purchased receivables during the period - % - % - %
Deposits
Deposits are our primary source of funds. Total deposits increased 33% to $2.4 billion at December 31, 2021 from $1.8 billion at December 31, 2020. This increase is primarily due to funding PPP loans, but is also due to new client relationships as a result of the Company's significant PPP efforts during 2021 and 2020. Our deposits generally are expected to fluctuate according to the level of our market share, economic conditions, and normal seasonal trends.
The following table sets forth the average balances outstanding and average interest rates for each major category of our deposits, for the periods indicated:
2021 2020 2019
Average balance Average rate paid Average balance Average rate paid Average balance Average rate paid
(In Thousands)
Interest-bearing demand accounts $575,298 0.08 % $387,416 0.16 % $272,895 0.17 %
Money market accounts 264,344 0.16 % 219,025 0.32 % 209,245 0.55 %
Savings accounts 323,131 0.15 % 257,292 0.28 % 233,057 0.46 %
Certificates of deposit 178,215 0.94 % 176,873 1.83 % 135,005 1.67 %
Total interest-bearing accounts 1,340,988 0.23 % 1,040,606 0.51 % 850,202 0.58 %
Noninterest-bearing demand accounts 784,092 597,610 426,205
Total average deposits $2,125,080 $1,638,216 $1,276,407
The Company's mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 93% of total deposits at December 31, 2021 and 90% at December 31, 2020.
The only deposit category with stated maturity dates is certificates of deposit. At December 31, 2021, we had $178.0 million in certificates of deposit, of which $118.5 million, or 67%, are scheduled to mature in 2022. The Company’s certificates of deposit increased to $178.0 million during 2021 as compared to $175.6 million at December 31, 2020. The aggregate amount of certificates of deposit in amounts of $250,000 or more at December 31, 2021 and 2020, was $77.1 million and $83.6 million, respectively. The following table sets forth the amount outstanding of certificates of deposits in amounts of $250,000 or more by time remaining until maturity and percentage of total deposits as of December 31, 2021:
Time Certificates of Deposits
of $250,000 or More
Percent of Total Deposits
(In Thousands) Amount
Amounts maturing in:
Three months or less $9,787 13 %
Over 3 through 6 months 9,814 13 %
Over 6 through 12 months 25,523 33 %
Over 12 months 31,989 41 %
Total $77,113 100 %
The Company offers the Certificate of Deposit Account Registry Service® (CDARS®) as a member of Promontory Interfinancial Network, LLCSM (Network). When a Network member places a deposit using CDARS, that certificate of deposit is divided into amounts under the standard FDIC insurance maximum ($250,000) and is allocated among member banks, making the large deposit eligible for FDIC insurance. The Company had $24.0 million CDARS certificates of deposits at December 31, 2021 and $9.4 million CDARS certificates of deposits at December 31, 2020.
Borrowings
FHLB: The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). As a member, the Bank is eligible to obtain advances from the FHLB. FHLB advances are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Company’s assets. At December 31, 2021, our maximum borrowing line from the FHLB was $1.219 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements. The Company has outstanding advances of $14.5 million as of December 31, 2021 which were originated to match fund low income housing projects that qualify for long term fixed interest
rates. These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23% to 3.25%.
Federal Reserve Bank: The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $50.7 million of loans as collateral to secure advances made through the discount window as of December 31, 2021. There were no discount window advances outstanding at December 31, 2021 or 2020. The Company paid less than $1,000 in interest in 2021 and 2020 on this agreement. The Company utilized the Federal Reserve Bank's PPPLF to fund SBA PPP loans during the second quarter of 2020, but has repaid those funds in full as of June 30, 2020. This advance had an interest rate of 0.35%.
Other Short and Long-term Borrowings: The Company had no short or long-term borrowings outstanding other than the FHLB advances noted above as of December 31, 2021 or 2020.
The Company is subject to provisions under Alaska state law which generally limit the amount of outstanding debt to 35% of total assets or $948.0 million at December 31, 2021 and 35% of total assets or $736.0 million at December 31, 2020.
Junior Subordinated Debentures
On December 16, 2005, the Company’s subsidiary, NST2, issued trust preferred securities in the principal amount of $10 million. These securities carry an interest rate of 90-day LIBOR plus 1.37% per annum that was initially set at 5.86% adjusted quarterly. The securities have a maturity date of March 15, 2036, and are callable by the Company on or after March 15, 2011. These securities are treated as Tier 1 capital by the Company’s regulators for capital adequacy calculations. The interest cost to the Company of these securities was $160,000 in 2021. At December 31, 2021, the securities had an interest rate of 1.57%. The Company entered into an interest rate swap in the third quarter of 2017 to hedge the variability in cash flows arising out of its junior subordinated debentures, 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 million of junior subordinated debentures held under NST2 at 3.72% through its maturity date. Net of the impact of the interest rate swap, interest expense on these securities was $382,000 in 2021 and $385,000 in 2020.
Liquidity and Capital Resources
The Company is a single bank holding company and its primary ongoing source of liquidity is from dividends received from the Bank. Such dividends arise from the cash flow and earnings of the Bank. Banking regulations and regulatory authorities may limit the amount of, or require the Bank to obtain certain approvals before paying, dividends to the Company. Given that the Bank currently meets and the Bank anticipates that it will continue to meet, all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards, the Company expects to continue to receive dividends from the Bank during 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 December 31, 2021, the Company has 10.0 million authorized shares of common stock, of which 6.0 million are issued and outstanding, leaving 4.0 million shares available for issuance. Additionally, the Company has 2.5 million authorized shares of preferred stock available for issuance.
The Bank manages its liquidity through its Asset and Liability Committee. The Bank's primary source of funds are customer deposits. These funds, together with loan repayments, loan sales, maturity of investment securities, borrowed funds, and retained earnings are used to make loans, to acquire securities and other assets, and to fund deposit flows and continuing operations. The primary sources of demands on our liquidity are customer demands for withdrawal of deposits and borrowers’ demands that we advance funds against unfunded lending commitments.
The Company had cash and cash equivalents of $645.8 million, or 24% of total assets at December 31, 2021 compared to $116.0 million, or 6% of total assets as of December 31, 2020. The increase in cash and cash equivalents is primarily due to a significant increase in deposits. Management expects this elevated level of liquidity to continue through 2022 and potentially into subsequent years. Accordingly, management has invested in slightly longer term investment securities as compared to the last several years. As of December 31, 2021, the weighted average maturity of available for sale securities is 4.1 years compared to 2.6 years at December 31, 2020. At December 31, 2021, $5.0 million in available for sale securities mature in 2022, $15 million mature in 2023, and $116.2 million mature in 2024. Our total unfunded commitments to fund loans, loans held for sale, and letters of credit at December 31, 2021, were $445.9 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. At December 31, 2021, certificates of deposit totaling $118.6 million and $52.6 million, respectively, contractually mature in 2022 and 2023, and may be withdrawn from the Bank. Similar to loans, we do not
expect that these maturing certificates of deposit, or other non-maturity deposits, to be withdrawn from the Bank in a manner that will strain liquidity; however, unforeseen future circumstances or events may cause higher than anticipated withdrawal of deposits or draws of unfunded commitments to fund new loans. Management believes that cash requirements to fund future non-deposit liabilities, including operating lease liabilities, other liabilities, or borrowings as of December 31, 2021, are not material to the Company's liquidity position as of December 31, 2021.
The Company has other available sources of liquidity to fund unforeseen liquidity needs. These include borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB. At December 31, 2021, our liquid assets were $907.9 million and our funds available for borrowing under our existing lines of credit were $1.27 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 II. Item 8 of this report, net cash provided by operating activities was $112.0 million in 2021 and net cash used by operating activities was $36.5 million in 2020. The primary source of cash provided by, and used by operating activities for all periods presented was positive net income. In 2021 proceeds from the sale of loans held for sale exceeded proceeds used in originations as refinance activity slowed, and in 2020 the opposite was true. In 2020 the origination of loans held for sale exceeded proceeds from the sale of loans held for sale which is the primary reason that operating cash flow is negative in 2020. Net cash used by investing activities was $159.1 million in 2021 primarily due to purchases of available for sale and held to maturity securities. Net cash used by investing activities was $382.8 million in 2020 primarily due to increases in loans, in particular PPP loans. Financing activities provided cash of $577.0 million in 2021 and $439.8 million in 2020. Financing activities provided cash in both 2021 and 2020 due to increases in deposits that were only partially offset by the payment of cash dividends to shareholders and the repurchase of shares of the Company's common stock.
Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market. The following table presents the amount of common shares repurchased and the weighted average price paid per share for the periods indicated:
Years Ending: Common Shares Repurchased Weighted Average Price
2021 279,276 $41.30
2020 327,000 $30.51
2019 347,676 $36.15
2018 15,468 $31.90
2017 58,341 $27.56
At December, 31, 2021, there were 33,724 shares available under the previously announced stock repurchase program. However, on January 28, 2022 the Company announced that its Board of Directors authorized the repurchase of up to an additional 300,000 shares of common stock. The Company intends to continue to repurchase our stock from time-to-time depending upon market conditions, but we can make no assurances that we will continue this program or that we will authorize additional shares for repurchase.
The table below shows the cumulative effect the repurchase of common shares since the inception of the Company on diluted earnings per share:
Years Ending: Diluted
EPS as
Reported Diluted EPS without Stock Repurchase
2021 $6.00 $4.79
2020 $5.11 $4.22
2019 $3.04 $2.59
2018 $2.86 $2.56
2017 $1.88 $1.69
Regulatory Capital Requirements: 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 December 31, 2021, that the Company and the Bank met all applicable capital adequacy requirements for a “well-capitalized” institution by regulatory standards.
The table below illustrates the capital requirements in effect in 2021 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 2022 exceeding the FDIC’s new 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 is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our consolidated 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 December 31, 2021 and 2020, respectively, 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
December 31, 2021
Total risk-based capital 8.00% 10.00% 14.79% 12.13%
Tier 1 risk-based capital 6.00% 8.00% 14.08% 11.42%
Common equity tier 1 capital 4.50% 6.50% 13.50% 11.43%
Leverage ratio 4.00% 5.00% 9.03% 7.31%
See Note 23 of the Consolidated Financial Statements included in Part II. Item 8 of this report for a detailed discussion of the capital ratios. The requirements for "well-capitalized" come from the Prompt Correction Action rules. See Part I. Item 1 Supervision and Regulation. 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.
Critical Accounting Policies
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. Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements in Part II. Item 8 of this report. Not all of these significant accounting policies require management to make critical accounting estimates. Management believes that the following accounting policies would be considered critical under the SEC's definition. The following discussion is intended to supplement, but not duplicate, information provided in Note 1 in the Notes to Consolidated Financial Statements in Part II. Item 8 of this report for these policies.
Allowance for Credit Losses Policy: The Company adopted CECL on January 1, 2021. The Company's Executive Loan Management Committee and Asset Liability Committee are both involved in monitoring various aspects of the Company's 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. The Company uses a DCF method for 8 of its 11 loan pools, which represent 97% of the amortized cost basis of total loan pools at December 31, 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.
Under the DCF method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD"). The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables. The Company's regression models for PD utilize the Company's actual historical loan level default data. The Company determines a reasonable and supportable forecast and applies that forecast to the regression model to estimate defaults over the forecast period. Management leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the Company's four quarter forecast period. Management utilizes and forecasts Alaska unemployment as a loss driver for all of the loans pools that utilize the DCF method. Management also utilizes and forecasts either one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics. Following the forecast period, the economic variables used to calculate PD revert to a historical average at a constant rate over an eight quarter reversion period. Other assumptions relevant to the discounted cash flow model to derive the quantitative allowance include the LGD, which is the estimate of loss for a defaulted loan, prepayment speeds, and the discount rate applied to future cash flows. The DCF method utilizes the effective interest rate of individual assets to discount the expected credit losses over the contractual term of the loan, adjusted for prepayments. The LGD is the expected loss which would be realized presuming a default has occurred and primarily measures the value of the collateral or other secondary source of repayment related to the collateral.
The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses under CECL as 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 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 credit lines 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.
Valuation of goodwill and other intangibles: Management performs an impairment analysis for the intangible assets with indefinite lives on an annual basis as of December 31. Additionally, goodwill and other intangible assets with indefinite lives are evaluated on an interim basis when events or circumstances indicate impairment potentially exists. The impairment analysis requires management to make subjective judgments. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. There can be no assurance that changes in circumstances, estimates or assumptions may result in additional impairment of all, or some portion of, goodwill or other intangible assets. The Company performed its annual goodwill impairment testing at December 31, 2021 and 2020 in
accordance with the policy described in Note 1 to the financial statements included in Part II. Item 8 of this report. At December 31, 2021, the Company performed its annual impairment test by performing a qualitative assessment. Significant positive inputs to the qualitative assessment included the Company’s increasing net income as compared to historical trends; the Company's increasing market share for deposits in our markets; results of regulatory examinations; peer comparisons of the Company's net interest margin; trends in the Company’s cash flows; improvements in the Alaskan economy in 2021; increases in the volume of mortgage originations in Alaska; increases in the Company's market share of mortgage originations; and increases in the Company's stock price. Significant negative inputs to the qualitative assessment included the muted pace of growth in the Alaska economy. We believe that the positive inputs to the qualitative assessment noted above outweigh the negative inputs for both of the Company's operating segments, and we therefore concluded that it is more likely than not that the fair value of the Company exceeds its carrying value at December 31, 2021 and that no potential impairment existed at that time.
Valuation of OREO: Other Real Estate Owned ("OREO") represents properties acquired through foreclosure or its equivalent. Prior to foreclosure, the carrying value is adjusted to the fair value, less cost to sell, of the real estate to be acquired by an adjustment to the allowance for loan loss. The amount by which the fair value less cost to sell is greater than the carrying amount of the loan plus amounts previously charged off is recognized in earnings. Any subsequent reduction in the carrying value is charged against earnings. Management's evaluation of fair value is based on appraisals or discounted cash flows of anticipated sales. The amounts ultimately recovered from the sale of OREO may differ from the carrying value of the assets because of market factors beyond the Company's control or due to changes in the Company's strategies for recovering the investment.
Servicing rights: The Company measures mortgage servicing rights ("MSRs") and commercial servicing rights ("CSRs") at fair value on a recurring basis with changes in fair value going through earnings in the period in which the change occurs. Changes in the fair value of MSRs are recorded in mortgage banking income, and changes in the fair value of CSRs are recorded in commercial servicing revenue. Fair value adjustments encompass market-driven valuation changes and the decrease in value that occurs from the passage of time, which are separately reported. Retained servicing rights are measured at fair value as of the date of sale. Initial and subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of servicing rights, the present value of expected net 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 for MSRs are also compared to publicly filed information from several large MSR holders, as available.
Fair Value: A hierarchical disclosure framework associated with the level of pricing observability is utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is defined as the sensitivity of income, expense, fair value measurements, and capital to changes in interest rates, foreign currency rates, commodity prices, and other relevant market rates or prices. The primary market risks that we are exposed to are interest rate and price risks, in addition to risk in the Alaska economy due to our community banking focus. Price risk is the risk to current or future earnings or capital arising from changes in the value of either assets or liabilities that are entered into as part of distributing or managing risk. Interest rate risk is the risk to current or future earnings or capital arising from changes in interest rates. Generally, there are four sources of interest rate risk as described below:
•Re-pricing Risk: Generally, re-pricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes affect an institution’s assets and liabilities.
•Basis Risk: Basis risk is the risk of adverse consequences resulting from unequal changes in the spread between two or more rates for different instruments with the same maturity.
•Yield Curve Risk: Also called yield curve twist risk, yield curve risk is the risk of adverse consequences resulting from unequal changes in the spread between two or more rates for different maturities for the same instrument.
•Option Risk: In banking, option risks are known as borrower options to prepay loans and depositor options to make deposits, withdrawals, and early redemptions. Option risk arises whenever bank products give customers the right, but not the obligation, to alter the quantity of the timing of cash flows.
The Company is exposed to price and interest rate risks in the financial instruments and positions we hold. This includes investment securities, loans, loans held for sale, mortgage servicing rights, deposits, borrowings, and derivative financial instruments. Market risks such as foreign currency exchange risk and commodity price risk do not arise in the normal course of the Company's business.
The Company's price and interest rate risks are managed by the Asset and Liability Committee, a management committee that identifies and manages the sensitivity of earnings and capital to changing interest rates to achieve our overall financial objectives. Based on economic conditions, asset quality and various other considerations, the Asset and Liability Committee establishes overall balance sheet management policies as well as tolerance ranges for interest rate sensitivity and manages within these ranges.
A number of measures are used to monitor and manage interest rate risk, including interest sensitivity (gap) analysis and income simulations. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Key assumptions in the model include loan and deposit volumes and pricing, prepayment speeds on fixed rate assets, and cash flows and maturities of investment securities. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, changes in market conditions and management strategies, among other factors.
Although analysis of interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is one standard tool for the measurement of exposure to interest rate risk, we believe that because interest rate gap analysis does not address all factors that can affect earnings performance it should not be used as the primary indicator of exposure to interest rate risk and the related volatility of net interest income in a changing interest rate environment. Interest rate gap analysis is primarily a measure of liquidity based upon the amount of change in principal amounts of assets and liabilities outstanding, as opposed to a measure of changes in the overall net interest margin.
The Company uses derivatives in the Home Mortgage Lending segment, including commitments to originate residential mortgage loans at fixed prices, and it enters into forward delivery contracts to sell mortgage-backed securities to broker/dealers at specific prices and dates in order to hedge the interest rate risk in its residential mortgage loan commitments. The Company does not use derivatives outside of these activities in the Home Mortgage Lending segment to manage our interest rate risk exposures. However, the Company does enter into commercial loan interest rate swap agreements in its Community Banking segment in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Commercial loan interest rate swap agreements are offset with corresponding swap agreements with a third party swap dealer in order to offset the Company's exposure on the fixed component of the customer’s interest rate swap. Additional information regarding the Company’s customer interest rate swap program is presented in Note 20 of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report.
The following table sets forth the estimated maturity or repricing, and the resulting interest rate gap, of our interest-earning assets (which exclude nonaccrual loans) and interest-bearing liabilities at December 31, 2021. The amounts shown below could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawals of deposits, and competition.
Estimated maturity or repricing at December 31, 2021
(In Thousands) Within 1 year 1-5 years >5 years Total
Interest -Earning Assets:
Interest bearing deposits in other banks $625,022 $- $- $625,022
Investments securities and FHLB Stock 144,270 313,941 - 458,211
Loans 650,478 675,118 88,183 1,413,779
Loans held for sale 73,650 - - 73,650
Total interest-earning assets $1,493,420 $989,059 $88,183 $2,570,662
Percent of total interest-earning assets 58.09 % 38.47 % 3.43 % 99.99 %
Interest-Bearing Liabilities:
Interest-bearing demand accounts $692,683 $- $- $692,683
Money market accounts 314,996 - - 314,996
Savings accounts 348,164 - - 348,164
Certificates of deposit 121,515 55,131 1,318 177,964
Securities sold under repurchase agreements - - - -
Borrowings 812 3,540 10,156 14,508
Junior subordinated debentures - - 10,310 10,310
Total interest-bearing liabilities $1,478,170 $58,671 $21,784 $1,558,625
Percent of total interest-bearing liabilities 94.84 % 3.76 % 1.40 % 100.00 %
Interest sensitivity gap $15,250 $930,388 $66,399 $1,012,037
Cumulative interest sensitivity gap $15,250 $945,638 $1,012,037
Cumulative interest sensitivity gap as a percentage
of total interest-earning assets 0.6 % 36.8 % 39.4 %
As stated previously, certain shortcomings, including those described below, are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets have features that restrict changes in their interest rates, both on a short-term basis and over the lives of the assets. Further, in the event of a change in market interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables as can the relationship of rates between different loan and deposit categories. Moreover, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an increase in market interest rates.
While the analysis above sets forth the estimated maturity or repricing and the resulting interest rate gap of our interest-earning assets and interest-bearing liabilities, the following tables show the estimated impact on net interest income and net income at one and two year time horizons with instantaneous parallel rate shocks of up 400 basis points, up 300 basis points, up 200 basis points, up 100 basis points, and up 50 basis points. The Company did not perform analyses for rate shock scenarios where interest rates instantaneously drop as of December 31, 2021 because those scenarios do not produce meaningful results in the current low interest rate environment. Due to the various assumptions used for this modeling and potential balance sheet strategies management may implement to mitigate interest rate risk, no assurance can be given that projections will reflect actual results.
The following table shows the estimated impact on net interest income under the stated interest rate scenarios:
1st Year Change in net interest income from base scenario Percentage change 2nd Year Change in net interest income from base scenario Percentage change
(In Thousands)
Scenario:
Up 400 basis points $22,226 31.06 % $30,206 43.61 %
Up 300 basis points $16,926 23.65 % $22,966 33.16 %
Up 200 basis points $11,235 15.70 % $15,302 22.09 %
Up 100 basis points $5,590 7.81 % $7,653 11.05 %
Up 50 basis points $4,552 6.36 % $5,730 8.27 %
Up 25 basis points $2,321 3.24 % $2,892 4.18 %
Down 50 basis points NM NM NM NM
Down 100 basis points NM NM NM NM
The following table shows the estimated impact on net income under the stated interest rate scenarios. The trends in the estimated impact on net income under the stated interest rate scenarios differ from the table above primarily due to the inclusion of the estimated impact of changes in other operating income and expense related to mortgage banking activities:
1st Year Change in net income from base scenario Percentage change 2nd Year Change in net income from base scenario Percentage change
(In Thousands)
Scenario:
Up 400 basis points $11,151 59.21 % $17,223 147.02 %
Up 300 basis points $10,187 54.09 % $14,757 125.97 %
Up 200 basis points $6,968 37.00 % $10,044 85.74 %
Up 100 basis points $3,786 20.10 % $5,342 45.61 %
Up 50 basis points $3,222 17.11 % $4,095 34.96 %
Up 25 basis points $1,841 9.77 % $2,260 19.29 %
Down 50 basis points NM NM NM NM
Down 100 basis points NM NM NM NM

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following report, audited consolidated financial statements and the notes thereto are set forth in this Annual Report on Form 10-K on the pages indicated:
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Everett, Washington, PCAOB ID: 659)
Consolidated Balance Sheets at December 31, 2021 and 2020
For the Years Ended December 2021, 2020 and 2019:
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Northrim BanCorp, Inc. and Subsidiaries
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Northrim BanCorp, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective January 1, 2021, due to the adoption of Accounting Standards Codification Topic 326: Financial Instruments - Credit Losses (“Topic 326”). The Company adopted the new credit loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses - Loans
As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for credit losses - loans balance was $11.7 million at December 31, 2021. The allowance for credit losses - loans is management’s best estimate of current expected credit losses in its loan portfolio and is estimated using either a discounted cash flow method or a weighted average remaining life method, depending on the nature and size of the loan pool. 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 loans. 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 using qualitative factors.
We identified management’s estimation and application of management’s forecast of economic conditions used in the calculation of probabilities of default in the allowance for credit losses - loans as a critical audit matter. The forecast of economic conditions component of the allowance for credit losses - loans is used to compare the conditions that existed during the historical period to current conditions and future expectations, and to make adjustments to the historical data accordingly. Auditing management’s judgments regarding the estimation and application of forecasted economic conditions portion of the allowance for credit losses - loans involved a high degree of subjectivity.
The primary procedures we performed to address the critical audit matters included:
•Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for credit losses - loans, including controls over the estimation and application of forecast of economic conditions.
•Obtaining management’s analysis and supporting documentation related to the forecast of economic conditions used to determine the probabilities of default, and testing whether the forecasts of economic conditions used in the calculation of the allowance for credit losses on loans are reasonable and supportable.
•Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses - loans, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, application of forecasted economic conditions used in the calculation of determining probabilities of default, and recalculation of the impact of the forecast on the allowance for credit losses - loans balance.
/s/ Moss Adams LLP
Everett, Washington
March 4, 2022
We have served as the Company’s auditor since 2010.
CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.
Consolidated Balance Sheets
December 31, 2021 and 2020
December 31,
2021 December 31,
(In Thousands, Except Share Data)
ASSETS
Cash and due from banks $20,805 $23,304
Interest bearing deposits in other banks 625,022 92,661
Investment securities available for sale, at fair value 426,684 247,633
Marketable equity securities 8,420 9,052
Investment securities held to maturity, at amortized cost 20,000 10,000
Investment in Federal Home Loan Bank stock 3,107 2,551
Loans held for sale 73,650 146,178
Loans 1,413,886 1,444,050
Allowance for credit losses, loans (11,739) (21,136)
Net loans 1,402,147 1,422,914
Purchased receivables, net 6,987 13,922
Mortgage servicing rights, at fair value 13,724 11,218
Other real estate owned, net 5,638 7,289
Premises and equipment, net 37,164 38,102
Operating lease right-of-use assets 11,001 12,440
Goodwill 15,017 15,017
Other intangible assets, net 992 1,029
Other assets 54,361 68,488
Total assets $2,724,719 $2,121,798
LIABILITIES
Deposits:
Demand $887,824 $643,825
Interest-bearing demand 692,683 459,095
Savings 348,164 308,725
Money market 314,996 237,705
Certificates of deposit less than $250,000 100,851 92,047
Certificates of deposit $250,000 and greater 77,113 83,584
Total deposits 2,421,631 1,824,981
Borrowings 14,508 14,817
Junior subordinated debentures 10,310 10,310
Operating lease liabilities 10,965 12,378
Other liabilities 29,488 37,737
Total liabilities 2,486,902 1,900,223
COMMITMENTS AND CONTINGENCIES (NOTE 19)
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding
- -
Common stock, $1 par value, 10,000,000 shares authorized, 6,014,813 and 6,251,004 shares
issued and outstanding at December 31, 2021 and December 31, 2020, respectively
6,015 6,251
Additional paid-in capital 31,162 41,808
Retained earnings 204,046 173,498
Accumulated other comprehensive (loss) income, net of tax (3,406) 18
Total shareholders' equity 237,817 221,575
Total liabilities and shareholders' equity $2,724,719 $2,121,798
See notes to consolidated financial statements
NORTHRIM BANCORP, INC.
Consolidated Statements of Income
Years Ended December 31, 2021, 2020, and 2019
(In Thousands, Except Share and Per Share Data) 2021 2020 2019
Interest and Dividend Income
Interest and fees on loans and loans held for sale $79,241 $71,091 $62,150
Interest on investment securities available for sale 3,339 4,832 6,572
Dividends on marketable equity securities 440 466 439
Interest on investment securities held to maturity 1,037 18 -
Dividends on Federal Home Loan Bank stock 102 84 76
Interest on deposits in other banks 447 225 846
Total Interest Income 84,606 76,716 70,083
Interest Expense
Interest expense on deposits 3,077 5,279 4,961
Interest expense on securities sold under agreements to repurchase - - 40
Interest expense on borrowings 320 387 251
Interest expense on junior subordinated debentures 382 385 389
Total Interest Expense 3,779 6,051 5,641
Net Interest Income 80,827 70,665 64,442
(Benefit) provision for credit losses (4,099) 2,432 (1,175)
Net Interest Income After (Benefit) Provision for Credit Losses 84,926 68,233 65,617
Other Operating Income
Mortgage banking income 42,144 52,635 24,201
Bankcard fees 3,389 2,837 2,976
Purchased receivable income 2,259 2,650 3,271
Service charges on deposit accounts 1,297 1,102 1,557
Interest rate swap income 452 949 964
Commercial servicing revenue 306 527 624
Gain on sale of marketable equity securities, net 67 98 -
Unrealized (loss) gain on marketable equity securities (101) 61 911
Gain on sale of investment securities available for sale, net - - 23
Other income 2,450 2,469 2,819
Total Other Operating Income 52,263 63,328 37,346
Other Operating Expense
Salaries and other personnel expense 60,412 61,137 51,317
Data processing expense 8,567 7,668 7,128
Occupancy expense 7,078 6,624 6,607
Professional and outside services 2,801 3,157 2,531
Marketing expense 2,741 2,320 2,373
Insurance expense 1,593 1,228 557
Intangible asset amortization expense 37 48 60
Compensation expense - RML acquisition payments - - 468
OREO (income) expense, net of rental income and gains on sale (432) (242) (193)
Other operating expense 6,399 7,174 5,990
Total Other Operating Expense 89,196 89,114 76,838
Income Before Provision for Income Taxes 47,993 42,447 26,125
Provision for income taxes 10,476 9,559 5,434
Net Income $37,517 $32,888 $20,691
Earnings Per Share, Basic $6.07 $5.18 $3.08
Earnings Per Share, Diluted $6.00 $5.11 $3.04
Weighted Average Shares Outstanding, Basic 6,180,801 6,354,687 6,708,622
Weighted Average Shares Outstanding, Diluted 6,249,313 6,431,367 6,808,209
See notes to consolidated financial statements
NORTHRIM BANCORP, INC.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2021, 2020, and 2019
(In Thousands) 2021 2020 2019
Net income $37,517 $32,888 $20,691
Other comprehensive income (loss), net of tax:
Securities available for sale:
Unrealized holding (losses) gains arising during the period ($5,564) $411 $2,866
Reclassification of net gains included in net income (net of tax
expense of $-, $-, and $7 in 2021, 2020, and 2019,
respectively) - - (16)
Derivatives and hedging activities:
Unrealized holding gains (losses) during the period 780 (1,201) (1,142)
Income tax benefit (expense) related to unrealized gains and losses 1,360 377 (757)
Other comprehensive (loss) income, net of tax (3,424) (413) 951
Comprehensive income $34,093 $32,475 $21,642
See notes to consolidated financial statements
NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2021, 2020, and 2019
Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total
Number of Shares Par Value
(In Thousands)
Balance at January 1, 2019 6,883 $6,883 $62,132 $137,452 ($520) $205,947
Cash dividend declared - - - (8,528) - (8,528)
Stock-based compensation expense - - 832 - - 832
Exercise of stock options and vesting of restricted stock units, net 24 24 (231) - - (207)
Repurchase of common stock (348) (348) (12,221) - - (12,569)
Other comprehensive income, net of tax - - - - 951 951
Net income - - - 20,691 - 20,691
Balance at December 31, 2019 6,559 $6,559 $50,512 $149,615 $431 $207,117
Cash dividend declared - - - (8,866) - (8,866)
Stock-based compensation expense - - 943 - - 943
Exercise of stock options and vesting of restricted stock units, net 19 19 (137) - - (118)
Repurchase of common stock (327) (327) (9,649) - - (9,976)
Other comprehensive (loss), net of tax - - - - (413) (413)
Cumulative effect of adoption of accounting principles related to equity compensation expense - - 139 (139) - -
Net income - - - 32,888 - 32,888
Balance at December 31, 2020 6,251 $6,251 $41,808 $173,498 $18 $221,575
Cash dividend declared - - - (9,369) - (9,369)
Stock-based compensation expense - - 1,073 - - 1,073
Exercise of stock options and vesting of restricted stock units, net 43 43 (464) - - (421)
Repurchase of common stock (279) (279) (11,255) - - (11,534)
Other comprehensive (loss), net of tax - - - - (3,424) (3,424)
Cumulative effect of adoption of ASU 2016-13 - - - 2,400 - 2,400
Net income - - - 37,517 - 37,517
Balance at 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 Cash Flows
Years Ended December 31, 2021, 2020, and 2019
(In Thousands) 2021 2020 2019
Operating Activities:
Net income $37,517 $32,888 $20,691
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Gain on sale of securities, net (67) (98) (23)
Loss on sale of premises and equipment - 22 -
Depreciation and amortization of premises 3,276 3,147 2,986
Amortization of software 1,161 1,104 1,019
Intangible asset amortization 37 48 60
Amortization of investment security premium, net of discount accretion 529 19 (15)
Unrealized loss (gain) on marketable equity securities 101 (61) (911)
Deferred tax (income) expense (1,298) 555 711
Stock-based compensation 1,073 943 832
Deferral of loan fees and amortization, net of costs (192) 6,650 598
Provision (benefit) for credit losses (4,099) 2,432 (1,175)
Benefit for purchased receivables - (21) (96)
Additions to home mortgage servicing rights carried at fair value (6,088) (4,824) (3,707)
Change in fair value of home mortgage servicing rights carried at fair value 3,582 5,526 2,608
Change in fair value of commercial servicing rights carried at fair value 437 99 (6)
Gain on sale of loans (36,436) (46,258) (19,813)
Proceeds from the sale of loans held for sale 1,227,150 1,263,325 670,986
Origination of loans held for sale (1,118,186) (1,295,411) (684,297)
Gain on sale of other real estate owned (685) (391) (380)
Net changes in assets and liabilities:
Decrease (increase) in accrued interest receivable 1,133 (3,467) 305
Decrease (increase) in other assets 12,739 (15,096) 6,395
(Decrease) increase in other liabilities (9,695) 12,415 2,411
Net Cash Provided (Used) by Operating Activities 111,989 (36,454) (821)
Investing Activities:
Investment in securities:
Purchases of investment securities available for sale (320,501) (160,423) (132,104)
Purchases of marketable equity securities (493) (1,552) -
Purchases of FHLB stock (573) (5,931) (880)
Purchases of investment securities held to maturity (10,000) (10,000) -
Proceeds from sales/calls/maturities of securities available for sale 135,365 189,323 130,482
Proceeds from sales of marketable equity securities 1,084 601 229
Proceeds from redemption of FHLB stock 17 5,518 843
Decrease (increase) in purchased receivables, net 6,935 10,472 (9,871)
Decrease (increase) in loans, net 28,975 (408,365) (58,879)
Proceeds from sale of other real estate owned 2,610 797 1,299
Purchases of software (170) (416) (721)
Purchases of premises and equipment (2,338) (2,849) (2,318)
Net Cash (Used) Provided by Investing Activities (159,089) (382,825) (71,920)
Financing Activities:
Increase in deposits 596,650 452,630 144,263
(Decrease) increase in securities sold under repurchase agreements - - (34,278)
Proceeds from borrowings - 110,610 1,817
Repayments of borrowings (309) (104,684) (167)
Proceeds from the issuance of common stock 1,543 84 73
Repurchase of common stock (11,534) (9,976) (12,569)
Cash dividends paid (9,388) (8,844) (8,512)
Net Cash Provided by Financing Activities 576,962 439,820 90,627
Net Change in Cash and Cash Equivalents 529,862 20,541 17,886
Cash and Cash Equivalents at Beginning of Year 115,965 95,424 77,538
Cash and Cash Equivalents at End of Year $645,827 $115,965 $95,424
Supplemental Information:
Income taxes paid $6,380 $7,790 $1,658
Interest paid $3,813 $6,009 $5,640
Noncash commitments to invest in Low Income Housing Tax Credit Partnerships $- $- $11,267
Transfer of loans to other real estate owned $274 $652 $-
Loans made to facilitate sales of other real estate owned $1,012 $- $-
Non-cash lease liability arising from obtaining right of use assets $79 $370 $1,234
Cash dividends declared but not paid $92 $98 $89
Cumulative effect adjustment to retained earnings $2,400 ($139) $-
See notes to consolidated financial statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
Nature of Operations: Northrim BanCorp, Inc. (the “Company”), is a publicly traded bank holding company headquartered in Anchorage, Alaska that is primarily engaged in the delivery of business and personal banking services through its wholly-owned banking subsidiary, Northrim Bank ("the Bank"). The Bank also engages in retail mortgage origination services through its wholly-owned subsidiary, Residential Mortgage Holding Company, LLC, the parent company of Residential Mortgage, LLC (collectively “RML”). Additionally, the Bank through its wholly-owned subsidiary, Northrim Funding Services ("NFS"), operates a factoring division in Bellevue, Washington. Related companies include Pacific Wealth Advisors, LLC (“PWA”) and Homestate Mortgage Company, LLC ("Homestate"). The Company has an equity investment in PWA through its wholly owned subsidiary, Northrim Investment Services Company ("NISC"), and the Company has an equity investment in Homestate through RML.
Use of Estimates: The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States and prevailing practices within the banking industry. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income, gains, expenses, and losses during the reporting periods. Actual results could differ from those estimates. Significant estimates include the allowance for loan losses (“Allowance”), valuation of goodwill and other intangibles, valuation of other real estate owned (“OREO”), valuation of mortgage servicing rights, and fair value disclosures.
Consolidation: The Company consolidates affiliates in which we have a controlling interest. The accompanying consolidated financial statements include the accounts of the Company, the Bank, RML, and NISC. Significant intercompany balances have been eliminated in consolidation. As of December 31, 2021, the Company had one wholly-owned business trust subsidiary, Northrim Statutory Trust 2 ("Trust 2") that was formed to issue trust preferred securities and related common securities of Trust 2. The Company has not consolidated the accounts of Trust 2 in its consolidated financial statements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). As a result, the junior subordinated debentures issued by the Company to Trust 2 are reflected on the Company’s consolidated balance sheet as junior subordinated debentures. The Company has determined that PWA and Homestate are not variable interest entities and therefore, the Company does not consolidate the balance sheets and income statements of PWA or Homestate into its financial statements. The Company owns a 24% interest in PWA and a 30% interest in Homestate Mortgage Company, LLC, and these investments are accounted for as equity method investments. Results of PWA and Homestate are included in "Other income" in our Consolidated Statements of Income. Investments in other companies are presented on a one-line basis in the caption “Other assets” in our Consolidated Balance Sheets.
Operating Segments: In accordance with ASC 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("CODM"), or decision making group, in deciding how to allocate resources and in assessing performance. The Company uses the "management approach" in determining reportable operating segments. The management approach considers the internal organization and reporting used the by the Company's CODM for making operating decisions and assessing performance as the source for determining the Company's reportable segments. Management, including the CODM, review operating results by the revenue of different services. For the year ended December 31, 2021 and 2020, the Company has two operating business lines; Community Banking and Home Mortgage Lending. Information about the Company's operating segments is included in Note 26 of the Notes to the Company's Consolidated Financial Statements included in Part II. Item 8 of this report.
Reclassifications: Certain reclassifications have been made to prior year amounts to maintain consistency with the current year with no impact on net income or total shareholders’ equity.
Subsequent Events: The Company has evaluated events and transactions subsequent to December 31, 2021 for potential recognition or disclosure.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with other banks, federal funds sold, and securities with original maturities of less than 90 days at acquisition.
Equity Securities: Marketable equity securities are stated at fair value. Changes in fair value are included in "Unrealized gain (loss) on marketable equity securities" in our Consolidated Statements of Income.
Non-marketable equity securities are accounted for under the equity method of accounting and are included in other assets in our Consolidated Balance Sheets. The Company performs an impairment analysis on it's non-marketable equity securities when events or circumstances indicate impairment potentially exists.
Investment Securities: Debt securities are classified as available for sale if the Company intends and has the ability to hold those securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell a debt security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Premiums and discounts are amortized over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
Securities available for sale are stated at fair value. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Unrealized holding gains or losses are included in other comprehensive income as a separate component of shareholders' equity, net of tax.
Held to maturity securities are stated at cost, adjusted for amortization of premium and accretion of discount on a level-yield basis. The Company has the ability and intent to hold these securities to maturity.
The Company amortizes purchase premiums for callable debt securities to the earliest call date and discounts are accreted over the contractual life.
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 December 31, 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.
Federal Home Loan Bank Stock: The Company’s investment in Federal Home Loan Bank of Des Moines (“FHLB”) stock is carried at par value because the shares can only be redeemed with the FHLB at par. The Company is required to maintain a minimum level of investment in FHLB stock based on the Company’s total Bank assets and outstanding advances. FHLB stock is carried at cost and is subject to recoverability testing at least annually.
Loans held for sale: The Company designates loans held for sale as either carried at fair value or the lower of cost or fair value at loan level at origination. Loans held for sale include residential mortgage loans that have been originated for sale in the secondary market. Related gains or losses on the sale of these loans are recognized in mortgage banking income.
Loans: Loans are carried at their principal amount outstanding, net of charge-offs, unamortized fees, and direct loan origination costs. Loan origination fees received in excess of direct origination costs are deferred and accreted to interest income using the interest method in accordance with ASC 310 over the life of the loan. Loan balances are charged-off to the ACL when management believes that collection of principal is unlikely. Interest income on loans is accrued and recognized on the principal amount outstanding except for loans in a nonaccrual status. All classes of loans are placed on nonaccrual when management believes doubt exists as to the collectability of the interest or principal. Cash payments received on nonaccrual loans are directly applied to the principal balance. Generally, a loan may be returned to accrual status when the delinquent principal and interest is brought current in accordance with the terms of the loan agreement and certain ongoing performance criteria have been met. Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms.
A loan is classified as a troubled debt restructuring ("TDR") when a borrower is experiencing financial difficulties that lead to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. These concessions may include interest rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses. Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a period of at least six months to demonstrate that the borrower can meet the restructured terms. If the borrower's performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan. 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 classifies fair value measurements on loans as level 3 valuations in the fair value hierarchy because of their use of unobservable inputs.
Acquired Loans: Loans purchased without more-than-insignificant credit deterioration are recorded at their fair value at the acquisition date. Loans purchased with more-than-insignificant credit deterioration will be recorded with their applicable allowance for credit loss to determine amortized cost basis.
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 loan 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 either a DCF method or a weighted average remaining life method to estimate expected credit losses quantitatively. 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"). Under the DCF method the combination of adjustments for the 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.
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 qualitative factors in its calculation of expected losses in 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 external appraisals or in-house evaluations on loans secured by real property, management’s assessment of the current market, recent payment history and an evaluation of other sources of repayment. 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 estimated value of the collateral, the location and type of collateral 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 appraisals 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’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.
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 an 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 ("PPP") 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.
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.
Other Real Estate Owned: OREO represents properties acquired through foreclosure or its equivalent. Prior to foreclosure, the carrying value is adjusted to the fair value, less cost to sell, of the real estate to be acquired by an adjustment to the Allowance. Management’s evaluation of fair value is based on appraisals or discounted cash flows of anticipated sales. After foreclosure, any subsequent reduction in the carrying value is charged against earnings. Operating expenses associated with OREO are charged to earnings in the period they are incurred. Operating expenses associated with OREO are recorded net of rental income and gain on sales associated with OREO.
Premises and Equipment: Premises and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization expense for financial reporting purposes is computed using the straight-line method based upon the shorter of the lease term or the estimated useful lives of the assets that vary according to the asset type and include; furniture and equipment ranging between 3 and 7 years, leasehold improvements ranging between 2 and 15 years, and buildings at 39 years. Maintenance and repairs are charged to current operations, while renewals and betterments are capitalized. Long-lived assets such as premises and equipment are reviewed for impairment at least annually or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision, or that the carrying amount of the long-lived asset may not be fully recoverable. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Goodwill and Other Intangible Assets: Intangible assets are comprised of goodwill and other intangibles acquired in business combinations. Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective useful lives, and are also reviewed for impairment. Amortization of intangible assets is included in other operating expense in the Consolidated Statements of Income. The Company performs a goodwill impairment analysis at each reporting unit on an annual basis. Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists.
Low Income Housing Tax Credit Partnerships: The Company earns a return on its investments in these partnerships in the form of tax credits and deductions that flow through to it as a limited partner. The Company amortizes these investments in tax expense over the period during which tax benefits are received.
Servicing Rights: Mortgage and commercial servicing rights associated with loans originated and sold, where servicing is retained, are measured at fair value and changes in fair value are reported through earnings. Changes in the fair value of servicing rights occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputs and assumptions. Under the fair value method, servicing rights are carried on the balance sheet at fair value and the changes in fair value are reported in earnings in other operating income in the period in which the change occurs. Fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of servicing rights, 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. For mortgage servicing rights ("MSRs"), the model assumptions are also compared to publicly filed information from several large MSR holders, as available.
Other Assets: Other assets include purchased software and prepaid expenses. Purchased software is carried at amortized cost and is amortized using the straight-line method over its estimated useful life or the term of the agreement. Also included in other assets is the net deferred tax asset, bank owned life insurance carried at cash surrender value, net of premium charges, accrued interest receivable, taxes receivable, and rate lock derivatives.
Derivatives: The Company records all derivatives on the Consolidated Balance Sheets at fair value. The accounting for change in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate the
derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Interest rate swaps that are designated as a cash flow hedge and satisfy the hedge accounting requirements involve the receipt of variable amounts from a counter-party in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives which are designed as cash flow hedges and satisfy hedge accounting requirements, the effective portion of changes in the fair value of the derivative is recorded in accumulated other comprehensive income (loss). The fair value of the Company's derivatives is determined using DCF analysis using observable market based inputs. The Company considers all free-standing derivatives not designated in a hedging relationship as economic hedges and recognizes these derivatives as either assets or liabilities in the balance sheet. These assets and liabilities are measured at fair value, and changes in fair value are recorded in earnings. By using derivatives, the Company is exposed to counterparty credit risk, which is the risk that counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, our counterparty credit risk is equal to the amount reported as a derivative asset on our balance sheet, net of cash collateral received. We minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. For derivative instruments executed with the same counterparty under a master netting arrangement, we do not offset fair value amounts of interest rate swaps in liability positions with interest rate swaps in asset positions. For further detail, see Note 20 of the notes to the Company's Consolidated Financial Statements included in Part II. Item 8 of this report.
Transfers or sales of financial assets: For transfers of entire financial assets or a participating interest in an entire financial asset recorded as sales, we recognize and initially measure at fair value all assets obtained and liabilities incurred. We record a gain or loss in other operating income for the difference between the carrying amount and the fair value of the assets sold. Fair values are based on quoted market prices, quoted market prices for similar assets, or if market prices are not available, then the fair value is estimated using discounted cash flow analysis with assumptions for credit losses, prepayments and discount rates that are corroborated by and verified against market observable data, where possible.
Revenue Recognition: The majority of the Company's revenues come from interest income on loans and investment securities, as well as other non-interest income including mortgage banking income, bankcard fees, purchased receivable income, and service charges on deposits. The Company recognizes income in accordance with the applicable accounting guidance for these revenue sources. The Company's revenues that are within the scope of ASC Topic 606 are presented within other operating income and include bankcard fees, service charges on deposits, and other non-interest income including merchant services fees, commissions from sales of mutual funds and other investments, safety deposit box rental fees, bank check and other check fees, and other miscellaneous revenue streams.
Revenue within the contracts with customers guidance is recognized when obligations under the terms of a contract with customers are satisfied. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. When the amount of consideration is variable, the Company will only recognize revenue to the extent that it is probable that the cumulative amount recognized will not be subject to a significant reversal in the future. Substantially all of the Company's contracts with customers have expected durations of one year or less and payments are typically due when or as the services are rendered or shortly thereafter. When third parties are involved in providing services to customers, the Company recognizes revenue on a gross basis when it has control over those services being provided to the customer; otherwise, revenue is recognized for the net amount of any fee or commission.
Advertising: Advertising, promotion, and marketing costs are expensed as incurred. The Company reported total expenses in these areas of $2.7 million, $2.3 million, and $2.4 million for each of the years ending December 31, 2021, 2020, and 2019, respectively.
Stock Incentive Plans: The Company has stock-based employee compensation plans as more fully discussed in Note 22, Stock-Based Compensation to the Company's Consolidated Financial Statements included in Part II. Item 8 of this report. Compensation cost is recognized for stock options and restricted stock units issued to employees based on the fair value of these awards at the date of grant. A Black Scholes model is utilized to estimate the fair value of stock options, while the market price for the Company's common stock at the date of grant issued is utilized for restricted stock awards. The Company recognizes compensation expense over the vesting period of each award. The Company's accounting policy changed during the year ended December 31, 2020 and now recognizes forfeitures as they occur.
Income Taxes: The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. Our policy is to recognize interest and penalties on unrecognized tax benefits in “Other operating expense" in the Consolidated Statements of Income.
Earnings Per Share: Earnings per share is calculated using the weighted average number of shares and dilutive common stock equivalents outstanding during the period. Stock options and restricted stock units, as described in Note 22 of the notes to the Company's Consolidated Financial Statements included in Part II. Item 8 of this report, are considered to be common stock equivalents. Potentially dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. Anti-dilutive shares outstanding related to options to acquire common stock for the year ended December 31, 2020 totaled 45,062. There were no anti-dilutive shares outstanding related to options to acquire common stock in 2021 or 2019.
Information used to calculate earnings per share was as follows:
(In Thousands) 2021 2020 2019
Net income $37,517 $32,888 $20,691
Basic weighted average common shares outstanding 6,181 6,355 6,709
Dilutive effect of potential common shares from awards granted under equity incentive program 68 76 99
Total 6,249 6,431 6,808
Earnings per common share
Basic $6.07 $5.18 $3.08
Diluted $6.00 $5.11 $3.04
Comprehensive Income: Comprehensive income consists of net income, net unrealized gains (losses) on securities available for sale after the tax effect, and net unrealized gains (losses) on derivative and hedging activities.
Concentrations: Substantially all of the Company’s business is derived from the Anchorage, Matanuska-Susitna Valley, Fairbanks, Kenai Peninsula, and Southeast areas of Alaska. As such, the Company’s growth and operations depend upon the economic conditions of Alaska and these specific markets. These areas rely primarily upon the natural resources industries, particularly oil production, as well as tourism, government and U.S. military spending for their economic success. A significant majority of the unrestricted revenues of the Alaska state government are currently funded through various taxes and royalties on the oil industry. The Company’s business is and will remain sensitive to economic factors that relate to these industries and local and regional business conditions. As a result, local or regional economic downturns, or downturns that disproportionately affect one or more of the key industries in regions served by the Company, may have a more pronounced effect upon its business than they might on an institution that is less geographically concentrated. The extent of the future impact of these events on economic and business conditions cannot be predicted; however, prolonged or acute fluctuations could have a material and adverse impact upon the Company’s results of operation and financial condition.
At December 31, 2021 and 2020, the Company had $572.7 million and $728.2 million, respectively, in commercial and construction loans. At December 31, 2021, commercial loans included $118.2 million in PPP loans administered by the U.S. Small Business Administration ("SBA"). Additionally, the Company continues to have a concentration in large borrowing relationships. At December 31, 2021, 33% of the Company’s loan portfolio is attributable to 32 large borrowing relationships. The Company has additional unfunded commitments to these borrowers of $153.3 million at December 31, 2021.
Fair Value Measurements: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies. In accordance with GAAP, the Company groups its assets and liabilities measured at fair value into the following three levels:
•Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value.
•Level 2: Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
•Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market, or inputs that require significant management judgment or estimation, some of which may be internally developed.
Recent Accounting Pronouncements
Accounting pronouncements implemented in 2021
In June 2016, 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 had 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 the publication of LIBOR after December 31, 2021, with the exception of certain tenors of U.S. dollar (USD) LIBOR that it proposed would remain available for use in legacy contracts or as otherwise enumerated by financial regulators until June 30, 2023. The Company has some assets and liabilities referenced to LIBOR, such as commercial loans, derivatives, debt securities, and junior subordinated debentures. As of December 31, 2021, we had approximately $180.5 million of assets, including $102.2 million in commercial loans and $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 December 31, 2021, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $143.2 million. Of this amount, $71.6 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers. An additional $71.6 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 $81.6 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.
NOTE 2 - Cash and Due from Banks
The Company is no longer required to maintain minimum cash balances or deposits with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank").
The Company is required to maintain a $300,000 balance with a correspondent bank for outsourced servicing of ATMs.
The Company is 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 of one of its interest rate swaps, respectively.
NOTE 3 - Interest Bearing Deposits in Other Banks
All interest bearing deposits in other banks have a maturity of one year or less. Balances at December 31 for the respective years are as follows:
(In Thousands) 2021 2020
Interest bearing deposits at Federal Reserve Bank $622,034 $54,488
Interest bearing deposits at FHLB 138 133
Other interest bearing deposits at other institutions 2,850 38,040
Total $625,022 $92,661
NOTE 4 - Investment Securities
Marketable Equity Securities
The Company held marketable equity securities with fair values of $8.4 million and $9.1 million at December 31, 2021 and 2020, respectively. The gross realized and unrealized gains (losses) recognized on marketable equity securities in other operating income in the Company's Consolidated Statements of Income for the periods indicated were as follows:
(In Thousands) 2021 2020 2019
Unrealized (loss) gain on marketable equity securities ($101) $61 $911
Gain on sale of marketable equity securities, net 67 98 -
Total ($34) $159 $911
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 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 unrecognized gains and losses of held to maturity securities at the periods indicated:
(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
(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
(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
Gross unrealized losses on investment 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 December 31, 2021 and 2020, were as follows:
Less Than 12 Months More Than 12 Months Total
(In Thousands) Fair
Value Unrealized Losses Fair
Value Unrealized Losses Fair
Value Unrealized Losses
Securities Available for Sale
U.S. Treasury and government sponsored entities $292,845 ($4,012) $21,743 ($355) $314,588 ($4,367)
Corporate bonds 4,953 (77) - - 4,953 (77)
Collateralized loan obligations 29,470 (22) - - 29,470 (22)
Total $327,268 ($4,111) $21,743 ($355) $349,011 ($4,466)
Securities Available for Sale
U.S. Treasury and government sponsored entities $31,270 ($47) $- $- $31,270 ($47)
Corporate bonds 3,198 (5) - - 3,198 (5)
Collateralized loan obligations 23,670 (118) 2,967 (24) 26,637 (142)
Total $58,138 ($170) $2,967 ($24) $61,105 ($194)
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 December 31, 2021 and 2020, there were 41 and 12 available for sale securities in an unrealized loss position without an ACL, respectively, that have been in a loss position for less than twelve months. There were 3 and 1 available for sale securities without an ACL with unrealized losses at December 31, 2021 and 2020, respectively, that have been at a loss position for more than twelve months. At December 31, 2021 and 2020, there were two and no held to maturity securities in an unrealized loss position without an ACL, respectively, that have been in a loss position for less than twelve months. 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 December 31, 2021, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no losses have been recognized in the Company's Consolidated Statements of Income.
At December 31, 2021 and 2020, $59.5 million and $77.9 million in securities were pledged for deposits and borrowings, respectively.
The amortized cost and fair values of available for sale and held to maturity debt securities at December 31, 2021, are distributed by contractual maturity as shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In Thousands) Amortized Cost Fair Value Weighted Average Yield
U.S. Treasury and government sponsored entities
Within 1 year $4,999 $5,041 2.80 %
1-5 years 340,515 336,439 0.79 %
Total $345,514 $341,480 0.82 %
Corporate bonds
1-5 years $37,691 $37,912 2.41 %
5-10 years 15,030 14,953 6.50 %
Total $52,721 $52,865 2.81 %
Collateralized loan obligations
1-5 years $5,000 $5,000 1.65 %
5-10 years 46,431 46,418 1.39 %
Total $51,431 $51,418 1.42 %
Municipal securities
1-5 years 820 840 2.14 %
Total $820 $840 2.14 %
The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the years ending December 31, 2021, 2020, and 2019, respectively, are as follows:
(In Thousands) Proceeds Gross Gains Gross Losses
Available for sale securities $- $- $-
Available for sale securities $- $- $-
Available for sale securities $4,219 $23 $-
A summary of interest income for the years ending December 31, 2021, 2020, and 2019 on available for investment securities is as follows:
(In Thousands) 2021 2020 2019
U.S. Treasury and government sponsored entities $2,203 $3,396 $4,170
Other 1,118 1,354 2,282
Total taxable interest income $3,321 $4,750 $6,452
Municipal securities $18 $82 $120
Total tax-exempt interest income $18 $82 $120
Total $3,339 $4,832 $6,572
NOTE 5 - 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 December 31, 2021 and 2020.
Loans Held for Investment
The Company adopted ASU 2016-13 effective January 1, 2021. Upon adoption, the Company changed its loan segments for purposes of the calculation of the ACL. Prior to January 1, 2021, the Company's loan segments were based on a combination of loan purpose and loan collateral. Effective January 1, 2021 and thereafter, the Company's loan segments are primarily based on loan collateral. The following table presents the Company's loan segments as of December 31, 2020 under the legacy segmentation and the new segmentation under ASU 2016-13:
(In Thousands) Pre-ASU 2016-13
Commercial loans $780,058
Real estate construction one-to-four family 38,467
Real estate construction other 80,315
Real estate term owner occupied 163,597
Real estate term non-owner occupied 309,074
Real estate term other 46,620
Consumer secured by 1st deeds of trust 15,585
Consumer other 22,069
Subtotal 1,455,785
Unearned loan fees, net (11,735)
Total portfolio loans $1,444,050
Post-ASU 2016-13
Commercial & industrial loans $619,304
Commercial real estate:
Owner occupied properties 234,364
Non-owner occupied and multifamily properties 394,860
Residential real estate:
1-4 family residential properties secured by first liens 33,463
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 18,114
1-4 family residential construction loans 32,760
Other construction, land development and raw land loans 84,352
Obligations of states and political subdivisions in the US 15,274
Agricultural production, including commercial fishing 13,093
Consumer loans 5,794
Other loans 4,407
Subtotal $1,455,785
Unearned loan fees, net ($11,735)
Total portfolio loans $1,444,050
The following table presents amortized cost and unpaid principal balance of loans for the periods indicated:
December 31, 2021 December 31, 2020
(In Thousands) Amortized Cost Unpaid Principal Difference Amortized Cost Unpaid Principal Difference
Commercial & industrial loans $448,338 $454,106 ($5,768) $612,254 $619,304 ($7,050)
Commercial real estate:
Owner occupied properties 300,200 301,623 (1,423) 233,320 234,363 (1,043)
Non-owner occupied and multifamily properties 435,311 438,631 (3,320) 392,452 394,860 (2,408)
Residential real estate:
1-4 family residential properties secured by first liens 32,542 32,602 (60) 33,415 33,510 (95)
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 19,610 19,489 121 18,236 18,114 122
1-4 family residential construction loans 36,222 36,542 (320) 32,500 32,760 (260)
Other construction, land development and raw land loans 88,094 88,604 (510) 83,463 84,351 (888)
Obligations of states and political subdivisions in the US 16,403 16,565 (162) 15,318 15,274 44
Agricultural production, including commercial fishing 27,959 28,082 (123) 12,968 13,093 (125)
Consumer loans 4,801 4,763 38 5,734 5,794 (60)
Other loans 4,406 4,422 (16) 4,390 4,407 (17)
Total 1,413,886 1,425,429 (11,543) 1,444,050 1,455,830 (11,780)
Allowance for credit losses (11,739) (21,136)
$1,402,147 $1,425,429 ($11,543) $1,422,914 $1,455,830 ($11,780)
The difference between the amortized cost and unpaid principal balance is primarily net deferred origination fees totaling $11.5 million and $11.7 million at December 31, 2021 and 2020, respectively, and premiums and discounts associated with acquired loans totaling $0 and $47,000 at December 31, 2021 and 2020, respectively.
Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $5.5 million and $7.1 million at December 31, 2021 and 2020, respectively, and was included in other assets in the Consolidated Balance Sheets.
Amortized cost in the above table includes $118.2 million and $304.6 million as of December 31, 2021 and 2020, respectively, in PPP loans administered by the SBA within the Commercial & industrial loan segment.
At December 31, 2021, approximately 75% of the Company’s loans, excluding PPP loans, are secured by real estate and 1% are unsecured. Approximately 24% are for general commercial uses, including professional, retail, and small businesses. Repayment is expected from the borrowers’ cash flow or, secondarily, the collateral. The Company’s exposure to credit loss, if any, is the outstanding amount of the loan if the collateral is determined to be of no value.
Allowance for Credit Losses
The activity in the ACL related to loans held for investment is as follows:
Beginning Balance Impact of adopting ASC 326 Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance
(In Thousands)
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 (122) (1,452) 253 3,027
Commercial real estate:
Owner occupied properties - 3,579 (412) - 9 3,176
Non-owner occupied and multifamily properties - 4,944 (2,014) - - 2,930
Residential real estate:
1-4 family residential properties secured by first liens - 673 (234) - - 439
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens - 419 (242) - 38 215
1-4 family residential construction loans - 454 (334) - - 120
Other construction, land development and raw land loans - 1,994 (359) - - 1,635
Obligations of states and political subdivisions in the US - 44 (12) - - 32
Agricultural production, including commercial fishing - 49 11 - 31 91
Consumer loans - 118 (65) - 14 67
Other loans - 3 4 - - 7
Total $21,136 ($4,511) ($3,779) ($1,452) $345 $11,739
Beginning Balance Provision (benefit) Charge-offs Recoveries Ending Balance
(In Thousands)
Commercial $6,604 $1,680 ($1,021) $710 $7,973
Real estate construction 1-4 family 643 36 - - 679
Real estate construction other 1,017 162 - - 1,179
Real estate term owner occupied 2,188 522 (85) - 2,625
Real estate term non-owner occupied 5,180 (47) - - 5,133
Real estate term other 671 106 - 2 779
Consumer secured by 1st deed of trust 270 (9) - - 261
Consumer other 436 (46) (15) 25 400
Unallocated 2,079 28 - - 2,107
Total $19,088 $2,432 ($1,121) $737 $21,136
As of December 31, 2021 the ACL decreased to $11.7 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.
At December 31, 2021, as compared to January 1, 2021, the Company forecasted a significantly lower unemployment rate in Alaska, a slightly higher one-year percentage change in the national commercial real estate price index, and a higher one-year percentage change in the Alaska home price index over the reasonable and supportable forecast period. Specifically regarding the forecasts used to calculate the December 31, 2021 ACL, management expects unemployment to decline each quarter in 2022 as compare to actual levels observed in Alaska as of December 2021. This rate is still above pre-pandemic levels over the forecast period, but is lower than rates previously projected by management.
The Company also applies qualitative factors in our CECL model, and these factors also improved as of December 31, 2021 as compared to January 1, 2021 due to increases in oil prices. Additionally, the ACL for individually impaired loans decreased during the 2021 due to pay downs. These factors, which decreased the ACL during 2021, were only partially offset by an increase 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 year ended December 31, 2020:
(In Thousands) Average Impaired Loans Interest Recognized
Commercial $10,964 $147
Real estate construction 1-4 family 781 -
Real estate construction other - -
Real estate term owner occupied 6,739 125
Real estate term non-owner occupied 562 29
Real estate term other 1,551 20
Consumer secured by 1st deed of trust 299 12
Consumer other 86 -
Total $20,982 $333
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 the 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.
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
The following table presents the Company's portfolio of risk-rated loans by grade as of December 31, 2020:
Pass Classified Total
(In Thousands)
December 31, 2020
Commercial $758,362 $14,106 $772,468
Real estate construction 1-4 family 37,093 1,087 38,180
Real estate construction other 79,403 - 79,403
Real estate term owner occupied 152,734 9,990 162,724
Real estate term non-owner occupied 289,555 17,692 307,247
Real estate term other 42,900 3,330 46,230
Consumer secured by 1st deed of trust 15,404 144 15,548
Consumer other 22,144 106 22,250
Portfolio loans 1,397,595 46,455 1,444,050
Government guarantees (334,639) (14,587) (349,226)
Portfolio loans, net of government guarantees $1,062,956 $31,868 $1,094,824
Past Due Loans
The following tables present an aging of contractually past due loans as of the periods indicated:
(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
December 31, 2021
Commercial & industrial loans $206 $51 $469 $726 $447,612 $448,338 $-
Commercial real estate:
Owner occupied properties 12 - 1,176 1,188 299,012 300,200 -
Non-owner occupied and multifamily properties - - - - 435,311 435,311 -
Residential real estate:
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 - - 139 139 19,471 19,610 -
1-4 family residential construction loans - - 109 109 36,113 36,222 -
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 - - - - 16,403 16,403 -
Agricultural production, including commercial fishing - - - - 27,959 27,959 -
Consumer loans - - - - 4,801 4,801 -
Other loans - - - - 4,406 4,406 -
Total $218 $51 $3,619 $3,888 $1,409,998 $1,413,886 $-
December 31, 2020
Commercial & industrial loans $242 $229 $2,675 $3,146 $609,108 $612,254 $-
Commercial real estate:
Owner occupied properties 2,203 - 2,459 4,662 228,658 233,320 449
Non-owner occupied and multifamily properties - - - - 392,452 392,452 -
Residential real estate:
1-4 family residential properties secured by first liens 446 - - 446 32,969 33,415 -
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 construction loans - - 702 702 31,798 32,500 -
Other construction, land development and raw land loans - - 1,545 1,545 81,918 83,463 -
Obligations of states and political subdivisions in the US - - - - 15,318 15,318 -
Agricultural production, including commercial fishing - - - - 12,968 12,968 -
Consumer loans - - 272 272 5,462 5,734 -
Other loans - - - - 4,390 4,390 -
Total $2,929 $229 $7,792 $10,950 $1,433,100 $1,444,050 $449
Nonaccrual Loans
Nonaccrual loans net of government guarantees totaled $10.7 million and $9.6 million at December 31, 2021 and December 31, 2020, respectively. The following table presents loans on nonaccrual status and loans on nonaccrual status for which there was no related allowance for credit losses:
December 31, 2021 December 31, 2020
(In Thousands) Nonaccrual Nonaccrual With No ACL Nonaccrual Nonaccrual With No ACL
Commercial & industrial loans $4,350 $4,298 $3,848 $3,513
Commercial real estate:
Owner occupied properties 3,506 3,506 4,620 4,582
Residential real estate:
1-4 family residential properties secured by first liens 1,778 1,778 160 160
1-4 family residential properties secured by junior liens
and revolving secured by 1-4 family first liens 271 215 242 221
1-4 family residential construction loans 109 109 702 702
Other construction, land development and raw land loans 1,636 1,636 1,545 1,545
Consumer loans - - 3 -
Total nonaccrual loans 11,650 11,542 11,120 10,723
Government guarantees on nonaccrual loans (978) (978) (1,483) (1,483)
Net nonaccrual loans $10,672 $10,564 $9,637 $9,240
Interest income which would have been earned on nonaccrual loans for 2021, 2020, and 2019 amounted to $744,000, $856,000, and $1.3 million, respectively.
There was $10,000 interest on nonaccrual loans reversed through interest income in 2021, and there was $12,000 in interest on nonaccrual loans reversed through interest income in 2020. There was no interest earned on nonaccrual loans with a principal balance during 2021 or 2020. However, the Company recognized interest income of $1.6 million, $924,000, and $301,000 in 2021, 2020, and 2019, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero.
Troubled Debt Restructurings
Loans classified as TDRs totaled $10.6 million and $7.9 million at December 31, 2021 and 2020, respectively. A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession that it would not grant otherwise.
The provisions of the 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. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company has elected to adopt these provisions of the CARES Act. As of December 31, 2021 and 2020, 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 December 31, 2021
(Dollars in thousands) Interest Only Full Payment Deferral Total
Portfolio loans $49,219 $31 $49,250
Number of modifications 16 1 17
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
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.
The following table presents the breakout between newly restructured loans that occurred during 2021 and restructured loans that occurred prior to 2021 that are still included in portfolio loans. As discussed above, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019. The below disclosed restructurings were not related to COVID-19 modifications:
Accrual Status Nonaccrual Status Total Modifications
(In Thousands)
New Troubled Debt Restructurings
Commercial & industrial loans $- $3,118 $3,118
Commercial real estate:
Owner occupied properties - 350 350
Residential real estate:
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens - 139 139
Other construction, land development and raw land loans - 577 577
Subtotal - 4,184 4,184
Existing Troubled Debt Restructurings 3,291 3,163 6,454
Total $3,291 $7,347 $10,638
The following tables present newly restructured loans that occurred during 2021 and 2020, by concession (terms modified):
December 31, 2021
(In Thousands) Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications
Pre-Modification Outstanding Recorded Investment:
Commercial & industrial loans 2 $- $3,792 $- $- $3,792
Commercial real estate:
Owner occupied properties 1 - 360 - - 360
Residential real estate:
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 1 - - 139 - 139
Other construction, land development and raw land loans 1 - 577 - - 577
Total 5 $- $4,729 $139 $- $4,868
Post-Modification Outstanding Recorded Investment:
Commercial & industrial loans 1 $- $3,118 $- $- $3,118
Commercial real estate:
Owner occupied properties 1 - 350 - - 350
Residential real estate:
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 1 - - 139 - 139
Other construction, land development and raw land loans 1 - 577 - - 577
Total 4 $- $4,045 $139 $- $4,184
December 31, 2020
(In Thousands) Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications
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 $- $1,590 $161 $- $1,751
Total 2 $- $1,590 $161 $- $1,751
The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in TDRs at December 31, 2021. There were zero charge-offs in 2021 and 2020 on loans that were later classified as a TDR.
There were no loans that were restructured during 2021, 2020, or 2019 that also subsequently defaulted within the first twelve months of restructure in those same periods.
Loans to Related Parties
Certain directors, and companies of which directors are principal owners, have loans with the Company. Such transactions are made on substantially the same terms, including interest rates and collateral required, as those prevailing for similar transactions of unrelated parties. An analysis of the loan transactions for the years indicated follows:
(In Thousands) 2021 2020 2019
Balance, beginning of the year $217 $309 $-
Loans made - - 309
Repayments 26 92 -
Balance, end of year $191 $217 $309
The Company had $115,000 of unfunded loan commitments to these directors or their related interests on December 31, 2021 and $15,000 of unfunded loan commitments on December 31, 2020.
Pledged Loans
At December 31, 2021 and 2020, there were no loans pledged as collateral to secure public deposits.
NOTE 6 - Purchased Receivables
Purchased receivables are carried at their principal amount outstanding, net of an ACL, and have a maturity of less than one year. There are no purchased receivables past due at December 31, 2021 or 2020, and there were no restructured purchased receivables in 2021, 2020, or 2019.
Income on purchased receivables is accrued and recognized on the balance 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 December 31, 2021 or 2020.
The following table summarizes the components of net purchased receivables at December 31, for the years indicated:
(In Thousands) 2021 2020
Purchased receivables $6,987 $13,995
Allowance for credit losses - purchased receivables - (73)
Total $6,987 $13,922
The following table sets forth information regarding changes in the ACL on purchased receivables for the periods indicated:
(In Thousands) 2021 2020 2019
Balance at beginning of year $73 $94 $190
Impact of adopting ASC 326 (73) - -
Charge-offs - - -
Recoveries - - -
Charge-offs net of recoveries - - -
Benefit for purchased receivables - (21) (96)
Balance at end of year $- $73 $94
NOTE 7 - Servicing Rights
Mortgage servicing rights
The following table details the activity in the Company's MSR for the year indicated:
(In Thousands) 2021 2020 2019
Balance, beginning of period $11,218 $11,920 $10,821
Additions for new MSR capitalized 6,088 4,824 3,707
Changes in fair value:
Due to changes in model inputs of assumptions (1)
(1,181) (2,701) (1,313)
Other (2)
(2,401) (2,825) (1,295)
Carrying value, December 31 $13,724 $11,218 $11,920
(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 the dates indicated:
(In Thousands) December 31, 2021 December 31, 2020
Balance of mortgage loans serviced for others $772,764 $683,117
MSR as a percentage of serviced loans 1.78 % 1.64 %
The Company recognized servicing fees of $2.9 million, $2.7 million, and $2.4 million during 2021, 2020, and 2019, respectively, which includes contractually specified servicing fees and ancillary fees which are included in "Mortgage banking income" as a component of other noninterest income in the Company's Consolidated Statements of Income.
The following table outlines the key assumptions used in measuring the fair value of mortgage servicing rights as of December 31, 2021 and 2020:
2021 2020
Average constant prepayment rate 11.80 % 13.05 %
Average discount rate 8.00 % 7.75 %
Key economic assumptions and the sensitivity of the current fair value for mortgage servicing rights to immediate adverse changes in those assumptions at December 31, 2021 and 2020 were as follows:
(In Thousands) December 31, 2021 December 31, 2020
Aggregate portfolio principal balance $772,764 $683,117
Weighted average rate of note 3.31 % 3.62 %
December 31, 2021 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change
Conditional prepayment rate 11.80 % 23.59 % 34.57 %
Discount rate 8.00 % 7.00 % 6.00 %
Fair value MSR $13,724 $9,612 $7,256
Percentage of MSR 1.78 % 1.24 % 0.94 %
December 31, 2020
Conditional prepayment rate 13.05 % 26.11 % 38.97 %
Discount rate 7.75 % 6.75 % 5.75 %
Fair value MSR $11,218 $7,455 $5,404
Percentage of MSR 1.64 % 1.09 % 0.79 %
The above tables show the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four family Alaska Housing Finance Corporation/FNMA/FHLMC serviced home loan. The above tables reference a 100 basis point and 200 basis point decrease in discount rates.
These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSR is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.
Commercial servicing rights
Commercial servicing right assets ("CSRs") have a carrying value of $1.1 million and $1.3 million at December 31, 2021 and 2020, respectively, and total commercial loans serviced for others were $259.8 million and $274.6 million at December 31, 2021 and 2020, respectively. Key assumptions used in measuring the fair value of CSRs as of December 31, 2021 and 2020 include a conditional prepayment rate of 16.08% and 9.66% and a discount rate of 9.94% and 9.46%, respectively.
NOTE 8 - Other Real Estate Owned
At December 31, 2021 and 2020, the Company held $5.6 million and $7.3 million, respectively, as OREO. The following table details net operating (income) expense related to OREO for the years indicated:
Years Ended December 31,
(In Thousands) 2021 2020 2019
OREO (income) expense, net rental income and gains on sale:
OREO operating expense $777 $658 $693
Rental income on OREO (524) (509) (506)
Gains on sale of OREO (685) (391) (380)
Total ($432) ($242) ($193)
NOTE 9 - Premises and Equipment
The following summarizes the components of premises and equipment at December 31 for the years indicated:
(In Thousands) Useful Life 2021 2020
Land $5,137 $5,137
Furniture and equipment 3-7 years
14,287 13,157
Tenant improvements 2-15 years
10,394 9,182
Buildings 39 years 37,283 37,618
Total Premises and Equipment 67,101 65,094
Accumulated depreciation and amortization (29,937) (26,992)
Total Premises and Equipment, Net $37,164 $38,102
Depreciation expense and amortization of leasehold improvements was $3.3 million, $3.1 million, and $3.0 million for the years ended December 31, 2021, 2020, and 2019, respectively.
NOTE 10 - 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") asset and lease liabilities. As of December 31, 2021, the Company has operating lease ROU assets of $11.0 million and operating lease liabilities of $11.0 million. As of December 31, 2020, the Company has operating lease ROU assets of $12.4 million and operating lease liabilities of $12.4 million. The Company does not have any agreements that are classified as finance leases.
The following table presents additional information about the Company's operating leases:
(In Thousands) 2021 2020
Lease Cost
Operating lease cost(1)
$2,773 $2,819
Short term lease cost(1)
27 35
Total lease cost $2,800 $2,854
Other information
Operating leases - operating cash flows $2,614 $2,681
Weighted average lease term - operating leases, in years 10.55 10.72
Weighted average discount rate - operating leases 3.21 % 3.29 %
(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 and the total of the subsequent remaining years to the operating lease liabilities recorded on the balance sheet:
(In Thousands) Operating Leases
2022 $2,502
2023 2,109
2024 1,961
2025 1,858
2026 721
Thereafter 4,265
Total minimum lease payments $13,416
Less: amount of lease payment representing interest (2,451)
Present value of future minimum lease payments $10,965
NOTE 11 - Goodwill and Intangible Assets
A summary of goodwill and intangible assets at December 31, 2021 and 2020, is as follows:
(In Thousands) 2021 2020
Intangible assets:
Goodwill $15,017 $15,017
Core deposit intangible 42 79
Trade name intangible 950 950
Total $16,009 $16,046
The Company performed goodwill impairment testing at December 31, 2021 and December 31, 2020 in accordance with the policy described in Note 1 to the Company's Consolidated Financial Statements included in Part II. Item 8 of this report.
At December 31, 2021, the Company performed its annual impairment test using a qualitative assessment. Significant positive inputs to the qualitative assessment included the Company’s increasing net income as compared to historical trends; the Company's increasing market share for deposits in our markets; results of regulatory examinations; peer comparisons of the Company's net interest margin; trends in the Company’s cash flows; improvements in the Alaskan economy in 2021; increases in the volume of mortgage originations in Alaska; increases in the Company's market share of mortgage originations; and increases in the Company's stock price. Significant negative inputs to the qualitative assessment included the the muted pace of growth in the Alaskan economy. We believe that the positive inputs to the qualitative assessment noted above outweigh the negative inputs, and we therefore concluded that it is more likely than not that no impairment existed at that time.
The Company recorded amortization expense of its intangible assets of $37,000, $48,000, and $60,000 for the years ended December 31, 2021, 2020, and 2019, respectively. Accumulated amortization for intangible assets was $6.0 million at both December 31, 2021 and 2020.
The future amortization expense required on these assets is as follows:
(In Thousands)
2022 $25
2023 14
2024 3
2025 -
2026 -
Thereafter -
Total $42
NOTE 12 - Other Assets
A summary of other assets as of December 31, 2021 and 2020, is as follows:
(In Thousands) 2021 2020
Other assets:
Investment in Low Income Housing Partnerships $20,640 $24,142
Accrued interest receivable 6,846 7,979
Interest rate swaps not designated as hedging instruments, at fair value 6,030 7,387
Bank owned life insurance, net 4,293 6,520
Taxes receivable 1,994 4,083
Interest rate lock commitments 1,387 4,034
Software 2,855 3,905
Equity method investments 2,219 2,462
Prepaid expenses 2,210 2,404
Deferred taxes, net 3,278 1,980
Commercial servicing rights, at fair value 1,084 1,310
Repossessed assets - 231
Other assets 1,525 2,051
Total $54,361 $68,488
Low Income Housing Partnerships: The following table shows the Company's commitments to invest in various low income housing tax credit partnerships. The Company earns a return on its investments in the form of tax credits and deductions that flow through to it as a limited partner in these partnerships. The Company recognized amortization expense of $3.5 million, $3.5 million, and $2.7 million in 2021, 2020, and 2019, respectively. The Company expects to fund its remaining $4.4 million in commitments on these investments through 2030.
(In Thousands) Date of original commitment Years over which tax benefits are earned Original commitment amount Less: life to date contributions Remaining commitment amount
USA 57 December 2006 15 3,000 (3,000) -
WNC December 2012 16 2,500 (2,500) -
R4 - Coronado March 2013 17 10,729 (10,629) 100
R4 - MVV May 2014 17 8,528 (8,348) 180
R4 - PJ33 June 2016 17 6,835 (6,529) 306
R4 - Coronado II July 2019 17 7,282 (7,022) 260
R4 - Duke Apartments November 2019 17 3,985 (384) 3,601
Total $42,859 ($38,412) $4,447
NOTE 13 - Deposits
Deposits: At December 31, 2021, the scheduled maturities of certificates of deposit are as follows:
(In Thousands)
2022 $118,569
2023 52,643
2024 4,572
2025 143
2026 280
Thereafter 1,757
Total $177,964
The Company offers IntraFi® Network DepositsSM as a member of IntraFi® NetworkSM (Network). When a Network member places a deposit using IntraFi Network Deposits, that certificate of deposit or deposit account is divided into amounts under the standard FDIC insurance maximum ($250,000) and is allocated among member banks, making the large deposit eligible for FDIC insurance. In addition to customer deposit placement, the IntraFi Network Deposits also allows placement of the Bank's own investment dollars. The Company had $24.0 million in IntraFi Network Deposits certificates of deposits and $223.7 million in IntraFi Network Deposits in deposit accounts at December 31, 2021 and $9.4 million in IntraFi Network Deposits certificates of deposits and $86.5 million in IntraFi Network Deposits in deposit accounts at December 31, 2020.
At December 31, 2021 and 2020, the Company held $3.6 million and $4.6 million, respectively, in deposits for related parties, including directors, executive officers, and their affiliates.
NOTE 14 - Borrowings
The Company has a maximum line of credit with the FHLB approximating 45% of eligible assets. FHLB advances are subject to collateral criteria that require the Company to pledge assets under a blanket pledge arrangement as collateral for its borrowings from the FHLB. Based on assets currently pledged and advances currently outstanding at December 31, 2021, the Company's available borrowing line is $271.8 million, representing approximately 10% of total assets. Additional advances of up to 45% of eligible assets, or $1.22 billion, 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 Company’s assets. The Company has outstanding FHLB advances of $14.5 million and $14.8 million as of December 31, 2021 and 2020, respectively, 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%.
The Federal Reserve Bank is holding $50.7 million of loans as collateral to secure available borrowing lines through the discount window of $32.2 million at December 31, 2021. There were no discount window advances outstanding at December 31, 2021 and 2020. The Company paid less than $1,000 in interest in 2021 and 2020 on this agreement. The Company utilized the Federal Reserve Bank's PPPLF to fund SBA PPP loans during the second quarter of 2020, but has repaid those funds in full as of June 30, 2020. This advance had an interest rate of 0.35%.
The Company is subject to provisions under Alaska state law, which generally limit the amount of the Bank's outstanding debt to 35% of total assets or $948.0 million at December 31, 2021 and $736.0 million at December 31, 2020.
Securities sold under agreements to repurchase were zero for both December 31, 2021 and 2020.
The future principal payments that are required on the Company’s borrowings as of December 31, 2021, are as follows:
(In Thousands)
2021 $412
2022 421
2023 431
2024 441
2025 453
Thereafter 12,350
Total $14,508
The Company recognized interest expense of $320,000, $387,000, and $291,000 on borrowings and securities sold under repurchase agreements in 2021, 2020, and 2019, respectively. The average interest rates paid on long-term debt in the same periods was 2.90%, 3.12%, and 3.39%, respectively.
NOTE 15 - Junior Subordinated Debentures
In December of 2005, the Company formed a wholly-owned Connecticut statutory business trust subsidiary, Northrim Statutory Trust 2 (the “Trust 2”), which issued $10 million of guaranteed undivided beneficial interests in the Company’s Junior Subordinated Deferrable Interest Debentures (“Trust Preferred Securities 2”). These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. All of the common securities of Trust 2 are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities 2 were used by Trust 2 to purchase $10.3 million of junior subordinated debentures of the Company. Trust 2 is not consolidated in the Company’s financial statements in accordance with GAAP; therefore, the Company has recorded its investment in Trust 2 as an other asset and the subordinated debentures as a liability. The debentures, which represent the sole asset of Trust 2, accrue and pay distributions quarterly at a variable rate of 90-day LIBOR plus 1.37% per annum, adjusted quarterly, of the stated liquidation value of $1,000 per capital security. The interest rate on these debentures was 1.57% at December 31, 2021. The interest cost to the Company on these debentures was $160,000, $219,000, and $398,000 in 2021, 2020, and 2019, respectively. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities 2; (ii) the redemption price with respect to any Trust Preferred Securities 2 called for redemption by Trust 2; and (iii) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of Trust 2. The Trust Preferred Securities 2 are mandatorily redeemable upon maturity of the debentures on March 15, 2036, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by Trust 2 in whole or in part, on or after March 15, 2011. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest.
NOTE 16 - Accumulated Other Comprehensive Income (Loss)
The following table shows changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2021, 2020, and 2019:
(In Thousands) Unrealized gains (losses) on securities available for sale Unrealized gains (losses) on derivatives and hedging Total
Balance at December 31, 2018 ($1,127) $607 ($520)
Other comprehensive income (loss), net of tax expense of $(757)
2,092 (1,141) 951
Balance at December 31, 2019 $965 ($534) $431
Other comprehensive income (loss), net of tax benefit of $1,600
294 (707) (413)
Balance at December 31, 2020 $1,259 ($1,241) $18
Other comprehensive income (loss), net of tax expense of $1,360
(3,982) 558 (3,424)
Balance at December 31, 2021 ($2,723) ($683) ($3,406)
NOTE 17 - Revenue
The Company records revenue when control of the promised products or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those products or services. All of the Company's revenue from contracts with customers in the scope of Topic 606 is recognized in non-interest income.
The following table presents the Company's sources other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2021, 2020 and 2019:
(In Thousands) December 31,
Other operating income 2021 2020 2019
In-scope of Topic 606:
Bankcard fees $3,389 $2,837 $2,976
Service charges on deposit accounts 1,297 1,102 1,557
Merchant fees 560 416 467
Commission income on the sale of mutual funds and annuity products 417 369 385
Other 826 743 812
Other operating income (in-scope of Topic 606) $6,489 $5,467 $6,197
Other operating income (out-of-scope of Topic 606) 45,774 57,861 31,149
Total other operating income $52,263 $63,328 $37,346
Bankcard fees
Bankcard fees are primarily comprised of debit card income and ATM fees. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa or MasterCard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. The Company’s performance obligation for bankcard fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payments are typically received immediately or in the following month.
Service charges on deposit accounts
Service charges on deposit accounts consist of general service fees for monthly account maintenance, activity- or transaction-based fees, and account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), and other deposit account related fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payments for service charges on deposit accounts are primarily received immediately or in the following month through a direct charge to customers’ accounts.
Other
Other operating income consists of other recurring revenue streams such as merchant services income, commissions from sales of mutual funds and other investments, safety deposit box rental fees, bank check and other check fees, unrealized gains and losses on marketable securities, and other miscellaneous revenue streams. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for merchant services income is largely satisfied, and related revenue recognized, when the transactions have been completed. Payment is typically received immediately or in the following month. The Company earns commissions from the sale of mutual funds as periodic service fees (i.e., trailers) from Elliott Cove Capital Management typically based on a percentage of net asset value. Trailer revenue is recorded over time, quarterly, as net asset value is determined. The Company also earns commission income from the sale of annuity products. The Company acts as an intermediary between the Company's customer and Elliott Cove Investment Advisors for these transactions, and commissions from annuity product sales are recorded when the Company’s performance obligation is satisfied, which is generally upon the issuance of the annuity policy. The Company does not earn trailer fees on annuity sales. Payment for commissions from sales of mutual funds and other investments and annuity sales is typically received in the following quarter. Other service charges include revenue from safety deposit box rental fees, processing wire transfers, bank check and other check fees, and other services. The Company’s performance obligations for these other revenue streams are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payments are typically received immediately or in the following month.
Gains on the sale of OREO are also within the scope of Topic 606 and are recorded within other operating expense on the Company's Consolidated Statements of Income. Gains on the sale of OREO properties were $685,000, $391,000, and $380,000 for the years ended December 31, 2021, 2020, and 2019, respectively.
NOTE 18 - Employee Benefit Plans
Employees of the Company are eligible to participate in the Company's 401(k) plan immediately upon date of hire. Employees may elect to have a portion of their salary contributed to the 401(k) plan in accordance with Section 401(k) of the Internal Revenue Code of 1986. The Company provides for a mandatory $1.00 match for each $1.00 contributed by employees of the Bank up to 5.5% of the employee’s eligible salary. The Company provides for a mandatory $1.00 match for each $1.00 contributed by employees of RML up to 2% of the employee’s eligible salary. The Bank or RML may increase the matching contribution at the discretion of the Board of Directors. The Company expensed $1.8 million, $1.7 million, and $1.4 million, in 2021, 2020, and 2019, respectively, for 401(k) contributions and included this expense in "Salaries and other personal expense" in the Consolidated Statements of Income.
On July 1, 1994, the Bank implemented a Supplemental Executive Retirement Plan for executive officers of the Bank whose retirement benefits under the 401(k) plan have been limited under provisions of the Internal Revenue Code. Contributions to this plan totaled $281,000, $290,000, and $262,000, in 2021, 2020, and 2019, respectively. These expenses are included in "Salaries and other personnel expense" in the Consolidated Statements of Income. At December 31, 2021 and 2020, the balance of the accrued liability for this plan was included in "Other liabilities" and totaled $2.2 million and $2.1 million, respectively.
RML has established a Supplemental Executive Retirement Plan ("SERP"), under which RML has agreed to make payment to certain key executives, based on contributions made by RML to the plan. Contributions and earnings made to the participant accounts to the SERP are vested over ten years. The Company recorded expenses of $959,000, $997,000, and $580,000 in 2021, 2020, and 2019, respectively. RML's recorded obligation under the SERP amounted to $3.0 million and $2.6 million at December 31, 2021 and 2020, respectively, and was included in "Other liabilities".
In February of 2002, Northrim Bank implemented a non-qualified deferred compensation plan in which certain of the executive officers participate. Northrim Bank's net liability under this plan is dependent upon market gains and losses on assets held in the plan. Northrim Bank recognized an increase in its liability of $173,000 in 2021, an increase in its liability of $78,000 in 2020, and an increase in its liability of $36,000 in 2019. These changes are included in "Salaries and other personnel expense" in the Consolidated Statements of Income. At December 31, 2021 and 2020, the balance of the accrued liability for this plan was included in "Other liabilities" and totaled $1.8 million and $1.6 million, respectively.
In November of 2011, Northrim Bank implemented a Profit Sharing Plan. All employees of the Bank employed on the last day of the calendar year are eligible and will participate in the Profit Sharing Plan. The aggregate amount to be paid to employees under the Profit Sharing Plan is determined using Company-wide performance goals that are established by the Compensation Committee of the Board of Directors. If the performance goals are met for the year, profit sharing for the period is calculated based on a formula that is also approved by the Compensation Committee each year. The Compensation Committee has complete discretion to designate an employee as ineligible for profit sharing, or to adjust the amount of profit share payments by individual employee or in aggregate. The Compensation Committee approved management’s recommendation based upon the calculated payout under the Profit Sharing Plan’s methodology resulting in aggregate payouts of $4.2 million, $3.7 million, and $2.9 million for 2021, 2020, and 2019, respectively.
NOTE 19 - Commitments and Contingencies
Employee benefit plans: The Company is self-insured for medical, dental, and vision plan benefits provided to employees. The Company has obtained stop-loss insurance to limit total medical claims in any one year to $175,000 per covered individual. The Company has established a liability for outstanding incurred but unreported claims. While management uses what it believes are pertinent factors in estimating the liability, it is subject to change due to claim experience, type of claims, and rising medical costs.
Legal proceedings: The Company from time to time may be involved with disputes, claims, and litigation related to the conduct of its banking business. In the opinion of management, the resolution of these matters will not have a material effect on the Company’s financial position, results of operations, or cash flows.
Financial Instruments with Off-Balance Sheet Risk: In the ordinary course of business, the Company enters into various types of transactions that involve financial instruments with off-balance sheet risk. These instruments include commitments to extend credit and standby letters of credit and are not reflected in the accompanying balance sheets. These transactions may involve to varying degrees credit and interest rate risk in excess of the amount, if any, recognized in the balance sheets. 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. Management does not anticipate any loss as a result of these commitments.
The Company’s off-balance sheet credit risk exposure is the contractual amount of commitments to extend credit and standby letters of credit. The Company applies the same credit standards to these contracts as it uses in its lending process.
(In Thousands) 2021 2020
Off-balance sheet commitments:
Commitments to extend credit $361,915 $375,065
Commitments to originate loans held for sale $81,617 $150,276
Standby letters of credit $2,364 $2,333
Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and generally have fixed expiration dates but may be terminated by the Company if certain conditions of the contract are violated. Our exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. Although currently subject to draw down, many of the commitments do not necessarily represent future cash requirements. Collateral held relating to these commitments varies, but generally includes real estate, inventory, accounts receivable, and equipment.
Mortgage loans sold to investors may be sold with servicing rights released, for which the Company makes only standard legal representations and warranties as to meeting certain underwriting and collateral documentation standards. In the past two years, the Company has had to repurchase four loans due to deficiencies in underwriting or loan documentation and
has not realized significant losses related to these loans. Management believes that any liabilities that may result from such recourse provisions are not significant.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Credit risk arises in these transactions from the possibility that a customer may not be able to repay the Company upon default of performance. Collateral held for standby letters of credit is based on an individual evaluation of each customer’s creditworthiness.
Total unfunded commitments were $445.9 million and $527.7 million at December 31, 2021 and 2020, respectively. The Company does not expect that all of these commitments are likely to be fully drawn upon at any one time. The Company has an ACL related to these commitments and letters of credit that is recorded in "Other liabilities" on the Consolidated Balance Sheets. The ACL for unfunded commitments was $1.1 million and $187,000 as of December 31, 2021 and 2020, respectively.
Capital Expenditures and Commitments: At December 31, 2021, the Company has no capital commitments. There were no other material changes outside of the ordinary course of business to any of our material contractual obligations during 2021.
NOTE 20 - Derivatives
Interest rate swaps related to community banking activities
The Company enters into commercial loans interest rate swaps with commercial banking customers which are offset with a corresponding swap agreement with a third party financial institution (“counterparty”). The Company has agreements with its counterparties that contain provisions that provide that if the Company fails to maintain its status as a "well-capitalized" institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. These agreements also require that the Company and the counterparty collateralize any fair value shortfalls that exceed $250,000 with eligible collateral, which includes cash and securities backed with the full faith and credit of the federal government. Similarly, the Company could be required to settle its obligations under the agreement if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels. The Company pledged $8.2 million and $10.7 million in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements as of December 31, 2021 and 2020, respectively.
The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $212.6 million and $196.0 million at December 31, 2021 and 2020, respectively. At December 31, 2021, the notional amount of interest rate swaps is made up of 19 variable to fixed rate swaps to commercial loan customers totaling $106.3 million, and 19 fixed to variable rate swap with a counterparty totaling $106.3 million. Changes in fair value from these 38 interest rate swaps offset each other in 2021 and 2020. The Company recognized $452,000, $949,000, and $964,000 in fee income related to interest rate swaps in 2021 and 2020, and 2019, respectively. Interest rate swap income is recorded in other operating income on the Consolidated Statements of Income. None of these interest rate swaps are designated as hedging instruments.
The Company has an interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures, which is floating rate debt, by swapping the cash flows with an interest rate swap which receives floating and pays fixed. The Company has designated this interest rate swap as a hedging instrument. The interest rate swap effectively fixes the Company's interest payments on the $10.0 million of junior subordinated debentures held under 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 1.57% as of December 31, 2021. The Company pledged $2.9 million and $2.9 million in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of December 31, 2021 and 2020, respectively. Changes in the fair value of this interest rate swap are reported in other comprehensive income. The unrealized loss on this interest rate swap was $1.0 million and $1.7 million as of December 31, 2021 and 2020, respectively.
Interest rate swaps related to home mortgage lending 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. At December 31, 2021 and 2020, RML had commitments to originate mortgage loans held for sale totaling $81.6 million and $150.3 million, 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 home mortgage lending derivatives are designated as hedging instruments.
The following table presents the fair value of derivatives not designated as hedging instruments as of the dates noted:
(In Thousands) Asset Derivatives
December 31, 2021 December 31, 2020
Balance Sheet Location Fair Value Fair Value
Interest rate swaps Other assets $6,030 $7,387
Interest rate lock commitments Other assets 1,387 4,034
Retail interest rate contracts Other assets 166 -
Total $7,583 $11,421
(In Thousands) Liability Derivatives
December 31, 2021 December 31, 2020
Balance Sheet Location Fair Value Fair Value
Interest rate swaps Other liabilities $6,030 $7,387
Retail interest rate contracts Other liabilities - 880
Total $6,030 $8,267
The following table presents the net gains (losses) of derivatives not designated as hedging instruments as of the dates noted:
(In Thousands) Income Statement Location December 31, 2021 December 31, 2020
Retail interest rate contracts Mortgage banking income $1,930 ($7,980)
Interest rate lock commitments Mortgage banking income (2,529) 3,062
Total ($599) ($4,918)
Our derivative transactions with counterparties under International Swaps and Derivative Association master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes.
The following table summarizes the derivatives that have a right of offset as of December 31, 2021 and 2020:
December 31, 2021 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 $6,030 $- $6,030 $- $- $6,030
Retail interest rate contracts 166 - 166 - - 166
Liability Derivatives
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
NOTE 21 - Common Stock
Quarterly cash dividends were paid aggregating to $9.4 million, $8.8 million, and $8.5 million, or $1.50 per share, $1.38 per share, and $1.26 per share, in 2021, 2020, and 2019, respectively. On February 24, 2022, the Board of Directors declared a $0.41 per share cash dividend payable on March 18, 2022, to shareholders of record on March 10, 2022. Federal and State regulations place certain limitations on the payment of dividends by the Company.
In January 2021, the Company’s Board of Directors approved a plan whereby it would periodically repurchase for cash up to approximately 5% of its shares of common stock in the open market. At December, 31, 2021, there were 33,724 shares available under the stock repurchase program. However, on January 28, 2022 the Company announced that its Board of Directors authorized the repurchase of up to an additional 300,000 shares of common stock. The Company intends to continue to repurchase its stock from time to time depending upon market conditions. The Company can make no assurances that it will continue this program or that it will authorize additional shares for repurchase. During 2021, 2020 and 2019, 279,276, 327,000 and 347,676 shares of common stock were repurchased, respectively.
NOTE 22 - Stock-Based Compensation
The Company adopted the 2020 Stock Option Plan (“2020 Plan”) following shareholder approval of the 2020 Plan at the 2020 Annual Meeting. Subsequent to the adoption of the 2020 Plan, no additional grants may be issued under the prior plans. The 2020 Plan provides for grants of up to 325,000 shares, which includes any shares subject to stock awards under the previous stock option plans.
Stock Options: Under the 2020 Plan and previous plans, certain key employees have been granted the option to purchase set amounts of common stock at the market price on the day the option was granted. Optionees, at their own discretion, may pay cash to cover the cost of exercise, may cover the cost of exercise through the exchange at the then fair value of already owned shares of the Company’s stock, or they may cover the cost of exercise through net settlement of a portion of the stock options exercised in satisfaction of the exercise price and applicable tax withholding requirements. The two latter options are referred to as cashless stock option exercises. Options are granted for a 10-year period and vest on a pro-rata basis over the initial three years from the grant date.
The Company measures the fair value of each stock option at the date of grant using the Black-Scholes option pricing model using assumptions noted in the following table. Expected volatility is based on the historical volatility of the price of the Company’s common stock. The Company uses historical data to estimate option exercise and stock option forfeiture rates within the valuation model. The expected term of options granted is determined based on historical experience with similar options and represents the period of time that options granted are expected to be outstanding. The expected dividend yield is based on dividend trends and the market value of the Company’s common stock at the time of grant. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The following assumptions were used to determine the fair value of stock options as of the grant date to determine compensation expense for the years ended December 31, 2021, 2020, and 2019:
Stock Options: 2021 2020 2019
Grant date fair value $10.27 $6.55 $5.34
Expected life of options 8 years 8 years 8 years
Risk-free interest rate 1.33 % 0.79 % 1.74 %
Dividend yield rate 3.86 % 4.55 % 4.11 %
Price volatility 36.46 % 35.44 % 24.34 %
The following table summarizes stock option activity during 2021:
Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life, in Years
Outstanding at January 1, 2021 178,793 $30.64
Granted 12,893 42.02
Forfeited - -
Exercised (54,867) 26.10
Outstanding at December 31, 2021 136,819 $33.53 6.61
At December 31, 2021, 2020, and 2019, there were 107,553, 136,038, and 112,319 options exercisable, with weighted average exercise prices of $32.63, $29.42, and $28.17, respectively.
The aggregate intrinsic value of the stock options is the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on December 31, 2021 and the exercise price, times the number of shares) that would have been received by the option holders had all the option holders exercised their options on December 31, 2021. This amount changes based on the fair value of the Company’s stock. The total intrinsic value of options outstanding and exercisable as of December 31, 2021, 2020, and 2019 was $1.2 million, $682,000, and $1.1 million, respectively. The total intrinsic value of options exercised for the years ended December 31, 2021, 2020, and 2019 was $969,000, zero, and $203,000, respectively.
As noted above, the Company allows stock options to be exercised through cash or cashless transactions. In 2021, 2020, and 2019 the Company received cash of zero, zero, and zero, respectively, for cash stock option exercises. In 2021, 2020, and 2019 the Company net settled $1.4 million, zero, and $282,000 respectively, for cashless stock option exercises. The Company withheld $1.7 million, zero, and $317,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options in 2021, 2020, and 2019, respectively.
For the years ended December 31, 2021, 2020 and 2019, the Company recognized $173,000, $148,000, and $143,000, respectively, in stock option compensation expense as a component of "Salaries and other personnel expense". As of
December 31, 2021, there was approximately $218,000 of total unrecognized compensation expense related to non-vested options, which is expected to be recognized over the weighted-average vesting period of 2.3 years.
Restricted Stock Units: Under the 2020 Plan and previous plans, the Company grants restricted stock units to certain key employees periodically. Recipients of restricted stock units do not pay any cash consideration to the Company for the shares and receive all dividends with respect to such shares when the shares vest. Restricted stock units cliff vest at the end of a three-year time period.
The following table summarizes restricted stock unit activity during 2021:
Number of Shares Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Life, in Years
Outstanding at January 1, 2021 72,817 $33.33
Granted 17,316 42.02
Dividend equivalents awarded 2,310 37.07
Vested (33,490) 33.24
Forfeited (2,738) 32.50
Outstanding at December 31, 2021 56,215 $34.74 2.29
The total intrinsic value of restricted stock units vested for the years ended December 31, 2021, 2020, and 2019 was $1.3 million, $735,000, and $906,000, respectively.
For the years ended December 31, 2021, 2020 and 2019, the Company recognized $900,000, $795,000, and $689,000, respectively, in restricted stock unit compensation expense as a component of "Salaries and other personnel expense". As of December 31, 2021, there was approximately $1.3 million of total unrecognized compensation expense related to non-vested options, which is expected to be recognized over the weighted-average vesting period of 2.3 years.
NOTE 23 - Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on a company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of total capital, Tier 1 capital, and common equity Tier 1 to risk-weighted assets, and of Tier 1 capital to average assets (as defined in the regulations).
The tables below illustrate the capital requirements for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements. The dividends that the Bank pays to the Company are limited to the extent necessary for the Bank to meet the regulatory requirements of a “well-capitalized” bank. The capital ratios for the Company exceed those for the Bank primarily because the $10 million trust preferred securities offerings that the Company completed in the fourth quarter of 2005 are included in the Company’s capital for regulatory purposes although they are accounted for as a liability in its financial statements. The trust preferred securities are not included in the Bank's capital ratios.
Northrim BanCorp, Inc. Actual Adequately-Capitalized Well-Capitalized
(In Thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2021:
Common equity tier 1 capital (to risk-weighted assets) $225,412 13.50 % $75,137 ≥ 4.5 % NA NA
Total Capital (to risk-weighted assets) $246,836 14.79 % $133,515 ≥ 8 % NA NA
Tier I Capital (to risk-weighted assets) $235,097 14.08 % $100,183 ≥ 6 % NA NA
Tier I Capital (to average assets) $235,097 9.03 % $104,140 ≥ 4 % NA NA
As of December 31, 2020:
Common equity tier 1 capital (to risk-weighted assets) $205,717 13.75 % $67,326 ≥ 4.5 % NA NA
Total Capital (to risk-weighted assets) $234,363 15.46 % $121,275 ≥ 8 % NA NA
Tier I Capital (to risk-weighted assets) $215,380 14.20 % $91,006 ≥ 6 % NA NA
Tier I Capital (to average assets) $215,380 10.25 % $84,051 ≥ 4 % NA NA
Northrim Bank Actual Adequately-Capitalized Well-Capitalized
(In Thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2021:
Common equity tier 1 capital (to risk-weighted assets) $189,447 11.43 % $74,585 ≥ 4.5 % $107,735 ≥ 6.5 %
Total Capital (to risk-weighted assets) $201,087 12.13 % $132,621 ≥ 8 % $165,777 ≥ 10 %
Tier I Capital (to risk-weighted assets) $189,348 11.42 % $99,482 ≥ 6 % $132,643 ≥ 8 %
Tier I Capital (to average assets) $189,348 7.31 % $103,610 ≥ 4 % $129,513 ≥ 5 %
As of December 31, 2020:
Common equity tier 1 capital (to risk-weighted assets) $178,532 11.89 % $67,569 ≥ 4.5 % $97,599 ≥ 6.5 %
Total Capital (to risk-weighted assets) $197,233 13.13 % $120,172 ≥ 8 % $150,216 ≥ 10 %
Tier I Capital (to risk-weighted assets) $178,429 11.88 % $90,116 ≥ 6 % $120,154 ≥ 8 %
Tier I Capital (to average assets) $178,429 8.55 % $83,476 ≥ 4 % $104,344 ≥ 5 %
As of the most recent notification from its regulatory agencies, the Bank was categorized as "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s regulatory capital category. Management believes, as of December 31, 2021, that the Company and Bank meets all capital adequacy requirements to which they are subject.
NOTE 24 - Income Taxes
Components of the provision for income taxes are as follows:
(In Thousands) Current Tax Expense (Benefit) Deferred Expense (Benefit) Total Expense
2021:
Federal $5,090 ($869) $4,221
State 3,182 (429) 2,753
Amortization of investment in low income housing tax credit partnerships 3,502 - 3,502
Total $11,774 ($1,298) $10,476
2020:
Federal $3,607 $371 $3,978
State 1,891 184 2,075
Amortization of investment in low income housing tax credit partnerships 3,506 - 3,506
Total $9,004 $555 $9,559
2019:
Federal $1,078 $476 $1,554
State 977 235 1,212
Amortization of investment in low income housing tax credit partnerships 2,668 - 2,668
Total $4,723 $711 $5,434
The actual expense for 2021, 2020, and 2019, differs from the “expected” tax expense (computed by applying the U.S. Federal Statutory Tax Rate of 21% for the years ended December 31, 2021, 2020 and 2019) as follows:
(In Thousands) 2021 2020 2019
Computed “expected” income tax expense $10,079 $8,914 $5,486
State income taxes, net 2,175 1,639 957
Tax-exempt interest on investment securities and loans (238) (256) (300)
Amortization of investment in low income housing tax credit partnerships, net 3,163 2,712 2,316
Low income housing credits (3,694) (3,168) (2,721)
Other (1,009) (282) (304)
Total $10,476 $9,559 $5,434
The components of the net deferred tax asset are as follows:
(In Thousands) 2021 2020 2019
Deferred Tax Asset:
Allowance for loan losses $3,126 $5,772 $5,190
Loan fees, net of costs 1,956 (635) 741
Interest income, nonaccrual loans 482 419 609
Deferred compensation 1,344 1,130 1,224
Equity compensation 406 481 429
Operating lease liabilities 3,117 3,519 4,045
Accrued liabilities 1,826 1,391 1,173
Unrealized gain on available for sale investment securities 1,270 54 27
Other 837 1,258 537
Total Deferred Tax Asset $14,364 $13,389 $13,975
Deferred Tax Liability:
Intangible amortization ($1,453) ($1,022) ($587)
Mortgage servicing rights (4,172) (3,530) (3,767)
Depreciation and amortization (1,515) (2,066) (1,848)
Operating lease right-of-use assets (3,128) (3,537) (4,067)
Unrealized loss on available for sale investment securities (189) (554) (411)
Unrealized loss on marketable equity securities, net (159) (187) (169)
Other (470) (513) (591)
Total Deferred Tax Liability ($11,086) ($11,409) ($11,440)
Net Deferred Tax Asset $3,278 $1,980 $2,535
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The primary source of recovery of the deferred tax asset will be future taxable income. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax asset. The deferred tax asset is included in "Other assets" in the Consolidated Balance Sheets.
As of December 31, 2021, the Company had no unrecognized tax benefits. In 2020 the Company reversed an accrual of $454,000 for a potential increase in tax expense that was recorded in 2019 related to an audit that was performed in 2018 by the State of Alaska for tax years 2014-2016. The Company appealed the initial audit decision and the appeal was ruled in the Company's favor in the first quarter of 2021. In 2019 the Company reversed an accrual of $250,000 related to interest and penalties that was recognized in 2018.
The tax years subject to examination by federal taxing authorities are the years ending December 31, 2021, 2020, 2019, and 2018. The tax years subject to examination by the State of Alaska are the years ending December 31, 2021, 2020, 2019, 2018, 2017 and 2016.
NOTE 25 - 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 December 31, 2021, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives. As a result, the Company has classified its interest rate derivative valuations in Level 2 of the fair value hierarchy.
Commitments to extend credit and standby letters of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.
Assets Subject to Nonrecurring Adjustment to Fair Value:
The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets, loans held for sale, impaired loans, and OREO at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the writedown of individual assets.
The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and loan individually evaluated for credit losses 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 other real estate owned that is not fully constructed based on as if complete values is more appropriate than recording other real estate owned 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 other real estate owned 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.
Estimated fair values as of the periods indicated are as follows:
December 31, 2021 December 31, 2020
(In Thousands) Carrying Amount Fair Value Carrying Amount Fair Value
Financial assets:
Level 1 inputs:
Cash, due from banks and deposits in other banks $645,827 $645,827 $115,965 $115,965
Investment securities available for sale 141,531 141,531 58,865 58,865
Marketable equity securities 8,420 8,420 9,052 9,052
Level 2 inputs:
Investment securities available for sale 285,153 285,153 188,768 188,768
Investment in Federal Home Loan Bank Stock 3,107 3,107 2,551 2,551
Loans held for sale 73,650 73,650 146,178 146,178
Accrued interest receivable 6,846 6,846 7,979 7,979
Interest rate swaps 6,030 6,030 7,387 7,387
Retail interest rate contracts 166 166 - -
Level 3 inputs:
Investment securities held to maturity 20,000 19,164 10,000 10,000
Loans 1,413,886 1,396,486 1,444,051 1,414,179
Purchased receivables, net 6,987 6,987 13,922 13,922
Interest rate lock commitments 1,387 1,387 4,034 4,034
Mortgage servicing rights 13,724 13,724 11,218 11,218
Commercial servicing rights 1,084 1,084 1,310 1,310
Financial liabilities:
Level 2 inputs:
Deposits $2,421,631 2,422,215 $1,824,981 $1,826,990
Borrowings 14,508 14,727 14,817 15,538
Accrued interest payable 31 31 65 65
Interest rate swaps 6,985 6,985 9,122 9,122
Retail interest rate contracts - - 880 880
Level 3 inputs:
Junior subordinated debentures 10,310 9,727 10,310 10,475
The following table sets forth the balances as of the periods indicated of assets measured at fair value on a recurring basis:
(In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
December 31, 2021
Assets:
Available for sale securities
U.S. Treasury and government sponsored entities $341,480 $115,686 $225,794 $-
Municipal securities 840 - 840 -
Corporate bonds 32,946 25,845 7,101 -
Collateralized loan obligations 51,418 - 51,418 -
Total available for sale securities $426,684 $141,531 $285,153 $-
Marketable equity securities $8,420 $8,420 $- $-
Total marketable equity securities $8,420 $8,420 $- $-
Interest rate swaps $6,030 $- $6,030 $-
Interest rate lock commitments 1,387 - - 1,387
Mortgage servicing rights 13,724 - - 13,724
Commercial servicing rights 1,084 - - 1,084
Retail interest rate contracts 166 - 166 -
Total other assets $22,225 $- $6,030 $16,195
Liabilities:
Interest rate swaps $6,985 $- $6,985 $-
Total other liabilities $6,985 $- $6,985 $-
December 31, 2020
Assets:
Available for sale securities
U.S. Treasury and government sponsored entities $174,601 $37,548 $137,053 $-
Municipal securities 856 - 856 -
Corporate bonds 30,492 21,317 9,175 -
Collateralized loan obligations 41,684 - 41,684 -
Total available for sale securities $247,633 $58,865 $188,768 $-
Marketable equity securities $9,052 $9,052 $- $-
Total marketable equity securities $9,052 $9,052 $- $-
Interest rate swaps $7,387 $- $7,387 $-
Interest rate lock commitments 4,034 - - 4,034
Mortgage servicing rights 11,218 - - 11,218
Commercial servicing rights 1,310 - - 1,310
Total other assets $23,949 $- $7,387 $16,562
Liabilities:
Interest rate swaps $9,122 $- $9,122 $-
Retail interest rate contracts 880 - 880 -
Total other liabilities $10,002 $- $10,002 $-
The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2021 and 2020:
(In Thousands) Beginning balance Change included in earnings Purchases and issuances Sales and settlements Ending balance
December 31, 2021
Interest rate lock commitments $4,034 ($3,389) $28,229 ($27,487) $1,387
Mortgage servicing rights 11,218 (3,582) 6,088 - 13,724
Commercial servicing rights 1,310 (437) 211 - 1,084
Total $16,562 ($7,408) $34,528 ($27,487) $16,195
December 31, 2020
Interest rate lock commitments $810 ($5,680) $49,186 ($40,282) $4,034
Mortgage servicing rights 11,920 (5,526) 4,824 - 11,218
Commercial servicing rights 1,214 (99) 195 - 1,310
Total $13,944 ($11,305) $54,205 ($40,282) $16,562
As of and for the years ending December 31, 2021 and 2020, except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis. For loans individually measured for 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)
December 31, 2021
Loans individually measured for credit losses $- $- $- $-
Total $- $- $- $-
December 31, 2020
Loans individually measured for credit losses $308 $- $- $308
Total $308 $- $- $308
The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the periods ended December 31, 2021, 2020 and 2019, respectively:
(In Thousands) 2021 2020 2019
Loans individually measured for credit losses ($13) ($4) $3
Total (income) loss from nonrecurring measurements ($13) ($4) $3
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 December 31, 2021 and 2020:
Financial Instrument Valuation Technique Unobservable Input Weighted Average or Rate Range
December 31, 2021
Interest rate lock commitment External pricing model Pull through rate 93.27 %
Mortgage servicing rights Discounted cash flow Constant prepayment rate 9.25% - 14.21%
Discount rate 8.00%
Commercial servicing rights Discounted cash flow Constant prepayment rate 12.30% - 16.57%
Discount rate 9.94 %
December 31, 2020
Loans individually measured for credit losses In-house valuation of collateral Discount rate 30 %
Interest rate lock commitment External pricing model Pull through rate 90.65 %
Mortgage servicing rights Discounted cash flow Constant prepayment rate 7.77% - 13.17%
Discount rate 7.75%
Commercial servicing rights Discounted cash flow Constant prepayment rate 7.38% - 9.94%
Discount rate 9.46 %
NOTE 26 - Segment Information
The Company's operations are managed along two 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 December 31, 2021, 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:
December 31, 2021
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Interest income $81,703 $2,903 $84,606
Interest expense 3,623 156 3,779
Net interest income 78,080 2,747 80,827
Provision for credit losses (4,099) - (4,099)
Other operating income 10,119 42,144 52,263
Other operating expense 58,647 30,549 89,196
Income before provision for income taxes 33,651 14,342 47,993
Provision for income taxes 6,468 4,008 10,476
Net income $27,183 $10,334 $37,517
Total assets $2,615,433 $109,286 $2,724,719
Loans held for sale $- $73,650 $73,650
December 31, 2020
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Interest income $73,435 $3,281 $76,716
Interest expense 5,788 263 6,051
Net interest income 67,647 3,018 70,665
Provision for credit losses 2,432 - 2,432
Other operating income 10,693 52,635 63,328
Other operating expense 57,614 31,500 89,114
Income before provision for income taxes 18,294 24,153 42,447
Provision for income taxes 2,694 6,865 9,559
Net income $15,600 $17,288 $32,888
Total assets $1,935,871 $185,927 $2,121,798
Loans held for sale $- $146,178 $146,178
December 31, 2019
(In Thousands) Community Banking Home Mortgage Lending Consolidated
Interest income $67,770 $2,313 $70,083
Interest expense 4,569 1,072 5,641
Net interest income 63,201 1,241 64,442
Benefit for credit losses (1,175) - (1,175)
Other operating income 13,145 24,201 37,346
Compensation expense, RML acquisition payments 468 - 468
Other operating expense 54,520 21,850 76,370
Income before provision for income taxes 22,533 3,592 26,125
Provision for income taxes 4,408 1,026 5,434
Net income $18,125 $2,566 $20,691
Total assets $1,540,869 $103,127 $1,643,996
Loans held for sale $- $67,834 $67,834
NOTE 27 - Parent Company Information
Balance Sheets at December 31, 2021 2020
(In Thousands)
Assets
Cash and cash equivalents $35,546 $24,742
Marketable equity securities 8,420 9,052
Investment in Northrim Bank 202,819 196,002
Investment in NISC 1,336 1,472
Investment in NST2 310 310
Taxes receivable, net 603 1,973
Other assets 358 497
Total Assets $249,392 $234,048
Liabilities
Junior subordinated debentures $10,310 $10,310
Other liabilities 1,265 2,163
Total Liabilities 11,575 12,473
Shareholders' Equity
Common stock 6,015 6,251
Additional paid-in capital 31,162 41,808
Retained earnings 204,046 173,498
Accumulated other comprehensive (loss) income (3,406) 18
Total Shareholders' Equity 237,817 221,575
Total Liabilities and Shareholders' Equity $249,392 $234,048
Statements of Income for Years Ended: 2021 2020 2019
(In Thousands)
Income
Interest income $551 $599 $635
Equity in undistributed earnings from Northrim Bank 38,625 33,570 20,680
Equity in undistributed earnings from NISC 66 174 218
Gain on sale of marketable equity securities, net 67 98 -
Unrealized gain (loss) on marketable equity securities (101) 61 911
Other income 151 10 44
Total Income $39,359 $34,512 $22,488
Expense
Interest expense 382 385 389
Administrative and other expenses 2,754 2,748 2,168
Total Expense 3,136 3,133 2,557
Income Before Benefit from Income Taxes 36,223 31,379 19,931
Benefit from income taxes (1,294) (1,509) (760)
Net Income $37,517 $32,888 $20,691
Statements of Cash Flows for Years Ended: 2021 2020 2019
(In Thousands)
Operating Activities:
Net income $37,517 $32,888 $20,691
Adjustments to Reconcile Net Income to Net Cash:
Gain on sale of securities, net (67) (98) -
Equity in undistributed earnings from subsidiaries (38,691) (33,744) (20,897)
Change in fair value marketable equity securities 101 (61) (911)
Stock-based compensation 1,073 943 832
Changes in other assets and liabilities (2,167) (2,118) 8,556
Net Cash Used from Operating Activities (2,234) (2,190) 8,271
Investing Activities:
Purchases of marketable equity securities (493) (1,552) -
Proceeds from sales/calls/maturities of marketable equity securities 1,016 503 229
Investment in Northrim Bank, NISC & NST2 31,894 21,423 19,488
Net Cash Provided by Investing Activities 32,417 20,374 19,717
Financing Activities:
Dividends paid to shareholders (9,388) (8,844) (8,512)
Proceeds from issuance of common stock 1,543 84 73
Repurchase of common stock (11,534) (9,976) (12,569)
Net Cash Used from Financing Activities (19,379) (18,736) (21,008)
Net change in Cash and Cash Equivalents 10,804 (552) 6,980
Cash and Cash Equivalents at beginning of year 24,742 25,294 18,314
Cash and Cash Equivalents at end of year $35,546 $24,742 $25,294
NOTE 28 - Subsequent Events
The Company's Executive Vice President, General Counsel and Corporate Secretary, who also served as Northrim Bank's Executive Vice President, General Counsel, Chief Operating Officer and Corporate Secretary passed away on November 11, 2021. The Company received $2.0 million in keyman life insurance proceeds on February 15, 2022 in connection with the death of this employee that will be reflected in the Company's Consolidated Statements of Net Income for the quarter ended March 31, 2022.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OF ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-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 our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic reports to the SEC. 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
There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15f and 15d-15(f) of the Securities Exchange Act of 1934) that occurred during the period covered by this report that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining internal control over financial reporting as defined in Rules 13a-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework.
Based on our assessment and the criteria discussed above, management believes that, as of December 31, 2021, the Company maintained effective internal control over financial reporting.
The Company’s independent registered public accounting firm has issued an attestation report on the Company’s effectiveness of internal control over financial reporting. This report appears under Part II. Item 8 of this report.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning the officers and directors of the Company required to be included in this item is incorporated by reference from the Company’s definitive proxy statement for its annual meeting of shareholders to be held in 2022 which will be filed with the Securities and Exchange Commission (the "SEC") within 120 days of our most recently completed fiscal year.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation and director compensation and certain matters regarding participation in the Company’s compensation committee required by this item is incorporated by reference from the Company’s definitive proxy statement for its annual meeting of shareholders to be held in 2022 which will be filed with the SEC within 120 days of our most recently completed fiscal year.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning the security ownership of certain beneficial owners and management required by this item is incorporated by reference from the Company’s definitive proxy statement for its annual meeting of shareholders to be held in 2022 which will be filed with the SEC within 120 days of our most recently completed fiscal year.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions required by this item is incorporated by reference from the Company’s definitive proxy statement for its annual meeting of shareholders to be held in 2022 which will be filed with the SEC within 120 days of our most recently completed fiscal year.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning fees paid to our independent auditors required by this item is incorporated by reference from the Company’s definitive proxy statement for its annual meeting of shareholders to be held in 2022 which will be filed with the SEC within 120 days of our most recently completed fiscal year.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements
(a) The following documents are filed as part of this Annual Report on Form 10-K:
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020, and 2019
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020, and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019
Notes to Consolidated Financial Statements
Exhibits
3.1 Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 of the Company's Form 8-A filed with the SEC on January 14, 2002.)
3.2 Articles of Amendment to the Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.3 of the Company’s Form 10-Q for the quarter ended June 30, 2009, filed with the SEC on August 10, 2009.)
3.3 Bylaws of Northrim BanCorp, Inc. as amended (Incorporated by reference to Exhibit 3.4 of the Company’s Current Report on Form 8-K filed with the SEC on November 22, 2016.)
4.1 Description of Securities (Incorporated by reference to Exhibit 4.1 of the Company's Form 10-K for the year ended December 31, 2019, filed with the SEC on March 6, 2020.)
4.2 Pursuant to Item 601 (b)(4)(iii)(A) of Regulation S-K, copies of instruments defining rights of holders of long-term debt and preferred securities are not filed. The Company agrees to furnish a copy thereof to the SEC upon request.
4.3 Indenture dated as of December 16, 2005 (Incorporated by reference to Exhibit 4.3 of the Company’s Form 10-K for the year ended December 31, 2005, filed with the SEC on March, 16, 2006.)
4.4 Form of Junior Subordinated Debt Security due 2036 (Incorporated by reference to Exhibit 4.4 of the Company’s Form 10-K for the year ended December 31, 2005, filed with the SEC on March, 16, 2006.)
10.01 Northrim Bancorp, Inc. 2014 Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 of the Company’s Form S-8 filed with the SEC on July 8, 2014.)
10.02 Northrim Bancorp, Inc. 2017 Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 of the Company’s Form S-8 filed with the SEC on June 6, 2017.)
10.03 Northrim Bancorp, Inc. Profit Sharing Plan (Incorporated by reference to Exhibit 10.41 to the Company’s Current Report on Form 8-K, filed with the SEC on November 22, 2011.)
10.04 Employment Agreement with Joseph M. Schierhorn dated January 1, 2022 (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on January 3, 2022.)
10.05 Employment Agreement with Jed Ballard dated January 1, 2022 (Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed on January 3, 2022.)
10.06 Employment Agreement with Michael Huston dated January 1, 2022 (Incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, filed on January 3, 2022.)
10.07 Employment Agreement with Benjamin Craig dated January 1, 2022 (Incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K, filed on January 3, 2022.)
10.08 Employment Agreement with Steve Aldrich dated January 1, 2022 (Incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K, filed on January 3, 2022.)
10.09 Supplemental Executive Retirement Plan originally effective as of July 1, 1994, amended effective as of January 6, 2000, January 8, 2004, January 1, 2005 and January 1, 2015 (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 2, 2015).
10.10 Supplemental Executive Retirement Deferred Compensation Plan originally effective as of February 1, 2002, amended effective as of January 1, 2005 and January 1, 2015 (Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on September 2, 2015).
10.11 Northrim BanCorp, Inc. 2020 Stock Incentive Plan (Incorporated by reference to Exhibit D to the Company's Proxy Statement filed with the SEC on April 27, 2020.)
21.1 Subsidiaries
23.1 Consent of Moss Adams LLP
24.1 Power of Attorney
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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 Annual Report on 10-K for the year ended December 31, 2021 - formatted in Inline XBRL (included in Exhibit 101)