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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
FORM 10-Q
(Mark One)
   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2021
   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from_____to____
Commission File Number 000-33501
NORTHRIM BANCORP, INC.
(Exact name of registrant as specified in its charter)
Alaska 92-0175752
(State or other jurisdiction of incorporation or organization)
 (I.R.S. Employer Identification No.)
3111 C Street
Anchorage, Alaska 99503
(Address of principal executive offices)    (Zip Code) 

(907) 562-0062

(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
TITLE OF EACH CLASSTRADING SYMBOLNAME OF EXCHANGE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   
ý Yes  ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
ý Yes  ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:  
Large Accelerated Filer ¨  Accelerated Filer ý    Non-accelerated Filer ¨
Smaller Reporting Company Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      
Yes  ý No

The number of shares of the issuer’s Common Stock, par value $1 per share, outstanding at May 5, 2021 was 6,206,913.



TABLE OF CONTENTS
   
Part  IFINANCIAL INFORMATION 
Item 1.Financial Statements (unaudited)
Item 2.
Item 3.
Item 4.
Part IIOTHER INFORMATION 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

1


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

ITEM 1. FINANCIAL STATEMENTS
2


CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.
Consolidated Balance Sheets
(Unaudited)
 March 31,
2021
December 31,
2020
(In Thousands, Except Share Data)
ASSETS  
Cash and due from banks$20,332 $23,304 
Interest bearing deposits in other banks183,258 92,661 
Investment securities available for sale, at fair value303,810 247,633 
Marketable equity securities9,471 9,052 
Investment securities held to maturity, at amortized cost20,000 10,000 
Total portfolio investments333,281 266,685 
Investment in Federal Home Loan Bank stock3,116 2,551 
Loans held for sale116,128 146,178 
Loans1,548,924 1,444,050 
Allowance for credit losses(14,764)(21,136)
Net loans1,534,160 1,422,914 
Purchased receivables, net11,818 13,922 
Mortgage servicing rights, at fair value11,657 11,218 
Other real estate owned, net7,563 7,289 
Premises and equipment, net38,171 38,102 
Operating lease right-of-use assets11,934 12,440 
Goodwill15,017 15,017 
Other intangible assets, net1,020 1,029 
Other assets63,788 68,488 
Total assets$2,351,243 $2,121,798 
LIABILITIES  
Deposits:  
Demand$762,793 $643,825 
Interest-bearing demand524,373 459,095 
Savings325,625 308,725 
Money market253,934 237,705 
Certificates of deposit less than $250,000105,374 92,047 
Certificates of deposit $250,000 and greater79,218 83,584 
Total deposits2,051,317 1,824,981 
Borrowings14,749 14,817 
Junior subordinated debentures10,310 10,310 
Operating lease liabilities11,883 12,378 
Other liabilities31,532 37,737 
Total liabilities2,119,791 1,900,223 
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, 6,206,913 and 6,251,004 issued and outstanding at March 31, 2021 and December 31, 2020, respectively
6,207 6,251 
Additional paid-in capital39,642 41,808 
Retained earnings185,766 173,498 
Accumulated other comprehensive (loss) income, net of tax(163)18 
Total shareholders' equity231,452 221,575 
Total liabilities and shareholders' equity$2,351,243 $2,121,798 
See notes to consolidated financial statements
3


NORTHRIM BANCORP, INC.
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
(In Thousands, Except Per Share Data)20212020
Interest and Dividend Income
Interest and fees on loans and loans held for sale$19,424 $15,359 
Interest on investment securities available for sale778 1,622 
Dividends on marketable equity securities87 102 
Interest on investment securities held to maturity246  
Dividends on Federal Home Loan Bank stock23 20 
Interest on deposits in other banks38 236 
Total Interest Income20,596 17,339 
Interest Expense
Interest expense on deposits949 1,484 
Interest expense on borrowings60 71 
Interest expense on junior subordinated debentures94 94 
Total Interest Expense1,103 1,649 
Net Interest Income19,493 15,690 
(Benefit) provision for credit losses(1,488)2,060 
Net Interest Income After Provision for Credit Losses20,981 13,630 
Other Operating Income
Mortgage banking income13,622 4,665 
Bankcard fees740 643 
Purchased receivable income532 921 
Service charges on deposit accounts290 362 
Unrealized (loss) on marketable equity securities(84)(871)
Interest rate swap income92  
Gain on sale of marketable equity securities, net 98 
Other income704 615 
Total Other Operating Income15,896 6,433 
Other Operating Expense
Salaries and other personnel expense14,728 12,256 
Data processing expense2,035 1,769 
Occupancy expense1,660 1,657 
Professional and outside services624 608 
Marketing expense404 583 
Insurance expense314 312 
Intangible asset amortization expense9 12 
OREO (income) expense, net(36)(36)
Other operating expense1,589 1,626 
Total Other Operating Expense21,327 18,787 
Income Before Provision for Income Taxes15,550 1,276 
Provision for income taxes3,369 243 
Net Income $12,181 $1,033 
Earnings Per Share, Basic$1.96 $0.16 
Earnings Per Share, Diluted$1.94 $0.16 
Weighted Average Shares Outstanding, Basic6,219,871 6,467,630 
Weighted Average Shares Outstanding, Diluted6,277,177 6,560,593 
See notes to consolidated financial statements
4


NORTHRIM BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
2010
Three Months Ended March 31,
(In Thousands)20212020
Net income$12,181 $1,033 
Other comprehensive income (loss), net of tax:  
   Securities available for sale:  
         Unrealized (losses) arising during the period($1,518)($1,330)
            Reclassification of net gains included in net income, net of tax expense
             of $0 and $28 for the first quarters of 2021 and 2020, respectively
 (70)
Derivatives and hedging activities:
     Unrealized gains (losses) arising during the period1,260 (1,867)
     Income tax benefit related to unrealized gains and losses77 1,131 
Other comprehensive loss, net of tax(181)(2,136)
Comprehensive income$12,000 ($1,103)
 
See notes to consolidated financial statements

5


NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 Common StockAdditional Paid-in Capital Retained EarningsAccumulated Other Comprehensive Income (Loss), net of Tax Total
 Number of SharesPar Value
(In Thousands)
Balance as of January 1, 20206,559 $6,559 $50,512 $149,615 $431 $207,117 
Cash dividend on common stock ($0.34 per share)
— — — (2,223)— (2,223)
Stock-based compensation expense— — 242 — — 242 
Repurchase of common stock(193)(193)(6,117)— — (6,310)
Other comprehensive income, net of tax— — — — (2,136)(2,136)
Cumulative effect of adoption of accounting principles related to equity compensation expense— — 139 (139)—  
Net income— — — 1,033 — 1,033 
Balance as of March 31, 20206,366 $6,366 $44,776 $148,286 ($1,705)$197,723 
Cash dividend on common stock ($0.34 per share)
— — — (2,188)— (2,188)
Stock-based compensation expense— — 238 — — 238 
Exercise of stock options and vesting of restricted stock units, net2 2 (8)— — (6)
Other comprehensive income, net of tax— — — — 1,256 1,256 
Net income— — — 9,900 — 9,900 
Balance as of June 30, 20206,368 $6,368 $45,006 $155,998 ($449)$206,923 
Cash dividend on common stock ($0.35 per share)
— — — (2,247)— (2,247)
Stock-based compensation expense— — 237 — — 237 
Repurchase of common stock(89)(89)(2,277)— — (2,366)
Other comprehensive loss, net of tax— — — — 214 214 
Net income— — — 11,855 — 11,855 
Balance as of September 30, 20206,279 $6,279 $42,966 $165,606 ($235)$214,616 
Cash dividend on common stock ($0.35 per share)
— — — (2,208)— (2,208)
Stock-based compensation expense— — 226 — — 226 
Exercise of stock options and vesting of restricted stock units, net17 17 (129)— — (112)
Repurchase of common stock(45)(45)(1,255)— — (1,300)
Other comprehensive income, net of tax— — — — 253 253 
Net income— — — 10,100 — 10,100 
Balance as of December 31, 20206,251 $6,251 $41,808 $173,498 $18 $221,575 
 See notes to consolidated financial statements





6


NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Continued)
(Unaudited)
 Common StockAdditional Paid-in Capital Retained EarningsAccumulated Other Comprehensive Income (Loss), net of Tax Total
 Number of SharesPar Value
(In Thousands)
Balance as of January 1, 20216,251 $6,251 $41,808 $173,498 $18 $221,575 
Cash dividend on common stock ($0.37 per share)
— — — (2,313)— (2,313)
Stock-based compensation expense— — 280 — — 280 
Exercise of stock options and vesting of restricted stock units, net17 17 (295)— — (278)
Repurchase of common stock(61)(61)(2,151)— — (2,212)
Other comprehensive loss, net of tax— — — — (181)(181)
Cumulative effect of adoption of ASU 2016-13— — — 2,400 — 2,400 
Net income— — — 12,181 — 12,181 
Balance as of March 31, 20216,207 $6,207 $39,642 $185,766 ($163)$231,452 
See notes to consolidated financial statements
7


NORTHRIM BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
(In Thousands)20212020
Operating Activities:  
Net income$12,181 $1,033 
Adjustments to Reconcile Net Income to Net Cash Used by Operating Activities:  
Gain on sale of securities, net (98)
Depreciation and amortization of premises and equipment789 761 
Amortization of software284 276 
Intangible asset amortization9 12 
Amortization of investment security premium, net of discount accretion73 (15)
Unrealized loss (gain) on marketable equity securities84 871 
Deferred tax (benefit) expense881 (1,061)
Stock-based compensation280 242 
Deferred loan fees and amortization, net of costs6,042 (148)
Provision (benefit) for credit losses(1,488)2,060 
Provision for purchased receivables 5 
Additions to home mortgage servicing rights carried at fair value(1,448)(663)
Change in fair value of home mortgage servicing rights carried at fair value1,009 930 
Change in fair value of commercial servicing rights carried at fair value23 21 
Gain on sale of loans(11,795)(4,643)
Proceeds from the sale of loans held for sale342,808 154,443 
Origination of loans held for sale(300,963)(168,224)
Gain on sale of other real estate owned(31)(37)
Net changes in assets and liabilities:  
(Increase) in accrued interest receivable(264)(495)
Decrease (Increase) in other assets2,795 (3,186)
(Increase) decrease in other liabilities(6,686)975 
Net Cash Provided (Used) by Operating Activities44,583 (16,941)
Investing Activities:  
Investment in securities:  
Purchases of investment securities available for sale(104,220)(38,906)
Purchases of marketable equity securities(505)(1,038)
Purchases of FHLB stock(569)(1,943)
Purchases of investment securities held to maturity(10,000) 
Proceeds from sales/calls/maturities of securities available for sale46,442 44,868 
Proceeds from sales of marketable equity securities 503 
Proceeds from redemption of FHLB stock4 769 
Decrease in purchased receivables, net2,104 698 
Increase in loans, net(111,146)(38,647)
Proceeds from sale of other real estate owned31 37 
Purchases of software(9) 
Purchases of premises and equipment(858)(1,632)
Net Cash (Used) by Investing Activities(178,726)(35,291)
Financing Activities:  
Increase in deposits226,336 23,141 
(Decrease) increase in borrowings(68)27,986 
Repurchase of common stock(2,212)(6,310)
Proceeds from the issuance of common stock5  
Cash dividends paid(2,293)(2,199)
Net Cash Provided by Financing Activities221,768 42,618 
Net Change in Cash and Cash Equivalents87,625 (9,614)
Cash and Cash Equivalents at Beginning of Period115,965 95,424 
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Cash and Cash Equivalents at End of Period$203,590 $85,810 
Supplemental Information:  
Income taxes paid$ $3 
Interest paid$1,105 $1,605 
Transfer of loans to other real estate owned$274 $162 
Non-cash lease liability arising from obtaining right of use assets$79 $ 
Cash dividends declared but not paid$20 $24 
 
See notes to consolidated financial statements
9


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited consolidated financial statements and corresponding footnotes have been prepared by Northrim BanCorp, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. The year-end Consolidated Balance Sheet data was derived from the Company's audited financial statements. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company owns a 100% interest in Residential Mortgage Holding Company, LLC, the parent company of Residential Mortgage, LLC (collectively "RML") and consolidates their balance sheets and income statement into its financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company determined that it operates in two primary operating segments: Community Banking and Home Mortgage Lending. The Company has evaluated subsequent events and transactions for potential recognition or disclosure. Operating results for the interim period ended March 31, 2021 are not necessarily indicative of the results anticipated for the year ending December 31, 2021. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020. There have been no significant changes in our application of these accounting policies in 2021, except as noted below.
As a result of the adoption of Accounting Standards Codification ("ASC") 326 Financial Instruments - Credit Losses on January 1, 2020, the Company has updated the following significant accounting policies.
Allowance for Credit Losses - Investment Securities: For available for sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. The ACL may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in such a situation.
In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors.

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

The ACL on held to maturity securities is estimated on a collective basis by major security type. At March 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.

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

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

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

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

Under the DCF method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD"). The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables. The Company's regression models for PD utilize the Company's actual historical loan level default data. The Company determines a reasonable and supportable forecast and applies that forecast to the regression model to estimate defaults over the forecast period. Management leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the Company's 4 quarter forecast period. Management utilizes and forecasts Alaska unemployment as a loss driver for all of the loans pools that utilized the DCF method. Management also utilizes and forecasts either one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics. Following the forecast period, the economic variables used to calculate PD revert to a historical average at a constant rate over an 8 quarter reversion period. Other assumptions relevant to the discounted cash flow model to derive the quantitative allowance include the LGD, which is the estimate of loss for a defaulted loan, prepayment speeds, and the discount rate applied to future cash flows. The DCF method utilizes the effective interest rate of individual assets to discount the expected credit losses over the contractual term of the loan, adjusted for prepayments. The LGD is the expected loss which would be realized presuming a default has occurred and primarily measures the value of the collateral or other secondary source of repayment related to the collateral.

The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.

In summary, under the DCF method the combination of adjustments for credit expectations (PD and LGD) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis.

The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses under the current expected credit loss model adopted by the Company on January 1, 2021:
Commercial & industrial - Commercial loans are loans for commercial, corporate and business purposes. The Company’s commercial business loan portfolio is comprised of loans for a variety of purposes and across a variety of industries. These loans include general commercial and industrial loans, loans to purchase capital equipment, and other business loans for working capital and operational purposes. Commercial loans are generally secured by accounts receivable, inventory and other
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business assets. Also included in commercial loans are our Paycheck Protection Program ("PPP") loans originated during 2020 and 2021. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

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

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

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

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

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

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

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

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

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

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

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

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

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

Lending strategy, policies, and procedures;
Quality of internal loan review;
Lending management and staff;
Trends in underlying collateral values;
Competition, legal, and regulatory changes;
Economic and business conditions including fluctuations in the price of Alaska North slope crude oil;
Changes in trends, volume and severity of adversely classified loans, nonaccrual loans, and delinquencies;
Concentration of credit; and
Changes in the nature and volume of the loan portfolio.

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

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

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

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

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

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company enters into various types of transactions that involve financial instruments with off-balance sheet risk, including commitments
13


to extend credit and standby letters of credit issued to meet customer financing needs. We apply the same credit standards to these commitments as in all of our lending activities and include these commitments in our lending risk evaluations. The Company’s exposure to credit loss in the event of nonperformance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to provision for credit loss expense in the Company’s consolidated statements of income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s consolidated balance sheets.
Purchased Receivables and related Allowance for Credit Losses: The Company purchases accounts receivable from its customers. The purchased receivables are carried at amortized cost, net of an allowance for credit losses. Management measures expected credit losses on purchased receivables by evaluating each receivable individually. Each quarter, management reviews purchased receivable asset balances compared to assets eligible for advancement of funds in order to determine the exposure to loss for the Company. Exposure is zero when outstanding balances exceed assets eligible for advancement. Management may determine that an ACL is appropriate for individual purchased receivables based on asset specific facts and circumstances. Fees charged to the customer are earned while the balances of the purchases are outstanding, which is typically less than one year. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or total shareholders' equity.
Recent Accounting Pronouncements
Accounting pronouncements implemented in 2021
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13” or “CECL”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. Under ASU 2016-13 financial institutions and other organizations will use forward-looking information to better inform their credit loss estimates but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
ASU 2016-13 is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2019, and must be applied prospectively. However, on October 16, 2019 the FASB voted to delay ASU 2016-13 for Smaller Reporting Companies. The Company has elected Small Reporting Company status, which changes the effective date for ASU 2016-13 for the Company to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2022. Early application was permitted for specified periods. The Company elected to early adopt ASU 2016-13 on January 1, 2021 after finalizing data and model validation and our internal governance framework. The guidance was applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at January 1, 2021. However, certain provisions of the guidance are only required to be applied on a prospective basis.
Results for periods beginning after January 1, 2021 and presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable US GAAP. The Company recorded a net increase in retained earnings of $2.4 million upon adoption. The transition adjustment includes a decrease in the allowance for credit losses on loans of $4.5 million, a decrease in the allowance for credit losses on purchased receivables of $73,000, and an increase in the allowance for credit losses on unfunded commitments of $1.2 million, net of the corresponding net decrease in deferred tax assets of $954,000.
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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 March 31, 2021, we had approximately $206.0 million of assets, including $128.7 million in commercial loans and $77.3 million in debt securities, and $10.3 million of liabilities in the form of our junior subordinated debentures linked to USD LIBOR. These amounts exclude derivative assets and liabilities on our consolidated balance sheet. As of March 31, 2021, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $158.3 million. Of this amount, $74.0 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers. An additional $74.0 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 $84.3 million, including an interest rate swap agreement for $10.3 million in notional value related to our junior subordinated debentures. Each of the USD LIBOR-linked amounts referenced above are expected to vary in future periods as current contracts expire with potential replacement contracts using an alternative reference rate.

In an effort to mitigate the risks associated with a transition away from LIBOR, our Asset Liability Committee has undertaken initiatives to: (i) develop more robust fallback language and disclosures related to the LIBOR transition, (ii) develop a plan to seek to amend legacy contracts to reference such fallback language or alternative reference rates, (iii) enhance systems to support commercial loans, securities, and derivatives linked to the Secured Overnight Financing Rate and other alternative reference rates, (iv) develop and evaluate internal guidance, policies and procedures focused on the transition away from LIBOR to alternative reference rate products, and (v) prepare and disseminate internal and external communications regarding the LIBOR transition.

The amendments are in effect from March 12, 2020, through December 31, 2022. ASU 2021-01 does not have a material impact on the Company's consolidated financial statements.



2. Cash and Cash Equivalents
The Company is required to maintain cash balances or deposits with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank") sufficient to meet its statutory reserve requirements and for purposes of settling financial transactions and charges for the Federal Reserve Bank services. The average reserve requirement for the maintenance period for the quarter ended March 31, 2021, was zero.
The Company is required to maintain a $250,000 balance with a correspondent bank for outsourced servicing of ATMs.

15


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

3. Investment Securities
Marketable Equity Securities
The Company held marketable equity securities with fair values of $9.5 million and $9.1 million at March 31, 2021 and December 31, 2020, respectively. The gross realized and unrealized gains (losses) recognized on marketable equity securities in other operating income in the Company's Consolidated Statements of Income were as follows:
Three Months Ended March 31,
(In Thousands)20212020
Unrealized (loss) gain on marketable equity securities($84)($871)
Gain on sale of marketable equity securities, net 98 
   Total($84)($773)

Debt securities
Debt securities have been classified in the financial statements as available for sale or held to maturity. The following table summarizes the amortized cost, estimated fair value, and allowance for credit losses of debt securities and the corresponding amounts of gross unrealized gains and losses of available-for-sale securities recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses of held to maturity securities at the periods indicated:
(In Thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance for Credit LossesFair Value
March 31, 2021    
Securities available for sale    
U.S. Treasury and government sponsored entities$224,824 $1,066 ($1,397)$ $224,493 
Municipal securities820 36   856 
Corporate bonds29,946 510   30,456 
Collateralized loan obligations47,990 56 (41) 48,005 
Total securities available for sale$303,580 $1,668 ($1,438)$ $303,810 
(In Thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
March 31, 2021
Securities held to maturity
Corporate bonds$20,000 $ ($94)$19,906 
   Allowance for credit losses — — — 
Total securities held to maturity, net of ACL$20,000 $ ($94)$19,906 
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(In Thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
December 31, 2020    
Securities available for sale    
U.S. Treasury and government sponsored entities$173,318 $1,330 ($47)$174,601 
Municipal securities820 36