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 ~~Northrim~~the Bank’s deposits and also examines, supervises, and regulates ~~Northrim~~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 ~~Northrim~~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 ~~Northrim~~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 ~~Northrim~~the Bank are now based on ~~Northrim~~the Bank’s total assets. Other Dodd-Frank Act changes include: (i) tightened capital requirements for ~~Northrim~~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.

~~The Trump administration~~In December 2013, the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC, the Securities and ~~various members of Congress from time~~Exchange Commission (“SEC”), and the Commodities Futures Trading Commission issued final rules to ~~time have expressed a desire to modify or repeal parts~~implement certain provisions of the Dodd-Frank ~~Act. We cannot predict whether any modification~~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 ~~repeal will be enacted or, if so, any effect they would have on our business, operation or financial condition 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 ~~financial services industry in general.~~ 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 ~~full~~ disclosure of ~~the Company’s~~ privacy ~~policy~~policies and allow consumers to ~~consumers and mandate offering the consumer the ability to “opt out” of having non-public~~prevent certain personal information ~~disclosed to~~from being shared with non-affiliated third parties. ~~Pursuant~~The Fair and Accurate Credit Transaction Act (“FACT Act”) requires financial institutions to ~~these provisions,~~develop and implement an identity theft prevention program to detect, prevent and mitigate identity theft “red flags” to reduce the ~~federal banking regulators adopted privacy regulations.~~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 ~~Northrim~~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 ~~banks~~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~~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 ~~started to be phased in beginning in 2016~~ 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) ~~have~~ proposed a rule intended to simplify capital rules for certain community banks and their holding ~~companies.~~companies, the Community Bank Leverage Ratio ("CBLR"). Qualifying community banking organizations ~~could~~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, mortgage servicing assets, and deferred tax assets)~~liabilities). The ~~community bank leverage ratio~~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 ~~proposal~~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 ~~2019~~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 ~~offerings~~offering that the Company completed in the ~~second quarter of 2003 and in the~~ fourth quarter of 2005 ~~are~~is included in the Company’s capital for regulatory purposes, although ~~they are~~it is accounted for as a liability in ~~its~~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). ~~The Company redeemed $8 million trust preferred securities in August 2017.~~ As a result, the Company has $10 million more in regulatory capital than the Bank at December 31, ~~2018~~2021 and ~~2017,~~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.

~~Northrim~~ The Bank is subject to the Community Reinvestment Act of 1977 (“CRA”). The CRA requires that ~~Northrim~~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 ~~Northrim~~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, ~~Northrim~~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 ~~requires~~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, ~~2018.~~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 ~~the Company~~to notification and ~~its affiliates~~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 ~~broad array~~Final Rule, with compliance required by May 1, 2022, that requires banking organizations to notify their primary banking regulator within 36 hours of ~~financial~~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 ~~regulations. Among~~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, ~~these laws~~require disclosures of the cost of credit and ~~regulations mandate certain disclosure requirements and~~terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the ~~manner in which~~use of credit report information, provide financial ~~institutions deal with their customers.~~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 ~~Securities and Exchange Commission (“SEC”),~~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.

ITEM 1A. RISK FACTORS

~~An investment in the Company’s common stock is subject to risks inherent to the Company’s business.~~ 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 commercialloan 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, ~~and~~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 ~~absent action by the Alaska state legislature, these deficits are expected~~this has addressed only part of Alaska's structural finance problem and this approach also increased Alaska's exposure to ~~exhaust cash savings of the state~~volatility in ~~the near term.~~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, ~~2018,~~2021, approximately ~~73%~~9% of the ~~Bank’s~~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 2%1% are unsecured. Approximately ~~25%~~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.

~~Changes in~~ Residential mortgage lending is a market ~~interest rates could adversely impact the Company.~~

~~Our earnings are impacted by changing interest rates. Changes in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loans~~sector that experiences significant volatility and securities, and rates paid on deposits and 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 further 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~~is influenced by many factors beyond our ~~control, including~~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 ~~and economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities. Since December 2015, the RB~~ has ~~increased short-term interest rates eight times and may consider additional rate increases in 2019. Market~~experienced substantial volatility in ~~interest rates can be difficult~~recent periods primarily due to ~~predict, as unexpected interest rate changes may result in a sudden impact while anticipated~~ changes in interest rates ~~generally~~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 ~~mortgage rate market prior to the actual rate change. Exposure to interest rate risk~~earnings and results of operations of RML. In addition, an increase, as 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 fluctuationscurrently expected, in interest rates ~~could potentially have an adverse effect on our business, financial condition and results of operations.~~

~~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 a new Consumer Financial Protection Bureau 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 debt 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~~future loan origination volume and ~~the trading price of our common stock.~~

~~We are subject to more stringent capital and liquidity requirements which may adversely affect our net income and future growth.~~

In July 2013, the FRB and the FDIC announced the new capital rules, which apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies. As described in further detail above in “Item 1 Business - Supervision and Regulation” these rules created increased capital requirements for United States depository institutions and their holding companies. These rules include risk-based and leverage capital ratio requirements, which became effective on January 1, 2015. These rules also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds. These revisions also became effective January 1, 2015.

~~Our failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.~~ margins.

Our information systems or those of our ~~third party~~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~~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 ~~vendor.~~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.

~~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 earningsOur 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 ~~RML. In addition, an increase~~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 ~~interest rates~~these practices could materially adversely affect our ability to anticipate business needs and meet regulatory requirements. Further, difficult economic conditions may ~~materially~~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 ~~mange~~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 ~~loan loss~~ allowance for credit losses may ~~not~~ be ~~adequate to cover future loan~~insufficient.

We maintain allowances for credit losses ~~which may adversely affect our earnings.~~

~~We have established a reserve for probable losses we expect to incur in connection with~~on loans, ~~in our~~securities and off-balance sheet credit ~~portfolio. This~~exposures. The amount of each allowance ~~reflects our~~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 ~~collectability~~contractual term of ~~certain identified loans, as well as an overall risk assessment of total loans outstanding. Our~~the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. As a result, the determination of the ~~amount~~appropriate level of loan loss allowance is highly subjective; although management personnel apply criteria such as risk ratings and historical loss rates; these factors may not be adequate predictors of future loan performance. Accordingly, we cannot offer assurances that these estimates ultimately will prove correct or that the loan loss allowance will be sufficient to protect against losses that ultimately may occur. If our loan loss allowance proves to be inadequate, we may suffer unexpected charges to income, which would adversely impact our results of operations and financial condition. Moreover, bank regulators frequently monitor banks' loan loss allowances, and if regulators were to determine that the allowance ~~is inadequate, they~~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 usan 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 ~~which also would adversely impact~~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.Adownturn in real estate within our markets would have a negative impact on our results of operations.

Approximately ~~73%~~75% of the Bank’s loan portfolio, excluding PPP loans, at December 31, ~~2018~~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 ~~impacted~~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 ~~50%~~52% of the Bank’s loan portfolio at December 31, ~~2018~~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 ~~conditions~~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, ~~2018,~~2021, the Bank held ~~$8.0~~$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.

~~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, Ketchikan, Sitka, and to a lessor extent, 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.

~~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. Since December 2015, the FRB has increased short-term interest rates eight times and may consider additional increases in 2019. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

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. ~~In 2016,~~On January 1, 2019, a requirement to have a capital conservation buffer ~~started to be phased in and this requirement, which~~ went into full effect ~~on January 1, 2019~~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 ~~2018,~~2021, the Company repurchased ~~15,468~~279,276 shares of common stock at an average price of ~~$31.90~~$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 ~~$1.02~~$1.50 per diluted share in ~~2018.~~2021. On February ~~28, 2019,~~24, 2022, the Board of Directors approved payment of a ~~$0.30~~$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.

~~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.

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; ~~Michael Martin, our Executive Vice President, General Counsel and Corporate Secretary;~~ and Jed W. Ballard, our Executive Vice President and Chief Financial Officer. While we maintain keyman life insurance on the lives of Messrs. Schierhorn ~~Martin,~~ and Ballard in the amounts of $2.4 million and $2 million, ~~each,~~respectively, we may not be able to timely replace Mr. Schierhorn ~~Mr. Martin,~~ 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.

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.

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.

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.

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.

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

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 ~~9170 Jewel Lake Road~~ 4000 W. Dimond Boulevard, Suite ~~101,~~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 ~~Loan Production Office~~ ~~44296~~Financial Center 44384 Sterling Highway, Suite 1,101, Soldotna, AK	~~Loan production~~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 ~~11901 Business Boulevard, #203,~~ 12812 Old Glenn Highway, Suite C-4, Eagle River, AK		Leased
Fairbanks Office ~~308~~ 324 Old Steese Highway, Suite 7, Fairbanks, AK		Leased
~~Fairbanks Northrim Office~~ ~~360 Merhar Avenue, Fairbanks, AK~~		~~Leased~~
Fairbanks Office 711 Gaffney Road, Suite ~~202,~~201, Fairbanks, AK	Leased
Juneau Office 8800 Glacier Highway, #232, Juneau, AK		Leased
Kodiak Office 2011 Mill Bay Road, ~~#101,~~#1, Kodiak, AK		Leased
Soldotna Office ~~44296~~ 44384 Sterling Highway, ~~#1,~~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

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.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

PART II

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 ~~12, 2019,~~4, 2022, the number of shareholders of record of our common stock was ~~246.~~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.

~~The following are high and low closing prices as reported by NASDAQ. Prices do not include retail markups, markdowns or commissions.~~

First Second Third Fourth
Quarter Quarter Quarter Quarter
2018
High $36.05 $40.45 $45.35 $43.00
Low $32.80 $34.05 $38.80 $30.70
2017
High $32.40 $32.55 $35.35 $37.90
Low $27.50 $29.25 $26.45 $32.50

In 2018, we paid cash dividends of $0.24 per share in the first and second quarters and $0.27 per share in the third and fourth quarters. In 2017, we paid cash dividends of $0.21 per share in the first and second quarters and $0.22 per share in the third and fourth quarters. Cash dividends totaled $7.1 million, $6.0 million, and $5.4 million in 2018, 2017, and 2016, respectively. On February 28, 2019, the Board of Directors approved payment of a $0.30 per share cash dividend on March 22, 2019, to shareholders of record on March 14, 2019. The Company and the Bank are subject to restrictions on the payment of dividends pursuant to applicable federal and state banking regulations and Alaska corporate law. 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. Given the fact that the Bank believes it will remain “well-capitalized”; the Company expects to receive dividends from the Bank in 2019. Beginning in 2016, a requirement to have a capital conservation buffer began to be phased in and is now in full effect, and this requirement could adversely affect the Bank's ability to pay dividends. See "Item 1 Business - Supervision and Regulation" in this report.

Repurchase of Securities

At December 31, ~~2018,~~2021, there ~~are 153,433~~were 33,724 shares available under the previously announced stock repurchase program. The Company repurchased ~~15,468~~279,276 shares in ~~2018~~2021 and ~~58,341~~327,000 shares in ~~2017.~~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 or that we will repurchase all~~program.

The Company repurchased 188,264 shares of its common stock during the ~~authorized shares.~~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, ~~2018.~~2021. Additional information regarding the Company’s equity plans is presented in Note 2122 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) ⁽²⁾	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))	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	222,447	$19.26	176,199	Equity compensation plans approved by security holders1	193,034	$23.77	170,905
Total	222,447	$19.26	176,199	Total	193,034	$23.77	170,905
¹Consists of the Company's 2017 Stock Incentive Plan, which replaced the 2014 Stock Incentive Plan (the "2014 Plan")
²Includes 129,933 options awarded under the 2014 Plan and other previous stock option plans.
1Consists of the Company's 2020 Stock Incentive Plan, which replaced the 2017 Stock Incentive Plan (the "2017 Plan")				1Consists of the Company's 2020 Stock Incentive Plan, which replaced the 2017 Stock Incentive Plan (the "2017 Plan")

an2020. The increase in net ~~interest~~ income ~~due to increases~~is the result of an $11.6 million increase in ~~interest rates~~

net income in the Community Banking segment, which was only partially offset by a $7.0 million decrease in ~~the provision for~~net income ~~taxes due to a lower federal corporate income tax rate in 2018 arising from the Tax Cuts Jobs Act, and~~

~~a decrease~~ in the ~~provision for loan losses primarily resulting from improvements in credit quality.~~Home Mortgage Lending segment.

~~The net interest margin increased to 4.55% in 2018 from 4.22% in 2017 and 4.14% in 2016 despite a decline in average loans to $971.5~~$2.5 million in ~~2018~~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 ~~$981.0~~$65.1 million in ~~2017 and $976.6~~2020. As of December 31, 2021, there is $4.5 million in ~~2016. This increase~~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 loan losses decreased in 2018 to a benefit of $500,000 from provisions of $3.2 million in 2017 and $2.3 million in 2016.~~improved but are not yet at pre-pandemic levels. Our nonperforming loans, net of government guarantees, ~~decreased~~increased to ~~$14.7~~$10.7 million at the end of ~~2018~~2021 compared to ~~$21.4~~$10.0 million at the end of ~~2017 and increased from $12.9 million at the end of 2016,~~2020, while total adversely classified loans, net of government guarantees at December 31, ~~2018 decreased~~2021 increased to ~~$27.2~~$13.7 million from ~~$33.8~~$12.8 million at December 31, ~~2017 and $35.6 million at December 31, 2016.~~2020. The ~~allowance~~Allowance for ~~loan losses (“Allowance”~~Credit Losses ("ACL") totaled ~~1.98%~~0.83% of total portfolio loans at December 31, ~~2018,~~2021, compared to ~~2.25%~~1.46% at December 31, ~~2017 and 2.02% at December 31, 2016.~~2020. The ~~Allowance~~ACL compared to nonperforming loans, net of government guarantees, was ~~133%~~110% at December 31, ~~2018~~2021 compared to ~~100%~~210% at the end of ~~2017 and 152%~~2020.

~~Return on average assets was~~ ~~1.34%~~Community Banking segment in ~~2018~~2021 primarily due to higher taxable income in 2021 compared to ~~0.87%~~2020.

•Net income in ~~2017~~ ~~and~~ ~~0.96%~~the Home Mortgage Lending segment decreased 40%, or $7.0 million, to $10.3 million in ~~2016~~.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 ~~15.47%~~14.08% at December 31, ~~2018~~2021 as compared to ~~14.65%~~14.20% at December 31, ~~2017.~~ 2020.

•The aggregate cash dividends paid by the Company in ~~2018~~2021 rose ~~19%~~6% to ~~$1.02 per diluted share~~$9.4 million from ~~$0.86 per diluted share~~$8.8 million paid in ~~2017.~~2020.

•The Company repurchased ~~15,468~~279,276 shares of its common stock in ~~2018~~2021 at an average price of ~~$31.90~~$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.

Reconciliationoftotal shareholders' equity to tangiblecommonshareholders’equity (Non-GAAP)and total assets totangible 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:


	2021
		% 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.


	2020
		% 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 ~~153,433~~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 ~~authorization.~~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 ~~often~~ as a result of the need to make "critical accounting estimates", which are estimates ~~about~~that involve estimation uncertainty that has had or is reasonably likely to have a material impact on the ~~effect~~Company's financial condition or results of ~~matters that are inherently uncertain and may change in future periods.~~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 ~~difficult, subjective or complex judgments or~~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 ~~loan losses:~~Credit Losses Policy: The Company ~~maintains an Allowance to reflect inherent losses~~adopted CECL on January 1, 2021. The Company's Executive Loan Management Committee and Asset Liability Committee are both involved in ~~its loan portfolio as~~monitoring various aspects of the ~~balance sheet date.~~Company's ACL methodology. The ~~Company performs regular credit reviews~~Company's Audit Committee provides board oversight of the ~~loan portfolio~~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 ~~quality~~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 ~~adherence~~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.~~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 ~~originated, they are assigned~~also considered by management when developing the forecast metrics. Following the forecast period, the economic variables used to calculate PD revert to a ~~risk rating that~~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 ~~reassessed periodically~~

~~during~~ 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, through the credit review process. The Company's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. These risk ratings are then consolidated into five classes, which include pass, special mention, substandard, doubtful and loss. These classes are a primary factor in determining an appropriate amount for the allowance for loan losses. Each class is assessed an inherent credit loss factor that determines an amount of allowance for loan losses provided for that group of loans. This allowance is then adjusted for qualitative factors, by segment and class. Qualitative factors are based on management’s assessment of current trends that may cause losses inherent in the current loan portfolio to differ significantly from historical losses. Some factors that management considers in determining the qualitative adjustment to the general reserve include loan quality trends in our own portfolio, the degree of concentrations of large borrowers in our loan portfolio, national and local economic trends, business conditions, underwriting policies and standards, trends in local real estate markets, effects of various political activities, peer group data, and internal factors such as underwriting policies and expertise of the Company’s employees.

Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. A loan is considered impaired when based on current information and events, we determine 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 as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loanprepayments. The LGD is the ~~liquidation of~~expected loss which would be realized presuming a default has occurred and primarily measures the ~~collateral. In these cases, we use the current fair~~ value of the collateral ~~less selling costs, instead~~or other secondary source of ~~discounted cash flows.~~ repayment related to the collateral.

The ~~analysis~~Company has identified the following pools of ~~collateral dependent~~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 ~~appraisals on~~term loans secured by first liens on residential real ~~property, management’s assessment~~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 ~~current market, recent payment history and an evaluation~~improvements by the builder for the end user, or sale of ~~other sources of repayment.~~the property to a third-party. The Company ~~obtains appraisals on real~~utilizes the DCF method to quantitatively estimate credit losses for this pool.

Other construction, land development, and ~~personal property that secure its~~raw land - This category of loans ~~during~~consists of loans to finance the ~~loan origination process in accordance with regulatory guidance~~ground up construction, improvement and/or carrying for sale after the completion of construction of owner occupied and ~~its loan policy. The Company obtains updated appraisals on~~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 ~~personal property based upon its assessment~~unsecured, and customer overdrafts. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Obligations of ~~changes~~states and political subdivisions in the ~~current market or particular projects or properties, information from other current appraisals~~US - This category of loans includes all loans made to states, counties municipalities, school districts, drainage and ~~other sources~~sewer districts, and Indian tribes in the U.S. These loans maybe be secured by any type of ~~information.~~collateral, including real estate. The Company ~~uses~~utilizes the ~~information provided in these updated appraisals along with its evaluation~~weighted average remaining life method to quantitatively estimate credit losses for this pool.

Other - This category of loans includes all other ~~information available on a particular property as it assesses the collateral coverage on its performing and nonperforming~~ loans ~~and the impact~~ that ~~may have on the adequacy of its Allowance.~~

~~If we determine that the value~~cannot properly be reported in one of the ~~impaired loan is less than~~preceding categories. The Company utilizes the ~~recorded investment~~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 ~~we either recognize an impairment reserve as a specific component to be provided for~~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 ~~Allowance or charge-off the impaired balance on collateral dependent~~price of Alaska North slope crude oil;

•Changes in trends, volume and severity of adversely classified loans, if it is determined that such amount represents a confirmed loss. The combination of the risk rating-based allowance component and the impairment reserve allowance component lead to an allocated allowance for loan losses.

~~Finally, the Company assesses the overall adequacy of the Allowance based on several factors including the level of the Allowance as compared to total~~nonaccrual loans, and ~~nonperforming loans~~delinquencies;

•Concentration of credit; and

•Changes in ~~light of current economic conditions. This portion of~~ the ~~Allowance is deemed “unallocated” because it is not allocated to any segment or class~~nature and volume of the loan portfolio. This portion of the Allowance provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component or in the specific impairment component of the Allowance and acknowledges the inherent imprecision of all loss prediction models.

The unallocated portion of the Allowance is based upon management’s evaluation of various factors that are not directly measured in the determination of the allocated portions of the Allowance. Such factors include uncertainties in identifying triggering events that directly correlate to subsequent loss rates, uncertainties in economic conditions, risk factors that have not yet manifested themselves in loss allocation factors, and historical loss experience data that may not precisely correspond to the current portfolio. In addition, the unallocated reserve may fluctuate based upon the direction of various risk indicators. Examples of such factors include the risk as to current and prospective economic conditions, the level and trend of charge offs or recoveries, and the risk of heightened imprecision or inconsistency of appraisals used in estimating real estate values. Although this allocation process may not accurately predict credit losses by loan type or in aggregate, the total allowance for credit losses is available to absorb losses that may arise from any loan type or category. Due to the subjectivity involved in the determination of the unallocated portion of the Allowance, the relationship of the unallocated component to the total Allowance may fluctuate from period to period.

Based on our methodology and its components, management believes the resulting Allowance is adequate and appropriate for the risk identified in the Company's loan portfolio. Given current processes employed by the Company, management believes the segments, classes, and estimated loss rates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be material to the Company's financial statements. In addition, current loan classes and fair value estimates of collateral are subject to change as we continue to review loans within our portfolio and as our borrowers are impacted by economic trends within their market areas. Although we have established an Allowance that we consider adequate, there can be no assurance that the established Allowance will be sufficient to offset losses on loans in the future. In addition, a substantial percentage of our loan portfolio is secured by real estate; as a result, a significant decline in real estate market values may require an increase in the Allowance.

Valuation of goodwill and other intangibles: ~~Goodwill and other intangible assets with indefinite lives are not amortized but instead are periodically tested for impairment.~~ 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, ~~2018~~2021 and ~~2017~~2020 in

accordance with the policy described in Note 1 to the financial statements included ~~with~~in Part II. Item 8 of this report. At December 31, ~~2018,~~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,~~trends; the Company's ~~stable budget-to-actual results of operations;~~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; ~~and~~ improvements in the Alaskan economy in ~~2018.~~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 ~~recent decline in oil prices and~~muted pace of growth in the ~~company's stock price, as well as the decline in the volume of mortgage originations in~~ Alaska ~~and the decrease in net income in the Company's Home Mortgage Lending segment. For the Community Banking segment, we~~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, ~~2018~~2021 and that no potential impairment existed at that time. After review of these qualitative inputs, the Company determined that performing a quantitative goodwill impairment test for the Home Mortgage Lending segment as of December 31, 2018 was appropriate. The Company estimated the fair value of the Home Mortgage Lending segment using a discounted cash flow approach. We then compared the estimated fair value of the Home Mortgage Lending segment to the carrying value as of December 31, 2018 and concluded that no potential impairment existed at that time.

Valuation of OREO: ~~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.

~~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, sales of employee benefit plans (through August of 2017, when we sold our interest in the assets of NBG), service charges and fees, and bankcard fees. Our operating expenses consist in large part of salaries and other personnel costs, occupancy, data processing, marketing, and professional services expenses and compensation expense for RML acquisition payments. Interest income and cost of funds, or interest expense, 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 attributable to the Company of $20.0 million in 2018, compared to net income of $13.2 million in 2017, and $14.4 million in 2016. During these periods, net income per diluted share was $2.86, $1.88, and $2.06, respectively. The increase in net income in 2018 compared to 2017 was primarily due to a decrease of $6.3 million in provision for income taxes, a decrease of $3.7 in the provision for loan losses, and a $3.5 million increase in net interest income. These changes were only partially offset by a decrease of $8.3 million in other operating income, which was primarily due to the sale of our interest in the assets of NBG in August 2017 and a decrease in mortgage banking income. The decrease in net income in 2017 compared to 2016 was primarily due to an increase of $4.3 million in provision for income taxes and an increase of $902,000 in the provision for loan losses, as well as a decrease of $2.8 million in other operating income, which was primarily driven by a reduction in mortgage banking income. These changes were only partially offset by a $1.3 million increase in net interest income and a $4.6 million decrease in compensation expense - RML acquisition payments in 2017 compared to 2016.

~~Net Interest Income / Net Interest Margin~~

Net interest income in 2018 was $61.2 million, compared to $57.7 million in 2017, and $56.4 million in 2016. The increase in 2018 as compared to 2017 and 2017 as compared to 2016 was mainly due to increased interest income earned on long- and short-term investments and loans primarily due to higher yields resulting from increases in interest rates in both 2018 and 2017 compared to the prior year. During 2018, 2017, and 2016, net interest margins were 4.55%, 4.22%, and 4.14%, respectively. The increase in net interest margin in both 2017 and 2018 compared to the prior year is the result of increases in the spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

Years ended December 31, 2018
2017
2016
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)

$971,548

$55,526
5.72 %

$981,001

$53,301
5.43 %

$976,613

$52,905
5.42 %
Loans held for sale 46,089
2,016
4.37 % 44,047
1,740
3.95 % 52,012
1,872
3.60 %
Long-term Investments⁽³⁾
286,426
5,829
2.04 %
305,211
4,634
1.52 %
296,214
3,936
1.33 %
Short-term investments⁽⁴⁾
42,386
806
1.90 %
36,944
433
1.17 %
37,074
205
0.55 %
Total interest-earning assets
$1,346,449

$64,177
4.77 %

$1,367,203

$60,108
4.40 %

$1,361,913

$58,918
4.33 %
Noninterest-earning assets 146,936

143,849

144,609

Total
$1,493,385

$1,511,052

$1,506,522

Interest-bearing deposits
$809,808

$2,307
0.28 %

$829,918

$1,707
0.21 %

$803,877

$1,870
0.23 %
Borrowings 47,570
662
1.37 %
50,523
723
1.43 %
50,095
691
1.38 %
Total interest-bearing liabilities
$857,378

$2,969
0.35 %

$880,441

$2,430
0.28 %

$853,972

$2,561
0.30 %
Noninterest-bearing demand deposits 417,464

418,415

446,366

Other liabilities 17,521

19,067

24,556

Equity 201,022

193,129

181,628

Total
$1,493,385

$1,511,052

$1,506,522

Net interest income
$61,208

$57,678

$56,357

Net interest margin 4.55 %
4.22 %
4.14 %
Average portfolio loans to average-earnings assets 72.16 % 71.75 % 71.71 %
Average portfolio loans to average total deposits 79.16 % 78.58 % 78.11 %
Average non-interest deposits to average total deposits 34.02 % 33.52 % 35.70 %
Average interest-earning assets to average interest-bearing liabilities 157.04 % 155.29 % 159.48 %

¹Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $3.0 million, $3.2 million and $3.1 million for 2018, 2017 and 2016, respectively.

²Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loans were $17.5 million, $18.1 million, and $7.2 million in 2018, 2017 and 2016, respectively.

³~~Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock.~~

⁴~~Consists of interest bearing deposits in other banks and domestic CDs.~~

2018 compared to 2017 2017 compared to 2016
Increase (decrease) due to Increase (decrease) due to
(In Thousands) Volume Rate Total Volume Rate Total
Interest Income:
Loans
($508 )
$2,733

$2,225

$238

$158

$396
Loans held for sale 83
193
276
(364 ) 232
(132 )
Long-term investments (264 ) 1,459
1,195
123
575
698
Short term investments 71
302
373
(1 ) 229
228
Total interest income
($618 )
$4,687

$4,069

($4 )
$1,194

$1,190
Interest Expense:
Interest-bearing deposits
($40 )
$640

$600

$64

($227 )
($163 )
Borrowings (35 ) (26 ) (61 ) 6
26
32
Total interest expense
($75 )
$614

$539

$70

($201 )
($131 )

~~Provision for Loan Losses~~

We recorded a benefit for loan losses in 2018 of $500,000, compared to a provision for loan losses of $3.2 million and $2.3 million in 2017 and 2016, respectively. The loan loss provision decreased in 2018 compared to 2017 primarily due to an improvement in credit quality as nonperforming loans, adversely classified loans, and specific impairment on loans decreased in 2018. The loan loss provision increased in 2017 compared to 2016 primarily due to an increase in nonperforming loans as well as an increase in specific impairment on loans. See the “Allowance for Loan Losses” section under “Financial Condition” and Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of these decreases and changes in the Company’s Allowance.

~~Other Operating Income~~

~~The following table details the major components of other operating income for the years ended December 31:~~

(In Thousands) 2018 $ Change % Change 2017 $ Change % Change 2016
Other Operating Income
Mortgage banking income
$20,844

($2,443 ) (10 )%
$23,287

($6,220 ) (21 )%
$29,507
Employee benefit plan income —
(2,506 ) (100 )% 2,506
(1,264 ) (34 )% 3,770
Bankcard fees 2,811
214
8 % 2,597
(73 ) (3 )% 2,670
Purchased receivable income 3,255
280
9 % 2,975
628
27 % 2,347
Service charges on deposit accounts 1,508
(106 ) (7 )% 1,614
(384 ) (19 )% 1,998
Commercial servicing revenue 1,422
1,050
282 % 372
50
16 % 322
Other loan fees 584
18
3 % 566
38
7 % 528
Rental income 692
160
30 % 532
108
25 % 424
Gain on loans acquired - APB 257
68
36 % 189
18
11 % 171
Gain (loss) on sale of securities —
(11 ) (100 )% 11
22
(200 )% (11 )
Gain on sale of Northrim Benefits Group —
(4,445 ) NM
4,445
4,445
NM
—
Loss on marketable equity securities (625 ) (625 ) NM
—
—
NM
—
Other income 1,419
39
3 % 1,380
(157 ) (10 )% 1,537
Total other operating income
$32,167

($8,307 ) (21 )%
$40,474

($2,789 ) (6 )%
$43,263

~~2018 Compared to 2017~~

The most significant changes in other operating income in 2018 were decreases in mortgage banking income and employee benefit plan income, as well as a $4.4 million decrease in gain on the sale of our interest in the assets of NBG. 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 65% of total other operating income in 2018. Mortgage banking income decreased in 2018 compared to 2017 mainly due to a decrease in the yield and amount of mortgage loans originated and sold as this volume decreased to $528 million in 2018 from $554 million in 2017. The overall decline in mortgage originations is primarily the result of the slowing of the Alaskan economy and rising interest rates while yields have decreased due to market competition. Employee benefit plan income decreased in 2018 compared to 2017 due to the sale of the assets of NBG in August 2017. Lastly, the Company recorded for the first time in other operating income the fair value of its commercial loan servicing portfolio of $1.0 million. Going forward, only changes in the fair value of the Company's commercial loan servicing portfolio will be reflected in other operating income and are not expected to be material to the Company's net income.

~~2017 Compared to 2016~~

The most significant changes in other operating income in 2017 were decreases in mortgage banking income and employee benefit plan income, which were partially offset by a $4.4 million gain on the sale of our interest in the assets of NBG. Mortgage banking income decreased in 2017 compared to 2016 mainly due to a decrease in mortgage loans originated and sold to $554 million in 2017 from $736 million in 2016.The overall decline in mortgage originations in 2017 was primarily the result of the slowing of the Alaskan economy. Employee benefit plan income decreased in 2017 compared to 2016 primarily due to the sale of our interest in the assets of NBG in August 2017. Lastly, purchased receivable income increased mostly due to higher yields and balances in 2017 compared to 2016 and service charges on deposit accounts decreased primarily due to lower non-sufficient funds fees.

~~Other Operating Expense~~

~~The following table details the major components of other operating expense for the years ended December 31:~~

(In Thousands) 2018 $ Change % Change 2017 $ Change % Change 2016
Other Operating Expense
Salaries and other personnel expense
$44,650

($71 ) — %
$44,721

($2,031 ) (4 )%
$46,752
Occupancy expense 6,136
(616 ) (9 )% 6,752
290
4 % 6,462
Data processing expense 6,035
486
9 % 5,549
670
14 % 4,879
Marketing expense 2,318
(248 ) (10 )% 2,566
117
5 % 2,449
Professional and outside services 2,453
88
4 % 2,365
(432 ) (15 )% 2,797
Insurance expense 862
(299 ) (26 )% 1,161
138
13 % 1,023
Intangible asset amortization 70
(30 ) (30 )% 100
(35 ) (26 )% 135
Loss on sale of premise and equipment 2
(1 ) NM
3
(349 ) (99 )% 352
Compensation expense - RML acquisition payments —
(130 ) (100 )% 130
(4,645 ) (97 )% 4,775
OREO (income) expense, net rental income and gains on sale:
   OREO operating expense 802
382
91 % 420
116
38 % 304
   Impairment on OREO —
(904 ) (100 )% 904
717
383 % 187
   Rental income on OREO (541 ) (425 ) (366 )% (116 ) (18 ) (18 )% (98 )
   Gains on sale of OREO (3 ) 368
99 % (371 ) (76 ) (26 )% (295 )
         Subtotal 258
(579 ) 69 % 837
739
754 % 98
Other expenses 7,016
47
1 % 6,969
411
6 % 6,558
     Total other operating expense
$69,800

($1,353 ) (2 )%
$71,153

($5,127 ) (7 )%
$76,280

~~2018 Compared to 2017~~

Other operating expense decreased in 2018 as compared to the prior year primarily due to decreases in occupancy expense and OREO expense, net of OREO gains on sale and rental income. In 2018, occupancy expense included a one-time technical correction that decreased depreciation expense by $670,000. OREO expenses net of gains and rental income decreased due to no impairment charges on OREO properties in 2018 and an increase in rental income on OREO properties associated with one commercial property. These decreases were partially offset by increases in OREO operating costs associated with the commercial property, and lower gains on the sale of OREO properties in 2018. Lastly, salaries and other personnel expense in the Home Mortgage Lending segment decreased $935,000 in 2018 as compared to 2017, primarily due to a reduction in full-time equivalent employees as mortgage origination volume has declined. This decrease was offset by an $864,000 increase in salaries and other personnel expense in the Community Banking segment in 2018 compared to 2017, primarily due to an increase in full time equivalent employees and an increase in benefits costs associated with the Company's self-insured group health plan due to higher medical claims.

~~2017 Compared to 2016~~

Other operating expense decreased in 2017 as compared to the prior year primarily due to decreased costs in compensation expense - RML acquisition payments and salaries and other personnel expense, and, to a lesser extent, professional and outside services expense and loss on sale of premises and equipment. Compensation expense - RML acquisition payments decreased $4.6 million in 2017 as compared to 2016 due in part to the fact that 2016 included a $2.3 million non-cash error correction that covered the period from December 1, 2014, through June 30, 2016. The remainder of the decrease in compensation expense - RML acquisition payments resulted from a decrease in net income from RML. Salaries and other personnel expense decreased primarily due to lower originator commission expense in the Home Mortgage Lending segment due to lower home mortgage loan originations. These decreases were partially offset by increases in impairment on OREO expense and data processing expense in 2017 compared to 2016. Impairment on OREO increased in 2017 as compared to 2016 due to writedowns on two OREO properties resulting from a decrease in sales price assumptions. Data processing expense increased in 2017 as compared to 2016 mostly due to higher software amortization and maintenance expense.

~~Income Taxes~~

The provision for income taxes decreased $6.3 million or 61%, to $4.1 million in 2018 as compared to 2017 and increased $4.3 million or 71%, to $10.3 million in 2017 as compared to 2016. The decrease in 2018 is primarily due to a decrease in the corporate tax rate included in federal tax legislation enacted in December 2017. In addition to reducing the Company's federal tax rate from 35% in 2017 to 21% in 2018, this change also resulted in $2.7 million in expense in 2017 for the revaluation of the Company's net deferred tax asset. In 2018, the Company finalized its valuation of net deferred tax assets related to the decrease in the federal tax rate after completing a fixed asset cost segregation study for tax planning purposes which resulted in a $470,000 decrease in tax expense. The Company's effective tax rates were 17%, 43%, and 29% in 2018, 2017, and 2016, respectively. The changes in the Company's effective tax rates for 2018 and 2017 are primarily due to the items discussed regarding the changes in tax expense for these periods.

~~FINANCIAL CONDITION~~

~~Investment Securities~~

The composition of our investment securities portfolio, which includes securities available for sale, securities held to maturity, 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 97% of the portfolio as of December 31, 2018 and are available to meet liquidity requirements.

Our investment portfolio consists primarily of government sponsored entity securities, corporate securities, and municipal securities. Investment securities at December 31, 2018 decreased $33.9 million, or 11%, to $278.9 million from $312.8 million at December 31, 2017. The decrease at December 31, 2018 as compared to December 31, 2017 is primarily due to a portion of the proceeds from sales, maturities, and security calls being reinvested in loans as of December 31, 2018. The average maturity of the investment portfolio was approximately two and a half years at December 31, 2018.

Investment securities may be pledged as collateral to secure public deposits or borrowings. At December 31, 2018 and 2017, $58.4 million and $51.6 million in securities were pledged for deposits and borrowings, respectively. Pledged securities increased at December 31, 2018 as compared to December 31, 2017 because the Company had increased balances in tri-party accounts at December 31, 2018.

~~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:

   2018:

    U.S. Treasury and government sponsored entities
$209,908

$208,860
    Municipal Securities 9,089

9,084
    Corporate Bonds 40,139

39,780
    Collateralized Loan Obligations 13,990
13,886
            Total
$273,126

$271,610
   2017:

    U.S. Treasury and government sponsored entities
$250,794

$249,461
    Municipal Securities 14,395

14,421
    Corporate Bonds 36,654

37,132
    Collateralized Loan Obligations 6,000
6,005
    Preferred Stock 5,422

5,731
             Total
$313,265

$312,750
   2016:

    U.S. Treasury and government sponsored entities
$264,267

$263,361
    Municipal Securities 18,184

18,157
    U.S. Agency Mortgage-backed Securities 2

2
    Corporate Bonds 44,437

44,732
    Preferred Stock 4,922

4,967
             Total
$331,812

$331,219
Marketable Equity Securities:
   2018:
    Preferred Stock
$7,580

$7,265
             Total
$7,580

$7,265
   2017:
    Preferred Stock
$—

$—
             Total
$—

$—
   2016:
    Preferred Stock
$—

$—
             Total
$—

$—
Securities Held to Maturity:

   2018:

    Municipal Securities
$—

$—
             Total
$—

$—
   2017:

    Municipal Securities
$—

$—
            Total
$—

$—
   2016:

    Municipal Securities
$899

$922
            Total
$899

$922

~~The following table sets forth the market value, maturities, and weighted average pretax yields of our investment portfolio as of December 31, 2018:~~

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
$67,798

$141,062

$—

$—

$208,860
         Weighted average yield 1.41 % 2.36 % — % — % 2.05 %
    Municipal securities

         Balance
$1,861

$7,223

$—

$—

$9,084
         Weighted average yield 1.64 % 2.64 % — % — % 2.43 %
    Corporate bonds

         Balance
$—

$30,103

$9,677

$—

$39,780
         Weighted average yield — % 3.45 % 3.51 % — % 3.46 %
    Collateralized loan obligations
         Balance
$—

$—

$2,990

$10,896

$13,886
         Weighted average yield — % — % 3.86 % 3.78 % 3.80 %
    Total

         Balance
$69,659

$178,388

$12,667

$10,896

$271,610
         Weighted average yield 1.41 % 2.55 % 3.59 % 3.78 % 2.36 %
Marketable Equity Securities

    Preferred Stock

         Balance
$—

$—

$—

$7,265

$7,265
         Weighted average yield — % — % — % 4.75 % 4.75 %

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. At December 31, 2018, we held no securities of any single issuer (other than government sponsored entities) that exceeded 10% of our shareholders’ equity.

~~Loans~~

Our loan products include short and medium-term commercial loans, commercial credit lines, construction and real estate loans, and consumer loans. To a lesser extent, through our wholly-owned subsidiary RML, we also originate mortgage loans which we sell to the secondary market. We also retain servicing rights on mortgage loans originated by RML and sold to the Alaska Housing Finance Corporation ("AHFC"). We emphasize providing financial services to small and medium-sized businesses and to individuals. From our inception, we have emphasized commercial, land development and home construction, and commercial real estate lending. These types of lending 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.

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 loan-to-one-borrower limitation for the Bank was $27.9 million at December 31, 2018. At December 31, 2018, the Company had two relationships whose total direct and indirect commitments exceeded $27.9 million; however, no individual direct relationship exceeded the loans-to-one borrower limitation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Provision for Loan Losses” for further discussion of the Company's concentration of loans to large borrowers.

Our lending operations are guided by loan policies, which 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 Senior 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.

~~The following table sets forth the composition of our loan portfolio by loan segment:~~

December 31, 2018 December 31, 2017 December 31, 2016 December 31, 2015 December 31, 2014
Dollar Amount Percent of Total Dollar Amount Percent of Total Dollar Amount Percent of Total Dollar Amount Percent of Total Dollar Amount Percent of Total
(In Thousands)
Commercial
$342,420
34.8 %
$313,514
32.8 %
$277,802
28.5 %
$271,946
27.8 %
$271,986
29.5 %
Real estate construction one-to-four family 37,111
3.8 % 31,201
3.3 % 26,061
2.7 % 44,488
4.5 % 34,842
3.8 %
Real estate construction other 72,256
7.3 % 80,093
8.4 % 72,159
7.4 % 74,956
7.7 % 91,162
9.9 %
Real estate term owner occupied 126,414
12.8 % 132,042
13.8 % 152,112
15.6 % 143,667
14.7 % 120,621
13.1 %
Real estate term non-owner occupied 325,720
33.1 % 319,313
33.4 % 356,411
36.6 % 347,284
35.4 % 301,544
32.7 %
Real estate term other 42,039
4.3 % 40,411
4.2 % 45,402
4.7 % 46,672
4.8 % 44,385
4.8 %
Consumer secured by 1st deeds of trust 19,228
2.0 % 22,616
2.4 % 23,280
2.4 % 26,369
2.7 % 31,640
3.4 %
Consumer other 23,645
2.4 % 19,919
2.1 % 25,281
2.6 % 28,912
3.0 % 31,493
3.4 %
Subtotal
$988,833

$959,109

$978,508

$984,294

$927,673

Less: Unearned origination fee,
net of origination costs (4,487 ) (0.5 )% (4,156 ) (0.4 )% (4,434 ) (0.5 )% (4,612 ) (0.5 )% (4,551 ) (0.5 )%
Total portfolio loans
$984,346

$954,953

$974,074

$979,682

$923,122

~~Commercial Loans:~~ Our commercial loan portfolio includes both secured and unsecured loans for working capital and expansion. Short-term working capital loans generally are secured by accounts receivable, inventory, or equipment. We also make longer-term commercial loans secured by equipment and real estate. We also make commercial loans that are guaranteed in large part by the Small Business Administration or the Bureau of Indian Affairs and to a lesser extent guaranteed by the United States Department of Agriculture, as well as commercial real estate loans that are purchased by the Alaska Industrial Development and Export Authority (“AIDEA”). Commercial loans increased to $342.4 million at December 31, 2018 from $313.5 million at December 31, 2017 and represented approximately 35% and 33% of our total loans outstanding as of December 31, 2018 and December 31, 2017, respectively. Commercial loans reprice more frequently than other types of loans, such as real estate loans. More frequent repricing means that interest cash flows from commercial loans are more sensitive to changes in interest rates. In a rising interest rate environment, our philosophy is to emphasize the pricing of loans on a floating rate basis, which allows these loans to reprice more frequently and to contribute positively to our net interest margin.

~~Commercial Real Estate:~~We are an active lender in the commercial real estate market. At December 31, 2018, commercial real estate loans increased to $494.2 million from $491.8 million at December 31, 2017, and represented approximately 50% and 52% of our loan portfolio as of December 31, 2018 and December 31, 2017, respectively. These loans are typically secured by office buildings, apartment complexes or warehouses. Loan amortization periods range from 10 to 25 years and generally have a maximum maturity of 10 years.

We may sell all or a portion of a commercial real estate loan to two State of Alaska entities, AIDEA and AHFC, which were both established to provide long-term financing in the State of Alaska. The loans that AIDEA purchases typically feature a maturity twice that of the loans retained by us and bear a lower interest rate. The blend of our and AIDEA’s loan terms allows us to provide competitive long-term financing to our customers, while reducing the risk inherent in this type of lending. We also originate and sell to AHFC loans secured by multifamily residential units. Typically, 100% of these loans are sold to AHFC and we provide ongoing servicing of the loans for a fee. AIDEA and AHFC make it possible for us to originate these commercial real estate loans and enhance fee income while reducing our exposure to interest rate risk.

~~Construction Loans:~~We provide construction lending for commercial real estate projects. Such loans generally are made only when the Company has also committed to finance the completed project with a commercial real estate loan, or if there is a firm

take-out commitment upon completion of the project by a third party lender. Additionally, we provide land development and residential subdivision construction loans. We also originate one-to-four-family residential and condominium construction loans to builders for construction of homes. The Company’s construction loans decreased in 2018 to $109.4 million, down from $111.3 million in 2017, and represented approximately 11% and 12% of our loan portfolio in December 31, 2018 and December 31, 2017, respectively. As of December 31, 2018, approximately $43.1 million or 39%, of the Company's construction loans were for low income housing tax credit projects as compared to $30.5 million or 27% as of December 31, 2017.

~~Consumer Loans:~~We provide personal loans for automobiles, recreational vehicles, boats, and other larger consumer purchases. We provide both secured and unsecured consumer credit lines to accommodate the needs of our individual customers, with home equity lines of credit serving as the major product in this area.

~~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 $62.3 million, or approximately 6% of loans as of December 31, 2018 have direct exposure to the oil and gas industry as compared to $70.8 million, or approximately 7% of loans as of December 31, 2017. The Company has no loans to oil producers or drilling and exploration companies as of the end of 2018 or 2017, but the $62.3 million outstanding as of December 31, 2018 noted above does include $9.6 million related to the construction of an oil rig. The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $32.5 million and $53.5 million at December 31, 2018 and 2017, 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 $1.4 million and $1.8 million as of December 31, 2018 and 2017, respectively.

~~The following table details loan balances by loan segment asset quality rating ("AQR") and class of financing receivable for loans with direct oil and gas exposure as of the dates indicated:~~

~~Maturities and Sensitivities of Loans to Change in Interest Rates:~~ ~~The following table presents the aggregate maturity data of our loan portfolio, excluding loans held for sale, at December 31, 2018:~~

Maturity
(In Thousands) Within 1 Year 1-5 Years Over 5 Years Total
Commercial
$146,127

$81,009

$115,284

$342,420
Real estate construction one-to-four family 36,367
744
—
37,111
Real estate construction other 43,005
19,092
10,159
72,256
Real estate term owner occupied 8,966
22,979
94,469
126,414
Real estate term non-owner occupied 27,801
119,627
178,292
325,720
Real estate term other 9,442
11,392
21,205
42,039
Consumer secured by 1st deeds of trust 55
1,766
17,407
19,228
Consumer other 1,477
5,576
16,592
23,645
Total
$273,240

$262,185

$453,408

$988,833
Fixed interest rate
$113,168

$82,084

$57,591

$252,843
Floating interest rate 160,072
180,101
395,817
735,990
Total
$273,240

$262,185

$453,408

$988,833

~~At December 31, 2018, 61% of the portfolio was scheduled to mature or reprice in 2019 with 36% scheduled to mature or reprice between 2020 and 2023.~~

As of December 31, 2018, approximately 70% of commercial loans are variable rate loans, of which 69% reprice within one year. The majority of these loans reprice to an index based upon the prime rate of interest or the respective Federal Home Loan Bank of Boston (the "Boston FHLB") rate. The Company also uses floors in its commercial loan pricing as loans are originated or renewed during the year.

At December 31, 2018, the interest rates for approximately 85% of commercial real estate loans are variable, of which 52% reset within one year. Approximately 42% of commercial real estate variable rate loans reprice in greater than one year but within three years. The indices for these loans include the prime rate of interest or the respective Treasury or Boston FHLB rate. The Company also uses floors in its commercial real estate loan pricing as loans are originated or renewed during the year.

~~Loans Held for Sale and Mortgage Servicing Rights:~~ The Company originates residential mortgage loans and sells them in the secondary market through our wholly-owned subsidiary, RML. All residential mortgage loans originated and sold in 2018 and 2017 were newly originated loans that did not affect nonperforming loans. The Company also has a mortgage servicing portfolio which is comprised of 1-4 family loans serviced for Freddie Mac Home Loan Corporation ("FHLMC") and AHFC. The Company retains servicing rights on all mortgage loans originated by RML and sold to AHFC. Mortgages originated by RML and sold to AHFC represent approximately 32% and 26% of the mortgages originated by RML in 2018 and 2017, respectively. Mortgage servicing rights are adjusted to fair value quarterly with the change recorded in mortgage banking income. The value of mortgage servicing rights is impacted by market rates for mortgage loans primarily due to how changes in interest rates affect prepayments of mortgage loans. To the extent loans are prepaid sooner than estimated at the time servicing assets are originally recorded, it is possible that certain residential mortgage servicing rights assets may decrease in value. Generally, the fair value of our residential mortgage servicing rights are expected to increase as market rates for mortgage loans rise and decrease if market rates fall.

~~Credit Quality and Nonperforming Assets~~

Nonperforming assets consist of nonaccrual loans, accruing loans that are 90 days or more past due, repossessed assets and OREO. The following table sets forth information regarding our nonperforming loans and total nonperforming assets:

(In Thousands) 2018 2017 2016 2015 2014
Nonperforming loans
Nonaccrual loans
$15,210

$21,626

$13,893

$3,686

$4,674
Loans 90 days past due and accruing —
252
456
—
—
Government guarantees on nonperforming loans (516 ) (467 ) (1,413 ) (1,561 ) (1,178 )
Net nonperforming loans
$14,694

$21,411

$12,936

$2,125

$3,496
Other real estate owned 7,962
8,651
6,574
3,053
4,607
Repossessed assets 1,242
—
—
—
19
Other real estate owned guaranteed by government (1,279 ) (1,333 ) (195 ) —
(891 )
Net nonperforming assets
$22,619

$28,729

$19,315

$5,178

$7,231

Nonperforming loans, net of government guarantees
to portfolio loans 1.49 % 2.24 % 1.33 % 0.22 % 0.38 %
Nonperforming assets, net of government guarantees to total assets 1.50 % 1.89 % 1.27 % 0.35 % 0.50 %

Performing restructured loans
$3,413

$7,668

$6,131

$11,804

$5,353

Nonperforming loans plus performing restructured loans, net of government guarantees
$18,107

$29,079

$19,067

$13,929

$8,849
Nonperforming loans plus performing restructured loans to portfolio loans, net of government guarantees 1.84 % 3.05 % 1.96 % 1.42 % 0.96 %
Nonperforming assets plus performing restructured loans to total assets, net of government guarantees 1.73 % 2.40 % 1.67 % 1.13 % 0.87 %

Adversely classified loans, net of government guarantees
$27,217

$33,845

$35,634

$30,825

$5,878
Loans 30-89 days past due and accruing, net of government guarantees to portfolio loans 0.36 % 0.22 % 0.22 % 0.12 % — %

Allowance for loan losses to portfolio loans 1.98 % 2.25 % 2.02 % 1.85 % 1.81 %
Allowance for loan losses to nonperforming loans, net of government guarantees 133 % 100 % 152 % 854 % 478 %

The Company’s nonperforming loans, net of government guarantees decreased in 2018 to $14.7 million as compared to $21.4 million in 2017. This decrease was due to the transfer of one borrowing relationship to repossessed assets, principal paydowns including one large nonaccrual loan payoff, and charge-offs on nonaccrual loans in 2018. There was interest income of $213,000, $142,000, and $181,000 recognized in net income for 2018, 2017, and 2016, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero. The Company had five relationships that represented more than 10% of nonaccrual loans as of December 31, 2018.

The Company had $3.4 million and $7.7 million in loans classified as troubled debt restructuring loans ("TDRs") that were performing as of December 31, 2018 and 2017, respectively. Additionally, there were $11.4 million and $16.2 million in TDRs included in nonaccrual loans at December 31, 2018 and 2017 for total TDRs of $14.8 million and $23.8 million at December 31, 2018 and 2017, respectively. The decrease in TDRs at December 31, 2018 as compared to 2017 was primarily due to several payoffs and paydowns on loans classified as TDRs that were only partially offset by additions to TDRs in 2018. See Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of TDRs.

At December 31, 2018, management had identified potential problem loans of $17.1 million as compared to potential problem loans of $9.5 million at December 31, 2017. 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 $7.6 million increase in potential problem loans at December 31, 2018 from December 31, 2017 was primarily due to the addition of three relationships totaling $9.1 million. These increases were partially offset by the payoff of one loan totaling $883,000 and other loan paydowns in 2018.

~~The Company acquired other assets consisting of aircraft totaling $1.2 million in the fourth quarter of 2018 through foreclosure proceedings related to one lending relationship.~~

~~The following summarizes OREO activity for the periods indicated:~~

(In Thousands) 2018 2017 2016
Balance, beginning of the year
$8,651

$6,574

$3,053
Transfers from loans 686
5,912
4,036
Investment in other real estate owned 144
—
311
Proceeds from the sale of other real estate owned (1,522 ) (3,302 ) (934 )
Gain on sale of other real estate owned, net 3
371
295
Impairment on other real estate owned —
(904 ) (187 )
Balance, end of year 7,962
8,651
6,574
Government guarantees (1,279 ) (1,333 ) (195 )
Balance, end of year, net of government guarantees
$6,683

$7,318

$6,379

At December 31, 2018 and 2017 the Company held $6.7 million and $7.3 million, respectively, of OREO assets, net of government guarantees. At December 31, 2018, OREO consists of $2.2 million in residential lots in various stages of development, a $151,000 single-family residence, and a $5.6 million commercial building. All OREO property is located in Alaska. The Bank initiates foreclosure proceedings to recover and sell collateral pledged by a debtor to secure a loan based on various events of default and circumstances related to loans that are secured by either commercial or residential real property. These events and circumstances include delinquencies, the Company’s relationship with the borrower, and the borrower’s ability to repay the loan via a source other than the collateral. If the loan has not yet matured, the debtors may cure the events of default up to the time of sale to retain their interest in the collateral. Failure to cure the defaults will result in the debtor losing ownership interest in the property, which is taken by the creditor, or high bidder at a foreclosure sale.

During 2018, additions to OREO totaled $686,000 which included four single-family residences. During 2018, the Company received approximately $1.5 million in proceeds from the sale of OREO which included $806,000 from the sale of lots and land, $645,000 from the sale of single-family residences, and $71,000 from the sale of a commercial building. The Company recognized $144,000, $391,000, and $295,000 in gains and $141,000, $19,000, and $0 in losses on the sale of OREO properties in 2018, 2017, and 2016, respectively, for net gains of $3,000, $371,000, and $295,000 in 2018, 2017, and 2016, respectively. The Company had remaining accumulated deferred gains on the sale of OREO properties of $262,000 at both December 31, 2018 and 2017.

The Company did not make any loans to facilitate the sale of OREO in 2018, 2017, or 2016. Our underwriting policies and procedures for loans to facilitate the sale of OREO are no different than our standard loan policies and procedures.

The Company recognized impairments of zero, $904,000 and $187,000 in 2018, 2017, and 2016, respectively, due to adjustments to the Company’s estimate of the fair value of certain properties based on changes in estimated costs to complete the projects, decrease in expected sales prices, and changes in the Anchorage, Fairbanks, and the Southeastern Alaska real estate markets.

~~Allowance for Loan Losses~~

The Company maintains an Allowance to reflect management's assessment of probable, estimable losses inherent in the loan portfolio. The Allowance is increased by provisions for loan losses and loan recoveries and decreased by loan charge-offs. The size of the Allowance is determined through quarterly assessments of probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the Allowance includes the following key elements:

A specific allocation for impaired loans. Management determines the fair value of the majority of these loans based on the underlying collateral values. This analysis is based upon a specific analysis for each impaired loan, including external appraisals on loans secured by real property, management’s assessment of the current market, recent payment history, and an evaluation of other sources of repayment. In-house evaluations of fair value are used in the impairment analysis in some situations. Inputs to the in-house evaluation process include information about sales of comparable properties in the appropriate markets and changes in tax assessed values. The Company obtains appraisals on real and personal property that secure its loans during the loan origination process in accordance with regulatory guidance and its loan policy. The Company obtains updated appraisals on loans secured by real or personal property based upon its assessment of changes in the current market or particular projects or properties, information from other current appraisals, and other sources of information. Appraisals may be adjusted downward by the Company based on its evaluation of the facts and circumstances on a case by case basis. External appraisals may be discounted when management believes that the absorption period used in the appraisal is unrealistic, when expected liquidation costs exceed those included in the appraisal, or when management’s evaluation of deteriorating market conditions warrants an adjustment. Additionally, the Company may also adjust appraisals in the above circumstances between appraisal dates. The Company uses the information provided in these updated appraisals along with its evaluation of all other information available on a particular property as it assesses the collateral coverage on its performing and nonperforming loans and the impact that may have on the adequacy of its Allowance. The specific allowance for impaired loans, as well as the overall Allowance, may increase based on the Company’s assessment of updated appraisals. See Note 24 of the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of the Company’s estimation of impaired loans measured at fair value.

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

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

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

After division of the loan portfolio into segments, the Company then further disaggregates each of the segments into classes. The Company has a total of five classes, which are based off of the Company's loan risk grading system known as the Asset Quality Rating (“AQR”) system. The risk ratings are discussed in Note 6 to the Consolidated Financial Statements included in Item 8 of this report. There are five loan classes: pass (pass AQR grades, which are grades 1 – 6), special mention, substandard, doubtful, and loss. There have been no changes to these loan classes in 2018.

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

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

An unallocated reserve - The unallocated portion of the Allowance provides for other credit losses inherent in our loan portfolio that may not have been contemplated in the specific and general components of the Allowance, and it acknowledges the inherent imprecision of all loss prediction models. The unallocated component is reviewed

periodically based on trends in credit losses and overall economic conditions. At December 31, 2018 and 2017, the unallocated allowance as a percentage of the total Allowance was 13% and 16%, respectively.

~~The following table shows the allocation of the Allowance for the years indicated:~~

2018 2017 2016 2015 2014

% of Loans⁽¹⁾

% of Loans⁽¹⁾

% of Loans⁽¹⁾

% of Loans⁽¹⁾

% of Loans⁽¹⁾
(In Thousands) Amount Amount Amount Amount Amount
Commercial
$5,660
35 %
$6,172
34 %
$5,535
28 %
$5,906
28 %
$5,643
33 %
Real estate construction one-to-four family 675
4 % 629
3 % 550
3 % 854
4 % 644
4 %
Real estate construction other 1,275
7 % 1,566
8 % 1,465
7 % 1,439
8 % 1,653
10 %
Real estate term owner occupied 2,027
13 % 2,194
14 % 2,358
16 % 1,657
15 % 1,580
12 %
Real estate term non-owner occupied 5,799
33 % 6,043
33 % 6,853
37 % 5,515
35 % 4,704
31 %
Real estate term other 716
4 % 725
4 % 819
5 % 628
4 % 656
4 %
Consumer secured by 1st deeds of trust 306
2 % 315
2 % 313
2 % 264
3 % 285
3 %
Consumer other 426
2 % 307
2 % 408
2 % 397
3 % 410
3 %
Unallocated 2,635
— % 3,510
— % 1,396
— % 1,493
— % 1,148
— %
Total
$19,519
100 %
$21,461
100 %
$19,697
100 %
$18,153
100 %
$16,723
100 %

¹~~Represents percentage of this category of loans to total portfolio loans.~~

~~The following table sets forth information regarding changes in our Allowance for the years indicated:~~

(In Thousands) 2018
2017
2016
2015
2014
Balance at beginning of year
$21,461

$19,697

$18,153

$16,723

$16,282
Charge-offs:

Commercial (1,716 )
(1,611 )
(903 )
(616 )
(319 )
Real estate construction one-to-four family —

—

(535 )
—

—
Real estate term non-owner occupied —

—

—

—

(160 )
Real estate term other (28 )
(5 )
—

(81 )
—
Consumer secured by 1st deeds of trust (143 )
(85 )
(36 )
(28 )
(59 )
Consumer other (39 )
(43 )
(8 )
(101 )
(87 )
Total charge-offs (1,926 )
(1,744 )
(1,482 )
(826 )
(625 )
Recoveries:

Commercial 442

293

699

379

1,041
Real estate construction one-to-four family —

—

—

—

625
Real estate term other 3

2

—

107

—
Consumer secured by 1st deeds of trust 12

2

—

3

4
Consumer other 27

11

29

13

32
Total recoveries 484

308

728

502

1,702
Net, recoveries (charge-offs) (1,442 )
(1,436 )
(754 )
(324 )
1,077
Provision (benefit) for loan losses (500 )
3,200

2,298

1,754

(636 )
Balance at end of year
$19,519

$21,461

$19,697

$18,153

$16,723
Ratio of net charge-offs to average loans

outstanding during the period 0.15 %
0.15 %
0.08 %
(0.03 )%
(0.12 )%

In accordance with GAAP, loans acquired in connection with our acquisition of Alaska Pacific on April 1, 2014 were recorded at their fair value at the acquisition date. Credit discounts were included in the determination of fair value; therefore, an allowance for loan losses was not recorded at the acquisition date. Purchased credit impaired loans were evaluated on a loan by loan basis and the valuation allowance for these loans was netted against the carrying value. Deterioration in credit quality of the acquired loans subsequent to acquisition date results in the establishment of an allowance. Management assesses the credit

impairment for the loans that were acquired in connection with the acquisition of Alaska Pacific as part of the on-going monitoring of the credit quality of the Company's entire loan portfolio. Management tracks certain credit quality indicators including trends in past due and nonaccrual loans, gross and net charge-offs, and movement in loan balances within the risk classifications. As of December 31, 2018, $220,000 of the original $141.5 million of purchased loans, or 0.16%, had migrated from pass grade loans to substandard loans. These loans are included in impaired loans as of December 31, 2018, and have been evaluated for specific impairment as part of the calculation of the Allowance. There was no specific impairment on these loans at December 31, 2018 or 2017. There was no Allowance related to acquired loans at December 31, 2017, however, the Company included these loans in the Allowance at December 31, 2018 due to the the amount of time that has passed since the loans were purchased. The purchase discount related to these acquired credit impaired loans was $375,000 and $803,000 as of December 31, 2018 and 2017, respectively.

The provision for loan losses in 2018 as compared to 2017 decreased $3.7 million to a benefit of $500,000 compared to a provision of $3.2 million in 2017. This decrease is primarily due to a decrease in nonperforming loans and the portion of the Allowance specific to impaired loans. The Company determined that an Allowance of $19.5 million, or 1.98% of portfolio loans, is appropriate as of December 31, 2018 based on our analysis of the current credit quality of the portfolio and current economic conditions. The provision for loan losses in 2017 as compared to 2016 increased $902,000 to $3.2 million compared to $2.3 million in 2016. This increase is primarily due to an increase in nonperforming loans and the portion of the Allowance specific to impaired loans. The provision for loan losses in 2016 as compared to 2015 increased $544,000 to $2.3 million compared to $1.8 million in 2015. This increase was primarily due to an increase in nonperforming loans in 2016 compared to the prior year as well as an increase in qualitative factors mostly due to softening in the Alaska economy in 2016. The provision for loan losses in 2015 as compared to 2014 increased $2.4 million to $1.8 million compared to a benefit, or negative expense, of $636,000 in 2014. This increase was primarily due to net recoveries on loans in 2014 that led to a negative loan loss provision in that year.

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

~~Purchased Receivables~~

We purchase accounts receivable from our business customers and provide them with short-term working capital. We provide this service to our customers in Alaska, Washington, Oregon, and some other states through NFS.

Our purchased receivable activity is guided by policies that outline risk management, documentation, and approval limits. The policies are reviewed and approved annually by the Company's Board of Directors. Purchased receivables are recorded on the balance sheet net of a reserve for purchased receivable losses.

Purchased receivable balances decreased at December 31, 2018 to $14.4 million from $22.2 million at December 31, 2017, and year-to-date average purchased receivable balances were $17.4 million, $15.9 million, and $13.3 million in 2018, 2017, and 2016, respectively. Purchased receivable income was $3.3 million, $3.0 million, and $2.3 million in 2018, 2017, and 2016, respectively. The increase in purchased receivable income in 2018 is attributable to increased average balances, as well as higher yields.

~~The following table sets forth information regarding changes in the purchased receivable reserve for the years indicated:~~

(In Thousands) 2018 2017 2016
Balance at beginning of year
$200

$171

$181
Charge-offs —
—
—
Recoveries —
—
—
Net recoveries (charge-offs) —
—
—
Reserve for (recovery from) purchased receivables (10 ) 29
(10 )
Balance at end of year
$190

$200

$171
Ratio of net charge-offs (recoveries) to average purchased receivables during the period — % — % — %

~~Deposits~~

Deposits are our primary source of funds. Total deposits decreased 2% to $1.228 billion at December 31, 2018 from $1.258 billion at December 31, 2017. 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:~~

2018
2017
2016
Average balance Average rate paid
Average balance Average rate paid
Average balance Average rate paid
(In Thousands)

Interest-bearing demand accounts
$243,000
0.07 %

$220,449
0.03 %

$192,512
0.04 %
Money market accounts 225,014
0.31 %
238,830
0.17 %
242,025
0.17 %
Savings accounts 241,807
0.31 %
249,641
0.21 %
234,347
0.21 %
Certificates of deposit 99,987
0.70 %
120,998
0.57 %
134,993
0.66 %
Total interest-bearing accounts 809,808
0.28 %
829,918
0.21 %
803,877
0.23 %
Noninterest-bearing demand accounts 417,464
418,415
446,366

Total average deposits
$1,227,272

$1,248,333

$1,250,243

~~Certificates of Deposit~~: The only deposit category with stated maturity dates is certificates of deposit. At December 31, 2018, we had $113.3 million in certificates of deposit, of which $57.4 million, or 51%, are scheduled to mature in 2019. The Company’s certificates of deposit increased to $113.3 million during 2018 as compared to $100.5 million at December 31, 2017. The aggregate amount of certificates of deposit in amounts of $100,000 or more at December 31, 2018 and 2017, was $70.7 million and $61.4 million, respectively. The following table sets forth the amount outstanding of certificates of deposits in amounts of $100,000 or more by time remaining until maturity and percentage of total deposits as of December 31, 2018:

Time Certificates of Deposits
of $100,000 or More

Percent of Total Deposits

(In Thousands) Amount
Amounts maturing in:

Three months or less
$8,237

12 %
Over 3 through 6 months 5,724

8 %
Over 6 through 12 months 20,850

29 %
Over 12 months 35,906

51 %
Total
$70,717

100 %

The Company is also a member of the Certificate of Deposit Account Registry System (“CDARS”) which is a network of over 3,000 banks throughout the United States. The CDARS system was founded in 2003 and allows participating banks to exchange FDIC insurance coverage so that 100% of the balance of their customers’ certificates of deposit is fully subject to FDIC insurance. At December 31, 2018 and 2017, the Company had no CDARS certificates of deposit.

~~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, 2018, our maximum borrowing line from the FHLB was $667.8 million, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements. The Company has outstanding advances of $7.2 million as of December 31, 2018 which were originated to match fund low income housing projects that qualify for long term fixed interest rates. The first advance is a $2.2 million FHLB Community Investment Program advance which was originated on March 22, 2013. It has an eighteen year term

with a 30 year amortization period, which mirrors the term of the term real estate loan made to the borrower, and a fixed rate of 3.12%. The second advance is a $2.3 million FHLB Community Investment Cash Advance Program advance that was originated in the second quarter of 2016. This advance has a 20 year term with a 30 year amortization period, which mirrors the term of the term real estate loan made to the borrower, and a fixed interest rate of 2.61%. The last advance is a $3.1 million FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2017. This advance has a 20 year term with a 30 year amortization period and a fixed interest rate of 3.25%, which mirrors the term of the loan made to the borrower. All of these FHLB advances are included in borrowings.

~~Federal Reserve Bank~~: The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $78.6 million of loans as collateral to secure advances made through the discount window as of December 31, 2018. There were no discount window advances outstanding at December 31, 2018 or 2017.

~~Other Short-term Borrowings:~~ Securities sold under agreements to repurchase were $34.3 million and $27.7 million, as of December 31, 2018 and 2017, respectively. The average balance outstanding of securities sold under agreements to repurchase during 2018 and 2017 was $29.9 million and $29.0 million, respectively, and the maximum outstanding at any month-end was $36.5 million and $32.6 million, respectively, during the same time periods. The securities sold under agreements to repurchase are held by the FHLB under the Company’s control.

The Company is subject to provisions under Alaska state law which generally limit the amount of outstanding debt to 15% of total assets or $222.6 million and $225.8 million at December 31, 2018 and 2017, respectively.

~~Long-term Borrowings:~~ ~~The Company had no long-term borrowings outstanding other than the FHLB advances noted above as of December 31, 2018 or 2017.~~

~~Contractual Obligations~~

~~The following table references contractual obligations of the Company for the periods indicated. This table does not include interest payments:~~

Payments Due by Period
Within 1 Year

Over 5 Years

(In Thousands)
1-3 Years
3-5 Years

Total
December 31, 2018:

Certificates of deposit
$57,451

$52,529

$1,494

$1,799

$113,273
Short-term borrowings 34,278

—

—

—

34,278
Long-term borrowings 167

351

373

6,350

7,241
Junior subordinated debentures —

—

—

10,310

10,310
Operating lease obligations 2,668

4,908

3,750

8,121

19,447
Other long-term liabilities⁽¹⁾
1,010

1,703

1,453

3,196

7,362
Capital commitments 57

—

—

—

57
Total
$95,631

$59,491

$7,070

$29,776

$191,968
December 31, 2017:

Certificates of deposit
$66,013

$31,470

$1,159

$1,885

$100,527
Short-term borrowings 27,746

—

—

—

27,746
Long-term borrowings 121

340

362

6,539

7,362
Junior subordinated debentures —

—

—

10,310

10,310
Operating lease obligations 2,737

4,334

3,762

9,354

20,187
Other long-term liabilities 6,230

1,556

718

3,482

11,986
Capital commitments
47

—

—

—

47
Total
$102,894

$37,700

$6,001

$31,570

$178,165

⁽¹⁾Includes principal payments related to employee benefit plans. If a benefit payment schedule is established, payments are recorded in the corresponding dates listed in the table above. Unscheduled payments for all remaining benefits are recorded "Over 5 Years". Additional information about employee benefit plans is provided in Note 17 of the Notes to the Consolidated Financial Statements in Item 8 below.

Short and long-term borrowings included in the table above are described in the "Borrowings" section above. Junior subordinated debentures include $10.3 million that was originated on December 16, 2005, matures on March 15, 2036, and bears interest at a rate of 90-day LIBOR plus 1.37%, adjusted quarterly. 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 Northrim Statutory Trust 2 ("NST2") at 3.72% through its maturity date. Operating lease obligations are more fully described in Note 18 of the Company’s Consolidated Financial Statements included in Item 8 of this report. Other long-term liabilities consist of amounts that the Company owes for its investments in Delaware limited partnerships that develop low-income housing projects throughout the United States. The Company purchased a $10.7 million interest in R4 Frontier Housing Partners L.P., Coronado Park Senior Village L.P. ("R4-Coronado") in March 2013. The investment in R4-Coronado was 95% funded at the end of 2018 and is expected to be fully funded in 2029. The Company also purchased an $8.5 million interest in R4 Frontier Housing Partners L.P., Mountain View Village V L.P. ("R4-MVV") in May 2014. The investment in R4-MVV was 97% funded at the end of 2017 and is expected to be fully funded in 2030. The Company also purchased a $6.8 million interest in R4 Frontier Housing Partners L.P., PJ33 L.P. ("R4-PJ33") in June 2016. The investment in R4-PJ33 was 94% funded at the end of 2018 and is expected to be fully funded in 2032.

~~Off-Balance Sheet Arrangements~~

The Company is a party to financial instruments with off-balance sheet risk. Among the off-balance sheet items entered into in the ordinary course of business are commitments to extend credit, commitments to originate loans held for sale and the issuance of letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheet. Certain commitments are collateralized. We apply the same credit standards to these commitments as in all of our lending activities and include these commitments in our lending risk evaluations.

As of December 31, 2018, we had commitments to extend credit of $260.6 million, which were not reflected on our balance sheet, compared to $283.9 million as of December 31, 2017. 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. Collateral held relating to these commitments varies, but generally includes real estate, inventory, accounts receivable, and equipment. Our exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. Since many of the commitments are expected to expire without being drawn upon, these total commitment amounts do not necessarily represent future cash requirements.

As of December 31, 2018, we had commitments to originate loans held for sale of $45.0 million, which were not reflected in the balance sheet compared to $43.6 million as of December 31, 2017. 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 one loan due to deficiencies in underwriting or loan documentation and has not realized significant losses related to this repurchase. Management currently believes that any liabilities that may result from such recourse provisions are not significant.

As of December 31, 2018, we had standby letters of credit of $3.2 million, which were not reflected on our balance sheet compared to $7.6 million as of December 31, 2017. 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.

Our total unfunded lending commitments at December 31, 2018, which includes commitments to extend credit, commitments to originate loans held for sale and standby letters of credit, were $308.8 million, compared to $335.1 million as of December 31, 2017. We do not expect that all of these commitments are likely to be fully drawn upon at any one time. The Company has established reserves of $130,000 and $152,000 at December 31, 2018 and 2017, respectively, for losses related to these commitments that are recorded in other liabilities on the consolidated balance sheet.

~~Additional information regarding Off-Balance Sheet Arrangements is included in Notes 18 and 19 of the Notes to Consolidated Financial Statements included in Item 8 of this report.~~

~~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 2019. A requirement to have a conservation buffer began being phased-in in 2016 and is now in full effect, and this requirement could adversely affect the Bank's ability to pay dividends.

The Bank manages its liquidity through its Asset and Liability Committee. Our primary sources of funds are customer deposits and advances from the FHLB. These funds, together with loan repayments, loan sales, other borrowed funds, retained earnings, and equity are used to make loans, to acquire securities and other assets, and to fund deposit flows and continuing operations. The primary sources of demands on our liquidity are customer demands for withdrawal of deposits and borrowers’ demands that we advance funds against unfunded lending commitments. Our total unfunded commitments to fund loans, loans held for sale, and letters of credit at December 31, 2018, were $308.8 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. Additionally, as noted above, our total deposits at December 31, 2018, were $1.2 billion.

As shown in the Consolidated Statements of Cash Flows, net cash provided by operating activities was $25.2 million, $19.3 million, and $20.1 million in 2018, 2017, and 2016 respectively. The primary source of cash provided by operating activities for all periods presented was positive net income in each of these periods. The primary reason that net cash provided by operating activities increased in 2018 as compared to 2017 was that the Company had net proceeds of $24.1 million in 2018 compared to $17.8 million in 2017 from sales of loans held for sale. Net cash of $5.6 million and $30.4 million was provided by investing activities in 2018 and 2017, respectively, as the Company's proceeds from security sales, maturities, and calls were greater than funds used to purchase additional investment securities in those years. $47.5 million of cash was used in investing activities in 2016 as the Company invested available cash primarily in available for sale securities and portfolio loans. Financing activities used cash of $31.1 million and $22.4 million in 2018 and 2017, respectively, and provided cash of $19.3 million in 2016. Financing activities used net cash in 2018 primarily as a result of a decrease in deposit balances in 2018 compared to 2017. Financing activities used net cash in 2017 primarily due to a decrease in deposit balances and the redemption of $8.3 million in junior subordinated debentures.

The sources by which we meet the liquidity needs of our customers are current assets and borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB. At December 31, 2018, our current assets were $439.7 million and our funds available for borrowing under our existing lines of credit were $739.5 million. 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.

During 2018, the Company's Board of Directors approved a quarterly cash dividend of $0.24 per common share for the first and second quarters and $0.27 per common share for the third and fourth quarters. These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, liquidity, asset quality, and the overall payout ratio. We expect that dividend payments will be reassessed on a quarterly basis by the Board of Directors in accordance with the dividend policy. The payment of cash dividends is subject to regulatory limitations as described under the Supervision and Regulation section of Part I of this report. There is no assurance that future cash dividends on common shares will be declared or increased.

On February 28, 2019, the Board of Directors approved payment of a $0.30 per share dividend on March 22, 2019, to shareholders of record on March 14, 2019. This dividend is $0.03, or 11%, higher than the Company’s dividend of $0.27 that was paid in the fourth quarter of 2018.

In September 2002, our Board of Directors approved a plan whereby we would periodically repurchase for cash up to approximately 5% of our shares of common stock in the open market. We purchased an aggregate of 688,442 shares of our stock under this program through December 31, 2009 at a total cost of $14.2 million at an average price of $20.65, which left a balance of 227,242 shares available under the stock repurchase program. The Company did not repurchase any of its shares in 2010 through 2016. In 2017, we purchased an aggregate of 58,341 shares at an average price of $27.56. In 2018, we purchased an aggregate of 15,468 shares at an average price of $31.90, which leaves a balance of 153,433 shares available under the stock repurchase plan as of December 31, 2018. We intend 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 repurchase all of the authorized shares. The table below shows this effect on diluted earnings per share.

Years Ending: Diluted
EPS as
Reported Diluted EPS without Stock Repurchase
2018 $2.86 $2.56
2017 $1.88 $1.69
2016 $2.06 $1.87
2015 $2.56 $2.31
2014 $2.54 $2.29

On May 8, 2003, the Company’s subsidiary, NCT1, issued trust preferred securities in the principal amount of $8 million. These securities carried an interest rate of 90-day LIBOR plus 3.15% per annum that was initially set at 4.45% adjusted quarterly. The securities had a maturity date of May 15, 2033, and were callable by the Company on or after May 15, 2008. These securities were treated as Tier 1 capital by the Company’s regulators for capital adequacy calculations. The Company redeemed these trust preferred securities on August 15, 2017.

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 $368,000 in 2018. At December 31, 2018, the securities had an interest rate of 4.16%. 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.

Our shareholders’ equity at December 31, 2018, was $205.9 million, as compared to $192.8 million at December 31, 2017. The Company earned net income of $20.0 million during 2018 and issued 26,721 shares through the exercise of stock options. At December 31, 2018, the Company had approximately 6.9 million shares of its common stock outstanding.

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, 2018, 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 2018 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 2019, 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 that the Company completed in the fourth quarter of 2005 is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our financial statements. The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital. As a result, the Company has $10 million more in regulatory capital than the Bank at December 31, 2018 and 2017, 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, 2018

Total risk-based capital 8.00%
10.00%
16.73%
14.30%
Tier 1 risk-based capital 6.00%
8.00%
15.47%
13.05%
Common equity tier 1 capital 4.50% 6.50% 14.73% 13.05%
Leverage ratio 4.00%
5.00%
13.40%
11.28%

See Note 22 of the Consolidated Financial Statements for a detailed discussion of the capital ratios. The requirements for "well-capitalized" come from the Prompt Correction Action rules. See 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.

~~Effects of Inflation and Changing Prices:~~ The primary impact of inflation on our operations is increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates, which could affect the degree and timing of the repricing of our assets and liabilities. In addition, inflation has an impact on our customers’ ability to repay their loans.

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:~~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:~~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:~~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:~~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 ~~risk~~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 1920 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, ~~2018.~~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, 2018													Estimated maturity or repricing at December 31, 2021
(In Thousands)	Within 1 year			1-5 years			>5 years			Total			(In Thousands)	Within 1 year		1-5 years		>5 years		Total
Interest -Earning Assets:													Interest -Earning Assets:
Interest bearing deposits in other banks		$50,767			$—			$—			$50,767		Interest bearing deposits in other banks	$625,022		$—		$—		$625,022
Portfolio investments and FHLB Stock	146,445			134,531			—			280,976
Portfolio loans	590,753			354,519			28,351			973,623
Investments securities and FHLB Stock													Investments securities and FHLB Stock	144,270		313,941		—		458,211
Loans													Loans	650,478		675,118		88,183		1,413,779
Loans held for sale	34,710			—			—			34,710			Loans held for sale	73,650		—		—		73,650
Total interest-earning assets		$822,675			$489,050			$28,351			$1,340,076		Total interest-earning assets	$1,493,420		$989,059		$88,183		$2,570,662
Percent of total interest-earning assets	61.4		%	36.5		%	2.1		%	100.0		%	Percent of total interest-earning assets	58.09	%	38.47	%	3.43	%	99.99	%
Interest-Bearing Liabilities:													Interest-Bearing Liabilities:
Interest-bearing demand accounts		$248,056			$—			$—			$248,056		Interest-bearing demand accounts	$692,683		$—		$—		$692,683
Money market accounts	206,717			—			—			206,717			Money market accounts	314,996		—		—		314,996
Savings accounts	239,054			—			—			239,054			Savings accounts	348,164		—		—		348,164
Certificates of deposit	57,541			54,377			1,355			113,273			Certificates of deposit	121,515		55,131		1,318		177,964
Securities sold under repurchase agreements	34,278			—			—			34,278			Securities sold under repurchase agreements	—		—		—		—
Borrowings	355			1,534			5,352			7,241			Borrowings	812		3,540		10,156		14,508
Junior subordinated debentures	—			—			10,310			10,310			Junior subordinated debentures	—		—		10,310		10,310
Total interest-bearing liabilities		$786,001			$55,911			$17,017			$858,929		Total interest-bearing liabilities	$1,478,170		$58,671		$21,784		$1,558,625
Percent of total interest-bearing liabilities	91.5		%	6.5		%	2.0		%	100.0		%	Percent of total interest-bearing liabilities	94.84	%	3.76	%	1.40	%	100.00	%
Interest sensitivity gap		$36,674			$433,139			$11,334			$481,147		Interest sensitivity gap	$15,250		$930,388		$66,399		$1,012,037
Cumulative interest sensitivity gap		$36,674			$469,813			$481,147					Cumulative interest sensitivity gap	$15,250		$945,638		$1,012,037
Cumulative interest sensitivity gap as a percentage													Cumulative interest sensitivity gap as a percentage
of total interest-earning assets	2.7		%	35.1		%	35.9		%				of total interest-earning assets	0.6	%	36.8	%	39.4	%

•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.

~~Error Corrections:~~

~~Acquisition of RML~~

In 2016, the Company identified and has corrected an error regarding the accounting for payments to be made by the Company to the four former equity owners of RML that were negotiated as part of the Company’s acquisition of 76.5% of the equity interest in RML on December 1, 2014. Three of the four former equity owners of RML had continuing employment contracts with the Company as of December 1, 2014, and under the terms of the acquisition agreement, the payments are terminated for future periods if any two of these three continuing employees terminate employment before November 30, 2019. The fair value of the estimated payments was recorded as acquisition consideration on December 1, 2014, and accrued as a contingent liability. The Company has determined that these payments are more appropriately accounted for as compensation expense in the period they are incurred. Changes in the value of the contingent liability that was initially recorded when the Company acquired RML have previously been reflected on the Company’s Consolidated Statements of Income in the “Change in fair value, RML earn-out liability” line item in prior periods. As of September 30, 2016, this line item has been renamed to “Compensation expense - RML acquisition payments”, and the payments to the sellers of RML are expensed and recorded in the Consolidated Statements of Income in that same line item. Management evaluated the materiality of the error from qualitative and quantitative perspectives and concluded that the error was immaterial to the prior period financial statements taken as a whole. Consequently, the financial statements for the period ended December 31, 2016, include the cumulative impact of the correction of the error, and prior period financial statements have not been restated. The error correction reduced the total purchase price of RML from $29.5 million to $22.2 million and reduced the amount of goodwill recorded in the RML acquisition from $14.8 million to $7.5 million. The error correction eliminated the contingent liability originally recorded as part of the purchase consideration and resulted in the accrual of compensation expense, which is included in "Other liabilities" on the Consolidated Balance Sheets. The error correction increased Compensation expense - RML acquisition payments by $2.3 million and reduced net income by $1.4 million and covered the period from December 1, 2014, through June 30, 2016. Additionally, the change in the prospective accounting treatment of these payments also increased Compensation expense - RML acquisition payments by $765,000 and reduced net income for the third and fourth quarters of 2016 by $438,000 for a total decrease in net income of $1.8 million in 2016. The change did not affect the

total cash flows from operating, investing, or financing activities in the Consolidated Statement of Cash Flows. Accrued compensation expense related to these payments was $0 as of December 31, 2018 and represents compensation accrued for the period from December 1, 2018 through December 31, 2018.

~~Recognition of commercial servicing rights~~

In 2018, the Company recorded for the first time in other operating income the fair value of its commercial loan servicing portfolio of $1.0 million. This revenue is included in the "Commercial servicing revenue" line item in the Company's Consolidated Statement of Income. In previous years, the Company accounted for revenue from commercial servicing activities on a cash basis. Management evaluated the materiality of this error from qualitative and quantitative perspectives and concluded that the error was immaterial to the prior period financial statements taken as a whole. Consequently, the financial statements for the period ended December 31, 2018, include the cumulative impact of the correction of the error, and prior period financial statements have not been restated. The error correction increased total assets and net income by $737,000 after the impact of accounting for a provision for income taxes and covered the period from March 31, 2001 to December 31, 2018. The change did not affect cash flows from operating, investing, or financing activities in the Consolidated Statement of Cash Flows.

~~Occupancy expense~~

In 2018, the Company performed a review of it's premises and equipment assets as part of it's tax planning process related to the Tax Cuts and Jobs Act of 2017 that was enacted in December of 2017. During this review, the Company identified that $2.6 million of land was misclassified as buildings in 2008. This misclassification resulted in the recognition of $670,000 in depreciation expense between September 30, 2008 and June 30, 2018. Management evaluated the materiality of this error from qualitative and quantitative perspectives and concluded that the error was immaterial to the prior period financial statements taken as a whole. Consequently, the financial statements for the period ended December 31, 2018, include the cumulative impact of the correction of the error, and prior period financial statements have not been restated. The error correction increased total assets and net income by $480,000 after the impact of accounting for a provision for income taxes and covered the period from September 30, 2008 to December 31, 2018. The change did not affect cash flows from operating, investing, or financing activities in the Consolidated Statement of Cash Flows.

Recent Accounting Pronouncements

Accounting pronouncements implemented in ~~2018~~2021

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~ (“ASU 2014-09”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, this new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2017; early adoption is permitted for annual reporting periods. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company has reviewed all revenue sources to determine the sources that are in scope for this guidance. As a bank, key revenue sources, including interest income and mortgage banking income have been identified as out of scope of this new guidance. The Company's overall assessment of material in-scope revenue sources include service charges on deposits and credit card payment processing fees. The Company adopted the guidance on January 1, 2018, utilizing the modified retrospective approach, which did not have a material impact on how the Company recognizes revenue or on our consolidated financial statements and disclosures. See Note 2 of the Notes to Consolidated Financial Statements for disclosures related to revenue generated from contracts with customers.

~~In January 2016, the FASB issued ASU 2016-01,~~ ~~Recognition and Measurement of Financial Assets and Financial Liabilities~~ (“ASU 2016-01”). The new guidance is intended to improve the recognition and measurement of financial instruments. ASU 2016-01 requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendment requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This ASU also eliminates the requirement for public business entities to disclose the method(s) and significant

assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendment also requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The Company adopted the guidance on January 1, 2018 and reclassified $191,000 in unrealized gains on its investments in preferred stock from other accumulated comprehensive income to retained earnings. The Company also used an exit price notion to measure the fair value of financial instruments for it's disclosures as of December 31, 2018. Adoption of the guidance does not have a material or significant impact on the Company's consolidated financial statements. As of January 1, 2018, unrealized gains and losses on marketable equity securities are included in other operating income in the Consolidated Statement of Income.

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~Classification of Certain Cash Receipts and Cash Payments~~ (“ASU 2016-15”). ASU 2016-15 provides guidance on eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The Company adopted the guidance on January 1, 2018 and made an accounting policy election to classify distributions from equity method investees using the cumulative earnings approach. Accordingly, these distributions are recorded as cash inflows in the operating activity section of the Statement of Cash Flows. Adoption of the guidance does not have a material or significant impact on the Company's consolidated financial statements.

~~In May 2017, the FASB issued ASU 2017-09,~~ ~~Compensation-Stock Compensation~~ (“ASU 2017-09”). ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The Company adopted the guidance on January 1, 2018, and it did not have a material impact on the Company’s consolidated financial position or results of operations.

~~In March 2017, the FASB issued ASU 2017-08,~~ ~~Receivables-Nonrefundable Fees and Other Costs~~ (“ASU 2017-08”). ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period for the premium to the earliest call date. Under the current guidance, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2018, and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. The Company early adopted this standard in the first quarter of 2018, which resulted in a $62,000 decrease in beginning retained earnings through a cumulative-effect adjustment.

~~In August 2017, the FASB issued ASU 2017-12,~~ ~~Derivatives and Hedging~~ (“ASU 2017-12”). ASU 2017-12 improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in this ASU make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP based on the feedback received from preparers, auditors, users, and other stakeholders. ASU 2017-12 is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2018, and all transition requirements and elections must be applied to hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The Company early-adopted this standard in the first quarter of 2018, and it did not have a significant impact on the Company’s consolidated financial position or results of operations.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles-Goodwill and Other~~ (“ASU 2017-04”). ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2019, and must be applied on a prospective basis. The Company early adopted this standard in the fourth quarter of 2018, and it did not have a significant impact on the Company’s consolidated financial position or results of operations.

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

In June 2016, ~~the~~ FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“(“ASU 2016-13” or “CECL”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ~~The standard requires the measurement of all expected credit losses for certain~~Under ASU 2016-13 financial ~~assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable~~

~~forecasts. Financial~~ institutions and other organizations will ~~now~~ use forward-looking information to better inform their credit loss estimates but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 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, ~~the~~ ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ~~The~~

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.~~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 ~~will be~~was permitted for specified periods. The Company ~~has formed~~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 ~~cross-functional team to begin implementation efforts~~modified retrospective basis with the cumulative effect of ~~this new guidance. The team is evaluating~~initially applying the ~~data elements and modeling options that~~amendments recognized in retained earnings at January 1, 2021. However, certain provisions of the guidance are ~~expected~~only required to be ~~critical~~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 ~~new process. Additionally,~~ACL on loans of $4.5 million, a decrease in the ~~Company has engaged external consulting services related to this effort. An estimate~~ACL on purchased receivables of $73,000, and an increase in the ACL on unfunded commitments of $1.2 million, net of the ~~impact~~corresponding net decrease in deferred tax assets of ~~this standard on the Company's consolidated financial position and results of operations has not yet been determined, however, the impact is expected~~$954,000.

Accounting pronouncements to be ~~significant and the impact on the Company's process for calculating the Allowance is also expected to be significant.~~implemented in future periods

In ~~February 2016,~~March 2020, the FASB issued ASU ~~2016-02,~~ ~~Leases~~2020-04, Reference Rate Reform (Topic ~~842)~~ (“848): Facilitation of the Effects of Reference Rate Report of Financial Reporting ("ASU ~~2016-02”~~2020-04"). ASU ~~2016-02 requires lessees, among other things,~~2020-04 was issued to ~~recognize lease assets~~provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and ~~lease liabilities on the balance sheet~~exceptions for ~~those leases~~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 operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 is effective for the Company’s financial statements for annual and interim periods beginning on or afterheld to maturity. The expedients are in effect from March 12, 2020, through December 15, 2018, and must be applied prospectively. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. As the Company expects to elect the transition option provided in ASU No. 2018-11 (see below), the modified retrospective approach will be applied on January 1, 2019 (as opposed to January 1, 2017). The Company also expects to elect certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less).31, 2022. The Company will ~~likely not elect the hindsight practical expedient, which allows entities~~be able to use ~~hindsight when determining lease term~~the expedients in this guidance to manage through the transition away from LIBOR, specifically for our loan portfolio, derivative contracts, and impairment of right-of-use assets. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated statements of condition. When the Company adopts these amendments onbond portfolio.

In January 1, 2019, the Company expects to recognize a right-of-use asset and related lease liability on the Company’s statement of financial condition of $15.9 and $15.9, respectively. The Company has finalized its review of the amendments and has updated its accounting policies and procedures.

~~In July 2018,~~2021, the FASB issued ASU ~~2018-11,~~ ~~Leases - Targeted Improvements~~No. 2021-01, Reference Rate Reform (Topic 848): Scope, ("ASU ~~2018-11"~~2021-01") ~~to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02. Specifically, under the~~. The amendments in ASU ~~2018-11: (1)~~2021-01 are elective and apply to all entities ~~may elect not~~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 ~~recast~~derivatives that are affected by the ~~comparative~~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 ~~presented when transitioning~~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 ~~new leasing standard,~~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 ~~(2) lessors may elect not~~derivatives linked to ~~separate lease~~the Secured Overnight Financing Rate and ~~non-lease components when certain conditions are met. The amendments have~~other alternative reference rates, (iv) develop and evaluate internal guidance, policies and procedures focused on the ~~same effective date as~~ transition away from LIBOR to alternative reference rate products, and (v) prepare and disseminate internal and external communications regarding the LIBOR transition.

ASU ~~2016-02 (January 1, 2019 for the Company). The Company expects to elect both transition options. ASU 2018-11~~2021-01 is not expected to have a material impact on the ~~Company’s Consolidated Financial Statements.~~

~~In August 2018, the FASB issued ASU 2018-13,~~ ~~Fair Value Measurement (Topic 820)~~ (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. ASU 2018-13 is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2019. The Company does not believe that the adoption of this standard will have a material impact on the Company’sCompany's consolidated financial ~~position or results of operations.~~statements.

~~NOTE2 – Revenue~~

The Company's revenue is included in net interest income and other operating income on its Consolidated Statements of Income. ASU 2014-09, which amends Topic 606 in the Accounting Standards Codification ("ASC"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our ongoing revenue-generating transactions are not subject to Topic 606, including revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, purchased receivable income, financial guarantees, and derivatives are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant services income, and commissions from the sales of mutual funds and other investments. However, the recognition of

these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s non-interest revenue is generated from contracts with customers. Non-interest revenue streams in-scope of Topic 606 are discussed below.

~~Bankcard fees~~

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

~~Service charges on deposit accounts~~

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

~~Other~~

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

~~The following presents other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2018, 2017 and 2016:~~

(In Thousands) December 31,
Other operating income 2018 2017 2016
In-scope of Topic 606:

Bankcard fees
$2,811

$2,597

$2,670
Service charges on deposit accounts 1,508
1,614
1,998
Other 1,592
1,615
1,612
Other operating income (in-scope of Topic 606)
$5,911

$5,826

$6,280
Other operating income (out-of-scope of Topic 606) 26,256
34,648
36,983
Total other operating income
$32,167

$40,474

$43,263

~~Contract Balances~~

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s other operating revenue streams are largely based on transactional activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Company satisfies its performance obligation

and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2018, 2017 and 2016, the Company did not have any significant contract balances.

~~Contract Acquisition Costs~~

An entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of ASU 2014-09, the Company did not capitalize any contract acquisition costs.

NOTE 32 – Cash and Due from Banks

The Company is no longer required to maintain ~~a $983,000~~ minimum ~~average daily balance~~cash balances or deposits with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank") for purposes of settling financial transactions and charges for Federal Reserve Bank services. The Company is also required to maintain cash balances or deposits with the Federal Reserve Bank sufficient to meet its statutory reserve requirements. The average reserve requirement for the maintenance period, which included December 31, 2018, was $0..

The Company is required to maintain a ~~$500,000~~$300,000 balance with a correspondent bank for outsourced servicing of ATMs.

The Company is required to maintain a $100,000 and ~~$300,000~~$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 43 - 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

(In Thousands) 2018
2017
Interest bearing deposits at Federal Reserve Bank
$49,924

$52,083
Interest bearing deposits at FHLB 142

41
Other interest bearing deposits at other institutions 701

701
Total
$50,767

$52,825

NOTE 54 - Investment Securities

Marketable Equity Securities

The ~~carrying values and approximate~~Company held marketable equity securities with fair values of ~~investment~~$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 are presented below:~~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

(In Thousands) Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
December 31, 2018

Securities available for sale

U.S. Treasury and government sponsored entities
$209,908

$391

$1,439

$208,860
Municipal securities 9,089

17

22

9,084
Corporate bonds 40,139

38

397

39,780
Collateralized loan obligations 13,990
—
104
13,886
Total securities available for sale
$273,126

$446

$1,962

$271,610
December 31, 2017

Securities available for sale

U.S. Treasury and government sponsored entities
$250,794

$3

$1,336

$249,461
Municipal securities 14,395

72

46

14,421
Corporate bonds 36,654

478

—

37,132
Collateralized loan obligations 6,000
5
—
6,005
Total securities available for sale
$307,843

$558

$1,382

$307,019

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, ~~2018~~2021 and ~~2017,~~2020, were as follows:


	Less Than 12 Months				More Than 12 Months				Total					Less Than 12 Months		More Than 12 Months		Total
(In Thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(In Thousands)	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
2018
2021													2021
Securities Available for Sale													Securities Available for Sale
U.S. Treasury and government sponsored entities		$5,030		$6		$135,807		$1,433		$140,837		$1,439	U.S. Treasury and government sponsored entities	$292,845	($4,012)	$21,743	($355)	$314,588	($4,367)
Corporate bonds	22,285		397		—		—		22,285		397		Corporate bonds	4,953	(77)	—	—	4,953	(77)

Collateralized loan obligations	13,886		104		—		—		13,886		104		Collateralized loan obligations	29,470	(22)	—	—	29,470	(22)
Municipal securities	—		—		1,673		22		1,673		22

Total		$41,201		$507		$137,480		$1,455		$178,681		$1,962	Total	$327,268	($4,111)	$21,743	($355)	$349,011	($4,466)
2017
2020													2020
Securities Available for Sale													Securities Available for Sale
U.S. Treasury and government sponsored entities		$116,331		$496		$122,605		$840		$238,936		$1,336	U.S. Treasury and government sponsored entities	$31,270	($47)	$—	$—	$31,270	($47)
Municipal securities	3,994		17		2,298		29		6,292		46

Corporate bonds													Corporate bonds	3,198	(5)	—	—	3,198	(5)
Collateralized loan obligations													Collateralized loan obligations	23,670	(118)	2,967	(24)	26,637	(142)
Total		$120,325		$513		$124,903		$869		$245,228		$1,382	Total	$58,138	($170)	$2,967	($24)	$61,105	($194)

~~The~~Management evaluates available for sale debt securities in unrealized ~~losses on investments~~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 ~~government sponsored entities, corporate bonds, municipal securities, and collateralized loan obligations~~the security for a period of time sufficient to allow for any anticipated recovery in ~~both periods were caused by changes in interest rates.~~ fair value.

At December 31, ~~2018~~2021 and ~~2017,~~2020, there were 1441 and 2312 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 233 and 171 available for sale securities without an ACL with unrealized losses at December 31, ~~2018~~2021 and ~~2017,~~2020, respectively, that have been at a loss position for more than twelve months. ~~The contractual terms~~At December 31, 2021 and 2020, there were 2 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 ~~investments do not permit the issuer to settle the~~ securities ~~at a price less than the amortized cost of the investment. Because~~and believes that it is more likely than not that the Company will ~~hold these~~not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments ~~until a~~decline. Accordingly, as of 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 ~~price recovery or maturity, these investments are not considered other-than-temporarily impaired.~~conditions, and therefore no losses have been recognized in the Company's Consolidated Statements of Income.

At December 31, ~~2018~~2021 and ~~2017, $58.4~~2020, $59.5 million and ~~$51.6~~$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, ~~2018,~~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	%

(In Thousands) Amortized Cost
Fair Value
Weighted Average Yield
U.S. Treasury and government sponsored entities

Within 1 year
$68,285

$67,798

1.41 %
1-5 years 141,623

141,062

2.36 %
Total
$209,908

$208,860

2.05 %
Corporate bonds

1-5 years
$30,130

$30,103

3.45 %
5-10 years 10,009

9,677

3.51 %
Total
$40,139

$39,780

3.46 %
Collateralized loan obligations
5-10 years
$3,000

$2,990
3.86 %
Over 10 years 10,990
10,896
3.78 %
Total
$13,990

$13,886
3.80 %
Municipal securities

Within 1 year
$1,867

$1,861

1.64 %
1-5 years 7,222

7,223

2.64 %
Total
$9,089

$9,084

2.43 %

The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the years ending December 31, ~~2018, 2017,~~2021, 2020, and ~~2016,~~2019, respectively, are as follows:


(In Thousands)	Proceeds	Gross Gains	Gross Losses
2021
Available for sale securities	$—	$—	$—
2020
Available for sale securities	$—	$—	$—
2019
Available for sale securities	$4,219	$23	$—

(In Thousands) Proceeds
Gross Gains
Gross Losses
2018

Available for sale securities
$—

$—

$—
2017

Available for sale securities
$25,006

$14

$3
2016

Available for sale securities
$5,785

$12

$23

A summary of interest income for the years ending December 31, ~~2018, 2017,~~2021, 2020, and ~~2016~~2019 on available for ~~sale~~ 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

(In Thousands) 2018
2017 2016
U.S. Treasury and government sponsored entities
$3,682

$2,983

$2,661
U.S. Agency mortgage-backed securities —

—
4
Other 1,532

880
633
Total taxable interest income
$5,214

$3,863

$3,298
Municipal securities
$267

$367

$282
Total tax-exempt interest income
$267

$367

$282
Total
$5,481

$4,230

$3,580

NOTE 65 - 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)
2021
Commercial	$7,973	($7,973)	$—	$—	$—	—
Real estate construction 1-4 family	679	(679)	—	—	—	—
Real estate construction other	1,179	(1,179)	—	—	—	—
Real estate term owner occupied	2,625	(2,625)	—	—	—	—
Real estate term non-owner occupied	5,133	(5,133)	—	—	—	—
Real estate term other	779	(779)	—	—	—	—
Consumer secured by 1st deed of trust	261	(261)	—	—	—	—
Consumer other	400	(400)	—	—	—	—
Unallocated	2,107	(2,107)	—	—	—	—
Commercial & industrial loans	—	4,348	(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)
2020
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 ~~tracks certain credit quality indicators including trends in past due and nonaccrual loans, gross and net charge-offs, and movement in loan balances within the risk classifications. The Company~~ 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 andother balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The ~~company~~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 ~~either~~ the repayment prospects for the asset ~~or the Bank's credit position~~ at some future date. Special mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Loans are currently protected, but are weak due to negative trends in the balance sheet and income statement. Current cash flow may be insufficient to meet debt service, with prospects that the condition may not be temporary. Profitability and key balance sheet ratios are below peers. There is a lack of effective control over collateral or there are documentation deficiencies as well as a potential risk of payment default. Collateral coverage is minimal in gross dollars or due to quality issues. Financial information may be inadequate to show the recent condition of borrower. The loan would not be approved as a new credit, and new loans would not be granted. Management may not be adequately qualified or may have very limited prior experience with similar activities or markets. The ability of management to cope with current conditions is questionable. Internal conflict and turnover in key positions may be present. Succession is unclear. The borrower's asset quality is below average. The capital base may be insufficient to cover capital losses. Leverage is above average or increasing. The industry outlook is generally negative but there are reasonable expectations of a turnaround within 12-18 months. The firm may be new, resulting in competitive deficiencies in comparison to the older, more established firms in the industry. Over-capacity may be evident in the industry. Collateral and guarantor strength are comparable to Management Attention-6, but agings and certifications of accounts receivable and inventory are required and are not being provided on a regular basis.

Substandard – 8: A "substandard" credit is inadequately protected by the current ~~sound~~ 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. Loans have well-defined weaknesses where a payment default and/or a loss are possible, but not yet probable. Cash flow is insufficient to service debt, with prospects that the condition is permanent. Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower, and there is a likelihood that collateral will have to be liquidated and/or the guarantor called upon to repay the debt. Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage. Loan(s) may have been restructured at less than market terms or have been partially charged off. If deficiencies are not corrected quickly, there is a probability of loss and the borrower’s ability to operate as a going concern may be deemed questionable/is questionable. Management has no prior experience with similar activities, demonstrating inability to realistically address problems and meet commitments. The borrower’s asset quality is poor. The capital base is weak and insufficient to absorb continuing losses, and leverage is significantly above peers. Liquidity is poor with significant reliance on short-term borrowing to support trade debt. Key balance sheet ratios are substantially inferior to industry norms. The industry is currently trending downward or demonstrating recovery from an adverse cycle. The outlook is generally negative at this time. Timing of recovery is unclear, but expectations are that market conditions will improve within 18-24 months. The borrower has substantial competitive deficiencies when compared to other firms, such as excess capacity and over-supply, resulting in frequent and significant concessions and discounting. Business failures are prevalent. Collateral coverage is marginal or non-existent. Collateral may be located outside the borrower’s market area. There are no agings or certifications of accounts receivable and inventory being received from the borrower, and collateral has doubtful marketability/convertibility. If guaranteed, the guarantor has limited outside worth and is highly leveraged with a poor credit report, which may reflect liens, collection problems, or lawsuits.

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. Cash flow is insufficient to service debt. The company has had a series of substantial losses. If the current material adverse trends continue, it is unlikely the borrower will have the ability to meet the terms of the loan agreement. It may be difficult to predict the exact amount of loss, but the probability of some loss is greater

than 50%. Loans are to be placed on non-accrual status when any portion is classified as doubtful. Non-accrual loans would not be classified "doubtful" as long as the collateral appears adequate to retire the outstanding balance. Management is clearly unable to address problems and meet commitments, and there is little expectation either of improvement or for sustaining the relationship with current management. The company is highly illiquid with excessive leverage. Key balance sheet ratios are at unacceptable levels, and downturn is severe. Timing of recovery is undeterminable. The company is unable to compete; collateral and guarantees provide limited support.

Loss – 10: An asset classified "loss" is considered ~~uncollectable~~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 ~~has doubtful characteristics, but~~constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the loan will definitely not be repaid in full. Debt service coverage clearly reflects the company's inability to service debt. The borrower cannot generate sufficient cash flow to cover fixed charges. All near-termpoint of renewal and ~~long-term trends concerning cash flow and earnings are negative. The damage to the financial condition~~considered current period originations for purposes of the ~~Company cannot be reversed at this point in time. Collateral and guarantees provide no support.~~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 ~~composition~~following table presents the Company's portfolio of ~~the loan portfolio~~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 is as follows:~~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

(In Thousands) Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deeds of trust Consumer other Total
December 31, 2018
AQR Pass
$315,112

$33,729

$72,256

$117,174

$307,126

$40,792

$18,768

$23,595

$928,552
AQR Special Mention 5,116

3,382

—

3,987

18,129

670

140

2

31,426
AQR Substandard 22,192

—

—

5,253

465

577

320

47

28,854
Subtotal
$342,420

$37,111

$72,256

$126,414

$325,720

$42,039

$19,228

$23,645

$988,833
Less: Unearned origination fees, net of origination costs (4,487 )
Total loans
$984,346
December 31, 2017
AQR Pass
$277,371

$31,201

$80,093

$127,059

$307,780

$39,777

$21,846

$19,895

$905,022
AQR Special Mention 4,921

—

—

2,095

11,051

634

3

22

18,726
AQR Substandard 31,222

—

—

2,888

482

—

767

2

35,361
Subtotal
$313,514

$31,201

$80,093

$132,042

$319,313

$40,411

$22,616

$19,919

$959,109
Less: Unearned origination fees, net of origination costs (4,156 )
Total loans
$954,953

At December 31, 2018, approximately 73% of the Company’s loans are secured by real estate and 2% are unsecured. Approximately 25% 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.

~~Nonaccrual~~0Nonaccrual Loans

Nonaccrual loans net of government guarantees totaled ~~$14.7~~$10.7 million and ~~$21.2~~$9.6 million at December 31, ~~2018~~2021 and December 31, ~~2017,~~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 ~~2018, 2017,~~2021, 2020, and ~~2016~~2019 amounted to $744,000, $856,000, and $1.3 million, ~~$1.4 million,~~respectively.

There was $10,000 interest on nonaccrual loans reversed through interest income in 2021, and ~~$676,000, respectively. Additionally,~~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 ~~$159,000, $120,000,~~$1.6 million, $924,000, and ~~$181,000~~$301,000 in ~~2018, 2017,~~2021, 2020, and ~~2016,~~2019, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero. ~~Nonaccrual loans at the periods indicated, by segment are presented below:~~

(In  Thousands) 30-59 Days
Past Due 60-89 Days
Past Due Greater Than
90 Days Past Due Current Total
December 31, 2018
Commercial
$1,329

$324

$1,287

$9,731

$12,671
Real estate term owner occupied —
—
1,694
—
1,694
Real estate term other —
—
577
—
577
Consumer secured by 1st deeds of trust —
—
—
220
220
Consumer other —
—
39
9
48
    Total nonaccrual loans 1,329
324
3,597
9,960
15,210
Government guarantees on nonaccrual loans (269 ) —
—
(247 ) (516 )
Net nonaccrual loans
$1,060

$324

$3,597

$9,713

$14,694
December 31, 2017
Commercial
$810

$—

$2,652

$16,455

$19,917
Real estate term owner occupied —
—
—
1,331
1,331
Consumer secured by 1st deeds of trust —
—
378
—
378
    Total nonaccrual loans 810
—
3,030
17,786
21,626
Government guarantees on nonaccrual loans —
—
(94 ) (373 ) (467 )
Net nonaccrual loans
$810

$—

$2,936

$17,413

$21,159

~~Past Due Loans~~

There were zero and $252,000 past due loans greater than 90 days and still accruing interest at December 31, 2018 and 2017, respectively. Past due loans and nonaccrual loans at the periods indicated are presented below by loan class:

(In Thousands)
30-59 Days
Past Due
Still
Accruing

60-89 Days
Past Due
Still
Accruing

Greater Than
90 Days
Still
Accruing

Total Past
Due
Nonaccrual
Current
Total
December 31, 2018

Commercial
$872

$857

$—

$1,729

$12,671

$328,020

$342,420
Real estate construction one-to-four family —

—

—

—

—

37,111

37,111
Real estate construction other —

—

—

—

—

72,256

72,256
Real estate term owner occupied 1,197

—

—

1,197

1,694

123,523

126,414
Real estate term non-owner occupied —

—

—

—

—

325,720

325,720
Real estate term other —

—

—

—

577

41,462

42,039
Consumer secured by 1st deed of trust 224

100

—

324

220

18,684

19,228
Consumer other 190

—

—

190

48

23,407

23,645
Subtotal
$2,483

$957

$—

$3,440

$15,210

$970,183

$988,833
Less: Unearned origination fees,  net of origination costs

(4,487 )
     Total

$984,346
December 31, 2017

Commercial
$503

$—

$240

$743

$19,917

$292,854

$313,514
Real estate construction one-to-four family —

—

—

—

—

31,201

31,201
Real estate construction other 90

—

—

90

—

80,003

80,093
Real estate term owner occupied 966

—

—

966

1,331

129,745

132,042
Real estate term non-owner occupied —

—

—

—

—

319,313

319,313
Real estate term other —

—

—

—

—

40,411

40,411
Consumer secured by 1st deed of trust 363

—

—

363

378

21,875

22,616
Consumer other 161

53

12

226

—

19,693

19,919
Subtotal
$2,083

$53

$252

$2,388

$21,626

$935,095

$959,109
Less: Unearned origination fees,  net of origination costs

(4,156 )
     Total

$954,953

~~Impaired Loans~~

At December 31, 2018 and 2017, the recorded investment in loans that are considered to be impaired was $31.7 million and $32.0 million, respectively. The following table presents information about impaired loans by class for the years ended December 31, 2018 and 2017:

(In Thousands) Recorded Investment
Unpaid Principal Balance
Related Allowance
December 31, 2018

With no related allowance recorded

Commercial - AQR pass
$80

$80

$—
Commercial - AQR special mention 2,009
2,009
—
Commercial - AQR substandard 21,252

22,303

—
Real estate term owner occupied - AQR substandard 5,253

5,253

—
Real estate term non-owner occupied - AQR pass 295

295

—
Real estate term non-owner occupied - AQR substandard 465

465

—
Real estate term other - AQR pass
486

486

—
Real estate term other - AQR substandard 577

577

—
Consumer secured by 1st deeds of trust - AQR pass
129

129

—
Consumer secured by 1st deeds of trust - AQR substandard
320

320

—
Subtotal
$30,866

$31,917

$—

With an allowance recorded

Commercial - AQR substandard
$848

$1,352

$14
Subtotal
$848

$1,352

$14

Commercial - AQR pass
$80

$80

$—
Commercial - AQR special mention 2,009
2,009
—
Commercial - AQR substandard 22,100

23,655

14
Real estate term owner-occupied - AQR substandard 5,253

5,253

—
Real estate term non-owner occupied - AQR pass 295

295

—
Real estate term non-owner occupied - AQR substandard 465

465

—
Real estate term other - AQR pass
486

486

—
Real estate term other - AQR substandard 577

577

—
Consumer secured by 1st deeds of trust - AQR pass
129

129

—
Consumer secured by 1st deeds of trust - AQR substandard
320

320

—
Total
$31,714

$33,269

$14

(In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance
December 31, 2017

With no related allowance recorded

Commercial - AQR special mention
$2,153

$2,153

$—
Commercial - AQR substandard 16,671

17,742

—
Real estate term owner occupied - AQR substandard 2,862

2,862

—
Real estate term non-owner occupied - AQR pass 303

303

—
Real estate term non-owner occupied - AQR special mention 89

89

—
Real estate term non-owner occupied - AQR substandard 482

482

—
Real estate term other - AQR pass 559

559

—
Consumer secured by 1st deeds of trust - AQR pass 136

136

—
Consumer secured by 1st deeds of trust - AQR substandard 724

809

—
Subtotal
$23,979

$25,135

$—

With an allowance recorded

Commercial - AQR substandard
$7,988

$7,988

$966
Subtotal
$7,988

$7,988

$966

Commercial - AQR special mention
$2,153

$2,153

$—
Commercial - AQR substandard 24,659

25,730

966
Real estate term owner-occupied - AQR substandard 2,862

2,862

—
Real estate term non-owner occupied - AQR pass 303

303

—
Real estate term non-owner occupied - AQR special mention 89

89

—
Real estate term non-owner occupied - AQR substandard 482

482

—
Real estate term other - AQR pass 559

559

—
Consumer secured by 1st deeds of trust - AQR pass 136

136

—
Consumer secured by 1st deeds of trust - AQR substandard 724

809

—
Total
$31,967

$33,123

$966

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

~~The following table summarizes our average recorded investment and interest income recognized on impaired loans for years ended December 31, 2018 and 2017, respectively:~~

Year Ended December 31, 2018 2017
(In Thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
With no related allowance recorded

     Commercial - AQR pass
$21

$2

$—

$—
     Commercial - AQR special mention 2,146
128
582
1
     Commercial - AQR substandard 24,548
381
19,521
487
     Real estate term owner occupied - AQR pass —
—
�� 62
5
     Real estate term owner occupied - AQR special mention 155
—
—
—
     Real estate term owner occupied - AQR substandard 3,813
201
5,402
286
     Real estate term non-owner occupied - AQR pass 265
24
354
43
     Real estate term non-owner occupied - AQR special mention 22
2
23
2
     Real estate term non-owner occupied - AQR substandard 381
30
611
45
     Real estate term other - AQR pass 421

36

595

42
     Real estate term other - AQR substandard 176
—
487
34
     Consumer secured by 1st deeds of trust - AQR pass 135
13
35
3
     Consumer secured by 1st deeds of trust - AQR special mention —
—
105
10
     Consumer secured by 1st deeds of trust - AQR substandard 175
10
561
17
     Consumer other - AQR substandard —
—
13
1
         Subtotal
$32,258

$827

$28,351

$976

With an allowance recorded

     Commercial - AQR special mention
$—

$—

$525

$3
     Commercial - AQR substandard 2,323
20
8,019
4
     Commercial - AQR doubtful 14
—
—
—
     Consumer secured by 1st deeds of trust - AQR substandard 94
—
—
—
         Subtotal
$2,431

$20

$8,544

$7

Total
     Commercial - AQR pass
$21

$2

$—

$—
     Commercial - AQR special mention 2,146
128
1,107
4
     Commercial - AQR substandard 26,871
401
27,540
491
     Commercial - AQR doubtful 14
—
—
—
     Real estate term owner-occupied - AQR pass —
—
62
5
     Real estate term owner-occupied - AQR special mention 155
—
—
—
     Real estate term owner-occupied - AQR substandard 3,813
201
5,402
286
     Real estate term non-owner occupied - AQR pass 265
24
354
43
     Real estate term non-owner occupied - AQR special mention 22
2
23
2
     Real estate term non-owner occupied - AQR substandard 381
30
611
45
     Real estate term other - AQR pass 421

36

595
42
     Real estate term other - AQR substandard 176
—
487
34
     Consumer secured by 1st deeds of trust - AQR pass 135
13
35
3
     Consumer secured by 1st deeds of trust - AQR special mention —
—
105
10
     Consumer secured by 1st deeds of trust - AQR substandard 269
10
561
17
     Consumer other - AQR substandard —
—
13
1
         Total Impaired Loans
$34,689

$847

$36,895

$983

~~The average recorded investment was $42.6 million, and interest income recognized on impaired loans was $2.4 million for the year ended December 31, 2016.~~

~~Purchased Credit Impaired Loans~~

~~The Company acquired eighteen purchased credit impaired loans from Alaska Pacific on April 1, 2014 subject to the requirements of FASB ASC 310-30~~ ~~Loans and Debt Securities Acquired with Deteriorated Credit Quality~~. This group of loans consists primarily of commercial and commercial real estate loans, and unlike a pool of consumer mortgages, it is not practicable for the Company to analyze the accretable yield of these loans. As such, the Company has elected the cost recovery method of income recognition for these loans, and thus no accretable difference has been identified for these loans. At the acquisition date, April 1, 2014, the fair value of this group of loans was $3.9 million. The carrying value of these loans as of December 31, 2018 and 2017 were $235,000 and $923,000, respectively.

Troubled Debt Restructurings

Loans classified as ~~troubled debt restructurings (“TDR”)~~TDRs totaled ~~$14.8~~$10.6 million and ~~$23.8~~$7.9 million at December 31, ~~2018~~2021 and ~~December 31, 2017,~~2020, respectively. A ~~troubled debt restructuring~~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 ~~some kind.~~ 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.

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

The following table ~~identifies~~presents the ~~portion of TDR balances~~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, ~~2018 that~~2019. The below disclosed restructurings were ~~restructured during 2018:~~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

Accrual Status
Nonaccrual Status
Total Modifications
(In Thousands)

New Troubled Debt Restructurings

Commercial - AQR substandard
$—

$1,166

$1,166
Real estate owner occupied - AQR substandard 227

1,694

1,921
Subtotal
$227

$2,860

$3,087
Existing Troubled Debt Restructurings 3,186

8,558

11,744
Total
$3,413

$11,418

$14,831

The following ~~table provides additional information about~~tables present newly restructured loans that ~~were restructured in 2018~~occurred during 2021 and ~~2017:~~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, 2018												December 31, 2020
(In Thousands)	Number of Contracts	Rate Modification		Term Modification		Payment Modification		Combination Modification		Total Modifications		(In Thousands)	Number of Contracts	Rate Modification	Term Modification	Payment Modification	Combination Modification	Total Modifications
Pre-Modification Outstanding Recorded Investment:	Pre-Modification Outstanding Recorded Investment:											Pre-Modification Outstanding Recorded Investment:
Commercial - AQR substandard	4		$—		$—		$2,704		$—		$2,704
Real estate term owner occupied - AQR substandard	3	—		—		1,921		—		1,921
Commercial & industrial loans												Commercial & industrial loans	2	$—	$3,249	$164	$—	$3,413
Total	7		$—		$—		$4,625		$—		$4,625	Total	2	$—	$3,249	$164	$—	$3,413
Post-Modification Outstanding Recorded Investment:	Post-Modification Outstanding Recorded Investment:											Post-Modification Outstanding Recorded Investment:
Commercial - AQR substandard	4		$—		$—		$1,166		$—		$1,166
Real estate term owner occupied - AQR substandard	3	—		—		1,921		—		1,921
Commercial & industrial loans												Commercial & industrial loans	2	$—	$1,590	$161	$—	$1,751
Total	7		$—		$—		$3,087		$—		$3,087	Total	2	$—	$1,590	$161	$—	$1,751

December 31, 2017
(In Thousands) Number of Contracts
Rate Modification
Term Modification
Payment Modification
Combination Modification
Total Modifications
Pre-Modification Outstanding Recorded Investment:

Commercial - AQR special mention 1

$—

$2,078

$—

$—

$2,078
Commercial - AQR substandard 2
—

10,665

210

—

10,875
Total 3

$—

$12,743

$210

$—

$12,953
Post-Modification Outstanding Recorded Investment:
Commercial - AQR special mention 1

$—

$2,059

$—

$—

$2,059
Commercial - AQR substandard 2
—

8,349

202

—

8,551
Total 3

$—

$10,408

$202

$—

$10,610

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in ~~troubled debt restructurings~~TDRs at December 31, ~~2018.~~2021. There were ~~$1.3 million of~~zero charge-offs in ~~2018~~2021 and 2020 on loans that were later classified as a ~~TDR, and there were $731,000 of charge-offs in 2017 on loans that were later classified as a TDR in 2017.~~TDR.

All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the Allowance. There was one TDR with specific impairment at December 31, 2018 and two at December 31, 2017, respectively.

There were no loans that were restructured during ~~2017, and 2016, respectively,~~2021, 2020, or 2019 that also subsequently defaulted within the first twelve months of restructure in those same periods. ~~The following table presents TDRs that occurred during 2018 that subsequently defaulted during the twelve-months ended December 31, 2018:~~

December 31, 2018
Number of Contracts Recorded Investment
(In Thousands)
Troubled Debt Restructurings that Subsequently Defaulted:
Commercial - AQR substandard 4 $1,166
Real estate term owner occupied - AQR substandard 2 1,694
Total 6 $2,860

Loans to Related Parties

Certain directors, and companies of which directors are principal owners, have loans ~~and other transactions such as architectural fees~~ 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)	2018		2017		2016		(In Thousands)	2021	2020	2019
Balance, beginning of the year		$—		$90		$117	Balance, beginning of the year	$217	$309	$—
Loans made	—		—		—		Loans made	—	—	309
Repayments	—		90		27		Repayments	26	92	—
Balance, end of year		$—		$—		$90	Balance, end of year	$191	$217	$309



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



Common Stock, $1.00 par value			The NASDAQ Stock Market, LLC
(Title of Class)			(Name of Exchange on Which Listed)



TABLE OF CONTENTS

	Part I
Item 1.	Business	2
Item 1A.	Risk Factors	1216
Item 1B.	Unresolved Staff Comments	2028
Item 2.	Properties	2129
Item 3.	Legal Proceedings	2230
Item 4.	Mine Safety Disclosures	2230
	Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2331
Item 6.	~~Selected Financial Data~~[R ESERVED]	2633
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2933
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	5360
Item 8.	Financial Statements and Supplementary Data	5664
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~118~~124
Item 9A.	Controls and Procedures	~~118~~124
Item 9B.	Other Information	~~118~~124
Item 9C.	~~Part III~~ Disclosures Regarding Foreign Jurisdictions that Prevent Inspections	125
	Part III
Item 10.	Directors, Executive Officers and Corporate Governance	~~119~~126
Item 11.	Executive Compensation	~~119~~126
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~119~~126
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~119~~126
Item 14.	Principal ~~Accounting~~Account ant Fees and Services	~~119~~126
	Part IV
Item 15.	Exhibits, ~~and~~ Financial Statement Schedules	~~120~~127
	Index to Exhibits	~~120~~127
Item 16.	~~Signatures~~Form 10-K Summary	~~123~~128
	Signatures	130


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	%



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⁾	14⁽³⁾		$1,222,336	6	%	11	%
Wells Fargo Bank Alaska⁽¹⁾	47	5,977,132		28	%	50	%
First National Bank Alaska⁽¹⁾	28	2,413,401		11	%	20	%
Key Bank⁽¹⁾	15	1,206,420		6	%	10	%
First Bank⁽¹⁾	9	504,670		2	%	4	%
Mt. McKinley Bank⁽¹⁾	5	324,165		2	%	3	%
Denali State Bank⁽¹⁾	5	260,068		1	%	2	%
Total bank branches	123		$11,908,192	56	%	100	%
Credit unions⁽²⁾	98		$9,278,777	44	%	NA
Total financial institution branches	221		$21,186,969	100	%	100	%



		First	Second	Third	Fourth
		Quarter	Quarter	Quarter	Quarter
2018
	High	$36.05	$40.45	$45.35	$43.00
	Low	$32.80	$34.05	$38.80	$30.70
2017
	High	$32.40	$32.55	$35.35	$37.90
	Low	$27.50	$29.25	$26.45	$32.50


	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



	Period Ending
Index	12/31/13	12/31/14	12/31/15	12/13/16	12/31/17	12/31/18
Northrim BanCorp, Inc.	100.00	102.77	107.11	131.15	144.42	144.01
Russell 3000	100.00	112.56	113.1	127.50	154.44	146.34
SNL Bank $1B-$5B	100.00	104.56	117.04	168.38	179.51	157.27



	2018 compared to 2017									2017 compared to 2016
	Increase (decrease) due to									Increase (decrease) due to
(In Thousands)	Volume			Rate			Total			Volume			Rate			Total
Interest Income:
Loans		($508	)		$2,733			$2,225			$238			$158			$396
Loans held for sale	83			193			276			(364		)	232			(132		)
Long-term investments	(264		)	1,459			1,195			123			575			698
Short term investments	71			302			373			(1		)	229			228
Total interest income		($618	)		$4,687			$4,069			($4	)		$1,194			$1,190
Interest Expense:
Interest-bearing deposits		($40	)		$640			$600			$64			($227	)		($163	)
Borrowings	(35		)	(26		)	(61		)	6			26			32
Total interest expense		($75	)		$614			$539			$70			($201	)		($131	)



	December 31, 2018					December 31, 2017					December 31, 2016					December 31, 2015					December 31, 2014
	Dollar Amount			Percent of Total		Dollar Amount			Percent of Total		Dollar Amount			Percent of Total		Dollar Amount			Percent of Total		Dollar Amount			Percent of Total
(In Thousands)	Dollar Amount			Percent of Total		Dollar Amount			Percent of Total		Dollar Amount			Percent of Total		Dollar Amount			Percent of Total		Dollar Amount			Percent of Total
Commercial		$342,420		34.8	%		$313,514		32.8	%		$277,802		28.5	%		$271,946		27.8	%		$271,986		29.5	%
Real estate construction one-to-four family	37,111			3.8	%	31,201			3.3	%	26,061			2.7	%	44,488			4.5	%	34,842			3.8	%
Real estate construction other	72,256			7.3	%	80,093			8.4	%	72,159			7.4	%	74,956			7.7	%	91,162			9.9	%
Real estate term owner occupied	126,414			12.8	%	132,042			13.8	%	152,112			15.6	%	143,667			14.7	%	120,621			13.1	%
Real estate term non-owner occupied	325,720			33.1	%	319,313			33.4	%	356,411			36.6	%	347,284			35.4	%	301,544			32.7	%
Real estate term other	42,039			4.3	%	40,411			4.2	%	45,402			4.7	%	46,672			4.8	%	44,385			4.8	%
Consumer secured by 1st deeds of trust	19,228			2.0	%	22,616			2.4	%	23,280			2.4	%	26,369			2.7	%	31,640			3.4	%
Consumer other	23,645			2.4	%	19,919			2.1	%	25,281			2.6	%	28,912			3.0	%	31,493			3.4	%
Subtotal		$988,833					$959,109					$978,508					$984,294					$927,673
Less: Unearned origination fee,
net of origination costs	(4,487		)	(0.5	)%	(4,156		)	(0.4	)%	(4,434		)	(0.5	)%	(4,612		)	(0.5	)%	(4,551		)	(0.5	)%
Total portfolio loans		$984,346					$954,953					$974,074					$979,682					$923,122



	Time Certificates of Deposits
	of $100,000 or More
			Percent of Total Deposits

(In Thousands)	Amount
Amounts maturing in:
Three months or less		$8,237	12	%
Over 3 through 6 months	5,724		8	%
Over 6 through 12 months	20,850		29	%
Over 12 months	35,906		51	%
Total		$70,717	100	%



	Payments Due by Period
	Within 1 Year						Over 5 Years
(In Thousands)	Within 1 Year		1-3 Years		3-5 Years		Over 5 Years		Total
December 31, 2018:
Certificates of deposit		$57,451		$52,529		$1,494		$1,799		$113,273
Short-term borrowings	34,278		—		—		—		34,278
Long-term borrowings	167		351		373		6,350		7,241
Junior subordinated debentures	—		—		—		10,310		10,310
Operating lease obligations	2,668		4,908		3,750		8,121		19,447
Other long-term liabilities⁽¹⁾	1,010		1,703		1,453		3,196		7,362
Capital commitments	57		—		—		—		57
Total		$95,631		$59,491		$7,070		$29,776		$191,968
December 31, 2017:
Certificates of deposit		$66,013		$31,470		$1,159		$1,885		$100,527
Short-term borrowings	27,746		—		—		—		27,746
Long-term borrowings	121		340		362		6,539		7,362
Junior subordinated debentures	—		—		—		10,310		10,310
Operating lease obligations	2,737		4,334		3,762		9,354		20,187
Other long-term liabilities	6,230		1,556		718		3,482		11,986
Capital commitments	47		—		—		—		47
Total		$102,894		$37,700		$6,001		$31,570		$178,165


	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



	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		$6,468		37.13	%		$15,838		81.11	%
Up 300 basis points		$4,963		28.49	%		$12,044		61.68	%
Up 200 basis points		$3,322		19.07	%		$8,134		41.66	%
Up 100 basis points		$1,739		9.98	%		$4,206		21.54	%
Up 50 basis points		$821		4.71	%		$2,041		10.45	%
Down 50 basis points		($1,728	)	(9.92	)%		($2,881	)	(14.75	)%
Down 100 basis points		($3,437	)	(19.73	)%		($5,866	)	(30.04	)%
Down 200 basis points		($7,686	)	(44.12	)%		($12,705	)	(65.07	)%



Report of Independent Registered Public Accounting Firm (Moss Adams LLP,Everett, Washington, PCAOB ID: 659)			5765
Consolidated Balance Sheets at December 31, ~~2018~~2021 and ~~201~~20720			5967
For the Years Ended December ~~2018, 2017~~2021, 2020 and ~~2016:~~2019:
Consolidated Statements of Income			6068
Consolidated Statements of Comprehensive Income			6169
Consolidated Statements of Changes in Shareholders’ Equity			6270
Consolidated Statements of Cash Flows			6371
Notes to the Consolidated Financial Statements			6573


	December 31, 2018			December 31, 2017				December 31, 2021	December 31, 2020
(In Thousands, Except Share Data)							(In Thousands, Except Share Data)
ASSETS							ASSETS
Cash and due from banks		$26,771			$25,016		Cash and due from banks	$20,805	$23,304
Interest bearing deposits in other banks	50,767			52,825			Interest bearing deposits in other banks	625,022	92,661
Investment securities available for sale	271,610			307,019
Investment securities available for sale, at fair value							Investment securities available for sale, at fair value	426,684	247,633
Marketable equity securities	7,265			5,731			Marketable equity securities	8,420	9,052
Total portfolio investments	278,875			312,750
Investment securities held to maturity, at amortized cost							Investment securities held to maturity, at amortized cost	20,000	10,000
Investment in Federal Home Loan Bank stock	2,101			2,115			Investment in Federal Home Loan Bank stock	3,107	2,551
Loans held for sale	34,710			43,979			Loans held for sale	73,650	146,178
Loans	984,346			954,953			Loans	1,413,886	1,444,050
Allowance for loan losses	(19,519		)	(21,461		)
Allowance for credit losses, loans							Allowance for credit losses, loans	(11,739)	(21,136)
Net loans	964,827			933,492			Net loans	1,402,147	1,422,914
Purchased receivables, net	14,406			22,231			Purchased receivables, net	6,987	13,922
Mortgage servicing rights, at fair value	10,821			7,305			Mortgage servicing rights, at fair value	13,724	11,218
OREO, net	7,962			8,651
Other real estate owned, net							Other real estate owned, net	5,638	7,289
Premises and equipment, net	39,090			37,867			Premises and equipment, net	37,164	38,102
Operating lease right-of-use assets							Operating lease right-of-use assets	11,001	12,440
Goodwill	15,017			15,017			Goodwill	15,017	15,017
Other intangible assets, net	1,137			1,207			Other intangible assets, net	992	1,029
Other assets	56,504			56,141			Other assets	54,361	68,488
Total assets		$1,502,988			$1,518,596		Total assets	$2,724,719	$2,121,798
LIABILITIES							LIABILITIES
Deposits:							Deposits:
Demand		$420,988			$414,686		Demand	$887,824	$643,825
Interest-bearing demand	248,056			252,009			Interest-bearing demand	692,683	459,095
Savings	239,054			247,458			Savings	348,164	308,725
Money market	206,717			243,603			Money market	314,996	237,705
Certificates of deposit less than $250,000	75,318			69,283			Certificates of deposit less than $250,000	100,851	92,047
Certificates of deposit $250,000 and greater	37,955			31,244			Certificates of deposit $250,000 and greater	77,113	83,584
Total deposits	1,228,088			1,258,283			Total deposits	2,421,631	1,824,981
Securities sold under repurchase agreements	34,278			27,746

Borrowings	7,241			7,362			Borrowings	14,508	14,817
Junior subordinated debentures	10,310			10,310			Junior subordinated debentures	10,310	10,310
Operating lease liabilities							Operating lease liabilities	10,965	12,378
Other liabilities	17,124			22,093			Other liabilities	29,488	37,737
Total liabilities	1,297,041			1,325,794			Total liabilities	2,486,902	1,900,223
COMMITMENTS AND CONTINGENTCIES (NOTE 18)
COMMITMENTS AND CONTINGENCIES (NOTE 19)							COMMITMENTS AND CONTINGENCIES (NOTE 19)	0	0
SHAREHOLDERS' EQUITY							SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding	—			—			Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding	—	—
Common stock, $1 par value, 10,000,000 shares authorized, 6,883,216 and 6,871,963 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively	6,883			6,872
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							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	62,132			61,793			Additional paid-in capital	31,162	41,808
Retained earnings	137,452			124,407			Retained earnings	204,046	173,498
Accumulated other comprehensive loss, net of tax	(520		)	(270		)
Accumulated other comprehensive (loss) income, net of tax							Accumulated other comprehensive (loss) income, net of tax	(3,406)	18

Total shareholders' equity	205,947			192,802			Total shareholders' equity	237,817	221,575
Total liabilities and shareholders' equity		$1,502,988			$1,518,596		Total liabilities and shareholders' equity	$2,724,719	$2,121,798


(In Thousands, Except Share and Per Share Data)	2018			2017		2016			(In Thousands, Except Share and Per Share Data)	2021	2020	2019
Interest Income
Interest and Dividend Income									Interest and Dividend Income
Interest and fees on loans and loans held for sale		$57,542			$55,041		$54,777		Interest and fees on loans and loans held for sale	$79,241	$71,091	$62,150
Interest on investment securities available for sale	5,481			4,230		3,580			Interest on investment securities available for sale	3,339	4,832	6,572
Dividends on marketable equity securities	348			345		315			Dividends on marketable equity securities	440	466	439
Interest on investment securities held to maturity	—			59		41			Interest on investment securities held to maturity	1,037	18	—
Dividends on Federal Home Loan Bank stock									Dividends on Federal Home Loan Bank stock	102	84	76
Interest on deposits in other banks	806			433		205			Interest on deposits in other banks	447	225	846
Total Interest Income	64,177			60,108		58,918			Total Interest Income	84,606	76,716	70,083
Interest Expense									Interest Expense
Interest expense on deposits	2,307			1,707		1,870			Interest expense on deposits	3,077	5,279	4,961
Interest expense on securities sold under agreements to repurchase	50			34		30			Interest expense on securities sold under agreements to repurchase	—	—	40
Interest expense on borrowings	223			173		127			Interest expense on borrowings	320	387	251
Interest expense on junior subordinated debentures	389			516		534			Interest expense on junior subordinated debentures	382	385	389
Total Interest Expense	2,969			2,430		2,561			Total Interest Expense	3,779	6,051	5,641
Net Interest Income	61,208			57,678		56,357			Net Interest Income	80,827	70,665	64,442
(Benefit) provision for loan losses	(500		)	3,200		2,298
Net Interest Income After Provision for Loan Losses	61,708			54,478		54,059
(Benefit) provision for credit losses									(Benefit) provision for credit losses	(4,099)	2,432	(1,175)
Net Interest Income After (Benefit) Provision for Credit Losses									Net Interest Income After (Benefit) Provision for Credit Losses	84,926	68,233	65,617
Other Operating Income									Other Operating Income
Mortgage banking income	20,844			23,287		29,507			Mortgage banking income	42,144	52,635	24,201
Bankcard fees									Bankcard fees	3,389	2,837	2,976
Purchased receivable income	3,255			2,975		2,347			Purchased receivable income	2,259	2,650	3,271
Bankcard fees	2,811			2,597		2,670
Service charges on deposit accounts	1,508			1,614		1,998			Service charges on deposit accounts	1,297	1,102	1,557
Interest rate swap income									Interest rate swap income	452	949	964
Commercial servicing revenue	1,422			372		322			Commercial servicing revenue	306	527	624
Gain on sale of Northrim Benefits Group	—			4,445		—
Employee benefit plan income	—			2,506		3,770
Gain (loss) on sale of securities	—			11		(11		)
Loss on marketable equity securities	(625		)	—		—
Gain on sale of marketable equity securities, net									Gain on sale of marketable equity securities, net	67	98	—
Unrealized (loss) gain on marketable equity securities									Unrealized (loss) gain on marketable equity securities	(101)	61	911
Gain on sale of investment securities available for sale, net									Gain on sale of investment securities available for sale, net	—	—	23

Other income	2,952			2,667		2,660			Other income	2,450	2,469	2,819
Total Other Operating Income	32,167			40,474		43,263			Total Other Operating Income	52,263	63,328	37,346
Other Operating Expense									Other Operating Expense
Salaries and other personnel expense	44,650			44,721		46,752			Salaries and other personnel expense	60,412	61,137	51,317
Data processing expense									Data processing expense	8,567	7,668	7,128
Occupancy expense	6,136			6,752		6,462			Occupancy expense	7,078	6,624	6,607
Data processing expense	6,035			5,549		4,879
Professional and outside services	2,453			2,365		2,797			Professional and outside services	2,801	3,157	2,531
Marketing expense	2,318			2,566		2,449			Marketing expense	2,741	2,320	2,373
Insurance expense	862			1,161		1,023			Insurance expense	1,593	1,228	557
Impairment of equity method investment	804			686		—
OREO expense, net of rental income and gains on sale	258			837		98
Intangible asset amortization expense	70			100		135			Intangible asset amortization expense	37	48	60
Loss on sale of premises and equipment	2			3		352
Compensation expense - RML acquisition payments	—			130		4,775			Compensation expense - RML acquisition payments	—	—	468

OREO (income) expense, net of rental income and gains on sale									OREO (income) expense, net of rental income and gains on sale	(432)	(242)	(193)

Other operating expense	6,212			6,283		6,558			Other operating expense	6,399	7,174	5,990
Total Other Operating Expense	69,800			71,153		76,280			Total Other Operating Expense	89,196	89,114	76,838
Income Before Provision for Income Taxes	24,075			23,799		21,042			Income Before Provision for Income Taxes	47,993	42,447	26,125
Provision for income taxes	4,071			10,321		6,052			Provision for income taxes	10,476	9,559	5,434
Net Income	20,004			13,478		14,990			Net Income	$37,517	$32,888	$20,691
Less: Net income attributable to the noncontrolling interest	—			327		579
Net Income Attributable to Northrim BanCorp, Inc.		$20,004			$13,151		$14,411

Earnings Per Share, Basic		$2.91			$1.91		$2.09		Earnings Per Share, Basic	$6.07	$5.18	$3.08
Earnings Per Share, Diluted		$2.86			$1.88		$2.06		Earnings Per Share, Diluted	$6.00	$5.11	$3.04
Weighted Average Shares Outstanding, Basic	6,877,573			6,889,621		6,883,663			Weighted Average Shares Outstanding, Basic	6,180,801	6,354,687	6,708,622
Weighted Average Shares Outstanding, Diluted	6,981,557			6,977,910		6,974,864			Weighted Average Shares Outstanding, Diluted	6,249,313	6,431,367	6,808,209



	Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non-controlling Interest			Total
	Number of Shares		Par Value
(In Thousands)	Number of Shares		Par Value
Balance at January 1, 2016	6,877			$6,877			$62,420			$108,150			($412	)		$179			$177,214
Cash dividend declared	—		—			—			(5,420		)	—			—			(5,420		)
Stock-based compensation expense	—		—			778			—			—			—			778
Exercise of stock options and vesting of restricted stock units, net	21		21			(183		)	—			—			—			(162		)
Excess tax benefits from share-based payment arrangements	—		—			(63		)	—			—			—			(63		)
Distributions to noncontrolling interest	—		—			—			—			—			(640		)	(640		)
Other comprehensive income, net of tax	—		—			—			—			15			—			15
Net income attributable to the noncontrolling interest	—		—			—			—			—			579			579
Net income attributable to Northrim BanCorp, Inc.	—		—			—			14,411			—			—			14,411
Balance at December 31, 2016	6,898			$6,898			$62,952			$117,141			($397	)		$118			$186,712
Cash dividend declared	—		—			—			(5,970		)	—			—			(5,970		)
Stock-based compensation expense	—		—			665			—			—			—			665
Exercise of stock options and vesting of restricted stock units, net	32		32			(275		)	—			—			—			(243		)
Repurchase of common stock	(58	)	(58		)	(1,549		)	—			—			—			(1,607		)
Distributions to noncontrolling interest	—		—			—			—			—			(445		)	(445		)
Other comprehensive income, net of tax	—		—			—			—			212			—			212
Reclassification for remeasuring of deferred tax asset related to investment securities	—		—			—			85			(85		)	—			—
Net income attributable to the noncontrolling interest	—		—			—			—			—			327			327
Net income attributable to Northrim BanCorp, Inc.	—		—			—			13,151			—			—			13,151
Balance at December 31, 2017	6,872			$6,872			$61,793			$124,407			($270	)		$—			$192,802
Cash dividend declared	—		—			—			(7,088		)	—			—			(7,088		)
Stock-based compensation expense	—		—			816			—			—			—			816
Exercise of stock options and vesting of restricted stock units, net	27		27			1			—			—			—			28
Repurchase of common stock	(16	)	(16		)	(478		)	—			—			—			(494		)
Other comprehensive loss, net of tax	—		—			—			—			(59		)	—			(59		)
Cumulative effect of adoption of accounting principles related to premium amortization of investment securities	—		—			—			(62		)	—			—			(62		)
Reclassification for cumulative effect of adoption of accounting principles related to fair value measurement of equity securities									191			(191		)				—
Net income attributable to Northrim BanCorp, Inc.	—		—			—			20,004			—			—			20,004
Balance at December 31, 2018	6,883			$6,883			$62,132			$137,452			($520	)		$—			$205,947


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)	$—



Net Cash (Used) Provided by Financing Activities	(31,099		)	(22,372		)	19,254
Net Change in Cash and Cash Equivalents	(303		)	27,290			(8,122		)
Cash and Cash Equivalents at Beginning of Year	77,841			50,551			58,673
Cash and Cash Equivalents at End of Year		$77,538			$77,841			$50,551

Supplemental Information:
Income taxes paid		$1,766			$7,764			$4,414
Interest paid		$2,971			$2,470			$2,553
Noncash commitments to invest in Low Income Housing Tax Credit Partnerships		$—			$—			$6,809
Transfer of loans to other real estate owned		$686			$5,912			$4,036
Cash dividends declared but not paid		$72			$53			$48



(In Thousands)	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Still Accruing		Total Past Due		Nonaccrual		Current		Total
December 31, 2018
Commercial		$872		$857		$—		$1,729		$12,671		$328,020		$342,420
Real estate construction one-to-four family	—		—		—		—		—		37,111		37,111
Real estate construction other	—		—		—		—		—		72,256		72,256
Real estate term owner occupied	1,197		—		—		1,197		1,694		123,523		126,414
Real estate term non-owner occupied	—		—		—		—		—		325,720		325,720
Real estate term other	—		—		—		—		577		41,462		42,039
Consumer secured by 1st deed of trust	224		100		—		324		220		18,684		19,228
Consumer other	190		—		—		190		48		23,407		23,645
Subtotal		$2,483		$957		$—		$3,440		$15,210		$970,183		$988,833
Less: Unearned origination fees, net of origination costs													(4,487		)
Total														$984,346
December 31, 2017
Commercial		$503		$—		$240		$743		$19,917		$292,854		$313,514
Real estate construction one-to-four family	—		—		—		—		—		31,201		31,201
Real estate construction other	90		—		—		90		—		80,003		80,093
Real estate term owner occupied	966		—		—		966		1,331		129,745		132,042
Real estate term non-owner occupied	—		—		—		—		—		319,313		319,313
Real estate term other	—		—		—		—		—		40,411		40,411
Consumer secured by 1st deed of trust	363		—		—		363		378		21,875		22,616
Consumer other	161		53		12		226		—		19,693		19,919
Subtotal		$2,083		$53		$252		$2,388		$21,626		$935,095		$959,109
Less: Unearned origination fees, net of origination costs													(4,156		)
Total														$954,953



(In Thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2018
With no related allowance recorded
Commercial - AQR pass		$80		$80		$—
Commercial - AQR special mention	2,009		2,009		—
Commercial - AQR substandard	21,252		22,303		—
Real estate term owner occupied - AQR substandard	5,253		5,253		—
Real estate term non-owner occupied - AQR pass	295		295		—
Real estate term non-owner occupied - AQR substandard	465		465		—
Real estate term other - AQR pass	486		486		—
Real estate term other - AQR substandard	577		577		—
Consumer secured by 1st deeds of trust - AQR pass	129		129		—
Consumer secured by 1st deeds of trust - AQR substandard	320		320		—
Subtotal		$30,866		$31,917		$—



With an allowance recorded
Commercial - AQR substandard	$848	$1,352	$14
Subtotal	$848	$1,352	$14



With an allowance recorded
Commercial - AQR substandard	$7,988	$7,988	$966
Subtotal	$7,988	$7,988	$966



Commercial - AQR special mention		$2,153		$2,153		$—
Commercial - AQR substandard	24,659		25,730		966
Real estate term owner-occupied - AQR substandard	2,862		2,862		—
Real estate term non-owner occupied - AQR pass	303		303		—
Real estate term non-owner occupied - AQR special mention	89		89		—
Real estate term non-owner occupied - AQR substandard	482		482		—
Real estate term other - AQR pass	559		559		—
Consumer secured by 1st deeds of trust - AQR pass	136		136		—
Consumer secured by 1st deeds of trust - AQR substandard	724		809		—
Total		$31,967		$33,123		$966



Year Ended December 31,	2018						2017
(In Thousands)	Average Recorded Investment		Interest Income Recognized			Average Recorded Investment			Interest Income Recognized
With no related allowance recorded
Commercial - AQR pass		$21			$2			$—			$—
Commercial - AQR special mention	2,146			128			582			1
Commercial - AQR substandard	24,548			381			19,521			487
Real estate term owner occupied - AQR pass	—			—		��	62			5
Real estate term owner occupied - AQR special mention	155			—			—			—
Real estate term owner occupied - AQR substandard	3,813			201			5,402			286
Real estate term non-owner occupied - AQR pass	265			24			354			43
Real estate term non-owner occupied - AQR special mention	22			2			23			2
Real estate term non-owner occupied - AQR substandard	381			30			611			45
Real estate term other - AQR pass	421			36			595			42
Real estate term other - AQR substandard	176			—			487			34
Consumer secured by 1st deeds of trust - AQR pass	135			13			35			3
Consumer secured by 1st deeds of trust - AQR special mention	—			—			105			10
Consumer secured by 1st deeds of trust - AQR substandard	175			10			561			17
Consumer other - AQR substandard	—			—			13			1
Subtotal		$32,258			$827			$28,351			$976



(In Thousands)	Useful Life	2018			2017
Land			$5,137			$2,562
Furniture and equipment	3-7 years	10,917			8,323
Tenant improvements	2-15 years	8,268			8,323
Buildings	39 years	35,626			38,114
Total Premises and Equipment		59,948			57,322
Accumulated depreciation and amortization		(20,858		)	(19,455		)
Total Premises and Equipment, Net			$39,090			$37,867


	2021		2020

Average constant prepayment rate	11.80	%	13.05	%
Average discount rate	8.00	%	7.75	%


(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


(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



(In Thousands)	Date of original commitment	Years over which tax credits are earned	Original commitment amount		Less: life to date contributions			Remaining commitment amount
R4 - MVV	May 2014	17		$8,528		($8,248	)		$280
R4 - Coronado	March 2013	17	10,729		(10,188		)	541
R4 - PJ33	June 2016	17	6,835		(6,442		)	393
WNC	December 2012	16	2,500		(2,500		)	—
USA 57	December 2006	15	3,000		(3,000		)	—
Centerline XXXIII	September 2006	18	3,000		(3,000		)	—
Centerline XXII	January 2003	18	3,000		(3,000		)	—
Total				$37,592		($36,378	)		$1,214


(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)



(In Thousands)
2019		$2,668
2020	2,495
2021	2,413
2022	1,983
2023	1,767
Thereafter	8,121
Total		$19,447



(In Thousands)	Liability Derivatives
		December 31, 2018		December 31, 2017
	Balance Sheet Location	Fair Value		Fair Value

Interest rate swaps	Other liabilities		$246		$77
Retail interest rate contracts	Other liabilities	262		—
Total			$508		$77


(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)