Loans and Allowance for Credit Losses | 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 March 31, 2021 and December 31, 2020. Loans Held for Investment The Company adopted ASU 2016-13 effective January 1, 2021. Upon adoption, the Company changed its loan segments for purposes of the calculation of the allowance for credit losses. 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: March 31, 2021 December 31, 2020 (In Thousands) Amortized Cost Unpaid Principal Difference Amortized Cost Unpaid Principal Difference Commercial & industrial loans $695,797 $708,704 ($12,907) $612,254 $619,304 ($7,050) Commercial real estate: Owner occupied properties 244,416 245,508 (1,092) 233,320 234,363 (1,043) Non-owner occupied and multifamily properties 399,982 402,477 (2,495) 392,452 394,860 (2,408) Residential real estate: 1-4 family residential properties secured by first liens 31,930 32,009 (79) 33,415 33,510 (95) 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 17,536 17,414 122 18,236 18,114 122 1-4 family residential construction loans 35,051 35,280 (229) 32,500 32,760 (260) Other construction, land development and raw land loans 86,574 87,558 (984) 83,463 84,351 (888) Obligations of states and political subdivisions in the US 15,795 15,912 (117) 15,318 15,274 44 Agricultural production, including commercial fishing 12,901 12,957 (56) 12,968 13,093 (125) Consumer loans 5,563 5,522 41 5,734 5,794 (60) Other loans 3,379 3,394 (15) 4,390 4,407 (17) Total 1,548,924 1,566,735 (17,811) 1,444,050 1,455,830 (11,780) Allowance for credit losses (14,764) (21,136) $1,534,160 $1,566,735 ($17,811) $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 $17.8 million and $11.7 million at March 31, 2021 and December 31, 2020, respectively, and premiums and discounts associated with acquired loans totaling $34,000 and $47,000 at March 31, 2021 and December 31, 2020, respectively. Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $7.1 million and $7.1 million at March 31, 2021 and December 31, 2020, respectively, and was included in other assets in the Consolidated Balance Sheets. Amortized cost in the above table includes $402.5 million and $304.6 million as of March 31, 2021 and December 31, 2020, respectively, in PPP loans administered by the U.S. Small Business Administration ("SBA") within the Commercial & industrial loan segment. Allowance for Credit Losses The activity in the ACL related to loans held for investment is as follows: Three Months Ended March 31, Beginning Balance Impact of adopting ASC 326 Credit Loss Expense Charge-offs Recoveries Ending Balance (In Thousands) 2021 Commercial $7,973 ($7,973) $— $— $— — Real estate construction 1-4 family 679 (679) — — — — Real estate construction other 1,179 (1,179) — — — — Real estate term owner occupied 2,625 (2,625) — — — — Real estate term non-owner occupied 5,133 (5,133) — — — — Real estate term other 779 (779) — — — — Consumer secured by 1st deed of trust 261 (261) — — — — Consumer other 400 (400) — — — — Unallocated 2,107 (2,107) — — — — Commercial & industrial loans — 4,348 (101) (163) 185 4,269 Commercial real estate: Owner occupied properties — 3,579 (215) — 2 3,366 Non-owner occupied and multifamily properties — 4,944 (1,240) — — 3,704 Residential real estate: 1-4 family residential properties secured by first liens — 673 140 — — 813 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — 419 (87) — 10 342 1-4 family residential construction loans — 454 (194) — — 260 Other construction, land development and raw land loans — 1,994 (173) — — 1,821 Obligations of states and political subdivisions in the US — 44 (8) — — 36 Agricultural production, including commercial fishing — 49 (11) — 8 46 Consumer loans — 118 (16) — 2 104 Other loans — 3 — — — 3 Total $21,136 ($4,511) ($1,905) ($163) $207 $14,764 Three Months Ended March 31, Beginning Balance Provision (benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2020 Commercial $6,604 $1,790 ($151) $26 $8,269 Real estate construction 1-4 family $643 $— $— $— $643 Real estate construction other 1,017 262 — — 1,279 Real estate term owner occupied 2,188 242 — — 2,430 Real estate term non-owner occupied 5,180 311 — — 5,491 Real estate term other 671 39 — 1 711 Consumer secured by 1st deed of trust 270 4 — — 274 Consumer other 436 24 (14) 7 453 Unallocated 2,079 (612) — — 1,467 Total $19,088 $2,060 ($165) $34 $21,017 The Company adopted ASU 2016-13 effective January 1, 2021. Upon adoption, the Company established an ACL of $16.6 million. The ACL as of March 31, 2021 the ACL decreased to $14.8 million primary due to projected improvement in the economic indicators, or loss drivers, that the Company uses to calculate expected lifetime losses. The Company primarily uses the DCF method to estimate ACL for loans. The Company utilizes and forecasts unemployment in Alaska as our primary loss driver. The Company also utilizes and forecasts either the one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Consistent forecasts of the loss drivers are used across the loan segments. At March 31, 2021, as compared to January 1, 2021, the Company forecasted a significantly lower unemployment rate in Alaska, a slightly lower one-year percentage change in the national commercial real estate price index , and a slightly higher one-year percentage change in the Alaska home price index over the reasonable and supportable forecast period. Specifically regarding the forecasts used to calculate the March 31, 2021 ACL, management expects unemployment to remain consistent with actual levels observed in Alaska as of December 2020, which remained relatively unchanged in January and February 2021. This rate is above pre-pandemic levels over the forecast period, but is lower than rates previously projected by management. The following table presents loans individually and collectively evaluated for impairment and their respective allowance for credit loss allocations as of December 31, 2020, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13: (In Thousands) Loan Evaluation ALLL Allocations Individually Collectively Total Individually Collectively Total Commercial $7,786 $764,682 $772,468 $13 $7,960 $7,973 Real estate construction 1-4 family 702 $37,478 38,180 — 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 quarter ended March 31, 2020: Three Months Ended March 31, 2020 (In Thousands) Average Impaired Loans Interest Recognized Commercial $13,430 $30 Real estate construction 1-4 family 1,132 — Real estate construction other — — Real estate term owner occupied 6,047 28 Real estate term non-owner occupied 177 3 Real estate term other 1,583 7 Consumer secured by 1st deed of trust 279 5 Consumer other 89 — Total $22,737 $73 Credit Quality Information As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management utilizes a loan risk grading system called the Asset Quality Rating (“AQR”) system to assign a risk classification to each of its loans. The risk classification is a dual rating system that contemplates both probability of default and risk of loss given default. Loans are graded on a scale of 1 to 10 and, loans graded 1 – 6 are considered “pass” grade loans. Loans graded 7 or higher are considered "classified" loans. A description of the general characteristics of the AQR risk classifications are as follows: Pass grade loans – 1 through 6: The borrower demonstrates sufficient cash flow to fund debt service, including acceptable profit margins, cash flows, liquidity and other balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The Company has competent management with an acceptable track record. The category does not include loans with undue or unwarranted credit risks that constitute identifiable weaknesses. Classified loans: Special Mention – 7: A "special mention" credit has weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date. Substandard – 8: A "substandard" credit is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Northrim Bank will sustain some loss if the deficiencies are not corrected. Doubtful – 9: An asset classified "doubtful" has all the weaknesses inherent in one that is classified "substandard-8" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. The loan has substandard characteristics, and available information suggests that it is unlikely that the loan will be repaid in its entirety. Loss – 10: An asset classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future. The following tables present the Company's portfolio of risk-rated loans by grade and by year of origination. Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. March 31, 2021 2021 2020 2019 2018 2017 Prior Total (In Thousands) Commercial & industrial loans Pass $218,186 $275,982 $50,311 $57,447 $26,348 $50,851 $679,125 Classified — 344 3,700 3,857 987 7,784 16,672 Total commercial & industrial loans $218,186 $276,326 $54,011 $61,304 $27,335 $58,635 $695,797 Commercial real estate: Owner occupied properties Pass $24,861 $88,524 $26,541 $13,740 $15,422 $65,601 $234,689 Classified — 1,497 — 558 — 7,672 9,727 Total commercial real estate owner occupied properties $24,861 $90,021 $26,541 $14,298 $15,422 $73,273 $244,416 Non-owner occupied and multifamily properties Pass $20,619 $73,970 $57,563 $34,907 $20,746 $181,695 $389,500 Classified — — — — 10,482 — 10,482 Total commercial real estate non-owner occupied and multifamily properties $20,619 $73,970 $57,563 $34,907 $31,228 $181,695 $399,982 Residential real estate: 1-4 family residential properties secured by first liens Pass $2,362 $11,563 $4,506 $891 $1,849 $8,390 $29,561 Classified — 1,629 509 — — 231 2,369 Total residential real estate 1-4 family residential properties secured by first liens $2,362 $13,192 $5,015 $891 $1,849 $8,621 $31,930 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens Pass $916 $2,625 $4,089 $3,950 $390 $5,327 $17,297 Classified — — — 220 — 19 239 Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $916 $2,625 $4,089 $4,170 $390 $5,346 $17,536 1-4 family residential construction loans Pass $6,145 $13,199 $5,253 $132 $99 $9,513 $34,341 Classified — 593 — — 117 — 710 Total residential real estate 1-4 family residential construction loans $6,145 $13,792 $5,253 $132 $216 $9,513 $35,051 Other construction, land development and raw land loans Pass $2,198 $24,279 $40,155 $8,510 $156 $5,528 $80,826 Classified — — — 4,200 — 1,548 5,748 Total other construction, land development and raw land loans $2,198 $24,279 $40,155 $12,710 $156 $7,076 $86,574 Obligations of states and political subdivisions in the US Pass $— $1,289 $3,150 $432 $2,755 $8,169 $15,795 Classified — — — — — — — Total obligations of states and political subdivisions in the US $— $1,289 $3,150 $432 $2,755 $8,169 $15,795 Agricultural production, including commercial fishing Pass $106 $7,356 $1,237 $1,321 $830 $2,051 $12,901 Classified — — — — — — — Total agricultural production, including commercial fishing $106 $7,356 $1,237 $1,321 $830 $2,051 $12,901 Consumer loans Pass $179 $1,193 $991 $534 $380 $2,284 $5,561 Classified — 2 — — — — 2 Total consumer loans $179 $1,195 $991 $534 $380 $2,284 $5,563 Other loans Pass $— $1,761 $452 $299 $— $867 $3,379 Classified — — — — — — — Total other loans $— $1,761 $452 $299 $— $867 $3,379 Total loans Pass $275,572 $501,741 $194,248 $122,163 $68,975 $340,276 $1,502,975 Classified — 4,065 4,209 8,835 11,586 17,254 45,949 Total loans $275,572 $505,806 $198,457 $130,998 $80,561 $357,530 $1,548,924 Total pass loans $275,572 $501,741 $194,248 $122,163 $68,975 $340,276 $1,502,975 Government guarantees (204,708) (214,883) (15,208) (3,643) (371) (6,755) (445,568) Total pass loans, net of government guarantees $70,864 $286,858 $179,040 $118,520 $68,604 $333,521 $1,057,407 Total classified loans $— $4,065 $4,209 $8,835 $11,586 $17,254 $45,949 Government guarantees — (1,347) (21) — (9,730) (3,320) (14,418) Total classified loans, net government guarantees $— $2,718 $4,188 $8,835 $1,856 $13,934 $31,531 The following table presents the Company's portfolio of risk-rated loans by grade as of December 31, 2020: Pass Classified Total (In Thousands) December 31, 2020 Commercial $758,362 $14,106 $772,468 Real estate construction 1-4 family 37,093 1,087 38,180 Real estate construction other 79,403 — 79,403 Real estate term owner occupied 152,734 9,990 162,724 Real estate term non-owner occupied 289,555 17,692 307,247 Real estate term other 42,900 3,330 46,230 Consumer secured by 1st deed of trust 15,404 144 15,548 Consumer other 22,144 106 22,250 Portfolio loans 1,397,595 46,455 1,444,050 Government guarantees (334,639) (14,587) (349,226) Portfolio loans, net of government guarantees $1,062,956 $31,868 $1,094,824 Past Due Loans: The following tables present an aging of contractually past due loans: (In Thousands) 30-59 Days 60-89 Days Greater Than Total Past Current Total Greater Than 90 Days Past Due Still Accruing March 31, 2021 Commercial & industrial loans $141 $— $1,322 $1,463 $694,334 $695,797 $— Commercial real estate: Owner occupied properties — — 1,501 1,501 242,915 244,416 — Non-owner occupied and multifamily properties — — — — 399,982 399,982 — Residential real estate: 1-4 family residential properties secured by first liens — — — — 31,930 31,930 — 1-4 family residential properties secured by junior liens 45 42 139 226 17,310 17,536 — 1-4 family residential construction loans 526 — 117 643 34,408 35,051 — Other construction, land development and raw land loans — — 1,545 1,545 85,029 86,574 — Obligations of states and political subdivisions in the US — — — — 15,795 15,795 — Agricultural production, including commercial fishing — — — — 12,901 12,901 — Consumer loans — — — — 5,563 5,563 — Other loans — — — — 3,379 3,379 — Total $712 $42 $4,624 $5,378 $1,543,546 $1,548,924 $— 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 38 — 139 177 18,059 18,236 — 1-4 family residential construction loans — — 702 702 31,798 32,500 — Other construction, land development and raw land loans — — 1,545 1,545 81,918 83,463 — Obligations of states and political subdivisions in the US — — — — 15,318 15,318 — Agricultural production, including commercial fishing — — — — 12,968 12,968 — Consumer loans — — 272 272 5,462 5,734 — Other loans — — — — 4,390 4,390 — Total $2,929 $229 $7,792 $10,950 $1,433,100 $1,444,050 $449 Nonaccrual loans: Nonaccrual loans net of government guarantees totaled $13.1 million and $9.6 million at March 31, 2021 and December 31, 2020, respectively. The following table presents loans on nonaccrual status and loan on nonaccrual status for which there was no related allowance for credit losses: March 31, 2021 December 31, 2020 (In Thousands) Nonaccrual Nonaccrual With No ACL Nonaccrual Nonaccrual With No ACL Commercial & industrial loans $6,212 $2,300 $3,848 $3,513 Commercial real estate: Owner occupied properties 4,056 4,016 4,620 4,582 Residential real estate: 1-4 family residential properties secured by first liens 2,292 154 160 160 1-4 family residential properties secured by junior liens 239 220 242 221 1-4 family residential construction loans 117 117 702 702 Other construction, land development and raw land loans 1,545 1,545 1,545 1,545 Consumer loans 2 — 3 — Total nonperforming loans 14,463 8,352 11,120 10,723 Government guarantees on nonaccrual loans (1,382) (1,350) (1,483) (1,483) Net nonaccrual loans $13,081 $7,002 $9,637 $9,240 There was no interest on nonaccrual loans reversed through interest income during three-month periods ending March 31, 2021 and March 31, 2020, respectively. There was no interest earned on nonaccrual loans during three-month periods ending March 31, 2021 and March 31, 2020, respectively. Troubled Debt Restructurings: Loans classified as TDRs totaled $6.5 million and $7.9 million at March 31, 2021 and December 31, 2020, respectively. A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession that it would not grant otherwise. The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) 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 March 31, 2021, the Company has made the following types of loan modifications related to COVID-19, which are not classified as TDRs with principal balance outstanding of: (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $65,201 $23,096 $88,297 Number of modifications 21 9 30 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. There were no newly restructured loans that occurred during the three months ended March 31, 2021. There were $2.4 million accruing restructured loans and $4.2 million nonaccrual 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, 2020. The disclosed restructurings were not related to COVID-19 modifications. March 31, 2020 Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications (In Thousands) Pre-Modification Outstanding Recorded Investment: Commercial - AQR substandard 1 $— $3,249 $— $— $3,249 Total 1 $— $3,249 $— $— $3,249 Post-Modification Outstanding Recorded Investment: Commercial - AQR substandard 1 $— $3,281 $— $— $3,281 Total 1 $— $3,281 $— $— $3,281 The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs. There were no in charge-offs in the three months ended March 31, 2021 on loans that were newly classified as TDRs during the same period. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the ACL. There were no TDRs with specific impairment at March 31, 2021 and December 31, 2020, respectively. The Company had no TDRs that defaulted within twelve months of restructure and defaulted during the three months ended March 31, 2021 and 2020, respectively. |