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OFFON

NORTHRIM BANCORP, INC.

(NRIM)
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NORTHRIM BANCORP : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/04/2021 | 01:54pm EST
This discussion should be read in conjunction with the unaudited consolidated
financial statements of Northrim BanCorp, Inc. (the "Company") and the notes
thereto presented elsewhere in this report and with the Company's Annual Report
on Form 10-K for the year ended December 31, 2020.
Except as otherwise noted, references to "we", "our", "us" or "the Company"
refer to Northrim BanCorp, Inc. and its subsidiaries that are consolidated for
financial reporting purposes.
Note Regarding Forward Looking-Statements
This quarterly report on Form 10-Q includes "forward-looking statements," as
that term is defined for purposes of Section 21E of the Securities Exchange Act
of 1934, as amended, which are not historical facts. These forward-looking
statements describe management's expectations about future events and
developments such as future operating results, growth in loans and deposits,
continued success of the Company's style of banking, the strength of the local
economy, and statements related to the expected or potential impact of the novel
coronavirus ("COVID-19") pandemic and related responses of the government. All
statements other than statements of historical fact, including statements
regarding industry prospects, future results of operations or financial position
and the expected or potential impact of COVID-19 and related responses of the
government, made in this report are forward-looking. We use words such as
"anticipate," "believe," "expect," "intend" and similar expressions in part to
help identify forward-looking statements. Forward-looking statements reflect
management's current plans and expectations and are inherently uncertain. Our
actual results may differ significantly from management's expectations, and
those variations may be both material and adverse. Forward-looking statements,
whether concerning COVID-19 and the government response related thereto or
otherwise, are subject to various risks and uncertainties that may cause our
actual results to differ materially and adversely from our expectations as
indicated in the forward-looking statements. These risks and uncertainties
include: the uncertainties relating to the impact of COVID-19 on the Company's
credit quality, business, operations and employees; the availability and terms
of funding from government sources related to COVID-19; the impact of the
results of the recent U.S. elections on the regulatory landscape, natural
resource extraction industries, capital markets, and the response to and
management of the COVID-19 pandemic, including the effectiveness of
previously-enacted fiscal stimulus from the federal government and a potential
infrastructure bill; the timing of Paycheck Protection Program ("PPP") loan
forgiveness; the impact of interest rates, inflation, trade policies and
tensions, including tariffs, and potential geopolitical instability; the general
condition of, and changes in, the Alaska economy; our ability to maintain or
expand our market share or net interest margin; our ability to maintain asset
quality; our ability to implement our marketing and growth strategies; and our
ability to execute our business plan. Further, actual results may be affected by
competition on price and other factors with other financial institutions;
customer acceptance of new products and services; the regulatory environment in
which we operate; and general trends in the local, regional and national banking
industry and economy. Many of these risks, as well as other risks that may have
a material adverse impact on our operations and business, are identified in Part
II. Item 1A Risk Factors of this report and Part I. Item 1A in the Company's
Annual Report on Form 10-K for the year ended December 31, 2020, as well as in
our other filings with the Securities and Exchange Commission. However, you
should be aware that these factors are not an exhaustive list, and you should
not assume these are the only factors that may cause our actual results to
differ from our expectations. In addition, you should note that forward looking
statements are made only as of the date of this report and that we do not intend
to update any of the forward-looking statements or the uncertainties that may
adversely impact those statements, other than as required by law.

Critical Accounting Policies

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

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Allowance for Credit Losses Policy: The Company's Executive Loan Management
Committee and Asset Liability Committee are both involved in monitoring various
aspects of the Company's allowances for credit losses ("ACL") methodology. The
Company's Audit Committee provides board oversight of the ACL process and
reviews and approves the ACL methodology on a quarterly basis.
CECL is not prescriptive in the methodology used to determine the expected
credit loss estimate. Therefore, management has flexibility in selecting the
methodology. However, the expected credit losses must be estimated over a
financial asset's contractual term, adjusted for prepayments, utilizing
quantitative and qualitative factors.

The estimate of current expected credit losses is based on relevant information
about past events, current conditions, and reasonable and supportable forecasts
that affect the collectability of the reported amounts. Historical loss
experience is the starting point for estimating expected credit losses.
Adjustments are made to historical loss experience to reflect differences in
asset-specific risk characteristics, such as underwriting standards, portfolio
mix or asset terms, and differences in economic conditions - both current
conditions and reasonable and supportable forecasts. When the Company is not
able to make or obtain reasonable and supportable forecasts for the entire life
of the financial asset it has estimated expected credit losses for the remaining
life after the forecasted period using an approach that reverts to historical
credit loss information.

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

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

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


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

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

Update on Economic Conditions

  The Alaska economy began to recover from the effect of the pandemic in the
fourth quarter of 2020, and Alaska's real Gross State Product ("GSP") continued
to increase in the first quarter of 2021.
The Alaska Department of Labor ("DOL") has released data through May of 2021.
They report total payroll jobs have grown 16,500 from May of 2020. This is a
total of 305,000 jobs or an improvement of 5.7% over the prior 12 months.
Tourism related jobs were the hardest hit from travel restrictions and have also
been the fastest to recover. According to the DOL, the Leisure and Hospitality
sector added 6,000 jobs between May of 2020 and May of 2021. However, this is
still 9,900 jobs less than May of 2019. Oil and Gas direct jobs continued to
decline in the last 12 months, down 1,400 jobs to 6,100 in May of 2021. This is
the only major sector to have fewer jobs than May of 2020. Construction has
recovered more than half of the 1,300 job decline from two years ago, adding 700
jobs since May of 2020. Health Care and Manufacturing, which is primarily
seafood processing, have now surpassed the total number of jobs seen two years
ago in May of 2019 according to the DOL report.
Alaska's GSP was $52.1 billion in 2020, compared to $54.7 billion in 2019,
according to the Federal Bureau of Economic Analysis ("BEA"). Alaska's reduction
was 4.9% and the worst state was Hawaii at 8%. Both states were more negatively
affected by travel restrictions reducing tourism. The U.S. GDP declined 3.5% in
2020. Alaska's largest GSP declines in 2020 came from Transportation and
Warehousing, followed by Accommodation and Food Services, Oil & Gas and Health
Care. All of these sectors showed positive recovery in the fourth quarter of
2020 in Alaska, helping place it ninth fastest growing for the quarter of the 50
U.S. states. Alaska's real GSP growth continued in the first quarter of 2021,
increasing 5.4% on an annualized basis, according to a June 25, 2021 BEA report.
Alaska's seasonally adjusted personal income for 2020 was $47.4 billion compared
to $46 billion in 2019, according to the BEA. Personal income in the U.S. in
2020 increased 6.1% and Alaska rose 3.1%. Per capita income in the U.S. was
$59,729 compared to $64,780 in Alaska, according to the BEA. This places Alaska
as the ninth highest per capita income of the 50 U.S. states.
In a typical year, the majority of personal income is derived from wage
earnings. Additionally, some people receive government transfer payments, such
as social security, Medicare and Medicaid. Personal income is further supported
by earnings from dividends, interest and rents. However, in 2020 earnings from
wages and investments decreased $500 million in Alaska according to the BEA's
report. The growth in personal income came predominantly from a $1.9 billion
increase in government transfer payments. About half of the transfer payment
increase was from unemployment insurance. Direct stimulus payments accounted for
a large part of the remainder. In Alaska, earnings from wages decreased 1.5% or
$435 million in 2020 and investment income fell 0.7% or $65 million. Government
transfer payments rose 24.2% or $1.9 billion over 2019 levels.
Alaska North Slope ("ANS") crude oil had monthly average prices in 2018 and 2019
ranging from $58.86 to $80.03 a barrel. ANS began 2020 at $65.48. Prices fell
quickly at the beginning of 2020, responding to fears that COVID-19 would
devastate the global economy and reduce the demand for travel. The low month was
April of 2020, when ANS averaged $16.54 a barrel. However, by June of last year
the oil markets stabilized and for the last six months of 2020 the average
monthly price remained between $40.42 and $50.32. In the first six months of
2021 ANS prices continued to rise. The monthly average price was $55.56 in
January of 2021. It rose to $65.60 in March, and $73.18 in June of 2021.
Alaska's home mortgage delinquency and foreclosure levels continue to be better
than most of the nation. According to the Mortgage Bankers Association, Alaska's
foreclosure rate improved from 0.63% at the end of 2019 to 0.45% at the end of
2020. In the first quarter of 2021 the foreclosure rate improved again slightly
to 0.41%. The comparable national average rate was higher than Alaska at 0.54%
in the first quarter of 2021. Management believes that the foreclosure rates are
somewhat misleading because the federal moratorium on foreclosure activity on
occupied homes led to declining foreclosure numbers, even though job losses
strained the economy and borrowers' ability to pay.
                                       48
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The Mortgage Bankers Association survey reported that the percentage of
delinquent mortgage loans at the end of 2019 in Alaska was 2.9%. This increased
to 6.2% at the end of 2020 after the effects of COVID-19 impacted jobs. In the
first quarter of 2021, it has improved to 5.4% in Alaska. According to the
survey, the comparable delinquency rate for the entire country remains higher
than Alaska at 6.1% in the first quarter of 2021.
According to the Alaska Multiple Listing Services, the average sales price of a
single family home in Anchorage rose 5.9% in 2020 to $396,779. This is following
increases of 0.5% and 2.3% in 2019 and 2018, respectively. Average sales prices
in the Matanuska Susitna Borough rose 9.9% in 2020, continuing a decade of
consecutive price gains. These two markets represent where the vast majority of
the Bank's residential building activity occurs. The average sales price for the
first six months of 2021 is 8% higher in Anchorage and 14.8% higher in the
Matanuska Susitna Borough than the 12 month average of 2020.
The number of units sold in Anchorage was up significantly in 2020 by 19.5%,
climbing from 2,719 homes sold in 2019 to 3,250 last year as reported by the
Alaska Multiple Listing Services. The main difference was a record number of
sales occurred in the last quarter of the year, when sales activity typically
declines in the winter. The Matanuska Susitna Borough also had strong sales
activity, up 9.7% in 2020 to 2,135 units sold compared to 1,946 in 2019. The
Matanuska Susitna Borough also had stronger than normal sales in the second half
of 2020. In the first six months of 2021 there have been 1,567 home sales in
Anchorage, or 30.3% more than in the first six months of 2020. The Matanuska
Susitna Borough had 998 sales in the first half of 2021, an increase of 25.2%
over the same time period in 2020.
We believe that the low interest rate environment has been a major factor in the
increase in home sales. According to the Federal Reserve Bank of St. Louis, the
average 30 year fixed rate mortgage in the U.S. hit an all-time record low last
year. Rates began 2020 at 3.7% in the first week of January and fell one percent
to 2.7% by the end of the year. Rates began to rise in the first quarter of 2021
and finished March at 3.2%. However, in the second quarter of 2021 they declined
to slightly under 3%.
COVID-19 Issues:
•Industry Exposure: Northrim has identified various industries that may be
adversely impacted by the COVID-19 pandemic and the significant decline in oil
prices. 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 June 30, 2021 are being impacted: Healthcare
(6%), Tourism (5%), Oil and Gas (4%), Aviation (non-tourism) (4%),
Accommodations (2%), Retail (2%), Fishing (3%), and Restaurants (3%). The
Company's exposure as a percent of the total loan portfolio excluding U.S. Small
Business Administration ("SBA") PPP loans as of June 30, 2021 are: Healthcare
(8%), Tourism (7%), Oil and Gas (5%), Aviation (non-tourism) (5%),
Accommodations (3%), Retail (3%), Fishing (3%), and Restaurants (3%).

                                       49
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•Customer Accommodations: The Company has implemented several forms of
assistance to help our customers in the event that they experience financial
hardship as a result of COVID-19 in addition to our participation in PPP
lending. The provisions of the CARES Act included an election to not apply the
guidance on accounting for certain troubled debt restructurings related to
COVID-19 and allow certain accommodations to borrowers. These accommodations
include interest only and deferral options on loan payments, as well as the
waiver of various fees related to loans, deposits and other services. The
Company has elected to adopt these provisions of the CARES Act. The outstanding
principal balance of loan modifications due to the impacts of COVID-19 were as
follows:
                  Loan Modifications due to COVID-19 as of June 30, 2021
     (Dollars in thousands)       Interest Only    Full Payment Deferral     Total
     Portfolio loans               $75,613                $7,440             $83,053
     Number of modifications            23                     1                  24


                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


Of the $83.1 million and 24 loan modifications as of June 30, 2021,
approximately $64.0 million and 22 loans have entered into a second
modification.
•Branch Operations: As of June 30, 2021, no branch operations are limited as a
result of COVID-19, while a number of customer and employee safety measures
continue to be implemented.

•Remote Workers: As of June 30, 2021, approximately 31% of the Company's
employees are working remotely either on a full- or part-time basis directly due
to the pandemic caused by COVID-19. These employees primarily hold non-customer
facing positions within the Company. Prior to the pandemic, less than 8% of the
Company's employees worked remotely. The increase in the number of employees
that work remotely has had no material impact on the Company's operations.

•Growth and Paycheck Protection Program:
•Over the last fifteen months, Northrim funded a total of nearly 5,800 PPP loans
totaling $612.6 million to both existing and new customers. Of this amount, 745
loans totaling $33 million were originated during the second quarter of 2021 and
2,125 loans totaling $204.0 million were originated during the first quarter of
2021, through the second round of PPP funding.
•As of June 30, 2021, PPP has resulted in 2,340 new customers totaling $40
million in non-PPP loans, and $83 million in new deposit balances.
•Management estimates that we funded approximately 24% of the number and 32% of
the value of all Alaska PPP second round loans as of June 30, 2021.
•As of June 30, 2021, Northrim customers had received forgiveness through the
SBA on 2,321 PPP loans totaling $303 million, of which 617 PPP loans totaling
$133 million were forgiven in the second quarter of 2021, and 1,167 PPP loans
totaling $105 million were forgiven in the first quarter of 2021. Of the PPP
loans forgiven in the second quarter of 2021, 81 loans totaling $2.2 million
related to PPP round two.
•The Company initially utilized the Federal Reserve Bank's Paycheck Protection
Program Liquidity Facility ("PPPLF") to fund PPP loans, but paid back those
funds in full during the second quarter of 2020 and has since funded the SBA PPP
loans through core deposits and maturity of long-term investments.
                                       50
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Highlights and Summary of Performance - Second Quarter of 2021
The Company reported net income and diluted earnings per share of $8.3 million
and $1.33, respectively, for the second quarter of 2021 compared to net income
and diluted earnings per share of $9.9 million and $1.52, respectively, for the
second quarter of 2020. The Company reported net income and diluted earnings per
share of $20.5 million and $3.27, respectively, for the first six months of 2021
compared to $10.9 million and $1.68, respectively, for the same period in 2020.
The decrease in net income for the three-month period ending June 30, 2021
compared to the same period last year is primarily attributable to a decrease in
net income in the Home Mortgage Lending segment, as a result of decreased
production. The increase in net income for the six-month period ending June 30,
2021 compared to the same period last year is attributable to increases in net
income in the Home Mortgage Lending segment, as a result of increased production
in the first quarter of 2021 compared to 2020, and increased net income in the
Community Banking segment mostly due to fee income from PPP loans and a
reduction in the provision for credit losses.
•Total revenue in the second quarter of 2021, which includes net interest income
plus other operating income, decreased 5% to $33.3 million from $35.0 million in
the second quarter a year ago, primarily due to a $3.9 million decrease in
mortgage banking income which was only partially offset by a $1.7 million
increase in net interest income.
•Net interest income increased 10% to $19.2 million in the second quarter of
2021 compared to the same period in 2020 mainly due to increased loan balances
and fees on PPP loans.
•Net interest margin decreased to 3.48% in the second quarter of 2021 as
compared to 3.98% in the second quarter a year ago primarily due to lower
interest rates and a change in the mix of earning assets. These decreases were
only partially offset by fees on PPP loans.
•The Company booked a benefit for credit losses of $427,000 for the three-month
period ending June 30, 2021, compared to a provision of $404,000 in the same
period in 2020. The provision for the current quarter was recorded using the
CECL accounting standard and reflects expected lifetime credit losses on loans
and off-balance sheet unfunded loan commitments. The decrease in the provision
for loan credit loss in the second quarter of 2021 compared to the same quarter
in 2020 is primarily the result of improvement in economic assumptions used to
estimate lifetime credit losses.
•The Company paid cash dividends of $0.37 per common share in the second quarter
of 2021, up 9% from $0.34 in the second quarter of 2020.
•At June 30, 2021, the capital ratios of the Company and Northrim Bank (the
"Bank") were well in excess of all regulatory requirements. During the second
quarter of 2021, there were no shares repurchased under the previously announced
share repurchase program.

Other financial measures are shown in the table below:

                                                       Three Months Ended June 30,           Six Months Ended June 30,
                                                         2021               2020              2021              2020
Return on average assets, annualized                         1.42  %            2.04  %           1.80  %           1.23  %
Return on average shareholders' equity,
annualized                                                  14.26  %           19.44  %          17.68  %          10.65  %
Dividend payout ratio                                       27.80  %           22.11  %          22.57  %          40.35  %


Credit Quality
Nonperforming assets: Nonperforming assets, net of government guarantees at
June 30, 2021 increased $1.5 million, or 9% to $17.8 million as compared to
$16.3 million at December 31, 2020. OREO, net of government guarantees,
decreased $216,000 to $5.8 million at June 30, 2021 as compared to $6.0 million
at December 31, 2020 due to the sale of one property in the second quarter of
2021 which was only partially offset by the addition of one OREO property in the
first quarter of 2021. Nonperforming loans, net of government guarantees
increased $2.0 million, or 20% to $12 million as of June 30, 2021 from $10
million as of December 31, 2020, primarily due to the addition of two
relationships in the first three months of 2021 which were only partially offset
by payoffs and paydowns in the second quarter of 2021. $9.5 million, or 54% of
nonperforming assets at June 30, 2021, are nonaccrual loans related to six
commercial relationships. While it is too early to determine the effect that the
COVID-19 pandemic will ultimately have on our non-performing assets, significant
increases may occur in subsequent quarters.

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

                                                                                                                   Writedowns                                  Transfers to
                                     Balance at March 31,                                                         /Charge-offs                              Performing Status
(In Thousands)                               2021             Additions this quarter    Payments this quarter      this quarter      Transfers to OREO         this quarter       Sales this quarter    Balance at June 30, 2021

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

Other real estate owned guaranteed
by government                                   (1,279)                    -                        -                      -                    -                      -                     -                   (1,279)

Total nonperforming assets,

  net of government guarantees                 $19,590                  $173                  ($1,136)                 ($110)                  $-                     $-                 ($715)                 $17,802


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

Nonperforming loans                            $15,074                $1,563                    ($773)                 ($804)                 ($695)                      $-                   $-                  $14,365
Nonperforming loans guaranteed by
government                                      (1,671)                  (54)                      90                      -                      -                        -                    -                   (1,635)
  Nonperforming loans, net                      13,403                 1,509                     (683)                  (804)                  (695)                       -                    -                   12,730
Other real estate owned                          7,205                     -                        -                      -                      -                        -                    -                    7,205
Repossessed assets                                 231                   695                       (7)                     -                      -                        -                    -                      919
Nonperforming purchased receivables                  -                 1,226                        -                      -                      -                        -                    -                    1,226
Other real estate owned guaranteed
by government                                   (1,279)                    -                        -                      -                      -                        -                    -                   (1,279)

Total nonperforming assets,

  net of government guarantees                 $19,560                $3,430                    ($690)                 ($804)                 ($695)                      $-                   $-                  $20,801


Potential problem loans: Potential problem loans are loans which are currently
performing in accordance with contractual terms but that have developed negative
indications that the borrower may not be able to comply with present payment
terms and which may later be included in nonaccrual, past due, or impaired
loans. These loans are closely monitored and their performance is reviewed by
management on a regular basis. At June 30, 2021, management had identified
potential problem loans of $5.4 million as compared to potential problem loans
of $6.1 million at December 31, 2020. The decrease in potential problem loans
from December 31, 2020 to June 30, 2021 is 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 in the first six months of 2021
which were only partially offset by additions to potential problem loans in the
first six months of 2021.
Troubled debt restructurings ("TDRs"): TDRs are those loans for which
concessions, including the reduction of interest rates below a rate otherwise
available to that borrower, have been granted due to the borrower's weakened
financial condition. Interest on TDRs will be accrued at the restructured rates
when it is anticipated that no loss of original principal will occur, and the
interest can be collected, which is generally after a period of six months. The
Company had $2.3 million in loans classified as TDRs that were performing and
$3.9 million in TDRs included in nonaccrual loans at June 30, 2021 for a total
of approximately $6.2 million. There are $2.5 million in government guarantees
associated with TDRs, so total TDRs, net of government guarantees, are $3.8
million at June 30, 2021. At December 31, 2020 there were $832,000 in loans
classified as TDRs, net of government guarantees that were performing and $4.5
million in TDRs included in nonaccrual loans for a total of $5.3 million. See
Note 4 of the Notes to Consolidated Financial Statements included in Item 1 of
this report for further discussion of TDRs.
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RESULTS OF OPERATIONS
Income Statement

Net Income

  Net income for the second quarter of 2021 decreased $1.6 million to $8.3
million as compared to $9.9 million for the same period in 2020. The decrease in
net income is attributable to a $2.3 million decrease in net income in the Home
Mortgage Lending segment, which is primarily due to lower production that was
only partially offset by a $662,000 increase in net income in the Community
Banking segment. The increase in net income in the Community Banking segment in
the three months ended June 30, 2021, as compared to the same period a year ago
is primarily due an increase in net interest income from PPP fees and a decrease
in the provision for credit losses, and these changes were only partially offset
by an increase in the provision for income taxes.
Net income for the first six months of 2021 increased $9.6 million to $20.5
million as compared to $10.9 million for the same period in 2020. The increase
in net income is attributable to a $7.0 million increase in net income in the
Community Banking segment due an increase in net interest income from PPP fees
and a decrease in the provision for credit losses, and similar to the second
quarter comparison discussed above, these changes were only partially offset by
an increase in the provision for income taxes. Net income in the Home Mortgage
Lending segment increased $2.6 million in the first six months of 2021 as
compared to the same period in 2020, primarily due to increases in production
and net mortgage servicing income.

Net Interest Income/Net Interest Margin

  Net interest income for the second quarter of 2021 increased $1.7 million, or
10%, to $19.2 million as compared to $17.5 million for the second quarter of
2020. Net interest margin decreased 50 basis points to 3.48% in the second
quarter of 2021 as compared to 3.98% in the second quarter of 2020. Net interest
income for the first half of 2021 increased $5.5 million, or 17%, to $38.7
million as compared to $33.1 million for the first half of 2020. The increase in
net interest income in the second quarter and first six-months of 2021 compared
to the same periods of 2020 was primarily the result of higher average earning
asset balances, an increase in loan fee income due in large part to full
recognition of the deferred PPP loan fees upon loan forgiveness through the SBA,
and reduced interest expense. During the three and six-month periods ending June
30, 2021, Northrim received $133.0 million and $238 million, respectively, in
loan forgiveness through the SBA compared to none in the same periods in 2020.
Total net PPP fee income including accretion and full fee recognition upon loan
forgiveness was $2.6 million and $5.9 million during the three and six-month
periods ending June 30, 2021, respectively, compared to $1.3 million in both the
three and six-month periods ending June 30, 2020. PPP fee income for 2020
included only fee accretion. As of June 30, 2021, there was $1.0 million of net
PPP fee income from round one remaining and $10.0 million remaining from round
two for total net deferred fees on PPP loans of $11.0 million. The decrease in
net interest margin in the second quarter and first six months of 2021 as
compared to the same periods a year ago was primarily the result of lower
interest rates and a less favorable mix of earning assets due to significant
increases in short-term investments, which is the lowest yielding type of
earning asset for the Company. Changes in net interest margin in the three and
six-month periods ended June 30, 2021 as compared to the same period in the
prior year are detailed below:
                                                                 Three 

Months Ended June 30, 2021

                                                                         vs. June 30, 2020
Nonaccrual interest adjustments                                                            0.01  %
Impact of SBA Paycheck Protection Program loans                                            0.22  %
Interest rates and loan fees                                                              (0.27) %
Volume and mix of interest-earning assets                                                 (0.46) %
Change in net interest margin                                                             (0.50) %


                                                                  Six Months Ended June 30, 2021
                                                                         vs. June 30, 2020
Nonaccrual interest adjustments                                                            0.02  %
Impact of SBA Paycheck Protection Program loans                                            0.14  %
Interest rates and loan fees                                                              (0.41) %
Volume and mix of interest-earning assets                                                 (0.21) %
Change in net interest margin                                                             (0.46) %


                                       53
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Components of Net Interest Margin
The following table compares average balances and rates as well as margins on
earning assets for the three-month periods ended June 30, 2021 and 2020:
(Dollars in Thousands)                                                                                                  Three Months Ended June 30,
                                                                                                                               Interest income/
                                                       Average Balances                            Change                           expense                         Change                         Average Yields/Costs
                                                 2021                    2020                   $              %           2021              2020                $             %            2021            2020          Change
Loans1,2                                          $1,541,701              $1,342,717           $198,984         15  %    $18,200             $16,584            $1,616          10  %           4.74  %       4.97  %       (0.23) %
Loans held for sale                                  111,228                 111,475               (247)         -  %        763                 870              (107)        (12) %           2.75  %       3.14  %       (0.39) %

Short-term investments3                              208,067                  51,448            156,619        304  %         61                  31                30          97  %           0.12  %       0.24  %       (0.12) %
Long-term investments4                               354,260                 256,500             97,760         38  %      1,229               1,519              (290)        (19) %           1.39  %       2.38  %       (0.99) %
  Total investments                                  562,327                 307,948            254,379         83  %      1,290               1,550              (260)        (17) %           0.92  %       2.02  %       (1.10) %
  Interest-earning assets                          2,215,256               1,762,140            453,116         26  %     20,253              19,004             1,249           7  %           3.67  %       4.34  %       (0.67) %
Nonearning assets                                    173,164                 186,583            (13,419)        (7) %
     Total                                        $2,388,420              $1,948,723           $439,697         23  %

Interest-bearing demand                             $561,570                $379,851           $181,719         48  %       $128                $156              ($28)        (18) %           0.09  %       0.17  %       (0.08) %
Savings deposits                                     311,929                 246,379             65,550         27  %        126                 176               (50)        (28) %           0.16  %       0.29  %       (0.13) %
Money market deposits                                256,215                 214,532             41,683         19  %        112                 164               (52)        (32) %           0.18  %       0.31  %       (0.13) %
Time deposits                                        186,315                 176,782              9,533          5  %        513                 835              (322)        (39) %           1.10  %       1.90  %       (0.80) %
  Total interest-bearing deposits                  1,316,029               1,017,544            298,485         29  %        879               1,331              (452)        (34) %           0.27  %       0.53  %       (0.26) %
Borrowings                                            25,032                  73,349            (48,317)       (66) %        182                 216               (34)        (16) %           2.92  %       1.18  %        1.74  %
  Total interest-bearing liabilities               1,341,061               1,090,893            250,168         23  %      1,061               1,547              (486)        (31) %           0.32  %       0.57  %       (0.25) %
Demand deposits and other
noninterest-bearing liabilities                      809,971                 652,989            156,982         24  %
Equity                                               237,388                 204,841             32,547         16  %
     Total                                        $2,388,420              $1,948,723           $439,697         23  %
Net interest income                                                                                                      $19,192             $17,457            $1,735          10  %
Net interest margin                                                                                                                                                                             3.48  %       3.98  %       (0.50) %
Average loans to average
interest-earning assets                                69.59  %                76.20  %
Average loans to average total deposits                74.01  %                82.88  %
Average non-interest deposits to
average total deposits                                 36.82  %                37.19  %
Average interest-earning assets to
average interest-bearing liabilities                  165.19  %             

161.53 %




1Interest income includes loan fees. Loan fees recognized during the period and
included in the yield calculation totaled $3.4 million and $2.0 million in the
second quarter of 2021 and 2020, respectively.
2Nonaccrual loans are included with a zero effective yield. Average nonaccrual
loans included in the computation of the average loan balances were $13.8
million and $14.6 million in the second quarter of 2021 and 2020, respectively.
3Consists of interest bearing deposits in other banks.
4Consists of investment in debt securities available for sale, equity
securities, investment securities held to maturity, and investment in Federal
Home Loan Bank stock.

                                       54
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  The following tables set forth the changes in consolidated net interest income
attributable to changes in volume and to changes in interest rates for the
three-month periods ending June 30, 2021 and 2020. Changes attributable to the
combined effect of volume and interest rate have been allocated proportionately
to the changes due to volume and the changes due to interest rates:
(In Thousands)                      Three Months Ended June 30, 2021 vs. 2020
                                  Increase (decrease) due to
                                   Volume             Rate              Total
Interest Income:
  Loans                           $2,362             ($746)           $1,616
  Loans held for sale                 (2)             (105)             (107)
  Short-term investments              52               (22)               30
  Long-term investments              545              (835)             (290)
     Total interest income        $2,957           ($1,708)           $1,249

Interest Expense:
  Interest-bearing deposits         $322             ($774)            ($452)
  Borrowings                          27               (61)              (34)
     Total interest expense         $349             ($835)            ($486)


                                       55
--------------------------------------------------------------------------------


The following table compares average balances and rates as well as margins on
earning assets for the six-month periods ended June 30, 2021 and 2020:
(Dollars in Thousands)                                                                                                   Six Months Ended June 30,
                                                                                                                               Interest income/
                                                       Average Balances                            Change                           expense                         Change                         Average Yields/Costs
                                                 2021                    2020                   $              %           2021              2020                $             %            2021            2020          Change
Loans1,2                                          $1,517,438              $1,200,870           $316,568         26  %    $36,842             $31,503            $5,339          17  %           4.90  %       5.28  %       (0.38) %
Loans held for sale                                  112,897                  80,925             31,972         40  %      1,545               1,310               235          18  %           2.76  %       3.26  %       (0.50) %

Short-term investments3                              164,712                  59,762            104,950        176  %         99                 267              (168)        (63) %           0.12  %       0.90  %       (0.78) %
Long-term investments4                               326,671                 270,284             56,387         21  %      2,363               3,263              (900)        (28) %           1.46  %       2.43  %       (0.97) %
  Total investments                                  491,383                 330,046            161,337         49  %      2,462               3,530            (1,068)        (30) %           1.01  %       2.15  %       (1.14) %
  Interest-earning assets                          2,121,718               1,611,841            509,877         32  %     40,849              36,343             4,506          12  %           3.88  %       4.53  %       (0.65) %
Nonearning assets                                    171,870                 180,316             (8,446)        (5) %
     Total                                        $2,293,588              $1,792,157           $501,431         28  %

Interest-bearing demand                             $516,228                $350,308           $165,920         47  %       $246                $320              ($74)        (23) %           0.10  %       0.18  %       (0.08) %
Savings deposits                                     314,709                 238,009             76,700         32  %        255                 413              (158)        (38) %           0.16  %       0.35  %       (0.19) %
Money market deposits                                251,140                 210,288             40,852         19  %        225                 421              (196)        (47) %           0.18  %       0.40  %       (0.22) %
Time deposits                                        179,778                 173,096              6,682          4  %      1,102               1,661              (559)        (34) %           1.24  %       1.93  %       (0.69) %
  Total interest-bearing deposits                  1,261,855                 971,701            290,154         30  %      1,828               2,815              (987)        (35) %           0.29  %       0.58  %       (0.29) %
Borrowings                                            25,066                  47,769            (22,703)       (48) %        336                 381               (45)        (12) %           2.70  %       1.60  %        1.10  %
  Total interest-bearing liabilities               1,286,921               1,019,470            267,451         26  %      2,164               3,196            (1,032)        (32) %           0.34  %       0.63  %       (0.29) %
Demand deposits and other
noninterest-bearing liabilities                      772,548                 566,284            206,264         36  %
Equity                                               234,119                 206,403             27,716         13  %
     Total                                        $2,293,588              $1,792,157           $501,431         28  %
Net interest income                                                                                                      $38,685             $33,147            $5,538          17  %
Net interest margin                                                                                                                                                                             3.68  %       4.14  %       (0.46) %
Average loans to average
interest-earning assets                                71.52  %                74.50  %
Average loans to average total deposits                76.27  %                80.62  %
Average non-interest deposits to
average total deposits                                 36.57  %                34.77  %
Average interest-earning assets to
average interest-bearing liabilities                  164.87  %             

158.11 %



1Interest income includes loan fees. Loan fees recognized during the period and
included in the yield calculation totaled $7.6 million and $2.9 million in the
first six months of 2021 and 2020, respectively.
2Nonaccrual loans are included with a zero effective yield. Average nonaccrual
loans included in the computation of the average loan balances were $12.2
million and $14.7 million in the first six months of 2021 and 2020,
respectively.
3Consists of interest bearing deposits in other banks.
4Consists of investment in debt securities available for sale, equity
securities, investment securities held to maturity, and investment in Federal
Home Loan Bank stock.

                                       56
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  The following tables set forth the changes in consolidated net interest income
attributable to changes in volume and to changes in interest rates for the
six-month periods ending June 30, 2021 and 2020. Changes attributable to the
combined effect of volume and interest rate have been allocated proportionately
to the changes due to volume and the changes due to interest rates:
(In Thousands)                    Six Months Ended June 30, 2021 vs. 2020
                                  Increase (decrease) due to
                                   Volume             Rate           Total
Interest Income:
  Loans                           $9,724           ($4,385)           $5,339
  Loans held for sale                386              (151)              235
  Short-term investments             500              (668)             (168)
  Long-term investments            1,697            (2,597)             (900)
     Total interest income       $12,307           ($7,801)           $4,506

Interest Expense:
  Interest-bearing deposits       $1,745           ($2,732)            ($987)
  Borrowings                        (445)              400               (45)
     Total interest expense       $1,300           ($2,332)          ($1,032)



  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 Item 1 of this report for detailed discussion
regarding ACL methodologies for loans, available for sale debt securities, held
to maturity securities, loans held for investment, unfunded commitments, and
purchased receivables.
The following table presents the major categories of credit loss expense:
                                                      Three Months Ended June 30,                Six Months Ended June 30,
(In Thousands)                                        2021                  2020                   2021                2020
Credit loss expense on loans held for
investment                                             ($161)                 $404                ($2,066)               $2,464
Credit loss expense on unfunded commitments             (266)                    -                    151                     -
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                              ($427)                 $404                ($1,915)               $2,464


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 two
different methodologies were 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 for the three and six-month periods ending June 30, 2021 as
compared to the same periods in 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.
                                       57
--------------------------------------------------------------------------------

Other Operating Income

  Other operating income for the three-month period ended June 30, 2021,
decreased $3.4 million, or 19%, to $14.1 million as compared to $17.5 million
for the same period in 2020, primarily due to a $3.9 million decrease in
mortgage banking income in the second quarter of 2021 compared to the same
quarter in 2020. The decrease in mortgage banking income in the three-month
period ended June 30, 2021 as compared to the same period in 2020 was primarily
due to decreased refinance activity due to changes in the mortgage interest
rates that was only partially offset by increased mortgages for home purchases.
Additionally, there was a decrease in purchased receivable income due to
customers reportedly using PPP funds instead of selling receivables. These
decreases were only partially offset by an increase in bankcard fees due to
lower transaction volume in the second quarter of 2020 resulting from quarantine
restrictions related to the COVID-19 pandemic, an increase in service charges on
deposits due to customer accommodations related to the impacts of COVID-19 that
lowered service changes on deposits in the second quarter of 2020, and an
increase in interest rate swap income.
Other operating income for the six-month period ended June 30, 2021, increased
$6.1 million, or 25%, to $30.0 million as compared to $24.0 million for the same
period in 2020, primarily due to a $5.1 million increase in mortgage banking
income in the second half of 2021 compared to the same period in 2020. The
increase in mortgage banking income in the six-month period ended June 30, 2021
as compared to the same period in 2020 was primarily due to increased home
purchase activity that was only partially offset by lower refinance activity due
to changes in the mortgage interest rates. Additionally, there was a $94,000
unrealized gain on marketable securities recognized in the first half of 2021
compared to a $722,000 unrealized loss in the same period in 2020. Bankcard
fees, service charges on deposits, and interest rate swap income also increased
in the first half of 2021 compared to 2020 due to the cessation of COVID-19
quarantine restrictions and higher transaction volume as compared to the same
period in 2020. These increases were only partially offset by a decrease in
purchased receivable income due to customers reportedly using PPP funds instead
of selling receivables.
Other Operating Expense
  Other operating expense for the second quarter of 2021 decreased $338,000, or
1%, to $22.3 million as compared to the same period in 2020 primarily due to
lower salaries and other personnel expense related to mortgage banking
operations, which fluctuate with production volumes. This decrease was only
partially offset by an increase in occupancy expense as a result of
miscellaneous repairs and maintenance and tenant improvements at several of the
Company's locations and data processing expense.
Other operating expense for the first half of 2021 increased $2.2 million, or
5%, to $43.7 million from $41.5 million for the same period in 2020 primarily
due to higher salaries and other personnel expense related to mortgage banking
operations, which fluctuate with production volumes. Additionally, data
processing and occupancy expenses increased in the first half of 2021 as
compared to 2020 due to miscellaneous repairs and maintenance, IT maintenance
and services, and tenant improvements at several of the Company's locations.
Income Taxes
  For the second quarter and first half of 2021, Northrim recorded a higher
effective tax rate as compared to the same periods in 2020 as a result of a
decrease in tax credits and tax exempt interest income as a percentage of
pre-tax income in 2021, as well as the reversal of a $454,000 accrual of tax
expense in the second quarter of 2020. In the second quarter of 2021, Northrim
recorded $3.1 million in state and federal income tax expense for an effective
tax rate of 26.9%, compared to $3.4 million, or 21.7% in the first quarter of
2021 and $2.0 million, or 16.9% in the second quarter a year ago. For the first
half of 2021, Northrim recorded $6.4 million in state and federal income tax
expense, for an effective tax rate of 23.9% compared to $2.3 million and 17.1%
for the same period in 2020.



FINANCIAL CONDITION
  Balance Sheet Overview
Portfolio Investments
Portfolio investments, which include investment securities available for sale,
investment securities held to maturity, and marketable equity securities, at
June 30, 2021 increased 38%, or $100.1 million, to $366.8 million from $266.7
million at December 31, 2020 as proceeds from an increase in deposits that were
not lent out were invested in the first six months of 2021.
                                       58
--------------------------------------------------------------------------------

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

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