NORTHRIM BANCORP, INC. This discussion should be read in conjunction with the unaudited consolidated financial statements ofNorthrim 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 endedDecember 31, 2020 . Except as otherwise noted, references to "we", "our", "us" or "the Company" refer toNorthrim 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 recentU.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, theAlaska 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 endedDecember 31, 2020 , as well as in our other filings with theSecurities 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 endedDecember 31, 2020 . TheSEC 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 ofJanuary 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. 46 -------------------------------------------------------------------------------- Allowance for Credit Losses Policy: The Company'sExecutive Loan Management Committee andAsset 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 forecastsAlaska 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 theAlaska 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 ofAlaska 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. 47 -------------------------------------------------------------------------------- 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
TheAlaska economy began to recover from the effect of the pandemic in the fourth quarter of 2020, andAlaska'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 theFederal Bureau of Economic Analysis ("BEA").Alaska's reduction was 4.9% and the worst state wasHawaii at 8%. Both states were more negatively affected by travel restrictions reducing tourism. TheU.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 inAlaska , helping place it ninth fastest growing for the quarter of the 50U.S. states.Alaska's real GSP growth continued in the first quarter of 2021, increasing 5.4% on an annualized basis, according to aJune 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 theU.S. in 2020 increased 6.1% andAlaska rose 3.1%. Per capita income in theU.S. was$59,729 compared to$64,780 inAlaska , according to the BEA. This placesAlaska 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 inAlaska 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. InAlaska , 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. AlaskaNorth 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 theMortgage 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 thanAlaska 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 -------------------------------------------------------------------------------- TheMortgage Bankers Association survey reported that the percentage of delinquent mortgage loans at the end of 2019 inAlaska 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% inAlaska . According to the survey, the comparable delinquency rate for the entire country remains higher thanAlaska 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 inAnchorage 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 inAnchorage and 14.8% higher in the Matanuska Susitna Borough than the 12 month average of 2020. The number of units sold inAnchorage 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 inAnchorage , 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 theFederal Reserve Bank of St. Louis , the average 30 year fixed rate mortgage in theU.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 ofJune 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 excludingU.S. Small Business Administration ("SBA") PPP loans as ofJune 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 -------------------------------------------------------------------------------- •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 ofJune 30, 2021 , approximately$64.0 million and 22 loans have entered into a second modification. •Branch Operations: As ofJune 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 ofJune 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 ofJune 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 ofJune 30, 2021 . •As ofJune 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 theFederal 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 -------------------------------------------------------------------------------- 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 endingJune 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 endingJune 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 endingJune 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. •AtJune 30, 2021 , the capital ratios of the Company andNorthrim 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.
51
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The following table summarizes nonperforming asset activity for the
three-month periods ending
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 atJune 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. AtJune 30, 2021 , management had identified potential problem loans of$5.4 million as compared to potential problem loans of$6.1 million atDecember 31, 2020 . The decrease in potential problem loans fromDecember 31, 2020 toJune 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 atJune 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 atJune 30, 2021 . AtDecember 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. 52 -------------------------------------------------------------------------------- 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 endedJune 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 endingJune 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 endingJune 30, 2021 , respectively, compared to$1.3 million in both the three and six-month periods endingJune 30, 2020 . PPP fee income for 2020 included only fee accretion. As ofJune 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 endedJune 30, 2021 as compared to the same period in the prior year are detailed below: Three
Months Ended
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-------------------------------------------------------------------------------- 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 endedJune 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 inFederal Home Loan Bank stock. 54 -------------------------------------------------------------------------------- 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 endingJune 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 endedJune 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 inFederal Home Loan Bank stock. 56 -------------------------------------------------------------------------------- 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 endingJune 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 effectiveJanuary 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 endingJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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, atJune 30, 2021 increased 38%, or$100.1 million , to$366.8 million from$266.7 million atDecember 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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