NORTHRIM BANCORP INC’S MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)



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, supply-chain constraints,
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, that affect our estimates 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 ACL reflects expected losses over the remaining contractual life of the assets. The contractual term does not take into account any extensions, renewals or modifications unless the Company has identified a debt restructuring in expected difficulty.

In addition to the quantitative part of the ACL derived from either the DCF method or the weighted average residual life method, the Company also takes into account the effects of the following qualitative factors in its calculation of expected losses in the portfolio of loans:

•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 DCF, 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 DCF. 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 is slowly recovering in 2021 from the effect of the global
pandemic. Management believes that rising oil prices, an improvement in tourism,
and strong liquidity levels in the private sector from government stimulus
programs have helped Alaska rebound from the economic lows seen in 2020. The
housing market remains strong with average sales prices and the number of units
sold up significantly, while home foreclosure and delinquency rates continue to
improve. Rising prices are starting to stress affordability levels for homes and
supply chain disruptions are expected to moderate construction activity in the
short run.
The Alaska Department of Labor ("DOL") has released data through August of 2021.
They report total payroll jobs in Alaska have grown by 13,600 compared to August
of 2020. This is a total of 308,900 jobs or an improvement of 4.4% 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 5,600 jobs between August of 2020 and
August of 2021, an increase of 19.9%. However, this is still 10,800 jobs less
than August of 2019. Trade, Transport, and Utilities have added 14.3% more jobs
than August of 2020 and Manufacturing, which is primarily seafood processing, is
11.3% higher over the last 12 months. Oil and Gas direct jobs continued to
decline in the last 12 months, down 400 jobs compared to August of 2020 and down
3,300 jobs from August of 2019. Education and Health Care are the only private
sector industries to surpass the August 2019 job levels in August of 2021
according to the DOL report.
Alaska's revised Gross State Product ("GSP") for 2020 was $49.8 billion,
compared to $54.5 billion in 2019, according to the Federal Bureau of Economic
Analysis ("BEA"). The national average for the second quarter was a 6.7%
increase according to an October 1, 2021 BEA report.

Alaska's seasonally adjusted personal income for the second quarter of 2021 was
$47.7 billion compared to $48.5 billion for the second quarter of 2020,
according to the BEA. There was a tremendous loss of jobs in 2020 that reduced
wage earnings last year. This was more than compensated for by a significant
amount of government transfer payments. Alaska, like the rest of the U.S.,
experienced a decline in government transfer payments in the second quarter of
2021. However, wage earnings are growing here and across the country as a
recovery in jobs continues in 2021.

Alaska North Slope ("ANS") crude oil began 2020 at $65.48 a barrel. 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. ANS prices continued to rise
throughout 2021 and averaged over $70 a barrel in June, July and August. The
monthly average for September has not yet been posted by the Alaska Department
of Revenue, but the daily spot price was $82.94 on October 8, 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 slightly to
0.41% and again in the second quarter to 0.36%. The comparable national average
rate was higher than Alaska at 0.51% in the second quarter of 2021. We believe
that the foreclosure rates are somewhat misleading because the recently ended
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.

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 improved to 5.4% in Alaska and again in the second
quarter to 5.1%. According to the survey, the comparable delinquency rate for
the entire country remains higher than Alaska at 5.5% in the second quarter of
2021.

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According to the Alaska Multiple Listing Services, the average sales price of a
single family home in Anchorage rose 5.8% in 2020 to $396,741. In the first nine
months of 2021, the average sales price has increased 7.5% to $426,445. Average
sales prices in the Matanuska Susitna Borough rose 9.9% in 2020 to $301,049,
continuing a decade of consecutive price gains. In the first nine months of 2021
prices have risen 15.1% to $346,353. These two markets represent where the vast
majority of the Bank's residential lending activity occurs.

The number of units sold in Anchorage was up significantly in 2020 by 19.6%,
climbing from 2,719 homes sold in 2019 to 3,251 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. Through the third quarter of 2021 there have been 2,647 home sales in
Anchorage, or 15.9% more than in the first nine months of 2020. The Matanuska
Susitna Borough had 1,719 sales through the third quarter of 2021, an increase
of 13.2% over the same time period in 2020.

We believe that the low interest rate environment has been a major factor.
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 slightly in 2021 and finished the third quarter at
3%.

COVID-19 Issues:
•Industry Exposure: Northrim has identified various industries that may be
adversely impacted by the COVID-19 pandemic and the volatility in oil prices
that has occurred over the last 18 months. 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
September 30, 2021 are being impacted: Healthcare (7%), Tourism (6%), Oil and
Gas (4%), Aviation (non-tourism) (4%), Accommodations (4%), Retail (3%), Fishing
(4%), 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 September 30, 2021 are: Healthcare (8%), Tourism (7%), Oil and Gas (5%),
Aviation (non-tourism) (5%), Accommodations (4%), Retail (3%), Fishing (5%), and
Restaurants (3%).

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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 number of
loans with modifications has decreased since December 31, 2020, with
approximately 82% of the modifications at September 30, 2021, representing three
relationships. The outstanding principal balance of loan modifications due to
the impacts of COVID-19 for the periods indicated were as follows:
               Loan Modifications due to COVID-19 as of September 30, 2021
  (Dollars in thousands)       Interest Only    Full Payment Deferral        Total
  Portfolio loans               $49,888                $7,533             $57,421
  Number of modifications            21                     3                  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


All 24 loan modifications totaling $57.4 million as of September 30, 2021, have
entered into more than one modification.
•Branch Operations: As of September 30, 2021, branch operations have returned to
pre-pandemic levels, while a number of customer and employee safety measures
continue to be implemented.

•Remote Workers: As of September 30, 2021, approximately 51% 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 18 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. No additional PPP loans were
originated in the third quarter of 2021.
•As of September 30, 2021, PPP has resulted in 2,341 new customers totaling
$68.0 million in non-PPP loans, and $125.6 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 September 30, 2021, Northrim customers had received forgiveness through
the SBA on 3,439 PPP loans totaling $405.8 million, of which 1,118 PPP loans
totaling $102.4 million were forgiven in the third quarter of 2021, and 617 PPP
loans totaling $133 million were forgiven in the second quarter of 2021. Of the
PPP loans forgiven in the third quarter of 2021, 578 loans totaling $35.2
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.
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Highlights and Summary of Performance - Third Quarter of 2021
The Company reported net income and diluted earnings per share of $8.9 million
and $1.42, respectively, for the third quarter of 2021 compared to net income
and diluted earnings per share of $11.9 million and $1.84, respectively, for the
third quarter of 2020. The Company reported net income and diluted earnings per
share of $29.4 million and $4.69, respectively, for the first nine months of
2021 compared to $22.8 million and $3.52, respectively, for the same period in
2020. The decrease in net income for the three-month period ending September 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 nine-month period
ending September 30, 2021 compared to the same period last year is attributable
to increased net income in the Community Banking segment mostly due to fee
income from PPP loans and a reduction in the ACL. This increase in the Community
Banking segment was only partially offset by a decrease in net income in the
Home Mortgage Lending segment, which resulted primarily from decreased
production in the second and third quarters of 2021 compared to 2020.
•Total revenue in the third quarter of 2021, which includes net interest income
plus other operating income, decreased 17% to $33.1 million from $39.9 million
in the third quarter a year ago, primarily due to a $8.0 million decrease in
mortgage banking income which was only partially offset by a $2.1 million
increase in net interest income. Total revenue in the first nine months of 2021
increased 5% to $101.8 million from $97.0 million compared to the same period a
year ago, primarily due to a $7.7 million increase in net interest income which
was only partially offset by a $2.9 million decrease in mortgage banking income.
The increases in net interest income in both periods in 2021 compared to the
same periods in 2020 are mainly due to increased loan balances and fees on PPP
loans.
•The Company booked a benefit for credit losses of $1.1 million for the
three-month period ending September 30, 2021, compared to a provision of
$567,000 in the same period in 2020. For the first nine months of 2021, the
Company booked a benefit for credit losses of $3.0 million compared to a
provision of $3.0 million in the same period in 2020. The provisions for both
periods in 2021 were recorded using the CECL accounting standard and reflect
expected lifetime credit losses on loans and off-balance sheet unfunded loan
commitments. The decrease in the provision for credit losses in both periods of
2021 compared to the same periods in 2020 is primarily the result of improvement
in economic assumptions used to estimate lifetime credit losses, which was only
partially offset by increases in loan balances, net of government guarantees.
•The Company paid cash dividends of $0.38 per common share in the third quarter
of 2021, up 9% from $0.35 in the third quarter of 2020.
•At September 30, 2021, the capital ratios of the Company and Northrim Bank (the
"Bank") were well in excess of all regulatory requirements. During the third
quarter of 2021, the Company repurchased 29,613 shares of its common stock under
the previously announced share repurchase program with 221,988 shares remaining
of the 313,000 authorized for repurchase.

Other financial measures are presented in the table below:

                                             Three Months Ended September 

30, nine months completed September 30,

                                                 2021                2020                 2021                2020
Return on average assets, annualized                  1.40  %             2.31  %              1.66  %             1.62  %
Return on average shareholders' equity,
annualized                                           14.47  %            22.10  %             16.57  %            14.58  %
Dividend payout ratio                                26.86  %            18.95  %             23.86  %            29.22  %


Credit Quality
Nonperforming assets: Nonperforming assets, net of government guarantees at
September 30, 2021 decreased $180,000, or 1% to $16.1 million as compared to
$16.3 million at December 31, 2020. OREO, net of government guarantees,
decreased $1.4 million to $4.6 million at September 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 and one property in the third 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 $1.4 million,
or 14% to $11.5 million as of September 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 pay downs in the
second and third quarters of 2021. $9.3 million, or 82% of nonperforming assets
at September 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 the activity of non-performing assets for the three-month periods ending September 30, 2021 and 2020.

                                                                                                                       Writedowns                                  Transfers to
                                                                                                                      /Charge-offs                              Performing Status                              Balance at
(In Thousands)                       Balance at June 30, 2021     Additions

this quarter Payments this quarter this quarter Transfers to OREO this quarter Sales this quarter September 30, 2021

Nonperforming loans                           $13,104                         $-                    ($611)                    $-                   $-                     $-                    $-                $12,493
Nonperforming loans guaranteed by
government                                     (1,096)                         -                       79                      -                    -                      -                     -                 (1,017)
  Nonperforming loans, net                     12,008                          -                     (532)                     -                    -                      -                     -                 11,476
Other real estate owned                         7,073                          -                        -                      -                    -                      -                (1,161)                 5,912

Other real estate owned guaranteed
by government                                  (1,279)                         -                        -                      -                    -                      -                     -                 (1,279)
  Total nonperforming assets,
  net of government guarantees                $17,802                         $-                    ($532)                    $-                   $-                     $-               ($1,161)               $16,109


                                                                                                                       Writedowns                                      Transfers to
                                                                                                                      /Charge-offs                                  Performing Status                              Balance at
(In Thousands)                       Balance at June 30, 2020     Additions 

this quarter Payments this quarter this quarter Transfers to OREO / REPO this quarter Sales this quarter September 30, 2020

Nonperforming loans                           $14,365                       $386                  ($1,963)                 ($141)                    $-                       $-                    $-                $12,647
Nonperforming loans guaranteed by
government                                     (1,635)                         -                       35                      -                      -                        -                     -                 (1,600)
  Nonperforming loans, net                     12,730                        386                   (1,928)                  (141)                     -                        -                     -                 11,047
Other real estate owned                         7,205                          -                        -                      -                      -                        -                  (243)                 6,962
Repossessed assets                                919                          -                        -                   (140)                     -                        -                     -                    779
Nonperforming purchased receivables             1,226                          -                     (816)                     -                      -                        -                     -                    410
Other real estate owned guaranteed
by government                                  (1,279)                         -                        -                      -                      -                        -                     -                 (1,279)

Total non-performing assets,

  net of government guarantees                $20,801                       $386                  ($2,744)                 ($281)                    $-                       $-                 ($243)               $17,919


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 September 30, 2021, management had identified
potential problem loans of $4.7 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 September 30, 2021 is primarily the result of one $3.9
million relationship moving to nonaccrual as well as pay downs and credit risk
upgrades to existing potential problem loans in the first nine months of 2021
which were only partially offset by additions to potential problem loans in the
first nine 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 $2.4 million in loans classified as TDRs that were performing and
$4.7 million in TDRs included in nonaccrual loans at September 30, 2021 for a
total of approximately $7.0 million. There are $2.4 million in government
guarantees associated with TDRs, resulting in total TDRs, net of government
guarantees, of $4.6 million at September 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 revenue

  Net income for the third quarter of 2021 decreased $3.0 million to $8.9
million as compared to $11.9 million for the same period in 2020. The decrease
in net income is attributable to a $4.9 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 $1.9 million increase in net income in the
Community Banking segment. The increase in net income in the Community Banking
segment in the three months ended September 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 nine months of 2021 increased $6.6 million to $29.4 million
as compared to $22.8 million for the same period in 2020. The increase in net
income is attributable to a $8.9 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 third 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 decreased $2.3 million in the first nine months of 2021 as
compared to the same period in 2020, primarily due to a decrease in production.

Net interest income / Net interest margin

  Net interest income for the third quarter of 2021 increased $2.1 million, or
12%, to $20.4 million as compared to $18.3 million for the third quarter of
2020. Net interest margin decreased 45 basis points to 3.45% in the third
quarter of 2021 as compared to 3.90% in the third quarter of 2020. Net interest
income for the first nine months of 2021 increased $7.7 million, or 15%, to
$59.1 million as compared to $51.4 million for the first nine months of 2020.
Net interest margin decreased 45 basis points to 3.60% in the first nine months
of 2021 as compared to 4.05% in the same period in 2020. The increase in net
interest income in the third quarter and first nine-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 nine-month periods ending
September 30, 2021, Northrim received $102.4 million and $339.4 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 $3.0 million and $8.9 million during the
three and nine-month periods ending September 30, 2021, respectively, compared
to $1.4 million and $2.7 million in the three and nine-month periods ending
September 30, 2020. PPP fee income for 2020 included only fee accretion. As of
September 30, 2021, there was $197,000 of net PPP fee income from round one
remaining and $7.9 million remaining from round two for total net deferred fees
on PPP loans of $8.1 million. The decrease in net interest margin in the third
quarter and first nine 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 nine-month periods ended September 30, 2021 as
compared to the same period in the prior year are detailed below:
                                                                  Three 

Ended months September 30,

                                                                     2021 vs. September 30, 2020
Nonaccrual interest adjustments                                                             (0.07) %
Impact of SBA Paycheck Protection Program loans                                              0.61  %
Interest rates and loan fees                                                                (0.18) %
Volume and mix of interest-earning assets                                                   (0.81) %
Change in net interest margin                                                               (0.45) %


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                                                                   Nine 

Ended months September 30,

                                                                     2021 vs. September 30, 2020
Nonaccrual interest adjustments                                                             (0.01) %
Impact of SBA Paycheck Protection Program loans                                              0.19  %
Interest rates and loan fees                                                                (0.33) %
Volume and mix of interest-earning assets                                                   (0.30) %
Change in net interest margin                                                               (0.45) %



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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 September 30, 2021 and 2020:
(Dollars in Thousands)                                                                                             Three Months Ended September 30,
                                                                                                                          Interest income/
                                                     Average Balances                         Change                           expense                         Change                         Average Yields/Costs
                                               2021                 2020                   $              %           2021              2020                $             %            2021            2020          Change
Loans1,2                                     $1,469,072              $1,465,839             $3,233          -  %    $19,173             $17,734            $1,439           8  %           5.18  %       4.81  %        0.37  %
Loans held for sale                              99,716                 122,994            (23,278)       (19) %        727                 957              (230)        (24) %           2.89  %       3.10  %       (0.21) %

Short-term investments3                         390,004                  60,504            329,500        545  %        149                  17               132         776  %           0.15  %       0.11  %        0.04  %
Long-term investments4                          389,631                 217,599            172,032         79  %      1,233               1,086               147          14  %           1.26  %       1.99  %       (0.73) %
  Total investments                             779,635                 278,103            501,532        180  %      1,382               1,103               279          25  %           0.70  %       1.58  %       (0.88) %
  Interest-earning assets                     2,348,423               1,866,936            481,487         26  %     21,282              19,794             1,488           8  %           3.60  %       4.22  %       (0.62) %
Nonearning assets                               170,317                 172,853             (2,536)        (1) %
     Total                                   $2,518,740              $2,039,789           $478,951         23  %

Interest-bearing demand                        $609,718                $409,758           $199,960         49  %       $117                $156              ($39)        (25) %           0.08  %       0.15  %       (0.07) %
Savings deposits                                326,733                 266,588             60,145         23  %        122                 168               (46)        (27) %           0.15  %       0.25  %       (0.10) %
Money market deposits                           267,723                 218,965             48,758         22  %         97                 153               (56)        (37) %           0.14  %       0.28  %       (0.14) %
Time deposits                                   176,287                 181,882             (5,595)        (3) %        331                 843              (512)        (61) %           0.74  %       1.84  %       (1.10) %
  Total interest-bearing deposits             1,380,461               1,077,193            303,268         28  %        667               1,320              (653)        (49) %           0.19  %       0.49  %       (0.30) %
Borrowings                                       24,962                  23,574              1,388          6  %        183                 180                 3           2  %           2.91  %       3.04  %       (0.13) %
  Total interest-bearing liabilities          1,405,423               1,100,767            304,656         28  %        850               1,500              (650)        (43) %           0.24  %       0.54  %       (0.30) %
Demand deposits and other
noninterest-bearing liabilities                 869,864                 725,585            144,279         20  %
Equity                                          243,453                 213,437             30,016         14  %
     Total                                   $2,518,740              $2,039,789           $478,951         23  %
Net interest income                                                                                                 $20,432             $18,294            $2,138          12  %
Net interest margin                                                                                                                                                                        3.45  %       3.90  %       (0.45) %
Average loans to average
interest-earning assets                           62.56  %                78.52  %
Average loans to average total deposits           66.55  %                83.75  %
Average non-interest deposits to
average total deposits                            37.46  %                38.45  %
Average interest-earning assets to
average interest-bearing liabilities             167.10  %               

169.60%



1Interest income includes loan fees. Loan fees recognized during the period and
included in the yield calculation totaled $3.9 million and $2.2 million in the
third 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 $12.7
million and $13.9 million in the third 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 September 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 September 30, 2021 vs. 2020
                                     Increase (decrease) due to
                                     Volume                Rate             Total
Interest Income:
  Loans                               $513                 $926               $1,439
  Loans held for sale                 (172)                 (58)                (230)
  Short-term investments               128                    4                  132
  Long-term investments                737                 (590)                 147
     Total interest income          $1,206                 $282               $1,488

Interest Expense:
  Interest-bearing deposits           $302                ($955)               ($653)
  Borrowings                            10                   (7)                   3
     Total interest expense           $312                ($962)               ($650)


                                       55
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The following table compares average balances and rates as well as margins on
earning assets for the nine-month periods ended September 30, 2021 and 2020:
(Dollars in Thousands)                                                                                              Nine Months Ended September 30,
                                                                                                                          Interest income/
                                                     Average Balances                         Change                           expense                         Change                         Average Yields/Costs
                                               2021                 2020                   $              %           2021              2020                $             %            2021            2020          Change
Loans1,2                                     $1,501,139              $1,289,838           $211,301         16  %    $56,015             $49,237            $6,778          14  %           4.99  %       5.10  %       (0.11) %
Loans held for sale                             108,455                  95,050             13,405         14  %      2,272               2,267                 5           -  %           2.80  %       3.19  %       (0.39) %

Short-term investments3                         240,635                  60,011            180,624        301  %        248                 284               (36)        (13) %           0.14  %       0.63  %       (0.49) %
Long-term investments4                          347,888                 252,594             95,294         38  %      3,596               4,349              (753)        (17) %           1.38  %       2.30  %       (0.92) %
  Total investments                             588,523                 312,605            275,918         88  %      3,844               4,633              (789)        (17) %           0.87  %       1.98  %       (1.11) %
  Interest-earning assets                     2,198,117               1,697,493            500,624         29  %     62,131              56,137             5,994          11  %           3.78  %       4.42  %       (0.64) %
Nonearning assets                               171,350                 177,811             (6,461)        (4) %
     Total                                   $2,369,467              $1,875,304           $494,163         26  %

Interest-bearing demand                        $547,734                $370,270           $177,464         48  %       $362                $476             ($114)        (24) %           0.09  %       0.17  %       (0.08) %
Savings deposits                                318,761                 247,605             71,156         29  %        377                 581              (204)        (35) %           0.16  %       0.31  %       (0.15) %
Money market deposits                           256,729                 213,201             43,528         20  %        323                 574              (251)        (44) %           0.17  %       0.36  %       (0.19) %
Time deposits                                   178,601                 176,046              2,555          1  %      1,433               2,504            (1,071)        (43) %           1.07  %       1.90  %       (0.83) %
  Total interest-bearing deposits             1,301,825               1,007,122            294,703         29  %      2,495               4,135            (1,640)        (40) %           0.26  %       0.55  %       (0.29) %
Borrowings                                       25,031                  39,645            (14,614)       (37) %        519                 561               (42)         (7) %           2.77  %       1.89  %        0.88  %
  Total interest-bearing liabilities          1,326,856               1,046,767            280,089         27  %      3,014               4,696            (1,682)        (36) %           0.30  %       0.60  %       (0.30) %
Demand deposits and other
noninterest-bearing liabilities                 805,343                 619,772            185,571         30  %
Equity                                          237,268                 208,765             28,503         14  %
     Total                                   $2,369,467              $1,875,304           $494,163         26  %
Net interest income                                                                                                 $59,117             $51,441            $7,676          15  %
Net interest margin                                                                                                                                                                        3.60  %       4.05  %       (0.45) %
Average loans to average
interest-earning assets                           68.29  %                75.98  %
Average loans to average total deposits           72.77  %                81.79  %
Average non-interest deposits to
average total deposits                            36.89  %                36.14  %
Average interest-earning assets to
average interest-bearing liabilities             165.66  %               

162.17%


1Interest income includes loan fees. Loan fees recognized during the period and
included in the yield calculation totaled $11.5 million and $5.1 million in the
first nine 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 $12.3
million and $14.4 million in the first nine 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
nine-month periods ending September 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)                    Nine Months Ended September 30, 2021 vs. 2020
                                  Increase (decrease) due to
                                   Volume             Rate              Total
Interest Income:
  Loans                           $7,603             ($825)           $6,778
  Loans held for sale                 35               (30)                5
  Short-term investments             317              (353)              (36)
  Long-term investments            1,554            (2,307)             (753)
     Total interest income        $9,509           ($3,515)           $5,994

Interest Expense:
  Interest-bearing deposits         $979           ($2,619)          ($1,640)
  Borrowings                        (248)              206               (42)
     Total interest expense         $731           ($2,413)          ($1,682)



  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 September 30,                 Nine Months Ended September 30,
(In Thousands)                                         2021                    2020                    2021                    2020
Credit loss expense on loans held for
investment                                              ($762)                   $567                 ($2,828)                 $3,031
Credit loss expense on unfunded commitments              (344)                      -                    (193)                      -
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                             ($1,106)                   $567                 ($3,021)                 $3,031


As noted above, the provision for credit losses was recorded in accordance with
CECL in 2021. The provision for credit losses in 2020, prior to adoption of
CECL, was recorded under the incurred loss model. Despite the fact that a
different methodology was used in the calculation of the provision for credit
losses in 2021 versus 2020, in general the decrease in the provision for credit
losses on loans for the three and nine-month periods ending September 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
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Other exploitation products

  Other operating income for the three-month period ended September 30, 2021,
decreased $9.0 million, or 41%, to $12.7 million as compared to $21.6 million
for the same period in 2020, primarily due to an $8.0 million decrease in
mortgage banking income in the third quarter of 2021 compared to the same
quarter in 2020. The decrease in mortgage banking income in the three-month
period ended September 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 and decreased mortgages for home purchases. Additionally, there
was a decrease in interest rate swap income and unrealized gain on marketable
securities. These decreases were only partially offset by an increase in
bankcard fees due to lower transaction volume in the third quarter of 2020
resulting from quarantine restrictions related to the COVID-19 pandemic and 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 third
quarter of 2020.
Other operating income for the nine-month period ended September 30, 2021,
decreased $2.9 million, or 6%, to $42.7 million as compared to $45.6 million for
the same period in 2020, primarily due to a $2.9 million decrease in mortgage
banking income in the first nine months of 2021 compared to the same period in
2020. The decrease in mortgage banking income in the nine-month period ended
September 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 interest rate swap income due to fewer of
these transactions and purchased receivable income decreased due to customers
reportedly using PPP funds instead of selling receivables. These decreases were
only partially offset by increases in bankcard fees and service charges on
deposits due to the cessation of COVID-19 quarantine restrictions and higher
transaction volume as compared to the same period in 2020, as well as an
increase in unrealized gain on marketable securities in the first nine months of
2021 compared to 2020.
Other Operating Expense
  Other operating expense for the third quarter of 2021 decreased $972,000, or
4%, to $22.5 million as compared to $23.5 million for the same period in 2020
primarily due to lower salaries and other personnel expense related to mortgage
banking operations, which fluctuate with production volumes. OREO expense, net
of renal income and gains on sale also decreased in the third quarter of 2021 as
compared to 2020 due to a gain on the sale of one OREO property in the third
quarter of 2021. These decreases were only partially offset by an increase in
data processing expense primarily related to increased customer and transaction
volume.
Other operating expense for the first nine months of 2021 increased $1.2
million, or 2%, to $66.2 million from $65.0 million for the same period in 2020
primarily due to higher salaries and other personnel expense in the Community
Banking segment due to salary increases and a higher accrual for profit sharing
expense. Additionally, data processing and occupancy expenses increased in the
first nine months of 2021 as compared to 2020 due to increased customer and
transaction volume, miscellaneous repairs and maintenance, and tenant
improvements at several of the Company's locations. These increases were only
partially offset by lower salary and other personnel expense related to mortgage
banking operations, which fluctuate with production volumes, and a decrease in
OREO expense, net of renal income and gains on sale due to a gain on the sale of
one OREO property noted above that occurred in the third quarter of 2021.
Income Taxes
  For the first nine months of 2021, Northrim recorded $9.2 million in state and
federal income tax expense, for an effective tax rate of 23.9% compared to $6.3
million and 21.5% for the same period in 2020. Northrim recorded a higher
effective tax rate for the first nine months of 2021 as compared to the same
period 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 third
quarter of 2021, Northrim recorded $2.8 million in state and federal income tax
expense for an effective tax rate of 23.9%, compared to $4.0 million, or 25.2%
in the third quarter of 2020. Northrim recorded a lower effective tax rate for
the third quarter of 2021 as compared to the same period in 2020 as a result of
an increase in tax credits and tax exempt interest income as a percentage of
pre-tax income in 2021 as compared to 2020.


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