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What changed 10-Q

Item 1. Financial Statements

2020-08-04 compared with 2020-05-05 · 272 added, 188 removed, 958 unchanged (32% of the section changed)

27 unchanged sentences

Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding

Common stock, $1 par value, 10,000,000 shares authorized, 6,366,100 and 6,558,809 issued and outstanding at March 31, 2020 and December 31, 2019, respectively

Common stock, $1 par value, 10,000,000 shares authorized, 6,368,046 and 6,558,809 issued and outstanding at June 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

7 unchanged sentences

Three Months Ended

Six Months Ended

(In Thousands, Except Per Share Data)

Interest Income

Interest and Dividend Income

Interest and fees on loans and loans held for sale

15 unchanged sentences

Mortgage banking income

Purchased receivable income

Bankcard fees

Purchased receivable income

Service charges on deposit accounts

Unrealized (loss) gain on marketable equity securities

Interest rate swap income

Gain on sale of marketable equity securities, net

Gain on sale of investment securities available for sale, net

Unrealized (loss) gain on marketable equity securities

Total Other Operating Income

18 unchanged sentences

NORTHRIM BANCORP, INC.

Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended March 31,

Consolidated Statements of Comprehensive Income

Three Months Ended June 30,

Six Months Ended June 30,

(In Thousands)

1 unchanged sentence

Securities available for sale:

Unrealized gains (losses) arising during the period

Reclassification of net (gains) losses included in net income (net of tax (benefit)

expense) of $28 and $7 for the first quarters of 2020 and 2019, respectively

Unrealized gains arising during the period

Reclassification of net gains included in net income, net of tax expense

of $0 for the second quarters of 2020 and 2019, and $28 and $7 for the

six months ended June 30, 2020 and 2019, respectively

Derivatives and hedging activities:

2 unchanged sentences

Other comprehensive (loss) income, net of tax

Comprehensive (loss) income

Comprehensive income

See notes to consolidated financial statements

7 unchanged sentences

Balance as of January 1, 2019

Cash dividend declared

Cash dividend on common stock ($0.30 per share)

Stock-based compensation expense

3 unchanged sentences

Balance as of March 31, 2019

Cash dividend declared

Cash dividend on common stock ($0.30 per share)

Stock-based compensation expense

2 unchanged sentences

Balance as of June 30, 2019

Cash dividend declared

Cash dividend on common stock ($0.33 per share)

Stock-based compensation expense

3 unchanged sentences

Balance as of September 30, 2019

Cash dividend declared

Cash dividend on common stock ($0.33 per share)

Stock-based compensation expense

10 unchanged sentences

Balance as of January 1, 2020

Cash dividend declared

Cash dividend on common stock ($0.34 per share)

Stock-based compensation expense

3 unchanged sentences

Balance as of March 31, 2020

Cash dividend on common stock ($0.34 per share)

Stock-based compensation expense

Exercise of stock options and vesting of restricted stock units, net

Other comprehensive income, net of tax

Balance as of June 30, 2020

See notes to consolidated financial statements

1 unchanged sentence

Consolidated Statements of Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

(In Thousands)

6 unchanged sentences

Amortization of investment security premium, net of discount accretion

Loss (gain) on marketable equity securities

Unrealized loss (gain) on marketable equity securities

Deferred tax (benefit) expense

Stock-based compensation

Amortization of deferred loan fees, net of costs

Deferred loan fees and amortization, net of costs

Provision for loan losses

Reserve (benefit) for purchased receivables

Benefit for purchased receivables

Additions to home mortgage servicing rights carried at fair value

6 unchanged sentences

Net changes in assets and liabilities:

(Increase) in accrued interest receivable

(Increase) decrease in other assets

Decrease (increase) in other liabilities

Net Cash (Used) Provided by Operating Activities

(Increase) decrease in accrued interest receivable

(Increase) in other assets

Decrease in other liabilities

Net Cash (Used) by Operating Activities

Investing Activities:

9 unchanged sentences

Proceeds from sale of other real estate owned

Purchases of software

Purchases of premises and equipment

1 unchanged sentence

Financing Activities:

Increase (decrease) in deposits

Increase in deposits

Increase in securities sold under repurchase agreements

1 unchanged sentence

Repurchase of common stock

Proceeds from the issuance of common stock

Cash dividends paid

Net Cash Provided (Used) by Financing Activities

Net Cash Provided by Financing Activities

Net Change in Cash and Cash Equivalents

4 unchanged sentences

Interest paid

Noncash commitments to invest in Low Income Housing Tax Credit Partnerships

Transfer of loans to other real estate owned

13 unchanged sentences

The Company has evaluated subsequent events and transactions for potential recognition or disclosure.

Operating results for the interim period ended March 31, 2020 are not necessarily indicative of the results anticipated for the year ending December 31, 2020 .

Operating results for the interim period ended June 30, 2020 are not necessarily indicative of the results anticipated for the year ending December 31, 2020 .

These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 .

50 unchanged sentences

Based on the credit quality of our existing debt securities portfolio, we do not expect the ACL for held-to-maturity and available-for-sale debt securities to be significant.

of March 31, 2020, the Company does not hold any debt securities classified as held-to-maturity.

of June 30, 2020, the Company does not hold any debt securities classified as held-to-maturity.

The ultimate effect of CECL on our ACL will depend on the size and composition of our loan and investment portfolios, the portfolios' credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions.

At adoption, we will have a cumulative-effect adjustment to retained earnings for our change in the ACL.

Goodwill and Intangible Assets

A summary of goodwill and intangible assets at March 31, 2020 and December 31, 2019 , is as follows:

(In Thousands)

March 31, 2020

December 31, 2019

Intangible assets:

Community Banking Segment

Home Mortgage Lending Segment

Community Banking Segment

Home Mortgage Lending Segment

Core deposit intangible

Trade name intangible

The Company performed goodwill impairment testing at March 31, 2020 in accordance with the policy described in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 .

The Company's policy dictates that the Company will perform interim impairment testing when a triggering event occurs.

The Company performed this interim impairment test using a discounted cash flow approach.

The estimated fair value of each of the Company's segments exceeds its carrying value as of March 31, 2020 , and we therefore concluded that no impairment existed at that time.

Cash and Cash Equivalents

The Company is required to maintain a $ 0 minimum average daily balance with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank") for purposes of settling financial transactions and charges for Federal Reserve Bank services.

The Company is also required to maintain cash balances or deposits with the Federal Reserve Bank sufficient to meet its statutory reserve requirements.

The average reserve requirement for the maintenance period for the quarter ended March 31, 2020 , was $ 0 .

The Company is required to maintain cash balances or deposits with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank") sufficient to meet its statutory reserve requirements and for purposes of settling financial transactions and charges for the Federal Reserve Bank services.

The average reserve requirement for the maintenance period for the quarter ended June 30, 2020 , was zero .

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

As of March 31, 2020, the Company was required to maintain a $ 100,000 and $ 2.8 million balance with a correspondent bank to collateralize the initial margin and the fair value exposure of its interest rate swap, respectively.

As of June 30, 2020 , the Company was required to maintain a $ 100,000 and $ 2.8 million balance with a correspondent bank to collateralize the initial margin and the fair value exposure of its interest rate swap, respectively.

Investment Securities

4 unchanged sentences

Gross Unrealized Losses

March 31, 2020

June 30, 2020

Securities available for sale

11 unchanged sentences

Total securities available for sale

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2020 and December 31, 2019 were as follows:

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2020 and December 31, 2019 were as follows:

Less Than 12 Months

4 unchanged sentences

Unrealized Losses

March 31, 2020:

June 30, 2020:

Securities available for sale

Treasury and government sponsored entities

Corporate bonds

6 unchanged sentences

treasury and government sponsored entities, corporate bonds, collateralized loan obligations, and municipal securities in both periods were caused by changes in interest rates.

At March 31, 2020 and December 31, 2019 , there were 17 and 8 available-for-sale securities with unrealized losses that have been in a loss position for less than twelve months, respectively.

There were 1 and 3 securities as of March 31, 2020 and December 31, 2019 that have been in an unrealized loss position for more than twelve months, respectively.

At June 30, 2020 and December 31, 2019 , there were 9 and 8 available-for-sale securities with unrealized losses that have been in a loss position for less than twelve months, respectively.

There were 1 and 3 securities as of June 30, 2020 and December 31, 2019 that have been in an unrealized loss position for more than twelve months, respectively.

The contractual terms of the investments in a loss position do not permit the issuer to settle the securities at a price less than the amortized cost of the investment.

Because it is more likely than not that the Company will hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

At March 31, 2020 and December 31, 2019 , $ 38.2 million and $ 30.6 million in securities were pledged for deposits and borrowings, respectively.

The amortized cost and estimated fair values of debt securities at March 31, 2020 , are distributed by contractual maturity as shown below.

At June 30, 2020 and December 31, 2019 , $ 94.3 million and $ 30.6 million in securities were pledged for deposits and borrowings, respectively.

The amortized cost and estimated fair values of debt securities at June 30, 2020 , are distributed by contractual maturity as shown below.

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

9 unchanged sentences

Municipal securities

The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the three -month periods ending March 31, 2020 and 2019 , are as follows:

The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the three and six -month periods ending June 30, 2020 and 2019 , are as follows:

(In Thousands)

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

Available for sale securities

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019

Available for sale securities

A summary of interest income for the three -month periods ending March 31, 2020 and 2019 , on available for sale investment securities are as follows:

Three Months Ended March 31,

Six Months Ended June 30, 2020

Available for sale securities

Six Months Ended June 30, 2019

Available for sale securities

A summary of interest income for the three and six -month periods ending June 30, 2020 and 2019 , on available for sale investment securities are as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(In Thousands)

3 unchanged sentences

Total tax-exempt interest income

L oans and Credit Quality

Loans and Credit Quality

The following table presents total portfolio loans by portfolio segment and class of financing receivable, based on the Company's asset quality rating ("AQR") criteria:

7 unchanged sentences

Consumer other

March 31, 2020

June 30, 2020

AQR Special Mention

5 unchanged sentences

Unearned origination fees, net of origination costs

The above table includes $ 353.5 million in Paycheck Protection Program ("PPP") loans administered by the U.S.

Small Business Administration ("SBA") within the Commercial loan segment.

Additionally, unearned origination fee, net of origination costs includes $ 9.8 million associated with SBA PPP loans.

Nonaccrual loans:

Nonaccrual loans net of government guarantees totaled $ 13.4 million and $ 14.0 million at March 31, 2020 and December 31, 2019 , respectively.

Nonaccrual loans net of government guarantees totaled $ 12.7 million and $ 14.0 million at June 30, 2020 and December 31, 2019 , respectively.

Nonaccrual loans at the periods indicated are presented below by segment:

1 unchanged sentence

90 Days Past Due

March 31, 2020

June 30, 2020

Real estate construction one-to-four family

18 unchanged sentences

(In Thousands)

March 31, 2020

June 30, 2020

Real estate construction one-to-four family

16 unchanged sentences

Impaired Loans:

At March 31, 2020 and December 31, 2019 , the recorded investment in loans that are considered to be impaired was $ 24.4 million and $ 24.7 million , respectively.

The following table presents information about impaired loans by class as of the periods indicated:

3 unchanged sentences

Related Allowance

March 31, 2020

June 30, 2020

With no related allowance recorded

3 unchanged sentences

Real estate term non-owner occupied - AQR pass

Real estate term non-owner occupied - AQR substandard

Real estate term other - AQR pass

10 unchanged sentences

Real estate term non-owner occupied - AQR pass

Real estate term non-owner occupied - AQR substandard

Real estate term other - AQR pass

31 unchanged sentences

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

The following tables summarize our average recorded investment and interest income recognized on impaired loans for the three -month periods ended March 31, 2020 and 2019 :

Three Months Ended March 31,

The following tables summarize our average recorded investment and interest income recognized on impaired loans for the three and six -month periods ended June 30, 2020 and 2019 :

Three Months Ended June 30,

(In Thousands)

18 unchanged sentences

Commercial - AQR substandard

Commercial - AQR pass

Commercial - AQR substandard

Real estate construction one-to-four family - AQR substandard

Real estate term owner-occupied - AQR substandard

Real estate term non-owner occupied - AQR pass

Real estate term non-owner occupied - AQR substandard

Real estate term other - AQR pass

Real estate term other - AQR substandard

Consumer secured by 1st deeds of trust - AQR pass

Consumer secured by 1st deeds of trust - AQR substandard

Consumer secured by 1st deeds of trust - AQR loss

Consumer other - AQR substandard

Total Impaired Loans

Six Months Ended June 30,

(In Thousands)

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

With no related allowance recorded

Commercial - AQR pass

10 unchanged sentences

Consumer other - AQR substandard

With an allowance recorded

Commercial - AQR substandard

Real estate term other - AQR substandard

Consumer secured by 1st deeds of trust - AQR substandard

Commercial - AQR pass

Commercial - AQR substandard

Real estate construction one-to-four family - AQR substandard

Real estate term owner-occupied - AQR substandard

Real estate term non-owner occupied - AQR pass

Real estate term non-owner occupied - AQR substandard

Real estate term other - AQR pass

Real estate term other - AQR substandard

Consumer secured by 1st deeds of trust - AQR pass

Consumer secured by 1st deeds of trust - AQR substandard

Consumer secured by 1st deeds of trust - AQR loss

Consumer other - AQR substandard

Total Impaired Loans

Troubled Debt Restructurings:

Loans classified as troubled debt restructurings (“TDR”) totaled $ 12.6 million and $ 10.1 million at March 31, 2020 and December 31, 2019 , respectively.

Loans classified as troubled debt restructurings (“TDR”) totaled $ 10.6 million and $ 10.1 million at June 30, 2020 and December 31, 2019 , respectively.

A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession that it would not grant otherwise.

1 unchanged sentence

The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019.

The Company has elected to adopt these provisions of the CARES Act, however as of March 31, 2020 the Company has not made loan modifications related to COVID-19.

The Company has elected to adopt these provisions of the CARES Act.

As of June 30, 2020, the Company has made the following loan modifications related to COVID-19, which are not classified as TDRs:

(Dollars in thousands)

Interest Only

Full Payment Deferral

Portfolio loans

Number of modifications

The Company has granted a variety of concessions to borrowers in the form of loan modifications.

11 unchanged sentences

All of the Company's TDRs are included in impaired loans.

The following table presents the breakout between newly restructured loans that occurred during the three months ended March 31, 2020 and restructured loans that occurred prior to 2020 that are still included in portfolio loans.

The following table presents the breakout between newly restructured loans that occurred during the six months ended June 30, 2020 and restructured loans that occurred prior to 2020 that are still included in portfolio loans.

As discussed above, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019.

7 unchanged sentences

Existing Troubled Debt Restructurings

There were no newly restructured loans that occurred during the three months ended March 31, 2019.

The following tables present newly restructured loans that occurred during the three months ended March 31, 2020 , by concession (terms modified):

March 31, 2020

The following tables present newly restructured loans that occurred during the six months ended June 30, 2020 and 2019, by concession (terms modified):

June 30, 2020

Number of Contracts

9 unchanged sentences

Commercial - AQR substandard

The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs.

There were no in charge-offs in the three months ended March 31, 2020 on loans that were newly classified as TDRs during the same period.

All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses ("Allowance").

There were three TDRs with specific impairment at March 31, 2020 and none at December 31, 2019 .

The following table presents TDRs that defaulted within twelve months of restructure and defaulted during the three months ended March 31, 2020 and 2019:

March 31, 2020

March 31, 2019

Number of Contracts

Recorded Investment

June 30, 2019

Number of Contracts

Recorded Investment

Rate Modification

Term Modification

Payment Modification

Combination Modification

Total Modifications

(In Thousands)

Troubled Debt Restructurings that Subsequently Defaulted:

Pre-Modification Outstanding Recorded Investment:

Commercial - AQR substandard

Real estate term owner occupied- AQR substandard

Post-Modification Outstanding Recorded Investment:

Commercial - AQR substandard

Real estate term owner occupied- AQR substandard

The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs.

There were no in charge-offs in the six months ended June 30, 2020 on loans that were newly classified as TDRs during the same period.

All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses ("Allowance").

There were no TDRs with specific impairment at June 30, 2020 and December 31, 2019 , respectively.

The Company had no TDRs that defaulted within twelve months of restructure and defaulted during the six months ended June 30, 2020 and 2019, respectively.

Allowance for Loan Losses

26 unchanged sentences

for impairment

Six Months Ended June 30,

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deed of trust

Consumer other

Balance, beginning of period

Provision (benefit)

Balance, end of period

Balance, end of period:

Individually evaluated

for impairment

Balance, end of period:

Collectively evaluated

for impairment

Balance, beginning of period

Provision (benefit)

Balance, end of period

Balance, end of period:

Individually evaluated

for impairment

Balance, end of period:

Collectively evaluated

for impairment

The following is a detail of the recorded investment, including unearned origination fees, net of origination costs, in the loan portfolio, segregated by amounts evaluated individually or collectively in the Allowance at the periods indicated:

7 unchanged sentences

Consumer other

March 31, 2020

June 30, 2020

Balance, end of period

22 unchanged sentences

Consumer other

March 31, 2020

June 30, 2020

Individually evaluated for impairment:

13 unchanged sentences

Management evaluates the adequacy of the reserve for purchased receivable losses based on historical loss experience by class of receivable and its assessment of current economic conditions.

As of March 31, 2020 , the Company has one class of purchased receivables.

There were no purchased receivables past due at March 31, 2020 or December 31, 2019 , and there were no restructured purchased receivables at March 31, 2020 or December 31, 2019 .

As of June 30, 2020 , the Company has one class of purchased receivables.

There were no purchased receivables past due at June 30, 2020 or December 31, 2019 , and there were no restructured purchased receivables at June 30, 2020 or December 31, 2019 .

Income on purchased receivables is accrued and recognized on the principal amount outstanding using an effective interest method except when management believes doubt exists as to the collectability of the income or principal.

Purchased receviables of $ 1.2 million related to one customer relationship are considered nonperforming assets as of June 30, 2020 for which the Company is not accruing and recognizing income.

There were no nonperforming purchased receivables as of December 31, 2019.

The following table summarizes the components of net purchased receivables for the periods indicated:

(In Thousands)

March 31, 2020

June 30, 2020

December 31, 2019

1 unchanged sentence

Reserve for purchased receivable losses

The following table sets forth information regarding changes in the purchased receivable reserve for the three-month periods ending March 31, 2020 and 2019 , respectively:

Three Months Ended March 31,

The following table sets forth information regarding changes in the purchased receivable reserve for the three and six-month periods ending June 30, 2020 and 2019 , respectively:

Three Months Ended June 30,

Six Months Ended June 30,

(In Thousands)

5 unchanged sentences

Mortgage servicing rights

The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three -month periods ended March 31, 2020 and 2019 :

Three Months Ended March 31,

The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three and six -month periods ended June 30, 2020 and 2019 :

Three Months Ended June 30,

Six Months Ended June 30,

(In Thousands)

6 unchanged sentences

(2) Represents changes due to collection/realization of expected cash flows over time.

The following table details information related to our serviced mortgage loan portfolio as of March 31, 2020 and December 31, 2019 :

The following table details information related to our serviced mortgage loan portfolio as of June 30, 2020 and December 31, 2019 :

(In Thousands)

March 31, 2020

June 30, 2020

December 31, 2019

1 unchanged sentence

MSR as a percentage of serviced loans

The Company recognized servicing fees of $ 663,000 and $ 561,000 during the three-month periods ending March 31, 2020 and 2019 , respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the key assumptions used in measuring the fair value of MSR as of March 31, 2020 and December 31, 2019 :

The Company recognized servicing fees of $ 639,000 and $ 588,000 during the three-month periods ending June 30, 2020 and 2019 , respectively and $ 1.3 million and $ 1.1 million during the six-month periods ending June 30, 2020 and 2019 , respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the weighted average key assumptions used in measuring the fair value of MSR as of June 30, 2020 and December 31, 2019 :

Constant prepayment rate

Discount rate

Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at March 31, 2020 and December 31, 2019 were as follows:

Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at June 30, 2020 and December 31, 2019 were as follows:

(In Thousands)

March 31, 2020

June 30, 2020

December 31, 2019

1 unchanged sentence

Weighted average rate of note

March 31, 2020

June 30, 2020

1.0% Adverse Rate Change

20 unchanged sentences

Commercial servicing rights

The commercial servicing right asset ("CSR") has a carrying value $ 1.2 million at March 31, 2020 and December 31, 2019 , and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets.

Total commercial loans serviced for others were $ 249.9 million and $ 252.9 million at March 31, 2020 and December 31, 2019 , respectively.

Key assumptions used in measuring the fair value of the CSR as of March 31, 2020 and December 31, 2019 include a constant prepayment rate of 12.25 % and a discount rate of 11.70 % .

The commercial servicing right asset ("CSR") has a carrying value $ 1.2 million at both June 30, 2020 and December 31, 2019 , and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets.

Total commercial loans serviced for others were $ 242.0 million and $ 252.9 million at June 30, 2020 and December 31, 2019 , respectively.

Key assumptions used in measuring the fair value of the CSR as of June 30, 2020 and December 31, 2019 include a constant prepayment rate of 12.25 % and a discount rate of 11.70 % .

We adopted ASU 2016-02 Leases (Topic 842) ("ASU 2016-02") using the modified retrospective approach with an effective date as of January 1, 2019.

12 unchanged sentences

The incremental borrowing rate is the rate that the Company would have incurred to borrow the funds necessary to purchase the leased asset over a similar term.

As of March 31, 2020, the Company has operating lease ROU assets of $ 13.8 million and operating lease liabilities of $ 13.7 million .

As of June 30, 2020, the Company has operating lease ROU assets of $ 13.2 million and operating lease liabilities of $ 13.1 million .

As of December 31, 2019, the Company had operating lease ROU assets of $ 14.3 million and operating lease liabilities of $ 14.2 million .

1 unchanged sentence

The following table presents additional information about the Company's operating leases:

Three Months Ended June 30,

Three Months Ended June 30,

Six Months Ended June 30,

Six Months Ended June 30,

(In Thousands)

Three Months Ended March 31,

Three Months Ended March 31,

Operating lease cost (1)

9 unchanged sentences

Operating Leases

2020 (Nine months)

2020 (Six months)

Total minimum lease payments

2 unchanged sentences

The Company's revenue is included in net interest income and other operating income on its Consolidated Statements of Income.

Topic 606 in the Accounting Standards Codification includes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.

Topic 606 in the Accounting Standards Codification ("Topic 606") includes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.

The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our ongoing revenue-generating transactions are not subject to Topic 606, including revenue associated with financial instruments, including revenue from loans and securities.

In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, purchased receivable income, financial guarantees, and derivatives are also not in scope of the guidance.

The majority of our ongoing revenue-generating transactions are not subject to Topic 606, including revenue associated with financial instruments and revenue from loans and securities.

In addition, certain noninterest income streams such as fees associated with MSRs, purchased receivable income, financial guarantees, and derivatives are also not in scope of the guidance.

Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant services income, and commissions from the sales of mutual funds and other investments.

25 unchanged sentences

Payments are typically received immediately or in the following month.

The following presents other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three-month periods ended March 31, 2020 and 2019 :

The following presents other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six-month periods ended June 30, 2020 and 2019 :

(In Thousands)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Other operating income

6 unchanged sentences

Gains on the sale of other real estate owned ("OREO") are also within the scope of Topic 606 and are recorded within other operating expense on the Company's Consolidated Statements of Income.

Gains on the sale of OREO properties were $ 37,000 and $ 316,000 for the three months ended March 31, 2020 and 2019 , respectively.

Gains on the sale of OREO properties were $ 38,000 and $ 0 for the three months ended June 30, 2020 and 2019 , respectively, and $ 75,000 and $ 316,000 for the six months ended June 30, 2020 and 2019 , respectively .

Interest rates swaps related to community banking activities

3 unchanged sentences

Similarly, the Company could be required to settle its obligations under the agreement if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels.

The Company pledged $ 9.3 million as of March 31, 2020 and $ 4.7 million as of December 31, 2019 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.

The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $ 93.4 million and $ 94.4 million at March 31, 2020 and December 31, 2019 , respectively.

At March 31, 2020 , the notional amount of interest rate swaps is made up of eight variable to fixed rate swaps to commercial loan customers totaling $ 46.7 million , and eight fixed to variable rate swaps with a counterparty totaling $ 46.7 million .

Changes in fair value from these eight interest rate swaps offset each other in the first three months of 2020 .

The Company recognized no fee income related to interest rate swaps in the three-month periods ending March 31, 2020 and March 31, 2019 , respectively.

The Company pledged $ 9.2 million as of June 30, 2020 and $ 4.7 million as of December 31, 2019 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.

The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $ 92.4 million and $ 94.4 million at June 30, 2020 and December 31, 2019 , respectively.

At June 30, 2020 , the notional amount of interest rate swaps is made up of eight variable to fixed rate swaps to commercial loan customers totaling $ 46.2 million , and eight fixed to variable rate swaps with a counterparty totaling $ 46.2 million .

Changes in fair value from these eight interest rate swaps offset each other in the first six months of 2020 .

The Company recognized $ 17,000 and $ 734,000 fee income related to interest rate swaps in the three and six-month periods ending June 30, 2020 and June 30, 2019 , respectively.

Interest rate swap income is recorded in other operating income on the Consolidated Statements of Income.

4 unchanged sentences

The floating rate that the dealer pays is equal to the three month LIBOR plus 1.37 % which reprices quarterly on the payment date.

This rate was 2.11 % as of March 31, 2020 .

The Company pledged $ 2.9 million and $ 1.3 million in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of March 31, 2020 and December 31, 2019 , respectively.

This rate was 1.68 % as of June 30, 2020 .

The Company pledged $ 2.9 million and $ 1.3 million in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of June 30, 2020 and December 31, 2019 , respectively.

Changes in the fair value of this interest rate swap are reported in other comprehensive income.

The unrealized loss on this interest rate swap was $ 2.4 million as of March 31, 2020 and the unrealized loss was $ 534,000 as of December 31, 2019 .

The unrealized loss on this interest rate swap was $ 2.4 million as of June 30, 2020 and the unrealized loss was $ 534,000 as of December 31, 2019 .

Interest rates swaps related to home mortgage banking activities

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Market risk with respect to commitments to originate loans arises from changes in the value of contractual positions due to changes in interest rates.

RML had commitments to originate mortgage loans held for sale totaling $ 197.9 million and $ 48.8 million at March 31, 2020 and December 31, 2019 , respectively.

RML had commitments to originate mortgage loans held for sale totaling $ 206.3 million and $ 48.8 million at June 30, 2020 and December 31, 2019 , respectively.

Changes in the value of RML's interest rate derivatives are recorded in mortgage banking income on the Consolidated Statements of Income.

None of these derivatives are designated as hedging instruments.

The following table presents the fair value of derivatives not designated as hedging instruments at March 31, 2020 and December 31, 2019 :

The following table presents the fair value of derivatives not designated as hedging instruments at June 30, 2020 and December 31, 2019 :

(In Thousands)

Asset Derivatives

March 31, 2020

June 30, 2020

December 31, 2019

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Liability Derivatives

March 31, 2020

June 30, 2020

December 31, 2019

4 unchanged sentences

Other liabilities

The following table presents the net gains (losses) of derivatives not designated as hedging instruments for the three-month periods ending March 31, 2020 and 2019:

Three Months Ended March 31,

The following table presents the net gains (losses) of derivatives not designated as hedging instruments for the three and six-month periods ending June 30, 2020 and 2019:

Three Months Ended June 30,

Six Months Ended June 30,

(In Thousands)

7 unchanged sentences

We do not offset such financial instruments for financial reporting purposes.

The following table summarizes the derivatives that have a right of offset as of March 31, 2020 and December 31, 2019 :

March 31, 2020

The following table summarizes the derivatives that have a right of offset as of June 30, 2020 and December 31, 2019 :

June 30, 2020

Gross amounts not offset in the Statement of Financial Position

23 unchanged sentences

Retail interest rate contracts

Stock Incentive Plan

The Company adopted the 2017 Stock Option Plan (“2017 Plan”) following shareholder approval of the 2017 Plan at the 2017 Annual Meeting.

Subsequent to the adoption of the 2017 Plan, no additional grants may be issued under the prior plans.

The 2017 Plan provides for grants of up to 350,000 shares of common stock.

Stock Options:

Under the 2017 Plan and previous plans, certain key employees have been granted the option to purchase set amounts of common stock at the market price on the day the option was granted.

Optionees, at their own discretion, may cover the cost of exercise through the exchange at the then fair value of already owned shares of the Company’s stock.

Options are granted for a 10 -year period and vest on a pro-rata basis over the initial three years from grant.

The Company measures the fair value of each stock option at the date of grant using the Black-Scholes option pricing model.

For the quarters ended March 31, 2020 and 2019 , the Company recognized $ 39,000 and $ 32,000 , respectively, in stock option compensation expense as a component of salaries and other personnel expense.

The Company allows stock options to be exercised through cash or cashless transactions.

Cashless stock option exercises require a portion of the options exercised to be net settled in satisfaction of the exercise price and applicable tax withholding requirements.

There were no stock options exercised for the three-month period ended March 31, 2020 .

The Company issued 1,723 shares from the exercises of stock options in the three-month periods ended March 31, 2019.

The Company received $ 0 cash for the stock option exercises in the three-month periods ended March 31, 2019.

months ended March 31, 2019, the Company net settled $ 66,000 for cashless stock option exercises.

The Company withheld $ 49,000 to pay for stock option exercises or income taxes the resulted from the exercise of stock options in the three-month periods ended March 31, 2019.

There were no stock options granted in the three-month periods ended March 31, 2020 or 2019 .

Restricted Stock Units:

The Company grants restricted stock units to certain key employees periodically.

Recipients of restricted stock units do not pay any cash consideration to the Company for the shares and receive all dividends with respect to such shares when the shares vest.

Restricted stock units cliff vest at the end of a three -year time period.

For the three months ended March 31, 2020 and 2019 , the Company recognized $ 204,000 and $ 164,000 , respectively, in restricted stock unit compensation expense as a component of salaries and other personnel expense.

There were no restricted stock units granted in the three-month periods ended March 31, 2020 or 2019 .

Fair Value Measurements

14 unchanged sentences

Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value.

Although the Company has determined that the majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.

However, as of March 31, 2020 , the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives.

Although the Company has determined that the majority of inputs used to

value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.

However, as of June 30, 2020 , the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives.

As a result, the Company has classified its interest rate derivative valuations in Level 2 of the fair value hierarchy.

10 unchanged sentences

The Company takes into account compliance with legal and regulatory guidelines, the amount of the loan, the size of the assets, the location and type of property to be valued and how critical the timing of completion of the analysis is to the assessment of value.

Those factors are balanced

with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists.

Those factors are balanced with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists.

The Company uses external sources to estimate fair value for projects that are not fully constructed as of the date of valuation.

10 unchanged sentences

Estimated fair values as of the periods indicated are as follows:

March 31, 2020

June 30, 2020

December 31, 2019

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Significant Unobservable Inputs (Level 3)

March 31, 2020

June 30, 2020

Available for sale securities

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Total other liabilities

The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three -month periods ended March 31, 2020 and 2019 :

The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the six -month periods ended June 30, 2020 and 2019 :

(In Thousands)

5 unchanged sentences

Net change in unrealized gains (losses) relating to items held at end of period

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

Interest rate lock commitments

1 unchanged sentence

Commercial servicing rights

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019

Interest rate lock commitments

1 unchanged sentence

Commercial servicing rights

There were no changes in unrealized gains and losses for the three month periods ending March 31, 2020 and 2019 included in other comprehensive income for recurring Level 3 fair value measurements.

As of and for the periods ending March 31, 2020 and December 31, 2019 , except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis.

(In Thousands)

Beginning balance

Change included in earnings

Purchases and issuances

Sales and settlements

Ending balance

Net change in unrealized gains (losses) relating to items held at end of period

Six Months Ended June 30, 2020

Interest rate lock commitments

Mortgage servicing rights

Commercial servicing rights

Six Months Ended June 30, 2019

Interest rate lock commitments

Mortgage servicing rights

Commercial servicing rights

There were no changes in unrealized gains and losses for the three and six-month periods ending June 30, 2020 and 2019 included in other comprehensive income for recurring Level 3 fair value measurements.

As of and for the periods ending June 30, 2020 and December 31, 2019 , except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis.

For loans measured for impairment, the Company classifies fair value measurements using observable inputs, such as external appraisals, as Level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as Level 3 valuations in the fair value hierarchy.

3 unchanged sentences

Significant Unobservable Inputs (Level 3)

March 31, 2020

June 30, 2020

Loans measured for impairment

1 unchanged sentence

Loans measured for impairment

The following table presents the gains and (losses) resulting from nonrecurring fair value adjustments for the three -month periods ended March 31, 2020 and 2019 :

Three Months Ended March 31,

The following table presents the gains and (losses) resulting from nonrecurring fair value adjustments for the three and six -month periods ended June 30, 2020 and 2019 :

Three Months Ended June 30,

Six Months Ended June 30,

(In Thousands)

2 unchanged sentences

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at March 31, 2020 and December 31, 2019 :

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at June 30, 2020 and December 31, 2019 :

Financial Instrument

2 unchanged sentences

Weighted Average Rate Range

March 31, 2020

June 30, 2020

Loans measured for impairment

36 unchanged sentences

The Community Banking segment's principal business focus is the offering of loan and deposit products to business and consumer customers in its primary market areas.

As of March 31, 2020 , the Community Banking segment operated 16 branches throughout Alaska.

As of June 30, 2020 , the Community Banking segment operated 16 branches throughout Alaska.

The Home Mortgage Lending segment's principal business focus is the origination and sale of mortgage loans for 1-4 family residential properties.

Summarized financial information for the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables:

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

(In Thousands)

7 unchanged sentences

Other operating expense

Income (loss) before provision for income taxes

Income before provision for income taxes

Provision (benefit) for income taxes

Net income (loss)

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019

(In Thousands)

9 unchanged sentences

Provision for income taxes

March 31, 2020

Six Months Ended June 30, 2020

(In Thousands)

1 unchanged sentence

Home Mortgage Lending

Interest income

Interest expense

Net interest income

Provision for loan losses

Other operating income

Other operating expense

Income before provision for income taxes

Provision for income taxes

Six Months Ended June 30, 2019

(In Thousands)

Community Banking

Home Mortgage Lending

Interest income

Interest expense

Net interest income

Benefit for loan losses

Other operating income

Other operating expense

Income before provision for income taxes

Provision for income taxes

June 30, 2020

(In Thousands)

Community Banking

Home Mortgage Lending

Loans held for sale

4 unchanged sentences

Loans held for sale

Subsequent Events

The provisions of the CARES Act created the Paycheck Protection Program ("PPP") through the Small Business Administration ("SBA") in early April, 2020.

As of May 4, 2020, the Company has originated $ 324 million in PPP loans and has an additional $ 55 million in the PPP loan pipeline.

In order to provide additional liquidity to banks participating in the PPP, the Federal Reserve Bank created the Paycheck Protection Program Lending Facility ("PPPLF") which provides banks with term, nonrecourse borrowings secured by PPP loans.

The interest rate of PPPLF borrowings is fixed at 0.35 % .

The maturity dates for term borrowings incurred by the Company under the PPPLF equal the maturity dates of the PPP loans pledged to secure the extension of credit, which is two years.

The maturity date of the PPPLF borrowings will be accelerated if the underlying PPP loan goes into default and the Company sells the PPP loan to the SBA to realize on the SBA guarantee.

The maturity date of the PPPLF borrowings will also be accelerated to the extent of any loan forgiveness reimbursement received by the Company from the SBA.

On April 9, 2020, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued an interim final rule to allow banking organizations to neutralize the effect of PPP loans financed under the PPPLF on leverage capital ratios, so origination of PPP loans does not require the Company to carry additional capital.

As of May 4, 2020, the Company has $ 104 million of PPPLF borrowings.

The Company has pledged $ 104 million in PPP loans as collateral for these borrowings.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.