NORTHRIM BANCORP INC 10-Q

ITEM 1. FINANCIAL STATEMENTS 2 CONSOLIDATED FINANCIAL STATEMENTS NORTHRIM BANCORP, INC. Consolidated Balance Sheets (Unaudited) June 30, 2020 December 31, 2019 (In Thousands, Except Share Data) ASSETS Cash and due from banks $ 34,331 $ 20,518 Interest bearing deposits in other banks 55,081 74,906 Investment securities available for sale, at fair value 202,347 276,138 Marketable equity securities 7,758 7,945 Investment in Federal Home Loan Bank stock 2,428 2,138 Loans held for sale 133,975 67,834 Loans 1,433,201 1,043,371 Allowance for loan losses ( 20,653 ) ( 19,088 ) Net loans 1,412,548 1,024,283 Purchased receivables, net 11,549 24,373 Mortgage servicing rights, at fair value 10,721 11,920 Other real estate owned, net 7,205 7,043 Premises and equipment, net 39,055 38,422 Operating lease right-of-use asset 13,189 14,306 Goodwill 15,017 15,017 Other intangible assets, net 1,053 1,077 Other assets 70,448 58,076 Total assets $ 2,016,705 $ 1,643,996 LIABILITIES Deposits: Demand $ 680,033 $ 451,896 Interest-bearing demand 400,138 320,264 Savings 261,934 229,918 Money market 215,735 205,801 Certificates of deposit less than $250,000 95,587 90,702 Certificates of deposit $250,000 and greater 83,932 73,770 Total deposits 1,737,359 1,372,351 Borrowings 11,754 8,891 Junior subordinated debentures 10,310 10,310 Operating lease liability 13,121 14,229 Other liabilities 37,238 31,098 Total liabilities 1,809,782 1,436,879 SHAREHOLDERS' EQUITY Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding — — Common stock, $1 par value, 10,000,000 shares authorized, 6,368,046 and 6,558,809 issued and outstanding at June 30, 2020 and December 31, 2019, respectively 6,368 6,559 Additional paid-in capital 45,006 50,512 Retained earnings 155,998 149,615 Accumulated other comprehensive (loss) income, net of tax ( 449 ) 431 Total shareholders' equity 206,923 207,117 Total liabilities and shareholders' equity $ 2,016,705 $ 1,643,996 See notes to consolidated financial statements 3 NORTHRIM BANCORP, INC. Consolidated Statements of Income (Unaudited) Three Months Ended Six Months Ended June 30, June 30, (In Thousands, Except Per Share Data) 2020 2019 2020 2019 Interest and Dividend Income Interest and fees on loans and loans held for sale $ 17,454 $ 15,353 $ 32,813 $ 30,330 Interest on investment securities available for sale 1,389 1,690 3,011 3,322 Dividends on marketable equity securities 112 109 214 216 Dividends on Federal Home Loan Bank stock 18 19 38 38 Interest on deposits in other banks 31 135 267 278 Total Interest Income 19,004 17,306 36,343 34,184 Interest Expense Interest expense on deposits 1,331 1,174 2,815 2,112 Interest expense on securities sold under agreements to repurchase — 18 — 40 Interest expense on borrowings 122 62 193 119 Interest expense on junior subordinated debentures 94 95 188 187 Total Interest Expense 1,547 1,349 3,196 2,458 Net Interest Income 17,457 15,957 33,147 31,726 Provision for loan losses 404 300 2,464 1,050 Net Interest Income After Provision for Loan Losses 17,053 15,657 30,683 30,676 Other Operating Income Mortgage banking income 15,227 5,950 19,892 10,248 Bankcard fees 681 744 1,324 1,394 Purchased receivable income 675 837 1,596 1,646 Service charges on deposit accounts 171 413 533 826 Unrealized (loss) gain on marketable equity securities 149 118 ( 722 ) 652 Interest rate swap income 17 734 17 734 Gain on sale of marketable equity securities, net — — 98 — Gain on sale of investment securities available for sale, net — — — 23 Other income 615 773 1,230 1,579 Total Other Operating Income 17,535 9,569 23,968 17,102 Other Operating Expense Salaries and other personnel expense 15,637 12,945 27,893 24,247 Data processing expense 2,033 1,796 3,802 3,475 Occupancy expense 1,618 1,642 3,275 3,413 Professional and outside services 714 684 1,322 1,240 Marketing expense 696 833 1,279 1,252 Insurance expense 301 232 613 490 Intangible asset amortization expense 12 15 24 30 OREO (income), net rental income and gains on sale 21 165 ( 15 ) ( 155 ) Other operating expense 1,642 1,507 3,268 2,907 Total Other Operating Expense 22,674 19,819 41,461 36,899 Income Before Provision for Income Taxes 11,914 5,407 13,190 10,879 Provision for income taxes 2,014 1,146 2,257 2,306 Net Income $ 9,900 $ 4,261 $ 10,933 $ 8,573 Earnings Per Share, Basic $ 1.54 $ 0.62 $ 1.70 $ 1.25 Earnings Per Share, Diluted $ 1.52 $ 0.62 $ 1.68 $ 1.24 Weighted Average Shares Outstanding, Basic 6,367,397 6,798,352 6,417,514 6,838,986 Weighted Average Shares Outstanding, Diluted 6,440,898 6,896,687 6,496,515 6,939,338 See notes to consolidated financial statements 4 NORTHRIM BANCORP, INC. Consolidated Statements of Comprehensive Income (Unaudited) 2010 Three Months Ended June 30, Six Months Ended June 30, (In Thousands) 2020 2019 2020 2019 Net income $ 9,900 $ 4,261 $ 10,933 $ 8,573 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized gains arising during the period $ 1,753 $ 1,300 $ 423 $ 2,733 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 — — ( 70 ) ( 16 ) Derivatives and hedging activities: Unrealized losses arising during the period — ( 588 ) ( 1,867 ) ( 981 ) Income tax (expense) benefit related to unrealized gains and losses ( 497 ) ( 370 ) 634 ( 719 ) Other comprehensive (loss) income, net of tax 1,256 342 ( 880 ) 1,017 Comprehensive income $ 11,156 $ 4,603 $ 10,053 $ 9,590 See notes to consolidated financial statements 5 NORTHRIM BANCORP, INC. Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss), Net of Tax Total Number of Shares Par Value (In Thousands) Balance as of January 1, 2019 6,883 $ 6,883 $ 62,132 $ 137,452 ($ 520 ) $ 205,947 Cash dividend on common stock ($0.30 per share) — — — ( 2,087 ) — ( 2,087 ) Stock-based compensation expense — — 196 — — 196 Exercise of stock options and vesting of restricted stock units, net 2 2 ( 2 ) — — — Repurchase of common stock ( 6 ) ( 6 ) ( 199 ) — — ( 205 ) Other comprehensive income, net of tax — — — — 675 675 Net income — — — 4,312 — 4,312 Balance as of March 31, 2019 6,879 $ 6,879 $ 62,127 $ 139,677 $ 155 $ 208,838 Cash dividend on common stock ($0.30 per share) — — — ( 2,060 ) — ( 2,060 ) Stock-based compensation expense — — 155 — — 155 Repurchase of common stock ( 150 ) ( 150 ) ( 5,048 ) — — ( 5,198 ) Other comprehensive income, net of tax — — — — 342 342 Net income — — — 4,261 — 4,261 Balance as of June 30, 2019 6,729 $ 6,729 $ 57,234 $ 141,878 $ 497 $ 206,338 Cash dividend on common stock ($0.33 per share) — — — ( 2,199 ) — ( 2,199 ) Stock-based compensation expense — — 193 — — 193 Exercise of stock options and vesting of restricted stock units, net 3 3 ( 37 ) — — ( 34 ) Repurchase of common stock ( 192 ) ( 192 ) ( 6,974 ) — — ( 7,166 ) Other comprehensive loss, net of tax — — — — ( 631 ) ( 631 ) Net income — — — 7,538 — 7,538 Balance as of September 30, 2019 6,540 $ 6,540 $ 50,416 $ 147,217 ($ 134 ) $ 204,039 Cash dividend on common stock ($0.33 per share) — — — ( 2,182 ) — ( 2,182 ) Stock-based compensation expense — — 288 — — 288 Exercise of stock options and vesting of restricted stock units, net 19 19 ( 192 ) — — ( 173 ) Other comprehensive income, net of tax — — — — 565 565 Net income — — — 4,580 — 4,580 Balance as of December 31, 2019 6,559 $ 6,559 $ 50,512 $ 149,615 $ 431 $ 207,117 6 NORTHRIM BANCORP, INC. Consolidated Statements of Changes in Shareholders’ Equity (Continued) (Unaudited) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss), Net of Tax Total Number of Shares Par Value (In Thousands) Balance as of January 1, 2020 6,559 $ 6,559 $ 50,512 $ 149,615 $ 431 $ 207,117 Cash dividend on common stock ($0.34 per share) — — — ( 2,223 ) — ( 2,223 ) Stock-based compensation expense — — 242 — — 242 Repurchase of common stock ( 193 ) ( 193 ) ( 6,117 ) — — ( 6,310 ) Other comprehensive loss, net of tax — — — — ( 2,136 ) ( 2,136 ) Cumulative effect of adoption of accounting principles related to equity compensation expense — — 139 ( 139 ) — — Net income — — — 1,033 — 1,033 Balance as of March 31, 2020 6,366 $ 6,366 $ 44,776 $ 148,286 ($ 1,705 ) $ 197,723 Cash dividend on common stock ($0.34 per share) — — — ( 2,188 ) — ( 2,188 ) Stock-based compensation expense — — 238 — — 238 Exercise of stock options and vesting of restricted stock units, net 2 2 ( 8 ) — — ( 6 ) Other comprehensive income, net of tax — — — — 1,256 1,256 Net income — — — 9,900 — 9,900 Balance as of June 30, 2020 6,368 $ 6,368 $ 45,006 $ 155,998 ($ 449 ) $ 206,923 See notes to consolidated financial statements 7 NORTHRIM BANCORP, INC. Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, (In Thousands) 2020 2019 Operating Activities: Net income $ 10,933 $ 8,573 Adjustments to Reconcile Net Income to Net Cash Used by Operating Activities: Gain on sale of securities, net ( 98 ) ( 23 ) Depreciation and amortization of premises and equipment 1,542 1,444 Amortization of software 551 496 Intangible asset amortization 24 30 Amortization of investment security premium, net of discount accretion ( 63 ) 25 Unrealized loss (gain) on marketable equity securities 722 ( 652 ) Deferred tax (benefit) expense ( 562 ) 735 Stock-based compensation 480 351 Deferred loan fees and amortization, net of costs 9,921 ( 169 ) Provision for loan losses 2,464 1,050 Benefit for purchased receivables ( 1 ) ( 92 ) Additions to home mortgage servicing rights carried at fair value ( 1,659 ) ( 1,639 ) Change in fair value of home mortgage servicing rights carried at fair value 2,858 1,624 Change in fair value of commercial servicing rights carried at fair value 79 98 Gain on sale of loans ( 15,965 ) ( 7,830 ) Proceeds from the sale of loans held for sale 499,134 242,409 Origination of loans held for sale ( 549,310 ) ( 261,400 ) Gain on sale of other real estate owned ( 75 ) ( 316 ) Net changes in assets and liabilities: (Increase) decrease in accrued interest receivable ( 3,877 ) 25 (Increase) in other assets ( 4,309 ) ( 3,162 ) Decrease in other liabilities 631 668 Net Cash (Used) by Operating Activities ( 46,580 ) ( 17,755 ) Investing Activities: Investment in securities: Purchases of investment securities available for sale ( 51,074 ) ( 15,373 ) Purchases of marketable equity securities ( 1,038 ) — Purchases of FHLB stock ( 5,801 ) ( 806 ) Proceeds from sales/calls/maturities of securities available for sale 125,451 39,729 Proceeds from sales of marketable equity securities 503 — Proceeds from redemption of FHLB stock 5,511 838 Decrease in purchased receivables, net 12,825 1,384 Increase in loans, net ( 400,812 ) ( 31,090 ) Proceeds from sale of other real estate owned 75 1,085 Purchases of software ( 89 ) ( 294 ) Purchases of premises and equipment ( 2,175 ) ( 1,509 ) Net Cash (Used) Provided by Investing Activities ( 316,624 ) ( 6,036 ) Financing Activities: Increase in deposits 365,008 60,090 Increase in securities sold under repurchase agreements — ( 33,414 ) Increase (decrease) in borrowings 2,863 ( 83 ) Repurchase of common stock ( 6,310 ) ( 5,403 ) Proceeds from the issuance of common stock ( 6 ) — Cash dividends paid ( 4,363 ) ( 4,106 ) Net Cash Provided by Financing Activities 357,192 17,084 8 Net Change in Cash and Cash Equivalents ( 6,012 ) ( 6,707 ) Cash and Cash Equivalents at Beginning of Period 95,424 77,538 Cash and Cash Equivalents at End of Period $ 89,412 $ 70,831 Supplemental Information: Income taxes paid $ 3 $ — Interest paid $ 3,112 $ 2,483 Noncash commitments to invest in Low Income Housing Tax Credit Partnerships $ — $ 7,282 Transfer of loans to other real estate owned $ 162 $ — Non-cash lease liability arising from obtaining right of use assets $ — $ 528 Cash dividends declared but not paid $ 48 $ 41 See notes to consolidated financial statements 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation and Significant Accounting Policies The accompanying unaudited consolidated financial statements and corresponding footnotes have been prepared by Northrim BanCorp, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. The year-end Consolidated Balance Sheet data was derived from the Company's audited financial statements. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company owns a 100 % interest in Residential Mortgage Holding Company, LLC, the parent company of Residential Mortgage, LLC (collectively "RML") and consolidates their balance sheets and income statement into its financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company determined that it operates in two primary operating segments: Community Banking and Home Mortgage Lending. The Company has evaluated subsequent events and transactions for potential recognition or disclosure. 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 . The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 . Reclassification of Prior Year Presentation Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or total shareholders' equity. Recent Accounting Pronouncements Accounting pronouncements implemented in 2020 In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including allowing entities to elect an accounting policy to account for forfeitures as they occur by reversing compensation expense when the award is forfeited instead of estimating future forfeitures that will occur when recognizing compensation expense related to share-based payment awards. The Company elected to account for forfeitures as they occur in accordance with the guidance in ASU 2016-09 on January 1, 2020, which resulted in a $ 139,000 decrease in beginning retained earnings through a cumulative-effect adjustment. In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (“ASU 2017-04”). ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. The Company adopted ASU 2017-04 on January 1, 2020. The adoption of ASU 2017-04 did not have a material impact on the Company’s consolidated financial position or results of operations. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial position or results of operations. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04"). ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by ASU 2020-04 do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company adopted ASU 2020-04 as of March 31, 2020. The adoption of ASU 2020-04 did not have a material impact on the Company’s consolidated financial position or results of operations because no contract modifications have been made to date. 10 Accounting pronouncements to be implemented in future periods In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. For loans and held-to-maturity debt securities, ASU 2016-13 requires a current expected credit loss ("CECL") measurement to estimate the allowance for credit losses ("ACL") for the remaining estimated life of the financial asset (including off-balance sheet credit exposures) using historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates, but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 eliminates the existing guidance for purchased credit impaired loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination. In addition, ASU 2016-13 modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit. ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's loan portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. ASU 2016-13 is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2019, and must be applied prospectively. However, on October 16, 2019 the FASB voted to delay ASU 2016-13 for Smaller Reporting Companies. In addition, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed by the President of the United States that included an option for entities to delay the implementation of ASU 2016-13 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. The Company has elected Small Reporting Company status, which changes the effective date for ASU 2016-13 for the Company to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2022. Our implementation process includes loss forecasting model development, evaluation of technical accounting topics, updates to our allowance documentation, reporting processes and related internal controls, and overall operational readiness for our adoption of the ASU 2016-13, which will continue until adoption, including parallel runs for CECL alongside our current allowance process. We are in the process of developing, validating, and implementing models used to estimate credit losses under CECL. We have completed substantially all of our loss forecasting models, and we expect to complete the validation process for our loan models during 2020. Our current planned approach for estimating expected life-time credit losses for loans and debt securities includes the following key components: • An initial loss forecast period of one year for all loan portfolio segments and classes of financing receivables and off balance-sheet credit exposures. This period reflects management’s expectation of losses based on forward-looking economic scenarios over that time. • A historical loss forecast period covering the remaining contractual life, adjusted for prepayments, by segment and class of financing receivables based on the change in key historical economic variables during representative historical expansionary and recessionary periods. • A reversion period of up to two years connecting the initial loss forecast to the historical loss forecast based on economic conditions at the measurement date. • Utilization of discounted cash flow ("DCF") methods to measure credit impairment for loans modified in a troubled debt restructuring, unless they are collateral dependent and measured at the fair value of collateral. The DCF methods would obtain estimated life-time credit losses using the conceptual components described above. • For debt securities classified as available-for-sale or held-to-maturity, we plan to utilize the DCF methods to measure the ACL, which will incorporate expected credit losses using the conceptual components described above. We will recognize an ACL for available-for-sale and held-to-maturity debt securities. The ACL on available-for-sale debt securities will be subject to a limitation based on the fair value of the debt securities. 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. As of June 30, 2020, the Company does not hold any debt securities classified as held-to-maturity. 11 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. 2 . Cash and Cash Equivalents 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 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. 3 . Investment Securities The carrying values and estimated fair values of investment securities at the periods indicated are presented below: (In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value June 30, 2020 Securities available for sale U.S. Treasury and government sponsored entities $ 137,908 $ 2,095 $ — $ 140,003 Municipal securities 2,295 32 — 2,327 Corporate bonds 31,752 323 ( 32 ) 32,043 Collateralized loan obligations 28,619 43 ( 688 ) 27,974 Total securities available for sale $ 200,574 $ 2,493 ($ 720 ) $ 202,347 December 31, 2019 Securities available for sale U.S. Treasury and government sponsored entities $ 210,756 $ 1,133 ($ 37 ) $ 211,852 Municipal securities 3,288 9 — 3,297 Corporate bonds 34,764 302 — 35,066 Collateralized loan obligations 25,980 — ( 57 ) 25,923 Total securities available for sale $ 274,788 $ 1,444 ($ 94 ) $ 276,138 12 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 More Than 12 Months Total (In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses June 30, 2020: Securities available for sale Corporate bonds $ 10,056 ($ 32 ) $ — $ — $ 10,056 ($ 32 ) Collateralized loan obligations 21,518 ( 610 ) 2,913 ( 78 ) 24,431 ( 688 ) Total $ 31,574 ($ 642 ) $ 2,913 ($ 78 ) $ 34,487 ($ 720 ) December 31, 2019: Securities available for sale U.S. Treasury and government sponsored entities $ 39,797 ($ 33 ) $ 2,996 ($ 4 ) $ 42,793 ($ 37 ) Collateralized loan obligations 14,972 ( 17 ) 7,951 ( 40 ) 22,923 ( 57 ) Total $ 54,769 ($ 50 ) $ 10,947 ($ 44 ) $ 65,716 ($ 94 ) The unrealized losses on investments in U.S. treasury and government sponsored entities, corporate bonds, collateralized loan obligations, and municipal securities in both periods were caused by changes in interest rates. 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 June 30, 2020 and December 31, 2019 , $ 94.3 million and $ 30.6 million in securities were pledged for deposits and borrowings, respectively. 13 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. (In Thousands) Amortized Cost Fair Value Weighted Average Yield US Treasury and government sponsored entities Within 1 year $ 64,003 $ 64,772 2.27 % 1-5 years 73,905 75,231 1.80 % Total $ 137,908 $ 140,003 2.02 % Corporate bonds Within 1 year $ 5,000 $ 5,002 1.87 % 1-5 years 26,752 27,041 1.79 % Total $ 31,752 $ 32,043 1.80 % Collateralized loan obligations 5-10 years $ 5,167 $ 5,081 3.40 % Over 10 years 23,452 22,893 2.70 % Total $ 28,619 $ 27,974 2.83 % Municipal securities 1-5 years $ 2,295 $ 2,327 3.94 % Total $ 2,295 $ 2,327 3.94 % 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) Proceeds Gross Gains Gross Losses Three Months Ended June 30, 2020 Available for sale securities $ — $ — $ — Three Months Ended June 30, 2019 Available for sale securities $ — $ — $ — Six Months Ended June 30, 2020 Available for sale securities $ — $ — $ — Six Months Ended June 30, 2019 Available for sale securities $ 4,219 $ 23 $ — 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) 2020 2019 2020 2019 US Treasury and government sponsored entities $ 998 $ 1,071 $ 2,159 $ 2,142 Other 369 589 803 1,098 Total taxable interest income $ 1,367 $ 1,660 $ 2,962 $ 3,240 Municipal securities $ 22 $ 30 $ 49 $ 82 Total tax-exempt interest income $ 22 $ 30 $ 49 $ 82 Total $ 1,389 $ 1,690 $ 3,011 $ 3,322 14 4 . 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: (In Thousands) Commercial 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 deeds of trust Consumer other Total June 30, 2020 AQR Pass $ 766,043 $ 36,329 $ 76,146 $ 144,310 $ 301,454 $ 38,921 $ 14,183 $ 23,688 $ 1,401,074 AQR Special Mention 2,465 1,287 — 3,637 17,178 1,179 177 — 25,923 AQR Substandard 11,606 702 — 6,794 625 1,176 84 112 21,099 AQR Doubtful 46 — — — — — — — 46 AQR Loss — — — — — — 66 — 66 Subtotal $ 780,160 $ 38,318 $ 76,146 $ 154,741 $ 319,257 $ 41,276 $ 14,510 $ 23,800 $ 1,448,208 Less: Unearned origination fees, net of origination costs ( 15,007 ) Total loans $ 1,433,201 December 31, 2019 AQR Pass $ 394,107 $ 34,132 $ 61,808 $ 129,959 $ 295,482 $ 38,771 $ 15,860 $ 24,464 $ 994,583 AQR Special Mention 2,279 3,337 — 3,828 17,478 2,559 179 — 29,660 AQR Substandard 16,304 1,349 — 5,104 — 1,176 159 121 24,213 Subtotal $ 412,690 $ 38,818 $ 61,808 $ 138,891 $ 312,960 $ 42,506 $ 16,198 $ 24,585 $ 1,048,456 Less: Unearned origination fees, net of origination costs ( 5,085 ) Total loans $ 1,043,371 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. 15 Nonaccrual loans: 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: (In Thousands) 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Current Total June 30, 2020 Commercial $ 354 $ — $ 6,031 $ 1,977 $ 8,362 Real estate construction one-to-four family — — 702 — 702 Real estate term owner occupied — 60 2,245 1,642 3,947 Real estate term other — — 1,176 — 1,176 Consumer secured by 1st deeds of trust — — — 66 66 Consumer other — — — 112 112 Total nonperforming loans 354 60 10,154 3,797 14,365 Government guarantees on nonaccrual loans ( 73 ) — — ( 1,562 ) ( 1,635 ) Net nonaccrual loans $ 281 $ 60 $ 10,154 $ 2,235 $ 12,730 December 31, 2019 Commercial $ 270 $ 385 $ 2,862 $ 5,636 $ 9,153 Real estate construction one-to-four family — — 1,349 — 1,349 Real estate term owner occupied 1,641 — 623 1,225 3,489 Real estate term other — — 1,176 — 1,176 Consumer secured by 1st deeds of trust — — — 68 68 Consumer other 26 89 — 6 121 Total nonperforming loans 1,937 474 6,010 6,935 15,356 Government guarantees on nonaccrual loans ( 268 ) — — ( 1,137 ) ( 1,405 ) Net nonaccrual loans $ 1,669 $ 474 $ 6,010 $ 5,798 $ 13,951 16 Past Due Loans: Past due loans and nonaccrual loans at the periods indicated are presented below by segment: (In Thousands) 30-59 Days Past Due Still Accruing 60-89 Days Past Due Still Accruing Greater Than 90 Days Still Accruing Total Past Due Nonaccrual Current Total June 30, 2020 Commercial $ 250 $ — $ — $ 250 $ 8,362 $ 771,548 $ 780,160 Real estate construction one-to-four family — — — — 702 37,616 38,318 Real estate construction other — — — — — 76,146 76,146 Real estate term owner occupied — — — — 3,947 150,794 154,741 Real estate term non-owner occupied — — — — — 319,257 319,257 Real estate term other — — — — 1,176 40,100 41,276 Consumer secured by 1st deed of trust — 553 — 553 66 13,891 14,510 Consumer other — 58 — 58 112 23,630 23,800 Subtotal $ 250 $ 611 $ — $ 861 $ 14,365 $ 1,432,982 $ 1,448,208 Less: Unearned origination fees, net of origination costs ( 15,007 ) Total $ 1,433,201 December 31, 2019 Commercial $ 270 $ — $ — $ 270 $ 9,153 $ 403,267 $ 412,690 Real estate construction one-to-four family — — — — 1,349 37,469 38,818 Real estate construction other — — — — — 61,808 61,808 Real estate term owner occupied 338 — — 338 3,489 135,064 138,891 Real estate term non-owner occupied — — — — — 312,960 312,960 Real estate term other 26 — — 26 1,176 41,304 42,506 Consumer secured by 1st deed of trust 750 — — 750 68 15,380 16,198 Consumer other 150 — — 150 121 24,314 24,585 Subtotal $ 1,534 $ — $ — $ 1,534 $ 15,356 $ 1,031,566 $ 1,048,456 Less: Unearned origination fees, net of origination costs ( 5,085 ) Total $ 1,043,371 17 Impaired Loans: The following table presents information about impaired loans by class as of the periods indicated: (In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance June 30, 2020 With no related allowance recorded Commercial - AQR substandard $ 11,193 $ 12,010 $— Real estate construction one-to-four family - AQR substandard 702 702 — Real estate term owner occupied - AQR substandard 6,794 6,794 — Real estate term non-owner occupied - AQR pass 177 177 — Real estate term non-owner occupied - AQR substandard 625 625 — Real estate term other - AQR pass 374 374 — Real estate term other - AQR substandard 1,177 1,177 — Consumer secured by 1st deeds of trust - AQR pass 118 118 — Consumer secured by 1st deeds of trust - AQR substandard 84 84 — Consumer secured by 1st deeds of trust - AQR loss 66 71 — Consumer other - AQR substandard 85 90 — Subtotal $ 21,395 $ 22,222 $— With an allowance recorded Commercial - AQR substandard $ 250 $ 250 $ 31 Subtotal $ 250 $ 250 $ 31 Total Commercial - AQR substandard $ 11,443 $ 12,260 $ 31 Real estate construction one-to-four family - AQR substandard 702 702 — Real estate term owner-occupied - AQR substandard 6,794 6,794 — Real estate term non-owner occupied - AQR pass 177 177 — Real estate term non-owner occupied - AQR substandard 625 625 — Real estate term other - AQR pass 374 374 — Real estate term other - AQR substandard 1,177 1,177 — Consumer secured by 1st deeds of trust - AQR pass 118 118 — Consumer secured by 1st deeds of trust - AQR substandard 84 84 — Consumer secured by 1st deeds of trust - AQR loss 66 71 — Consumer other - AQR substandard 85 90 — Total $ 21,645 $ 22,472 $ 31 (In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance December 31, 2019 With no related allowance recorded Commercial - AQR substandard $ 15,517 $ 15,582 $— Real estate construction one-to-four family -AQR substandard 1,349 1,349 — Real estate term owner occupied - AQR substandard 5,104 5,104 — Real estate term non-owner occupied - AQR pass 178 178 — Real estate term other - AQR pass 417 417 — Real estate term other - AQR substandard 1,176 1,176 — Consumer secured by 1st deeds of trust - AQR pass 122 122 — Consumer secured by 1st deeds of trust - AQR substandard 159 163 — Consumer other - AQR substandard 90 94 — Subtotal $ 24,112 $ 24,185 $— 18 With an allowance recorded Commercial - AQR substandard $ 561 $ 561 $ 17 Subtotal $ 561 $ 561 $ 17 Total Commercial - AQR substandard $ 16,078 $ 16,143 $ 17 Real estate construction one-to-four family -AQR substandard 1,349 1,349 — Real estate term owner occupied - AQR substandard 5,104 5,104 — Real estate term non-owner occupied - AQR pass 178 178 — Real estate term other - AQR pass 417 417 — Real estate term other - AQR substandard 1,176 1,176 — Consumer secured by 1st deeds of trust - AQR pass 122 122 — Consumer secured by 1st deeds of trust - AQR substandard 159 163 — Consumer other - AQR substandard 90 94 — Total $ 24,673 $ 24,746 $ 17 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 and six -month periods ended June 30, 2020 and 2019 : Three Months Ended June 30, 2020 2019 (In Thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded Commercial - AQR pass $ — $ — $ 75 $ 1 Commercial - AQR substandard 12,767 65 17,192 95 Real estate construction one-to-four family - AQR substandard 808 — 1,958 — Real estate term owner occupied- AQR substandard 6,707 49 5,877 14 Real estate term non-owner occupied- AQR pass 177 3 276 5 Real estate term non-owner occupied- AQR substandard 313 — — — Real estate term other - AQR pass 386 7 457 8 Real estate term other - AQR substandard 1,176 — 1,213 — Consumer secured by 1st deeds of trust - AQR pass 120 3 127 3 Consumer secured by 1st deeds of trust - AQR substandard 86 2 309 2 Consumer secured by 1st deeds of trust - AQR loss 66 — — — Consumer other - AQR substandard 86 — 95 — Subtotal $ 22,692 $ 129 $ 27,579 $ 128 With an allowance recorded Commercial - AQR substandard $ 125 $ — $ 917 $ — Subtotal $ 125 $ — $ 917 $ — 19 Total Commercial - AQR pass $ — $ — $ 75 $ 1 Commercial - AQR substandard 12,892 65 18,109 95 Real estate construction one-to-four family - AQR substandard 808 — 1,958 — Real estate term owner-occupied - AQR substandard 6,707 49 5,877 14 Real estate term non-owner occupied - AQR pass 177 3 276 5 Real estate term non-owner occupied - AQR substandard 313 — — — Real estate term other - AQR pass 386 7 457 8 Real estate term other - AQR substandard 1,176 — 1,213 — Consumer secured by 1st deeds of trust - AQR pass 120 3 127 3 Consumer secured by 1st deeds of trust - AQR substandard 86 2 309 2 Consumer secured by 1st deeds of trust - AQR loss 66 — — — Consumer other - AQR substandard 86 — 95 — Total Impaired Loans $ 22,817 $ 129 $ 28,496 $ 128 Six Months Ended June 30, 2020 2019 (In Thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded Commercial - AQR pass $ 10,575 $ 95 $ 1,073 $ 35 Commercial - AQR substandard — — 16,995 185 Real estate construction one-to-four family - AQR substandard 970 — 2,427 — Real estate term owner occupied- AQR substandard 6,378 78 5,895 49 Real estate term non-owner occupied- AQR pass 177 7 283 10 Real estate term non-owner occupied- AQR substandard 156 463 — Real estate term other - AQR pass 396 14 467 16 Real estate term other - AQR substandard 1,176 — 897 — Consumer secured by 1st deeds of trust - AQR pass 121 6 128 6 Consumer secured by 1st deeds of trust - AQR substandard 87 3 278 4 Consumer secured by 1st deeds of trust - AQR loss 67 — — — Consumer other - AQR substandard 88 — 48 — Subtotal $ 20,191 $ 203 $ 28,954 $ 305 With an allowance recorded Commercial - AQR substandard $ 2,586 $ — $ 881 $ — Real estate term other - AQR substandard — — 328 — Consumer secured by 1st deeds of trust - AQR substandard — — 108 — Subtotal $ 2,586 $ — $ 1,317 $ — 20 Total Commercial - AQR pass $ 10,575 $ 95 $ 1,073 $ 35 Commercial - AQR substandard 2,586 — 17,876 185 Real estate construction one-to-four family - AQR substandard 970 — 2,427 — Real estate term owner-occupied - AQR substandard 6,378 78 5,895 49 Real estate term non-owner occupied - AQR pass 177 7 283 10 Real estate term non-owner occupied - AQR substandard 156 — 463 — Real estate term other - AQR pass 396 14 467 16 Real estate term other - AQR substandard 1,176 — 1,225 — Consumer secured by 1st deeds of trust - AQR pass 121 6 128 6 Consumer secured by 1st deeds of trust - AQR substandard 87 3 386 4 Consumer secured by 1st deeds of trust - AQR loss 67 — — — Consumer other - AQR substandard 88 — 48 — Total Impaired Loans $ 22,777 $ 203 $ 30,271 $ 305 Troubled Debt Restructurings: 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. The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company has elected to adopt these provisions of the CARES Act. As of 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 Total Portfolio loans $ 64,298 $ 293,224 $ 357,522 Number of modifications 76 403 479 The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories: Rate Modification : A modification in which the interest rate is changed. Term Modification : A modification in which the maturity date, timing of payments, or frequency of payments is changed. Payment Modification : A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time is included in this category. Combination Modification : Any other type of modification, including the use of multiple categories above. AQR pass graded loans included above in the impaired loan data are loans classified as TDRs. By definition, TDRs are considered impaired loans. All of the Company's TDRs are included in impaired loans. 21 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. The below disclosed restructurings were not related to COVID-19 modifications: Accrual Status Nonaccrual Status Total Modifications (In Thousands) New Troubled Debt Restructurings Commercial - AQR substandard $ 2,031 $ — $ 2,031 Subtotal $ 2,031 $ — $ 2,031 Existing Troubled Debt Restructurings $ 856 $ 7,749 $ 8,605 Total $ 2,887 $ 7,749 $ 10,636 22 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 Rate Modification Term Modification Payment Modification Combination Modification Total Modifications (In Thousands) Pre-Modification Outstanding Recorded Investment: Commercial - AQR substandard 1 $ — $ 3,249 $ — $ — $ 3,249 Total 1 $ — $ 3,249 $ — $ — $ 3,249 Post-Modification Outstanding Recorded Investment: Commercial - AQR substandard 1 $ — $ 2,031 $ — $ — $ 2,031 Total 1 $ — $ 2,031 $ — $ — $ 2,031 June 30, 2019 Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications (In Thousands) Pre-Modification Outstanding Recorded Investment: Commercial - AQR substandard 5 $ — $ — $ 509 $ 1,350 $ 1,859 Real estate term owner occupied- AQR substandard 1 — — 192 — 192 Total 6 $ — $ — $ 701 $ 1,350 $ 2,051 Post-Modification Outstanding Recorded Investment: Commercial - AQR substandard 5 $ — $ — $ 433 $ 1,346 $ 1,779 Real estate term owner occupied- AQR substandard 1 — — 189 — 189 Total 6 $ — $ — $ 622 $ 1,346 $ 1,968 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. 23 5 . Allowance for Loan Losses The following tables detail activity in the Allowance for the periods indicated: Three Months Ended June 30, Commercial 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 Unallocated Total 2020 Balance, beginning of period $ 8,269 $ 643 $ 1,279 $ 2,430 $ 5,491 $ 711 $ 274 $ 453 $ 1,467 $ 21,017 Charge-Offs ( 804 ) — — — — — — — — ( 804 ) Recoveries 30 — — — — 1 — 5 — 36 Provision (benefit) ( 129 ) 47 ( 64 ) 103 ( 70 ) ( 10 ) ( 16 ) ( 11 ) 554 404 Balance, end of period $ 7,366 $ 690 $ 1,215 $ 2,533 $ 5,421 $ 702 $ 258 $ 447 $ 2,021 $ 20,653 Balance, end of period: Individually evaluated for impairment $ 31 $ — $ — $ — $ — $ — $ — $ — $ — $ 31 Balance, end of period: Collectively evaluated for impairment $ 7,335 $ 690 $ 1,215 $ 2,533 $ 5,421 $ 702 $ 258 $ 447 $ 2,021 $ 20,622 2019 Balance, beginning of period $ 6,478 $ 659 $ 1,367 $ 2,320 $ 6,122 $ 844 $ 396 $ 501 $ 1,522 $ 20,209 Charge-Offs ( 64 ) — — — — — — ( 4 ) — ( 68 ) Recoveries 48 — — — — 25 — 4 — 77 Provision (benefit) 661 80 ( 255 ) ( 39 ) 109 ( 108 ) ( 74 ) ( 15 ) ( 59 ) 300 Balance, end of period $ 7,123 $ 739 $ 1,112 $ 2,281 $ 6,231 $ 761 $ 322 $ 486 $ 1,463 $ 20,518 Balance, end of period: Individually evaluated for impairment $ 6 $ — $ — $ — $ — $ — $ — $ — $ — $ 6 Balance, end of period: Collectively evaluated for impairment $ 7,117 $ 739 $ 1,112 $ 2,281 $ 6,231 $ 761 $ 322 $ 486 $ 1,463 $ 20,512 24 Six Months Ended June 30, Commercial 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 Unallocated Total 2020 Balance, beginning of period $ 6,604 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079 $ 19,088 Charge-Offs ( 955 ) — — — — — — ( 14 ) — ( 969 ) Recoveries 56 — — — — 1 — 13 — 70 Provision (benefit) 1,661 47 198 345 241 30 ( 12 ) 12 ( 58 ) 2,464 Balance, end of period $ 7,366 $ 690 $ 1,215 $ 2,533 $ 5,421 $ 702 $ 258 $ 447 $ 2,021 $ 20,653 Balance, end of period: Individually evaluated for impairment $ 31 $ — $ — $ — $ — $ — $ — $ — $ — $ 31 Balance, end of period: Collectively evaluated for impairment $ 7,335 $ 690 $ 1,215 $ 2,533 $ 5,421 $ 702 $ 258 $ 447 $ 2,021 $ 20,622 2019 Balance, beginning of period $ 5,660 $ 675 $ 1,275 $ 2,027 $ 5,799 $ 716 $ 306 $ 426 $ 2,635 $ 19,519 Charge-Offs ( 173 ) — — — — — — ( 4 ) — ( 177 ) Recoveries 92 — — — — 27 — 7 — 126 Provision (benefit) 1,544 64 ( 163 ) 254 432 18 16 57 ( 1,172 ) 1,050 Balance, end of period $ 7,123 $ 739 $ 1,112 $ 2,281 $ 6,231 $ 761 $ 322 $ 486 $ 1,463 $ 20,518 Balance, end of period: Individually evaluated for impairment $ 6 $ — $ — $ — $ — $ — $ — $ — $ — $ 6 Balance, end of period: Collectively evaluated for impairment $ 7,117 $ 739 $ 1,112 $ 2,281 $ 6,231 $ 761 $ 322 $ 486 $ 1,463 $ 20,512 25 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: (In Thousands) Commercial 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 Total June 30, 2020 Balance, end of period $ 768,988 $ 38,148 $ 75,333 $ 153,942 $ 317,333 $ 40,989 $ 14,496 $ 23,972 $ 1,433,201 Balance, end of period: Individually evaluated for impairment $ 11,443 $ 702 $ — $ 6,794 $ 802 $ 1,551 $ 268 $ 85 $ 21,645 Balance, end of period: Collectively evaluated for impairment $ 757,545 $ 37,446 $ 75,333 $ 147,148 $ 316,531 $ 39,438 $ 14,228 $ 23,887 $ 1,411,556 December 31, 2019 Balance, end of period $ 411,327 $ 38,503 $ 60,906 $ 138,181 $ 311,302 $ 42,200 $ 16,191 $ 24,761 $ 1,043,371 Balance, end of period: Individually evaluated for impairment $ 16,077 $ 1,349 $ — $ 5,104 $ 178 $ 1,594 $ 281 $ 90 $ 24,673 Balance, end of period: Collectively evaluated for impairment $ 395,250 $ 37,154 $ 60,906 $ 133,077 $ 311,124 $ 40,606 $ 15,910 $ 24,671 $ 1,018,698 The following represents the balance of the Allowance for the periods indicated segregated by segment and class: (In Thousands) Commercial 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 deeds of trust Consumer other Unallocated Total June 30, 2020 Individually evaluated for impairment: AQR Substandard $ 31 $ — $ — $ — $ — $ — $ — $ — $ — $ 31 Collectively evaluated for impairment: AQR Pass 7,223 667 1,215 2,469 5,277 681 253 443 — 18,228 AQR Special Mention 60 23 — 64 144 21 5 — — 317 AQR Substandard 6 — — — — — — 4 — 10 AQR Doubtful 46 — — — — — — — — 46 Unallocated — — — — — — — — 2,021 2,021 $ 7,366 $ 690 $ 1,215 $ 2,533 $ 5,421 $ 702 $ 258 $ 447 $ 2,021 $ 20,653 December 31, 2019 Individually evaluated for impairment: AQR Substandard $ 17 $ — $ — $ — $ — $ — $ — $ — $ — $ 17 Collectively evaluated for impairment: AQR Pass 6,514 588 1,017 2,125 4,829 629 266 431 — 16,399 AQR Special Mention 64 55 — 63 351 42 4 — — 579 AQR Substandard 9 — — — — — — 5 — 14 Unallocated — — — — — — — — 2,079 2,079 $ 6,604 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079 $ 19,088 26 6 . Purchased Receivables Purchased receivables are carried at their principal amount outstanding, net of a reserve for anticipated losses that have not yet been identified, and have a maturity of less than one year . Purchased receivable balances are charged against this reserve when management believes that collection of principal is unlikely. 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 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) June 30, 2020 December 31, 2019 Purchased receivables $ 11,642 $ 24,467 Reserve for purchased receivable losses ( 93 ) ( 94 ) Total $ 11,549 $ 24,373 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) 2020 2019 2020 2019 Balance, beginning of period $ 99 $ 141 $ 94 $ 190 Charge-offs — — — — Recoveries — — — — Charge-offs net of recoveries — — — — Reserve (benefit) for purchased receivables ( 6 ) ( 43 ) ( 1 ) ( 92 ) Balance, end of period $ 93 $ 98 $ 93 $ 98 27 7 . Servicing Rights Mortgage servicing rights 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) 2020 2019 2020 2019 Balance, beginning of period $ 11,653 $ 11,254 $ 11,920 $ 10,821 Additions for new MSR capitalized 996 532 1,659 1,639 Changes in fair value: Due to changes in model inputs of assumptions (1) ( 891 ) ( 630 ) ( 1,592 ) ( 1,007 ) Other (2) ( 1,037 ) ( 320 ) ( 1,266 ) ( 617 ) Balance, end of period $ 10,721 $ 10,836 $ 10,721 $ 10,836 (1) Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates. (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 June 30, 2020 and December 31, 2019 : (In Thousands) June 30, 2020 December 31, 2019 Balance of mortgage loans serviced for others $ 655,183 $ 659,048 MSR as a percentage of serviced loans 1.64 % 1.81 % 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 : 2020 2019 Constant prepayment rate 14.30 % 10.61 % Discount rate 7.75 % 8.52 % 28 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) June 30, 2020 December 31, 2019 Aggregate portfolio principal balance $ 655,183 $ 659,048 Weighted average rate of note 3.80 % 3.90 % June 30, 2020 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change Constant prepayment rate 14.30 % 40.94 % 50.36 % Discount rate 7.75 % 6.75 % 5.75 % Fair value MSR $ 10,721 $ 4,304 $ 3,376 Percentage of MSR 1.64 % 0.66 % 0.52 % December 31, 2019 Constant prepayment rate 10.61 % 26.25 % 28.39 % Discount rate 8.52 % 7.52 % 6.52 % Fair value MSR $ 11,920 $ 7,005 $ 6,625 Percentage of MSR 1.81 % 1.06 % 1.01 % The above tables show the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four family Alaska Housing Finance Corporation/FNMA/FHLMC serviced home loan. The above tables reference a 100 basis point and 200 basis point decrease in discount rates. These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSR is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time. Commercial servicing rights 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 % . 8 . Leases 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. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company also elected the practical expedient on not separating lease components from nonlease components for all operating leases. Additionally, the Company has elected to not apply ASU 2016-02 to short-term leases. Short- 29 term leases are those leases that, at the lease commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. The Company has lease agreements for land and office facilities that it occupies to operate several of its retail branch locations, as well as one storage facility, that are classified as operating leases and are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities. Most of these leases contain options to extend the duration of the leases at management's discretion. Management has recognized these renewal options as part of its ROU asset and lease liabilities when management is reasonably certain to exercise these options. Whether or not management is reasonably certain to exercise such an option is determined based on facts and circumstances for each individual lease. However, if a renewal option is offered at below market terms, management considers the exercise of that option to be reasonably certain for the purposes of calculating its ROU assets and lease liabilities. None of the Company's leases include residual value guarantees, and there are no restrictions or covenants imposed by these leases that impose significant additional financial obligations on the Company. The Company uses the rate implicit in each lease as the discount rate to determine the lease liability, which is the present value of lease payments not yet paid at the lease commencement date. If the rate implicit in each lease is not readily determinable, which is often the case, the Company uses its incremental borrowing rate as the discount rate. 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 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 . The Company did not have any agreements that are classified as finance leases in 2020 or 2019. 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) 2020 2019 2020 2019 Lease Cost Operating lease cost (1) $ 706 $ 677 $ 1,401 $ 1,355 Short term lease cost (1) 8 8 17 17 Total lease cost $ 714 $ 685 $ 1,418 $ 1,372 Other information Operating leases - operating cash flows $ 1,341 $ 1,348 Weighted average lease term - operating leases, in years 10.80 11.26 Weighted average discount rate - operating leases 3.34 % 3.32 % (1) Expenses are classified within occupancy expense on the Consolidated Statements of Income. The table below reconciles the remaining undiscounted cash flows for the next five years for each twelve-month period presented (unless otherwise indicated) and the total of the subsequent remaining years to the operating lease liabilities recorded on the balance sheet: (In Thousands) Operating Leases 2020 (Six months) $ 1,336 2021 2,581 2022 2,139 2023 1,850 2024 1,742 Thereafter 6,453 Total minimum lease payments $ 16,101 Less: amount of lease payment representing interest ( 2,980 ) Present value of future minimum lease payments $ 13,121 30 9 . Revenue 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 ("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 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. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s non-interest revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below. Bankcard fees Bankcard fees are primarily comprised of debit card income and ATM fees. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa or MasterCard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. The Company’s performance obligation for bankcard fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payments are typically received immediately or in the following month. Service charges on deposit accounts Service charges on deposit accounts consist of general service fees for monthly account maintenance, activity- or transaction-based fees, and account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), and other deposit account related fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payments for service charges on deposit accounts are primarily received immediately or in the following month through a direct charge to customers’ accounts. Other Other operating income consists of other recurring revenue streams such as merchant services income, commissions from sales of mutual funds and other investments, safety deposit box rental fees, bank check and other check fees, unrealized gains and losses on marketable securities, and other miscellaneous revenue streams. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for merchant services income is largely satisfied, and related revenue recognized, when the transactions have been completed. Payment is typically received immediately or in the following month. The Company earns commissions from the sale of mutual funds as periodic service fees (i.e., trailers) from Elliott Cove Capital Management typically based on a percentage of net asset value. Trailer revenue is recorded over time, quarterly, as net asset value is determined. The Company also earns commission income from the sale of annuity products. The Company acts as an intermediary between the Company's customer and Elliott Cove Investment Advisors for these transactions, and commissions from annuity product sales are recorded when the Company’s performance obligation is satisfied, which is generally upon the issuance of the annuity policy. The Company does not earn trailer fees on annuity sales. Payment for commissions from sales of mutual funds and other investments and annuity sales is typically received in the following quarter. Other service charges include revenue from safety deposit box rental fees, processing wire transfers, bank check and other check fees, and other services. The Company’s performance obligations for these other revenue streams are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payments are typically received immediately or in the following month. 31 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 June 30, Six Months Ended June 30, Other operating income 2020 2019 2020 2019 In-scope of Topic 606: Bankcard fees $ 681 $ 744 $ 1,324 $ 1,394 Service charges on deposit accounts 171 413 533 826 Other 421 451 735 816 Other operating income (in-scope of Topic 606) $ 1,273 $ 1,608 $ 2,592 $ 3,036 Other operating income (out-of-scope of Topic 606) 16,262 7,961 21,376 14,066 Total other operating income $ 17,535 $ 9,569 $ 23,968 $ 17,102 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 $ 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 . 32 10 . Derivatives Interest rates swaps related to community banking activities The Company enters into commercial loan interest rate swap agreements with commercial banking customers which are offset with a corresponding swap agreement with a third party financial institution ("counterparty"). The Company has agreements with its counterparties that contain provisions that provide that if the Company fails to maintain its status as a "well-capitalized" institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. These agreements also require that the Company and the counterparty collateralize any fair value shortfalls that exceed $ 250,000 with eligible collateral, which includes cash and securities backed with the full faith and credit of the federal government. 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 $ 9.2 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. None of these interest rate swaps are designated as hedging instruments. The Company has an interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures, which is floating rate debt, by swapping the cash flows with an interest rate swap which receives floating and pays fixed. The Company has designated this interest rate swap as a hedging instrument. The interest rate swap effectively fixes the Company's interest payments on the $ 10.0 million of junior subordinated debentures held under Northrim Statutory Trust 2 at 3.72 % through its maturity date. 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 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 June 30, 2020 and the unrealized loss was $ 534,000 as of December 31, 2019 . Interest rates swaps related to home mortgage banking activities The Company also uses derivatives to hedge the risk of changes in the fair values of interest rate lock commitments. The Company enters into commitments to originate residential mortgage loans at specific rates; the value of these commitments are detailed in the table below as "interest rate lock commitments". The Company also hedges the interest rate risk associated with its residential mortgage loan commitments, which are referred to as "retail interest rate contracts" in the table below. 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 $ 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. 33 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 June 30, 2020 December 31, 2019 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other assets $ 8,411 $ 2,950 Interest rate lock commitments Other assets 4,653 810 Total $ 13,064 $ 3,760 (In Thousands) Liability Derivatives June 30, 2020 December 31, 2019 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other liabilities $ 8,411 $ 2,950 Retail interest rate contracts Other liabilities 628 71 Total $ 9,039 $ 3,021 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) Income Statement Location 2020 2019 2020 2019 Retail interest rate contracts Mortgage banking income ($ 1,579 ) ($ 524 ) ($ 4,702 ) ($ 692 ) Interest rate lock commitments Mortgage banking income 1,447 781 3,591 1,005 Total ($ 132 ) $ 257 ($ 1,111 ) $ 313 Our derivative transactions with counterparties under International Swaps and Derivative Association master agreements include "right of set-off" provisions. "Right of set-off" provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes. 34 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 (In Thousands) Gross amounts of recognized assets and liabilities Gross amounts offset in the Statement of Financial Position Net amounts of assets and liabilities presented in the Statement of Financial Position Financial Instruments Collateral Posted Net Amount Asset Derivatives Interest rate swaps $ 8,411 $ — $ 8,411 $ — $ — $ 8,411 Liability Derivatives Interest rate swaps $ 8,411 $ — $ 8,411 $ — $ 8,411 $ — Retail interest rate contracts 628 — 628 — — 628 December 31, 2019 Gross amounts not offset in the Statement of Financial Position (In Thousands) Gross amounts of recognized assets and liabilities Gross amounts offset in the Statement of Financial Position Net amounts of assets and liabilities presented in the Statement of Financial Position Financial Instruments Collateral Posted Net Amount Asset Derivatives Interest rate swaps $ 2,950 $ — $ 2,950 $ — $ — $ 2,950 Liability Derivatives Interest rate swaps $ 2,950 $ — $ 2,950 $ — $ 2,950 $ — Retail interest rate contracts 71 — 71 — — 71 11 . Fair Value Measurements Assets and Liabilities Measured at Fair Value on a Recurring Basis Investment securities available for sale and marketable equity securities : Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Servicing rights: MSR and CSR are measured at fair value on a recurring basis. These assets are classified as Level 3 as quoted prices are not available. In order to determine the fair value of MSR and CSR, the present value of net expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates, and ancillary fee income net of servicing costs. The model assumptions are also compared to publicly filed information from several large MSR holders, as available. Derivative instruments: The fair value of the interest rate lock commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. 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 35 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. Commitments to extend credit and standby letters of credit : The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date. Assets Subject to Nonrecurring Adjustment to Fair Value: The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets, impaired loans, and OREO at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the writedown of individual assets. The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and impaired loans as of each reporting date. In-house appraisals are considered Level 3 inputs and external appraisals are considered Level 2 inputs. The Company’s determination of which method to use is based upon several factors. 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. The Company uses external sources to estimate fair value for projects that are not fully constructed as of the date of valuation. These projects are generally valued as if complete, with an appropriate allowance for cost of completion, including contingencies developed from external sources such as vendors, engineers and contractors. The Company believes that recording OREO that is not fully constructed based on as if complete values is more appropriate than recording OREO that is not fully constructed using as is values. We concluded that as-is-complete values are appropriate for these types of projects based on the accounting guidance for capitalization of project costs and subsequent measurement of the value of real estate. GAAP specifically states that estimates and cost allocations must be reviewed at the end of each reporting period and reallocated based on revised estimates. The Company adjusts the carrying value of OREO in accordance with this guidance for increases in estimated cost to complete that exceed the fair value of the real estate at the end of each reporting period. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 36 Estimated fair values as of the periods indicated are as follows: June 30, 2020 December 31, 2019 (In Thousands) Carrying Amount Fair Value Carrying Amount Fair Value Financial assets: Level 1 inputs: Cash, due from banks and deposits in other banks $ 89,412 $ 89,412 $ 95,424 $ 95,424 Investment securities available for sale 79,875 79,875 75,456 75,456 Marketable equity securities 7,758 7,758 7,945 7,945 Level 2 inputs: Investment securities available for sale 122,472 122,472 200,682 200,682 Investment in Federal Home Loan Bank stock 2,428 2,428 2,138 2,138 Accrued interest receivable 8,389 8,389 4,512 4,512 Interest rate swaps 8,411 8,411 2,950 2,950 Level 3 inputs: Loans and loans held for sale 1,567,177 1,551,085 1,111,205 1,095,031 Purchased receivables, net 11,549 11,549 24,373 24,373 Interest rate lock commitments 4,653 4,653 810 810 Mortgage servicing rights 10,721 10,721 11,920 11,920 Commercial servicing rights 1,162 1,162 1,214 1,214 Financial liabilities: Level 2 inputs: Deposits $ 1,737,359 $ 1,740,146 $ 1,372,351 $ 1,373,647 Borrowings 11,754 12,872 8,891 9,216 Accrued interest payable 107 107 23 23 Interest rate swaps 10,812 10,812 3,484 3,484 Retail interest rate contracts 628 628 71 71 Level 3 inputs: Junior subordinated debentures 10,310 10,711 10,310 11,000 37 The following table sets forth the balances as of the periods indicated of assets and liabilities measured at fair value on a recurring basis: (In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) June 30, 2020 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 140,003 $ 47,832 $ 92,171 $ — Municipal securities 2,327 — 2,327 — Corporate bonds 32,043 32,043 — — Collateralized loan obligations 27,974 — 27,974 — Total available for sale securities $ 202,347 $ 79,875 $ 122,472 $ — Marketable equity securities $ 7,758 $ 7,758 $ — $ — Total marketable equity securities $ 7,758 $ 7,758 $ — $ — Interest rate swaps $ 8,411 $ — $ 8,411 $ — Interest rate lock commitments 4,653 — — 4,653 Mortgage servicing rights 10,721 — — 10,721 Commercial servicing rights 1,162 — — 1,162 Total other assets $ 24,947 $ — $ 8,411 $ 16,536 Liabilities: Interest rate swaps $ 10,812 $ — $ 10,812 $ — Retail interest rate contracts 628 — 628 — Total other liabilities $ 11,440 $ — $ 11,440 $ — December 31, 2019 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 211,852 $ 57,480 $ 154,372 $ — Municipal securities 3,297 — 3,297 — Corporate bonds 35,066 17,976 17,090 — Collateralized loan obligations 25,923 — 25,923 — Total available for sale securities $ 276,138 $ 75,456 $ 200,682 $ — Marketable equity securities $ 7,945 $ 7,945 $ — $ — Total marketable securities $ 7,945 $ 7,945 $ — $ — Interest rate swaps $ 2,950 $ — $ 2,950 $ — Interest rate lock commitments 810 — — 810 Mortgage servicing rights 11,920 — — 11,920 Commercial servicing rights 1,214 — — 1,214 Total other assets $ 16,894 $ — $ 2,950 $ 13,944 Liabilities: Interest rate swaps $ 3,484 $ — $ 3,484 $ — Retail interest rate contracts 71 — 71 — Total other liabilities $ 3,555 $ — $ 3,555 $ — 38 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) 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 Three Months Ended June 30, 2020 Interest rate lock commitments $ 3,188 ($ 2,242 ) $ 17,605 ($ 13,898 ) $ 4,653 $ 4,653 Mortgage servicing rights 11,653 ( 1,928 ) 996 — 10,721 — Commercial servicing rights 1,200 ( 58 ) 20 — 1,162 — Total $ 16,041 ($ 4,228 ) $ 18,621 ($ 13,898 ) $ 16,536 $ 4,653 Three Months Ended June 30, 2019 Interest rate lock commitments $ 1,237 ($ 549 ) $ 5,094 ($ 3,710 ) $ 2,072 $ 2,072 Mortgage servicing rights 11,254 ( 950 ) 532 — 10,836 — Commercial servicing rights 1,047 ( 75 ) 27 — 999 — Total $ 13,538 ($ 1,574 ) $ 5,653 ($ 3,710 ) $ 13,907 $ 2,072 (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 $ 810 ($ 3,139 ) $ 25,112 ($ 18,130 ) $ 4,653 $ 4,653 Mortgage servicing rights 11,920 ( 2,858 ) 1,659 — 10,721 — Commercial servicing rights 1,214 ( 79 ) 27 — 1,162 — Total $ 13,944 ($ 6,076 ) $ 26,798 ($ 18,130 ) $ 16,536 $ 4,653 Six Months Ended June 30, 2019 Interest rate lock commitments $ 978 ($ 878 ) $ 8,190 ($ 6,218 ) $ 2,072 $ 2,072 Mortgage servicing rights 10,821 ( 1,624 ) 1,639 — 10,836 — Commercial servicing rights 1,030 ( 98 ) 67 — 999 — Total $ 12,829 ($ 2,600 ) $ 9,896 ($ 6,218 ) $ 13,907 $ 2,072 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. 39 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. (In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) June 30, 2020 Loans measured for impairment $ 250 $ — $ — $ 250 Total $ 250 $ — $ — $ 250 December 31, 2019 Loans measured for impairment $ 561 $ — $ — $ 561 Total $ 561 $ — $ — $ 561 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) 2020 2019 2020 2019 Loans measured for impairment ($ 651 ) ($ 299 ) $ 14 ($ 7 ) Total loss from nonrecurring measurements ($ 651 ) ($ 299 ) $ 14 ($ 7 ) 40 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 June 30, 2020 and December 31, 2019 : Financial Instrument Valuation Technique Unobservable Input Weighted Average Rate Range June 30, 2020 Loans measured for impairment In-house valuation of collateral Discount rate 50 % Interest rate lock commitment External pricing model Pull through rate 90.55 % Mortgage servicing rights Discounted cash flow Constant prepayment rate 8.10% - 14.56% Discount rate 7.75 % Commercial servicing rights Discounted cash flow Constant prepayment rate 7.64% - 15.67% Discount rate 11.70 % December 31, 2019 Loans measured for impairment In-house valuation of collateral Discount rate 25 % Interest rate lock commitment External pricing model Pull through rate 92.65 % Mortgage servicing rights Discounted cash flow Constant prepayment rate 9.11% - 10.67% Discount rate 8.51% - 8.66% Commercial servicing rights Discounted cash flow Constant prepayment rate 7.64% - 15.67% Discount rate 11.70 % 41 12 . Segment Information The Company's operations are managed along two operating segments: Community Banking and Home Mortgage Lending. 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 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 June 30, 2020 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 18,117 $ 887 $ 19,004 Interest expense 1,468 79 1,547 Net interest income 16,649 808 17,457 Provision for loan losses 404 — 404 Other operating income 2,308 15,227 17,535 Other operating expense 14,113 8,561 22,674 Income before provision for income taxes 4,440 7,474 11,914 Provision (benefit) for income taxes ( 124 ) 2,138 2,014 Net income $ 4,564 $ 5,336 $ 9,900 Three Months Ended June 30, 2019 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 16,758 $ 548 $ 17,306 Interest expense 1,125 224 1,349 Net interest income 15,633 324 15,957 Provision for loan losses 300 — 300 Other operating income 3,619 5,950 9,569 Other operating expense 14,111 5,708 19,819 Income before provision for income taxes 4,841 566 5,407 Provision for income taxes 984 162 1,146 Net income $ 3,857 $ 404 $ 4,261 42 Six Months Ended June 30, 2020 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 34,997 $ 1,346 $ 36,343 Interest expense 3,087 109 3,196 Net interest income 31,910 1,237 33,147 Provision for loan losses 2,464 — 2,464 Other operating income 4,076 19,892 23,968 Other operating expense 27,725 13,736 41,461 Income before provision for income taxes 5,797 7,393 13,190 Provision for income taxes 142 2,115 2,257 Net income $ 5,655 $ 5,278 $ 10,933 Six Months Ended June 30, 2019 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 33,269 $ 915 $ 34,184 Interest expense 2,148 310 2,458 Net interest income 31,121 605 31,726 Benefit for loan losses 1,050 — 1,050 Other operating income 6,854 10,248 17,102 Other operating expense 26,629 10,270 36,899 Income before provision for income taxes 10,296 583 10,879 Provision for income taxes 2,139 167 2,306 Net income $ 8,157 $ 416 $ 8,573 June 30, 2020 (In Thousands) Community Banking Home Mortgage Lending Consolidated Total assets $ 1,843,345 $ 173,360 $ 2,016,705 Loans held for sale $ — $ 133,975 $ 133,975 December 31, 2019 (In Thousands) Community Banking Home Mortgage Lending Consolidated Total assets $ 1,540,869 $ 103,127 $ 1,643,996 Loans held for sale $ — $ 67,834 $ 67,834 43