NORTHRIM BANCORP INC 10-Q

ITEM 1. FINANCIAL STATEMENTS 2 CONSOLIDATED FINANCIAL STATEMENTS NORTHRIM BANCORP, INC. Consolidated Balance Sheets (Unaudited) September 30, 2020 December 31, 2019 (In Thousands, Except Share Data) ASSETS Cash and due from banks $ 31,165 $ 20,518 Interest bearing deposits in other banks 69,964 74,906 Investment securities available for sale, at fair value 215,369 276,138 Marketable equity securities 8,534 7,945 Investment in Federal Home Loan Bank stock 2,508 2,138 Loans held for sale 128,105 67,834 Loans 1,492,720 1,043,371 Allowance for loan losses ( 21,683 ) ( 19,088 ) Net loans 1,471,037 1,024,283 Purchased receivables, net 13,520 24,373 Mortgage servicing rights, at fair value 10,589 11,920 Other real estate owned, net 6,962 7,043 Premises and equipment, net 38,615 38,422 Operating lease right-of-use asset 12,943 14,306 Goodwill 15,017 15,017 Other intangible assets, net 1,041 1,077 Other assets 72,369 58,076 Total assets $ 2,097,738 $ 1,643,996 LIABILITIES Deposits: Demand $ 697,363 $ 451,896 Interest-bearing demand 427,811 320,264 Savings 272,624 229,918 Money market 227,106 205,801 Certificates of deposit less than $250,000 94,743 90,702 Certificates of deposit $250,000 and greater 86,486 73,770 Total deposits 1,806,133 1,372,351 Borrowings 13,737 8,891 Junior subordinated debentures 10,310 10,310 Operating lease liability 12,881 14,229 Other liabilities 40,061 31,098 Total liabilities 1,883,122 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, 6,279,304 and 6,558,809 issued and outstanding at September 30, 2020 and December 31, 2019, respectively 6,279 6,559 Additional paid-in capital 42,966 50,512 Retained earnings 165,606 149,615 Accumulated other comprehensive (loss) income, net of tax ( 235 ) 431 Total shareholders' equity 214,616 207,117 Total liabilities and shareholders' equity $ 2,097,738 $ 1,643,996 See notes to consolidated financial statements 3 NORTHRIM BANCORP, INC. Consolidated Statements of Income (Unaudited) Three Months Ended Nine Months Ended September 30, September 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 $ 18,691 $ 15,863 $ 51,504 $ 46,193 Interest on investment securities available for sale 940 1,528 3,951 4,850 Dividends on marketable equity securities 122 114 336 330 Dividends on Federal Home Loan Bank stock 24 19 62 57 Interest on deposits in other banks 17 313 284 591 Total Interest Income 19,794 17,837 56,137 52,021 Interest Expense Interest expense on deposits 1,320 1,365 4,135 3,477 Interest expense on securities sold under agreements to repurchase — 1 — 41 Interest expense on borrowings 84 70 277 189 Interest expense on junior subordinated debentures 96 95 284 282 Total Interest Expense 1,500 1,531 4,696 3,989 Net Interest Income 18,294 16,306 51,441 48,032 Provision (benefit) for loan losses 567 ( 2,075 ) 3,031 ( 1,025 ) Net Interest Income After Provision for Loan Losses 17,727 18,381 48,410 49,057 Other Operating Income Mortgage banking income 17,932 7,565 37,824 17,813 Bankcard fees 770 820 2,094 2,214 Purchased receivable income 516 709 2,112 2,355 Service charges on deposit accounts 269 398 802 1,224 Unrealized (loss) gain on marketable equity securities 375 130 ( 347 ) 782 Interest rate swap income 726 — 743 734 Gain on sale of marketable equity securities, net — — 98 — Gain on sale of investment securities available for sale, net — — — 23 Other income 1,040 887 2,270 2,466 Total Other Operating Income 21,628 10,509 45,596 27,611 Other Operating Expense Salaries and other personnel expense 16,418 13,186 44,311 37,433 Data processing expense 1,851 1,849 5,653 5,324 Occupancy expense 1,648 1,576 4,923 4,989 Professional and outside services 884 610 2,206 1,850 Marketing expense 302 357 1,581 1,609 Insurance expense 315 102 928 592 Intangible asset amortization expense 12 15 36 45 OREO expense (income), net rental income and gains on sale 23 ( 31 ) 8 ( 186 ) Other operating expense 2,053 1,660 5,321 4,567 Total Other Operating Expense 23,506 19,324 64,967 56,223 Income Before Provision for Income Taxes 15,849 9,566 29,039 20,445 Provision for income taxes 3,994 2,028 6,251 4,334 Net Income $ 11,855 $ 7,538 $ 22,788 $ 16,111 Earnings Per Share, Basic $ 1.87 $ 1.13 $ 3.57 $ 2.38 Earnings Per Share, Diluted $ 1.84 $ 1.11 $ 3.52 $ 2.35 Weighted Average Shares Outstanding, Basic 6,338,465 6,604,044 6,391,164 6,760,672 Weighted Average Shares Outstanding, Diluted 6,413,221 6,707,523 6,467,991 6,861,973 See notes to consolidated financial statements 4 NORTHRIM BANCORP, INC. Consolidated Statements of Comprehensive Income (Unaudited) 2010 Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2020 2019 2020 2019 Net income $ 11,855 $ 7,538 $ 22,788 $ 16,111 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized gains arising during the period $ 54 $ 83 $ 477 $ 2,816 Reclassification of net gains included in net income, net of tax expense of $ 0 for the third quarters of 2020 and 2019, and $ 28 and $ 7 for the nine months ended September 30, 2020 and 2019, respectively — — ( 70 ) ( 16 ) Derivatives and hedging activities: Unrealized gains (losses) arising during the period 245 ( 691 ) ( 1,622 ) ( 1,672 ) Income tax (expense) benefit related to unrealized gains and losses ( 85 ) ( 23 ) 549 ( 742 ) Other comprehensive (loss) income, net of tax 214 ( 631 ) ( 666 ) 386 Comprehensive income $ 12,069 $ 6,907 $ 22,122 $ 16,497 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 Cash dividend on common stock ($ 0.35 per share) — — — ( 2,247 ) — ( 2,247 ) Stock-based compensation expense — — 237 — — 237 Repurchase of common stock ( 89 ) ( 89 ) ( 2,277 ) — — ( 2,366 ) Other comprehensive income, net of tax — — — — 214 214 Net income — — — 11,855 — 11,855 Balance as of September 30, 2020 6,279 $ 6,279 $ 42,966 $ 165,606 ($ 235 ) $ 214,616 See notes to consolidated financial statements 7 NORTHRIM BANCORP, INC. Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (In Thousands) 2020 2019 Operating Activities: Net income $ 22,788 $ 16,111 Adjustments to Reconcile Net Income to Net Cash Used by Operating Activities: Gain on sale of securities, net ( 98 ) ( 23 ) Loss on disposal of premises and equipment 22 — Depreciation and amortization of premises and equipment 2,337 2,231 Amortization of software 821 753 Intangible asset amortization 36 45 Amortization of investment security premium, net of discount accretion ( 24 ) 26 Unrealized loss (gain) on marketable equity securities 347 ( 782 ) Deferred tax (benefit) expense ( 477 ) 758 Stock-based compensation 717 544 Deferred loan fees and amortization, net of costs 9,399 137 Provision (benefit) for loan losses 3,031 ( 1,025 ) Benefit for purchased receivables ( 7 ) ( 103 ) Additions to home mortgage servicing rights carried at fair value ( 3,032 ) ( 2,672 ) Change in fair value of home mortgage servicing rights carried at fair value 4,363 2,287 Change in fair value of commercial servicing rights carried at fair value 180 118 Gain on sale of loans ( 30,701 ) ( 14,598 ) Proceeds from the sale of loans held for sale 883,899 470,561 Origination of loans held for sale ( 913,469 ) ( 503,195 ) Gain on sale of other real estate owned ( 176 ) ( 380 ) Net changes in assets and liabilities: (Increase) decrease in accrued interest receivable ( 3,512 ) 19 (Increase) in other assets ( 6,443 ) 3,257 Decrease in other liabilities 2,980 3,590 Net Cash (Used) by Operating Activities ( 27,019 ) ( 22,341 ) Investing Activities: Investment in securities: Purchases of investment securities available for sale ( 89,173 ) ( 63,904 ) Purchases of marketable equity securities ( 1,439 ) — Purchases of FHLB stock ( 5,884 ) ( 879 ) Proceeds from sales/calls/maturities of securities available for sale 150,544 81,059 Proceeds from sales of marketable equity securities 502 — Proceeds from redemption of FHLB stock 5,514 840 Decrease in purchased receivables, net 10,860 836 Increase in loans, net ( 459,346 ) ( 51,545 ) Proceeds from sale of other real estate owned 419 1,149 Purchases of software ( 96 ) ( 374 ) Purchases of premises and equipment ( 2,552 ) ( 1,697 ) Net Cash (Used) by Investing Activities ( 390,651 ) ( 34,515 ) Financing Activities: Increase in deposits 433,782 122,941 Decrease in securities sold under repurchase agreements — ( 34,278 ) Increase in borrowings 4,846 1,692 Repurchase of common stock ( 8,676 ) ( 12,569 ) Proceeds from the issuance of common stock 8 — Cash dividends paid ( 6,585 ) ( 6,280 ) Net Cash Provided by Financing Activities 423,375 71,506 Net Change in Cash and Cash Equivalents 5,705 14,650 8 Cash and Cash Equivalents at Beginning of Period 95,424 77,538 Cash and Cash Equivalents at End of Period $ 101,129 $ 92,188 Supplemental Information: Income taxes paid $ 1,940 $ 275 Interest paid $ 4,580 $ 3,889 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 $ 370 $ 528 Cash dividends declared but not paid $ 73 $ 66 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 September 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 10 material impact on the Company’s consolidated financial position or results of operations because no contract modifications have been made to date. 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 11 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 September 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 . 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 September 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 September 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, respectively, of its interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures. 3. Investment Securities The amortized cost 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 September 30, 2020 Securities available for sale U.S. Treasury and government sponsored entities $ 155,971 $ 1,629 ($ 48 ) $ 157,552 Municipal securities 2,295 41 — 2,336 Corporate bonds 26,750 465 — 27,215 Collateralized loan obligations 28,526 7 ( 267 ) 28,266 Total securities available for sale $ 213,542 $ 2,142 ($ 315 ) $ 215,369 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 September 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 September 30, 2020: Securities available for sale U.S. Treasury and government sponsored entities $ 36,286 ($ 48 ) $ — $ — $ 36,286 ($ 48 ) Collateralized loan obligations 21,812 ( 223 ) 2,947 ( 44 ) 24,759 ( 267 ) Total $ 58,098 ($ 271 ) $ 2,947 ($ 44 ) $ 61,045 ($ 315 ) 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 and collateralized loan obligations in both periods were caused by changes in interest rates. At September 30, 2020 and December 31, 2019, there were 11 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 September 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 September 30, 2020 and December 31, 2019, $ 85.0 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 September 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 $ 69,006 $ 69,784 2.22 % 1-5 years 86,965 87,768 1.15 % Total $ 155,971 $ 157,552 1.63 % Corporate bonds 1-5 years $ 26,750 $ 27,215 1.45 % Total $ 26,750 $ 27,215 1.45 % Collateralized loan obligations 5-10 years $ 5,090 $ 5,053 1.89 % Over 10 years 23,436 23,213 1.70 % Total $ 28,526 $ 28,266 1.73 % Municipal securities 1-5 years $ 2,295 $ 2,336 3.92 % Total $ 2,295 $ 2,336 3.92 % The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the three and nine-month periods ending September 30, 2020 and 2019, are as follows: (In Thousands) Proceeds Gross Gains Gross Losses Three Months Ended September 30, 2020 Available for sale securities $ — $ — $ — Three Months Ended September 30, 2019 Available for sale securities $ — $ — $ — Nine Months Ended September 30, 2020 Available for sale securities $ — $ — $ — Nine Months Ended September 30, 2019 Available for sale securities $ 4,219 $ 23 $ — A summary of interest income for the three and nine-month periods ending September 30, 2020 and 2019, on available for sale investment securities are as follows: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2020 2019 2020 2019 US Treasury and government sponsored entities $ 680 $ 943 $ 2,839 $ 3,085 Other 237 573 1,040 1,671 Total taxable interest income $ 917 $ 1,516 $ 3,879 $ 4,756 Municipal securities $ 23 $ 12 $ 72 $ 94 Total tax-exempt interest income $ 23 $ 12 $ 72 $ 94 Total $ 940 $ 1,528 $ 3,951 $ 4,850 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 September 30, 2020 AQR Pass $ 821,117 $ 37,256 $ 82,661 $ 138,886 $ 302,902 $ 40,191 $ 13,726 $ 23,023 $ 1,459,762 AQR Special Mention 5,782 — — 2,677 17,178 2,172 176 — 27,985 AQR Substandard 8,971 702 — 7,430 613 1,176 148 110 19,150 AQR Doubtful 308 — — — — — — — 308 Subtotal $ 836,178 $ 37,958 $ 82,661 $ 148,993 $ 320,693 $ 43,539 $ 14,050 $ 23,133 $ 1,507,205 Less: Unearned origination fees, net of origination costs ( 14,485 ) Total loans $ 1,492,720 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 $ 375.6 million in Paycheck Protection Program ("PPP") loans administered by the U.S. Small Business Administration ("SBA") within the Commercial loan segment as of September 30, 2020. Additionally, unearned origination fee, net of origination costs includes $ 8.8 million associated with SBA PPP loans. 15 Nonaccrual loans: Nonaccrual loans net of government guarantees totaled $ 11.0 million and $ 14.0 million at September 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 September 30, 2020 Commercial $ 115 $ — $ 4,634 $ 2,082 $ 6,831 Real estate construction one-to-four family — — 702 — 702 Real estate term owner occupied — 226 2,729 809 3,764 Real estate term other — — 1,176 — 1,176 Consumer secured by 1st deeds of trust — — — 65 65 Consumer other — — — 109 109 Total nonperforming loans 115 226 9,241 3,065 12,647 Government guarantees on nonaccrual loans — — — ( 1,600 ) ( 1,600 ) Net nonaccrual loans $ 115 $ 226 $ 9,241 $ 1,465 $ 11,047 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 September 30, 2020 Commercial $ — $ — $ — $ — $ 6,831 $ 829,347 $ 836,178 Real estate construction one-to-four family — — — — 702 37,256 37,958 Real estate construction other — — — — — 82,661 82,661 Real estate term owner occupied — 1,421 — 1,421 3,764 143,808 148,993 Real estate term non-owner occupied — 691 — 691 — 320,002 320,693 Real estate term other — — — — 1,176 42,363 43,539 Consumer secured by 1st deed of trust 236 — — 236 65 13,749 14,050 Consumer other — — — — 109 23,024 23,133 Subtotal $ 236 $ 2,112 $ — $ 2,348 $ 12,647 $ 1,492,210 $ 1,507,205 Less: Unearned origination fees, net of origination costs ( 14,485 ) Total $ 1,492,720 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 September 30, 2020 With no related allowance recorded Commercial - AQR substandard $ 8,668 $ 8,872 $— Commercial - AQR doubtful 308 308 — Real estate construction one-to-four family - AQR substandard 702 702 — Real estate term owner occupied - AQR substandard 7,430 7,515 — Real estate term non-owner occupied - AQR pass 177 177 — Real estate term non-owner occupied - AQR substandard 613 613 — Real estate term other - AQR pass 322 322 — Real estate term other - AQR substandard 1,176 1,176 — Consumer secured by 1st deeds of trust - AQR pass 116 116 — Consumer secured by 1st deeds of trust - AQR substandard 148 148 — Consumer other - AQR substandard 84 88 — Subtotal $ 19,744 $ 20,037 $— With an allowance recorded Commercial - AQR substandard $ 202 $ 202 $ 41 Subtotal $ 202 $ 202 $ 41 Total Commercial - AQR substandard $ 8,870 $ 9,074 $ 41 Commercial - AQR doubtful 308 308 — Real estate construction one-to-four family - AQR substandard 702 702 — Real estate term owner-occupied - AQR substandard 7,430 7,515 — Real estate term non-owner occupied - AQR pass 177 177 — Real estate term non-owner occupied - AQR substandard 613 613 — Real estate term other - AQR pass 322 322 — Real estate term other - AQR substandard 1,176 1,176 — Consumer secured by 1st deeds of trust - AQR pass 116 116 — Consumer secured by 1st deeds of trust - AQR substandard 148 148 — Consumer other - AQR substandard 84 88 — Total $ 19,946 $ 20,239 $ 41 (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 nine-month periods ended September 30, 2020 and 2019: Three Months Ended September 30, 2020 2019 (In Thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded Commercial - AQR substandard $ 8,564 $ 42 $ 17,616 $ 107 Commercial - AQR doubtful 308 — — — Real estate construction one-to-four family - AQR substandard 488 — 1,482 — Real estate term owner occupied- AQR substandard 6,998 47 5,896 34 Real estate term non-owner occupied- AQR pass 177 3 242 4 Real estate term non-owner occupied- AQR substandard 619 19 — — Real estate term other - AQR pass 348 6 438 8 Real estate term other - AQR substandard 1,228 — 1,198 — Consumer secured by 1st deeds of trust - AQR pass 117 3 125 3 Consumer secured by 1st deeds of trust - AQR substandard 269 — 93 2 Consumer other - AQR substandard 84 — 93 — Subtotal $ 19,200 $ 120 $ 27,183 $ 158 With an allowance recorded Commercial - AQR substandard $ 226 $ 8 $ 391 $ — Consumer secured by 1st deeds of trust - AQR substandard — — 74 — Subtotal $ 226 $ 8 $ 465 $ — 19 Total Commercial - AQR substandard $ 8,790 $ 50 $ 18,007 $ 107 Commercial - AQR doubtful 308 — — — Real estate construction one-to-four family - AQR substandard 488 — 1,482 — Real estate term owner-occupied - AQR substandard 6,998 47 5,896 34 Real estate term non-owner occupied - AQR pass 177 3 242 4 Real estate term non-owner occupied - AQR substandard 619 19 — — Real estate term other - AQR pass 348 6 438 8 Real estate term other - AQR substandard 1,228 — 1,198 — Consumer secured by 1st deeds of trust - AQR pass 117 3 125 3 Consumer secured by 1st deeds of trust - AQR substandard 269 — 167 2 Consumer other - AQR substandard 84 — 93 — Total Impaired Loans $ 19,426 $ 128 $ 27,648 $ 158 Nine Months Ended September 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 $ — $ — $ 711 $ 35 Commercial - AQR substandard 9,899 138 17,205 292 Commercial - AQR doubtful 103 — — — Real estate construction one-to-four family - AQR substandard 808 — 2,109 — Real estate term owner occupied- AQR substandard 6,586 125 5,896 83 Real estate term non-owner occupied- AQR pass 177 10 269 15 Real estate term non-owner occupied- AQR substandard 312 20 307 — Real estate term other - AQR pass 380 20 457 24 Real estate term other - AQR substandard 1,194 — 998 — Consumer secured by 1st deeds of trust - AQR pass 119 9 127 9 Consumer secured by 1st deeds of trust - AQR substandard 149 3 215 5 Consumer secured by 1st deeds of trust - AQR loss 44 — — — Consumer other - AQR substandard 87 — 63 — Subtotal $ 19,858 $ 325 $ 28,357 $ 463 With an allowance recorded Commercial - AQR substandard $ 1,794 $ 8 $ 715 $ — Real estate term other - AQR substandard — — 218 — Consumer secured by 1st deeds of trust - AQR substandard — — 97 — Subtotal $ 1,794 $ 8 $ 1,030 $ — 20 Total Commercial - AQR pass $ — $ — $ 711 $ 35 Commercial - AQR substandard 11,693 146 17,920 292 Commercial - AQR doubtful 103 — — — Real estate construction one-to-four family - AQR substandard 808 — 2,109 — Real estate term owner-occupied - AQR substandard 6,586 125 5,896 83 Real estate term non-owner occupied - AQR pass 177 10 269 15 Real estate term non-owner occupied - AQR substandard 312 20 307 — Real estate term other - AQR pass 380 20 457 24 Real estate term other - AQR substandard 1,194 — 1,216 — Consumer secured by 1st deeds of trust - AQR pass 119 9 127 9 Consumer secured by 1st deeds of trust - AQR substandard 149 3 312 5 Consumer secured by 1st deeds of trust - AQR loss 44 — — — Consumer other - AQR substandard 87 — 63 — Total Impaired Loans $ 21,652 $ 333 $ 29,387 $ 463 Troubled Debt Restructurings: Loans classified as troubled debt restructurings (“TDR”) totaled $ 8.5 million and $ 10.1 million at September 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 September 30, 2020, the Company has made the following types of loan modifications related to COVID-19, which are not classified as TDRs with principal balance outstanding of: (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $ 46,056 $ 74,337 $ 120,393 Number of modifications 16 59 75 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 nine months ended September 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 $ 1,565 $ 163 $ 1,728 Subtotal $ 1,565 $ 163 $ 1,728 Existing Troubled Debt Restructurings $ 802 $ 5,946 $ 6,748 Total $ 2,367 $ 6,109 $ 8,476 22 The following tables present newly restructured loans that occurred during the nine months ended September 30, 2020 and 2019, by concession (terms modified): September 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 2 $ — $ 3,249 $ 164 $ — $ 3,413 Total 2 $ — $ 3,249 $ 164 $ — $ 3,413 Post-Modification Outstanding Recorded Investment: Commercial - AQR substandard 2 $ — $ 1,565 $ 163 $ — $ 1,728 Total 2 $ — $ 1,565 $ 163 $ — $ 1,728 September 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 $ — $ — $ 425 $ 1,340 $ 1,765 Real estate term owner occupied- AQR substandard 1 — — 188 — 188 Total 6 $ — $ — $ 613 $ 1,340 $ 1,953 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 nine months ended September 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 September 30, 2020 and December 31, 2019, respectively. The Company had no TDRs that defaulted within twelve months of restructure and defaulted during the nine months ended September 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 September 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 $ 7,366 $ 690 $ 1,215 $ 2,533 $ 5,421 $ 702 $ 258 $ 447 $ 2,021 $ 20,653 Charge-Offs ( 56 ) — — ( 85 ) — — — — — ( 141 ) Recoveries 600 — — — — 1 — 3 — 604 Provision (benefit) 285 10 58 21 61 55 ( 2 ) ( 7 ) 86 567 Balance, end of period $ 8,195 $ 700 $ 1,273 $ 2,469 $ 5,482 $ 758 $ 256 $ 443 $ 2,107 $ 21,683 Balance, end of period: Individually evaluated for impairment $ 41 $ — $ — $ — $ — $ — $ — $ — $ — $ 41 Balance, end of period: Collectively evaluated for impairment $ 8,154 $ 700 $ 1,273 $ 2,469 $ 5,482 $ 758 $ 256 $ 443 $ 2,107 $ 21,642 2019 Balance, beginning of period $ 7,123 $ 739 $ 1,112 $ 2,281 $ 6,231 $ 761 $ 322 $ 486 $ 1,463 $ 20,518 Charge-Offs ( 22 ) — — — — — — ( 7 ) — ( 29 ) Recoveries 709 — — — — 1 — 13 — 723 Provision (benefit) ( 1,340 ) ( 122 ) ( 101 ) ( 299 ) ( 703 ) ( 48 ) ( 49 ) ( 62 ) 649 ( 2,075 ) Balance, end of period $ 6,470 $ 617 $ 1,011 $ 1,982 $ 5,528 $ 714 $ 273 $ 430 $ 2,112 $ 19,137 Balance, end of period: Individually evaluated for impairment $ 97 $ — $ — $ — $ — $ — $ 5 $ — $ — $ 102 Balance, end of period: Collectively evaluated for impairment $ 6,373 $ 617 $ 1,011 $ 1,982 $ 5,528 $ 714 $ 268 $ 430 $ 2,112 $ 19,035 24 Nine Months Ended September 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 ( 1,011 ) — — ( 85 ) — — — ( 14 ) — ( 1,110 ) Recoveries 656 — — — — 2 — 16 — 674 Provision (benefit) 1,946 57 256 366 302 85 ( 14 ) 5 28 3,031 Balance, end of period $ 8,195 $ 700 $ 1,273 $ 2,469 $ 5,482 $ 758 $ 256 $ 443 $ 2,107 $ 21,683 Balance, end of period: Individually evaluated for impairment $ 41 $ — $ — $ — $ — $ — $ — $ — $ — $ 41 Balance, end of period: Collectively evaluated for impairment $ 8,154 $ 700 $ 1,273 $ 2,469 $ 5,482 $ 758 $ 256 $ 443 $ 2,107 $ 21,642 2019 Balance, beginning of period $ 5,660 $ 675 $ 1,275 $ 2,027 $ 5,799 $ 716 $ 306 $ 426 $ 2,635 $ 19,519 Charge-Offs ( 195 ) — — — — — — ( 11 ) — ( 206 ) Recoveries 801 — — — — 28 — 20 — 849 Provision (benefit) 204 ( 58 ) ( 264 ) ( 45 ) ( 271 ) ( 30 ) ( 33 ) ( 5 ) ( 523 ) ( 1,025 ) Balance, end of period $ 6,470 $ 617 $ 1,011 $ 1,982 $ 5,528 $ 714 $ 273 $ 430 $ 2,112 $ 19,137 Balance, end of period: Individually evaluated for impairment $ 97 $ — $ — $ — $ — $ — $ 5 $ — $ — $ 102 Balance, end of period: Collectively evaluated for impairment $ 6,373 $ 617 $ 1,011 $ 1,982 $ 5,528 $ 714 $ 268 $ 430 $ 2,112 $ 19,035 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 September 30, 2020 Balance, end of period $ 825,702 $ 37,751 $ 81,772 $ 148,167 $ 318,738 $ 43,245 $ 14,037 $ 23,308 $ 1,492,720 Balance, end of period: Individually evaluated for impairment $ 9,178 $ 701 $ — $ 7,430 $ 790 $ 1,499 $ 264 $ 84 $ 19,946 Balance, end of period: Collectively evaluated for impairment $ 816,524 $ 37,050 $ 81,772 $ 140,737 $ 317,948 $ 41,746 $ 13,773 $ 23,224 $ 1,472,774 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 September 30, 2020 Individually evaluated for impairment: AQR Substandard $ 41 $ — $ — $ — $ — $ — $ — $ — $ — $ 41 Collectively evaluated for impairment: AQR Pass 8,009 700 1,273 2,421 5,343 719 251 439 — 19,155 AQR Special Mention 141 — — 48 139 39 5 — — 372 AQR Substandard 4 — — — — — — 4 — 8 AQR Doubtful — — — — — — — — — — Unallocated — — — — — — — — 2,107 2,107 $ 8,195 $ 700 $ 1,273 $ 2,469 $ 5,482 $ 758 $ 256 $ 443 $ 2,107 $ 21,683 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 September 30, 2020, the Company has one class of purchased receivables. There were no purchased receivables past due at September 30, 2020 or December 31, 2019, and there were no restructured purchased receivables at September 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 receivables of $ 410,000 related to one customer relationship are considered nonperforming assets as of September 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) September 30, 2020 December 31, 2019 Purchased receivables $ 13,607 $ 24,467 Reserve for purchased receivable losses ( 87 ) ( 94 ) Total $ 13,520 $ 24,373 The following table sets forth information regarding changes in the purchased receivable reserve for the three and nine-month periods ending September 30, 2020 and 2019, respectively: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2020 2019 2020 2019 Balance, beginning of period $ 93 $ 98 $ 94 $ 190 Charge-offs — — — — Recoveries — — — — Charge-offs net of recoveries — — — — Benefit for purchased receivables ( 6 ) ( 11 ) ( 7 ) ( 103 ) Balance, end of period $ 87 $ 87 $ 87 $ 87 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 nine-month periods ended September 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2020 2019 2020 2019 Balance, beginning of period $ 10,721 $ 10,836 $ 11,920 $ 10,821 Additions for new MSR capitalized 1,373 1,033 3,032 2,672 Changes in fair value: Due to changes in model inputs of assumptions (1) ( 699 ) ( 378 ) ( 2,291 ) ( 1,385 ) Other (2) ( 806 ) ( 285 ) ( 2,072 ) ( 902 ) Balance, end of period $ 10,589 $ 11,206 $ 10,589 $ 11,206 (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 September 30, 2020 and December 31, 2019: (In Thousands) September 30, 2020 December 31, 2019 Balance of mortgage loans serviced for others $ 655,733 $ 659,048 MSR as a percentage of serviced loans 1.61 % 1.81 % The Company recognized servicing fees of $ 671,000 and $ 616,000 during the three-month periods ending September 30, 2020 and 2019, respectively and $ 2.0 million and $ 1.8 million during the nine-month periods ending September 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 September 30, 2020 and December 31, 2019: September 30, 2020 December 31, 2019 Constant prepayment rate 14.31 % 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 September 30, 2020 and December 31, 2019 were as follows: (In Thousands) September 30, 2020 December 31, 2019 Aggregate portfolio principal balance $ 655,733 $ 659,048 Weighted average rate of note 3.74 % 3.90 % September 30, 2020 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change Constant prepayment rate 14.31 % 42.34 % 50.41 % Discount rate 7.75 % 6.75 % 5.75 % Fair value MSR $ 10,589 $ 4,748 $ 3,808 Percentage of MSR 1.61 % 0.72 % 0.58 % 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 $ 1.3 million and $ 1.2 million at September 30, 2020 and December 31, 2019, respectively, 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 $ 267.9 million and $ 252.9 million at September 30, 2020 and December 31, 2019, respectively. Key assumptions used in measuring the fair value of the CSR as of September 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-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. 29 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 September 30, 2020, the Company has operating lease ROU assets of $ 12.9 million and operating lease liabilities of $ 12.9 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 as of September 30, 2020 or December 31, 2019. The following table presents additional information about the Company's operating leases: Three Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2020 2019 2020 2019 Lease Cost Operating lease cost (1) $ 710 $ 675 $ 2,111 $ 2,030 Short term lease cost (1) 9 9 26 26 Total lease cost $ 719 $ 684 $ 2,137 $ 2,056 Other information Operating leases - operating cash flows $ 2,012 $ 2,015 Weighted average lease term - operating leases, in years 10.85 11.11 Weighted average discount rate - operating leases 3.30 % 3.33 % (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 (Three months) $ 678 2021 2,594 2022 2,189 2023 1,902 2024 1,795 Thereafter 6,607 Total minimum lease payments $ 15,765 Less: amount of lease payment representing interest ( 2,884 ) Present value of future minimum lease payments $ 12,881 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 nine-month periods ended September 30, 2020 and 2019: (In Thousands) Three Months Ended September 30, Nine Months Ended September 30, Other operating income 2020 2019 2020 2019 In-scope of Topic 606: Bankcard fees $ 770 $ 820 $ 2,094 $ 2,214 Service charges on deposit accounts 269 398 802 1,224 Other 389 433 1,123 1,249 Other operating income (in-scope of Topic 606) $ 1,428 $ 1,651 $ 4,019 $ 4,687 Other operating income (out-of-scope of Topic 606) 20,200 8,858 41,577 22,924 Total other operating income $ 21,628 $ 10,509 $ 45,596 $ 27,611 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 $ 100,000 and $ 63,000 for the three months ended September 30, 2020 and 2019, respectively, and $ 176,000 and $ 380,000 for the nine months ended September 30, 2020 and 2019, respectively . 32 10. Derivatives Derivatives 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 $ 10.7 million as of September 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 $ 172.8 million and $ 94.4 million at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, the notional amount of interest rate swaps is made up of thirteen variable to fixed rate swaps to commercial loan customers totaling $ 86.4 million, and thirteen fixed to variable rate swaps with a counterparty totaling $ 86.4 million. Changes in fair value from these thirteen interest rate swaps offset each other in the first six months of 2020. The Company recognized $ 726,000 and zero in fee income related to interest rate swaps in the three month periods ending September 30, 2020 and September 30, 2019, respectively, and $ 743,000 and $ 734,000 in fee income related to interest rate swaps in the nine month periods ending September 30, 2020 and September 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 1.62 % as of September 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 September 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 $ 2.2 million as of September 30, 2020 and the unrealized loss was $ 534,000 as of December 31, 2019. Derivatives 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 $ 257.3 million and $ 48.8 million at September 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 designed as hedging instruments. 33 The following table presents the fair value of derivatives not designated as hedging instruments at September 30, 2020 and December 31, 2019: (In Thousands) Asset Derivatives September 30, 2020 December 31, 2019 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other assets $ 8,846 $ 2,950 Interest rate lock commitments Other assets 6,519 810 Total $ 15,365 $ 3,760 (In Thousands) Liability Derivatives September 30, 2020 December 31, 2019 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other liabilities $ 8,846 $ 2,950 Retail interest rate contracts Other liabilities 466 71 Total $ 9,312 $ 3,021 The following table presents the net gains (losses) of derivatives not designated as hedging instruments for the three and nine-month periods ending September 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) Income Statement Location 2020 2019 2020 2019 Retail interest rate contracts Mortgage banking income ($ 1,823 ) ($ 242 ) ($ 6,525 ) ($ 934 ) Interest rate lock commitments Mortgage banking income 1,781 ( 692 ) 5,372 313 Total ($ 42 ) ($ 934 ) ($ 1,153 ) ($ 621 ) 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 September 30, 2020 and December 31, 2019: September 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 $ 8,846 $ — $ 8,846 $ — $ — $ 8,846 Liability Derivatives Interest rate swaps $ 8,846 $ — $ 8,846 $ — $ 8,846 $ — Retail interest rate contracts 466 — 466 — — 466 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 35 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 September 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: September 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 $ 101,129 $ 101,129 $ 95,424 $ 95,424 Investment securities available for sale 59,865 59,865 75,456 75,456 Marketable equity securities 8,534 8,534 7,945 7,945 Level 2 inputs: Investment securities available for sale 155,504 155,504 200,682 200,682 Investment in Federal Home Loan Bank stock 2,508 2,508 2,138 2,138 Accrued interest receivable 8,024 8,024 4,512 4,512 Interest rate swaps 8,846 8,846 2,950 2,950 Level 3 inputs: Loans and loans held for sale 1,620,826 1,602,727 1,111,205 1,095,031 Purchased receivables, net 13,520 13,520 24,373 24,373 Interest rate lock commitments 6,519 6,519 810 810 Mortgage servicing rights 10,589 10,589 11,920 11,920 Commercial servicing rights 1,286 1,286 1,214 1,214 Financial liabilities: Level 2 inputs: Deposits $ 1,806,133 $ 1,808,534 $ 1,372,351 $ 1,373,647 Borrowings 13,737 15,119 8,891 9,216 Accrued interest payable 139 139 23 23 Interest rate swaps 11,002 11,002 3,484 3,484 Retail interest rate contracts 466 466 71 71 Level 3 inputs: Junior subordinated debentures 10,310 10,610 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) September 30, 2020 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 157,552 $ 37,691 $ 119,861 $ — Municipal securities 2,336 — 2,336 — Corporate bonds 27,215 22,174 5,041 — Collateralized loan obligations 28,266 — 28,266 — Total available for sale securities $ 215,369 $ 59,865 $ 155,504 $ — Marketable equity securities $ 8,534 $ 8,534 $ — $ — Total marketable equity securities $ 8,534 $ 8,534 $ — $ — Interest rate swaps 8,846 — 8,846 — Interest rate lock commitments 6,519 — — 6,519 Mortgage servicing rights 10,589 — — 10,589 Commercial servicing rights 1,286 — — 1,286 Total other assets $ 27,240 $ — $ 8,846 $ 18,394 Liabilities: Interest rate swaps $ 11,002 $ — $ 11,002 $ — Retail interest rate contracts 466 — 466 — Total other liabilities $ 11,468 $ — $ 11,468 $ — 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 tables provide a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine-month periods ended September 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 September 30, 2020 Interest rate lock commitments $ 4,653 ($ 1,784 ) $ 15,329 ($ 11,679 ) $ 6,519 $ 6,519 Mortgage servicing rights 10,721 ( 1,505 ) 1,373 — 10,589 — Commercial servicing rights 1,162 ( 101 ) 225 — 1,286 — Total $ 16,536 ($ 3,390 ) $ 16,927 ($ 11,679 ) $ 18,394 $ 6,519 Three Months Ended September 30, 2019 Interest rate lock commitments $ 2,072 ($ 553 ) $ 4,569 ($ 4,725 ) $ 1,363 $ 1,363 Mortgage servicing rights 10,836 ( 663 ) 1,033 — 11,206 — Commercial servicing rights 999 ( 20 ) 39 — 1,018 — Total $ 13,907 ($ 1,236 ) $ 5,641 ($ 4,725 ) $ 13,587 $ 1,363 (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 Nine Months Ended September 30, 2020 Interest rate lock commitments $ 810 ($ 4,923 ) $ 40,441 ($ 29,809 ) $ 6,519 $ 6,519 Mortgage servicing rights 11,920 ( 4,363 ) 3,032 — 10,589 — Commercial servicing rights 1,214 ( 180 ) 252 — 1,286 — Total $ 13,944 ($ 9,466 ) $ 43,725 ($ 29,809 ) $ 18,394 $ 6,519 Nine Months Ended September 30, 2019 Interest rate lock commitments $ 978 ($ 1,431 ) $ 12,759 ($ 10,943 ) $ 1,363 $ 1,363 Mortgage servicing rights 10,821 ( 2,287 ) 2,672 — 11,206 — Commercial servicing rights 1,030 ( 118 ) 106 — 1,018 — Total $ 12,829 ($ 3,836 ) $ 15,537 ($ 10,943 ) $ 13,587 $ 1,363 There were no changes in unrealized gains and losses for the three and nine-month periods ending September 30, 2020 and 2019 included in other comprehensive income for recurring Level 3 fair value measurements. 39 As of and for the periods ending September 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) September 30, 2020 Loans measured for impairment $ 202 $ — $ — $ 202 Total $ 202 $ — $ — $ 202 December 31, 2019 Loans measured for impairment $ 561 $ — $ — $ 561 Total $ 561 $ — $ — $ 561 The following table presents the gains resulting from nonrecurring fair value adjustments for the three and nine-month periods ended September 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2020 2019 2020 2019 Loans measured for impairment $ 10 $ 96 $ 24 $ 89 Total loss from nonrecurring measurements $ 10 $ 96 $ 24 $ 89 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 September 30, 2020 and December 31, 2019: Financial Instrument Valuation Technique Unobservable Input Weighted Average Rate Range September 30, 2020 Loans measured for impairment In-house valuation of collateral Discount rate 40 % Interest rate lock commitment External pricing model Pull through rate 90.24 % Mortgage servicing rights Discounted cash flow Constant prepayment rate 9.54 % - 14.50 % 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 September 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 September 30, 2020 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 18,821 $ 973 $ 19,794 Interest expense 1,433 67 1,500 Net interest income 17,388 906 18,294 Provision for loan losses 567 — 567 Other operating income 3,696 17,932 21,628 Other operating expense 14,353 9,153 23,506 Income before provision for income taxes 6,164 9,685 15,849 Provision (benefit) for income taxes 1,249 2,745 3,994 Net income $ 4,915 $ 6,940 $ 11,855 Three Months Ended September 30, 2019 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 17,108 $ 729 $ 17,837 Interest expense 1,108 423 1,531 Net interest income 16,000 306 16,306 Provision for loan losses ( 2,075 ) — ( 2,075 ) Other operating income 2,944 7,565 10,509 Other operating expense 13,126 6,198 19,324 Income before provision for income taxes 7,893 1,673 9,566 Provision for income taxes 1,550 478 2,028 Net income $ 6,343 $ 1,195 $ 7,538 42 Nine Months Ended September 30, 2020 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 53,818 $ 2,319 $ 56,137 Interest expense 4,520 176 4,696 Net interest income 49,298 2,143 51,441 Provision for loan losses 3,031 — 3,031 Other operating income 7,772 37,824 45,596 Other operating expense 42,078 22,889 64,967 Income before provision for income taxes 11,961 17,078 29,039 Provision for income taxes 1,391 4,860 6,251 Net income $ 10,570 $ 12,218 $ 22,788 Nine Months Ended September 30, 2019 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 50,377 $ 1,644 $ 52,021 Interest expense 3,256 733 3,989 Net interest income 47,121 911 48,032 Benefit for loan losses ( 1,025 ) — ( 1,025 ) Other operating income 9,798 17,813 27,611 Other operating expense 39,755 16,468 56,223 Income before provision for income taxes 18,189 2,256 20,445 Provision for income taxes 3,689 645 4,334 Net income $ 14,500 $ 1,611 $ 16,111 September 30, 2020 (In Thousands) Community Banking Home Mortgage Lending Consolidated Total assets $ 1,928,465 $ 169,273 $ 2,097,738 Loans held for sale $ — $ 128,105 $ 128,105 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