NORTHRIM BANCORP INC 10-Q

ITEM 1. FINANCIAL STATEMENTS 2 CONSOLIDATED FINANCIAL STATEMENTS NORTHRIM BANCORP, INC. Consolidated Balance Sheets (Unaudited) September 30, 2021 December 31, 2020 (In Thousands, Except Share Data) ASSETS Cash and due from banks $ 34,216 $ 23,304 Interest bearing deposits in other banks 458,063 92,661 Investment securities available for sale, at fair value 379,122 247,633 Marketable equity securities 8,551 9,052 Investment securities held to maturity, at amortized cost 20,000 10,000 Total portfolio investments 407,673 266,685 Investment in Federal Home Loan Bank stock 3,110 2,551 Loans held for sale 106,224 146,178 Loans 1,450,657 1,444,050 Allowance for credit losses ( 13,816 ) ( 21,136 ) Net loans 1,436,841 1,422,914 Purchased receivables, net 20,118 13,922 Mortgage servicing rights, at fair value 13,080 11,218 Other real estate owned, net 5,912 7,289 Premises and equipment, net 37,610 38,102 Operating lease right-of-use assets 11,371 12,440 Goodwill 15,017 15,017 Other intangible assets, net 1,002 1,029 Other assets 59,709 68,488 Total assets $ 2,609,946 $ 2,121,798 LIABILITIES Deposits: Demand $ 868,810 $ 643,825 Interest-bearing demand 644,035 459,095 Savings 330,465 308,725 Money market 278,529 237,705 Certificates of deposit less than $250,000 99,587 92,047 Certificates of deposit $250,000 and greater 75,115 83,584 Total deposits 2,296,541 1,824,981 Borrowings 14,605 14,817 Junior subordinated debentures 10,310 10,310 Operating lease liabilities 11,334 12,378 Other liabilities 34,682 37,737 Total liabilities 2,367,472 1,900,223 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, 6,177,300 and 6,251,004 issued and outstanding at September 30, 2021 and December 31, 2020, respectively 6,177 6,251 Additional paid-in capital 38,929 41,808 Retained earnings 198,284 173,498 Accumulated other comprehensive (loss) income, net of tax ( 916 ) 18 Total shareholders' equity 242,474 221,575 Total liabilities and shareholders' equity $ 2,609,946 $ 2,121,798 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) 2021 2020 2021 2020 Interest and Dividend Income Interest and fees on loans and loans held for sale $ 19,900 $ 18,691 $ 58,287 $ 51,504 Interest on investment securities available for sale 828 940 2,421 3,951 Dividends on marketable equity securities 115 122 328 336 Interest on investment securities held to maturity 262 — 773 — Dividends on Federal Home Loan Bank stock 28 24 74 62 Interest on deposits in other banks 149 17 248 284 Total Interest Income 21,282 19,794 62,131 56,137 Interest Expense Interest expense on deposits 667 1,320 2,495 4,135 Interest expense on borrowings 89 84 237 277 Interest expense on junior subordinated debentures 94 96 282 284 Total Interest Expense 850 1,500 3,014 4,696 Net Interest Income 20,432 18,294 59,117 51,441 (Benefit) provision for credit losses ( 1,106 ) 567 ( 3,021 ) 3,031 Net Interest Income After (Benefit) Provision for Credit Losses 21,538 17,727 62,138 48,410 Other Operating Income Mortgage banking income 9,893 17,932 34,875 37,824 Bankcard fees 878 770 2,497 2,094 Purchased receivable income 530 516 1,637 2,112 Service charges on deposit accounts 345 269 943 802 Interest rate swap income 195 726 390 743 Gain on sale of marketable equity securities, net 36 — 67 98 Unrealized gain (loss) on marketable equity securities ( 67 ) 375 27 ( 347 ) Other income 848 1,040 2,250 2,270 Total Other Operating Income 12,658 21,628 42,686 45,596 Other Operating Expense Salaries and other personnel expense 15,756 16,418 45,401 44,311 Data processing expense 2,198 1,851 6,439 5,653 Occupancy expense 1,707 1,648 5,236 4,923 Professional and outside services 703 884 1,969 2,206 Marketing expense 533 302 1,609 1,581 Insurance expense 322 315 965 928 Intangible asset amortization expense 9 12 27 36 OREO (income) expense, net ( 378 ) 23 ( 367 ) 8 Other operating expense 1,684 2,053 4,918 5,321 Total Other Operating Expense 22,534 23,506 66,197 64,967 Income Before Provision for Income Taxes 11,662 15,849 38,627 29,039 Provision for income taxes 2,785 3,994 9,224 6,251 Net Income $ 8,877 $ 11,855 $ 29,403 $ 22,788 Earnings Per Share, Basic $ 1.43 $ 1.87 $ 4.73 $ 3.57 Earnings Per Share, Diluted $ 1.42 $ 1.84 $ 4.69 $ 3.52 Weighted Average Shares Outstanding, Basic 6,196,260 6,338,465 6,207,681 6,391,164 Weighted Average Shares Outstanding, Diluted 6,265,602 6,413,221 6,274,634 6,467,991 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) 2021 2020 2021 2020 Net income $ 8,877 $ 11,855 $ 29,403 $ 22,788 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized (losses) gains arising during the period ($ 533 ) $ 54 ($ 2,141 ) $ 477 Derivatives and hedging activities: Unrealized (losses) gains arising during the period 162 245 835 ( 1,622 ) Income tax benefit (expense) related to reclassifications and unrealized gains and losses 106 ( 85 ) 372 479 Other comprehensive (loss) gain, net of tax ( 265 ) 214 ( 934 ) ( 666 ) Comprehensive income $ 8,612 $ 12,069 $ 28,469 $ 22,122 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, 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 income, 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 loss, 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 Cash dividend on common stock ($ 0.35 per share) — — — ( 2,208 ) — ( 2,208 ) Stock-based compensation expense — — 226 — — 226 Exercise of stock options and vesting of restricted stock units, net 17 17 ( 129 ) — — ( 112 ) Repurchase of common stock ( 45 ) ( 45 ) ( 1,255 ) — — ( 1,300 ) Other comprehensive income, net of tax — — — — 253 253 Net income — — — 10,100 — 10,100 Balance as of December 31, 2020 6,251 $ 6,251 $ 41,808 $ 173,498 $ 18 $ 221,575 See notes to consolidated financial statements 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, 2021 6,251 $ 6,251 $ 41,808 $ 173,498 $ 18 $ 221,575 Cash dividend on common stock ($ 0.37 per share) — — — ( 2,313 ) — ( 2,313 ) Stock-based compensation expense — — 280 — — 280 Exercise of stock options and vesting of restricted stock units, net 17 17 ( 295 ) — — ( 278 ) Repurchase of common stock ( 61 ) ( 61 ) ( 2,151 ) — — ( 2,212 ) Other comprehensive loss, net of tax — — — — ( 181 ) ( 181 ) Cumulative effect of adoption of ASU 2016-13 — — — 2,400 — 2,400 Net income — — — 12,181 — 12,181 Balance as of March 31, 2021 6,207 $ 6,207 $ 39,642 $ 185,766 ($ 163 ) $ 231,452 Cash dividend on common stock ($ 0.37 per share) — — — ( 2,320 ) — ( 2,320 ) Stock-based compensation expense — — 229 — — 229 Other comprehensive loss, net of tax — — — — ( 488 ) ( 488 ) Net income — — — 8,345 — 8,345 Balance as of June 30, 2021 6,207 $ 6,207 $ 39,871 $ 191,791 ($ 651 ) $ 237,218 Cash dividend on common stock ($ 0.38 per share) — — — ( 2,384 ) — ( 2,384 ) Stock-based compensation expense — — 232 — — 232 Exercise of stock options and vesting of restricted stock units, net — — — — — — Repurchase of common stock ( 30 ) ( 30 ) ( 1,174 ) — — ( 1,204 ) Other comprehensive income, net of tax — — — — ( 265 ) ( 265 ) Net income — — — 8,877 — 8,877 Balance as of September 30, 2021 6,177 $ 6,177 $ 38,929 $ 198,284 ($ 916 ) $ 242,474 See notes to consolidated financial statements 7 NORTHRIM BANCORP, INC. Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (In Thousands) 2021 2020 Operating Activities: Net income $ 29,403 $ 22,788 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Gain on sale of securities, net ( 67 ) ( 98 ) Loss on disposal of premises and equipment — 22 Depreciation and amortization of premises and equipment 2,473 2,337 Amortization of software 868 821 Intangible asset amortization 27 36 Amortization of investment security premium, net of discount accretion 367 ( 24 ) Unrealized (gain) loss on marketable equity securities ( 27 ) 347 Deferred tax expense (benefit) 587 ( 477 ) Stock-based compensation 741 717 Deferred loan fees and amortization, net of costs 3,128 9,399 (Benefit) provision for credit losses ( 3,021 ) 3,031 (Benefit) provision for purchased receivables — ( 7 ) Additions to home mortgage servicing rights carried at fair value ( 4,896 ) ( 3,032 ) Change in fair value of home mortgage servicing rights carried at fair value 3,034 4,363 Change in fair value of commercial servicing rights carried at fair value 134 180 Gain on sale of loans ( 29,222 ) ( 30,701 ) Proceeds from the sale of loans held for sale 939,618 883,899 Origination of loans held for sale ( 870,442 ) ( 913,469 ) Gain on sale of other real estate owned ( 577 ) ( 176 ) Net changes in assets and liabilities: Decrease (increase) in accrued interest receivable 433 ( 3,512 ) (Increase) decrease in other assets 5,875 ( 6,443 ) Increase (decrease) in other liabilities ( 3,139 ) 2,980 Net Cash Provided (Used) by Operating Activities 75,297 ( 27,019 ) Investing Activities: Investment in securities: Purchases of investment securities available for sale ( 259,016 ) ( 89,173 ) Purchases of marketable equity securities ( 493 ) ( 1,439 ) Purchases of FHLB stock ( 571 ) ( 5,884 ) Purchases of investment securities held to maturity ( 10,000 ) — Proceeds from sales/calls/maturities of securities available for sale 125,092 150,544 Proceeds from sales of marketable equity securities 1,017 502 Proceeds from redemption of FHLB stock 12 5,514 (Increase) decrease in purchased receivables, net ( 6,196 ) 10,860 Increase in loans, net ( 9,990 ) ( 459,346 ) Proceeds from sale of other real estate owned 2,228 419 Purchases of software ( 76 ) ( 96 ) Purchases of premises and equipment ( 1,981 ) ( 2,552 ) Net Cash (Used) by Investing Activities ( 159,974 ) ( 390,651 ) Financing Activities: Increase in deposits 471,560 433,782 (Decrease) increase in borrowings ( 212 ) 4,846 Repurchase of common stock ( 3,416 ) ( 8,676 ) Proceeds from the issuance of common stock 5 8 Cash dividends paid ( 6,946 ) ( 6,585 ) Net Cash Provided by Financing Activities 460,991 423,375 Net Change in Cash and Cash Equivalents 376,314 5,705 8 Cash and Cash Equivalents at Beginning of Period 115,965 95,424 Cash and Cash Equivalents at End of Period $ 492,279 $ 101,129 Supplemental Information: Income taxes paid $ 4,577 $ 1,940 Interest paid $ 2,950 $ 4,580 Transfer of loans to other real estate owned $ 274 $ 162 Loans made to facilitate sales of other real estate owned $ 1,012 $ — Non-cash lease liability arising from obtaining right of use assets $ 79 $ 370 Cash dividends declared but not paid $ 71 $ 73 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, 2021 are not necessarily indicative of the results anticipated for the year ending December 31, 2021. 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, 2020. 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, 2020. There have been no significant changes in our application of these accounting policies in 2021, except as noted below. As a result of the adoption of Accounting Standards Codification ("ASC") 326 Financial Instruments - Credit Losses on January 1, 2020, the Company has updated the following significant accounting policies. Allowance for Credit Losses - Investment Securities: For available for sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. The ACL may be reversed if conditions change. However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in such a situation. In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. The ACL on held to maturity securities is estimated on a collective basis by major security type. At September 30, 2021, the Company’s held to maturity securities consisted of investments in corporate bonds. Expected credit losses for these securities are estimated using a discounted cash flow ("DCF") methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Accrued interest receivable is excluded from the estimate of credit losses. Allowance for Credit Losses - Loans : Under the current expected credit loss model adopted by the Company on January 1, 2021, the ACL on loans is a valuation allowance estimated at each balance sheet date that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. 10 The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL. Expected credit losses are reflected in the ACL through a provision for or (reversal) of credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible when management believes that collection of principal is unlikely. Subsequent recoveries, if any, are credited to the ACL when received. The Company measures expected credit losses of financial assets on a collective (pool) basis, when the financial assets share similar risk characteristics. Depending on the nature and size of the pool of financial assets with similar risk characteristics, the Company uses a DCF method or a weighted average remaining life method to estimate expected credit losses quantitatively. The Company uses a DCF method for 8 of its 11 loan pools, which represent 96 % of the amortized cost basis of total loan pools at September 30, 2021. The weighted average remaining life method is used for the remaining 3 loan pools primarily because loan level data constraints preclude the use of the DCF model. The weighted average remaining life method uses exposure at default, along with the expected credit losses adjusted for prepayments to calculate the required allowance. The Company utilizes peer historical loss data to estimate credit losses under the weighted average remaining life method. Under the DCF method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD"). The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables. The Company's regression models for PD utilize the Company's actual historical loan level default data. The Company determines a reasonable and supportable forecast and applies that forecast to the regression model to estimate defaults over the forecast period. Management leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the Company's four quarter forecast period. Management utilizes and forecasts Alaska unemployment as a loss driver for all of the loans pools that utilized the DCF method. Management also utilizes and forecasts either one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics. Following the forecast period, the economic variables used to calculate PD revert to a historical average at a constant rate over an eight quarter reversion period. Other assumptions relevant to the discounted cash flow model to derive the quantitative allowance include the LGD, which is the estimate of loss for a defaulted loan, prepayment speeds, and the discount rate applied to future cash flows. The DCF method utilizes the effective interest rate of individual assets to discount the expected credit losses over the contractual term of the loan, adjusted for prepayments. The LGD is the expected loss which would be realized presuming a default has occurred and primarily measures the value of the collateral or other secondary source of repayment related to the collateral. The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring. In summary, under the DCF method the combination of adjustments for credit expectations (PD and LGD) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis. The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses under the current expected credit loss model adopted by the Company on January 1, 2021: Commercial & industrial - Commercial loans are loans for commercial, corporate and business purposes. The Company’s commercial business loan portfolio is comprised of loans for a variety of purposes and across a variety of industries. These loans include general commercial and industrial loans, loans to purchase capital equipment, and other business loans for working capital and operational purposes. Commercial loans are generally secured by accounts receivable, inventory and other 11 business assets. Also included in commercial loans are our Paycheck Protection Program ("PPP") loans originated during 2020 and 2021. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Commercial real estate - This category of loans consists of the following loan types: Owner occupied - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including owner occupied commercial real estate loans primarily secured by commercial office or industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Non-owner occupied and multifamily - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including investment real estate loans that are primarily secured by office and industrial buildings, warehouses or retail buildings where the owner of the building does not occupy the property, non-owner occupied apartment or multifamily residential buildings, and various special purpose properties. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. Generally, these types of loans are thought to involve a greater degree of credit risk than owner occupied commercial real estate as they are more sensitive to adverse economic conditions. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Residential real estate - This category of loans consists of the following loan types: 1-4 family residential properties secured by first liens - This category of loans includes term loans secured by first liens on residential real estate. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens - This category of loans includes term loans primarily secured by junior liens on residential real estate and revolving credit lines that are secured by first liens on residential real estate. Home equity revolving lines of credit and home equity term loans are included in this group of loans. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. 1-4 family residential construction - This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of 1-4 family residential properties which will secure the loan. These loans may also be secured by tracts or individual parcels of land on which 1-4 family residential properties are being constructed. The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third-party. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Other construction, land development, and raw land - This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of owner occupied and non-owner occupied commercial properties, and loans secured by raw or improved land. The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third-party. Repayment of land secured loans are dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Agricultural production, including commercial fishing - These loans are for the purpose of financing agricultural production, including growing and storing of crops, and for the purpose of financing fisheries and forestries, including loans to commercial fishermen. These loans may be secured or unsecured, but any loans for these purposes that are secured by real estate are included in a real estate category. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool. Consumer - Loans used for personal use, which may be secured or unsecured, and customer overdrafts. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool. Obligations of states and political subdivisions in the US - This category of loans includes all loans made to states, counties municipalities, school districts, drainage and sewer districts, and Indian tribes in the U.S. These loans maybe be secured by any type of collateral, including real estate. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool. 12 Other - This category of loans includes all other loans that cannot properly be reported in one of the preceding categories. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool. In addition to the quantitative portion of the ACL derived using either the DCF or weighted average remaining life method, the Company also considers the effects of the following qualitative factors in its calculation of expected losses in the loan portfolio: • Lending strategy, policies, and procedures; • Quality of internal loan review; • Lending management and staff; • Trends in underlying collateral values; • Competition, legal, and regulatory changes; • Economic and business conditions including fluctuations in the price of Alaska North slope crude oil; • Changes in trends, volume and severity of adversely classified loans, nonaccrual loans, and delinquencies; • Concentration of credit; and • Changes in the nature and volume of the loan portfolio. The qualitative factor methodology is based on quantitative metrics, but also includes a high degree of subjectivity and changes in any of the metrics could have a significant impact on our calculation of the allowance. Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for expected credit losses and are not included in the collective evaluation. Loans are identified for individual evaluation during regular credit reviews of the portfolio. A loan is generally identified for individual evaluation when management determines that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan for individual evaluation, we measure expected credit losses using DCF, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of DCF. The analysis of collateral dependent loans includes appraisals on loans secured by real property, management’s assessment of the current market, recent payment history and an evaluation of other sources of repayment. A loan that has been modified or renewed is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty; and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL. If we determine that the value of and individually evaluated loan is less than the recorded investment in the loan, we either recognize an allowance for credit losses specific to that loan, or charge-off the deficit balance on collateral dependent loans if it is determined that such amount represents a confirmed loss. Subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported. Paycheck Protection Program and other loans guaranteed by the U.S. government: With the passage of the PPP, the Company has actively participated in assisting its customers with applications for loans through the program. Loans funded through the PPP program are fully guaranteed by the U.S. government subject to certain representations and warranties. This guarantee exists at the inception of the loans and throughout the lives of the loans and was not entered into separately and apart from the loans. ASC 326 requires credit enhancements that mitigate credit losses, such as the U.S. government guarantee on PPP loans, to be considered in estimating credit losses. The guarantee is considered “embedded” and, therefore, is considered when estimating credit loss on the PPP loans and other loans guaranteed by the U.S. government. Given that the loans are fully guaranteed by the U.S. government and absent any specific loss information on any of our guaranteed loans, the Company does not carry an ACL on its PPP and other loans guaranteed by the U.S. government at September 30, 2021 or December 31, 2020. Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company enters into various types of transactions that involve financial instruments with off-balance sheet risk, including commitments 13 to extend credit and standby letters of credit issued to meet customer financing needs. We apply the same credit standards to these commitments as in all of our lending activities and include these commitments in our lending risk evaluations. The Company’s exposure to credit loss in the event of nonperformance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an ACL on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to provision for credit loss expense in the Company’s consolidated statements of income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s consolidated balance sheets. Purchased Receivables and related Allowance for Credit Losses: The Company purchases accounts receivable from its customers. The purchased receivables are carried at amortized cost, net of an ACL. Management measures expected credit losses on purchased receivables by evaluating each receivable individually. Each quarter, management reviews purchased receivable asset balances compared to assets eligible for advancement of funds in order to determine the exposure to loss for the Company. Exposure is zero when outstanding balances exceed assets eligible for advancement. Management may determine that an ACL is appropriate for individual purchased receivables based on asset specific facts and circumstances. Fees charged to the customer are earned while the balances of the purchases are outstanding, which is typically less than one year. Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. 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 2021 In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13” or “CECL”). 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. Under ASU 2016-13 financial institutions and other organizations will 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 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 portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. 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. 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. Early application was permitted for specified periods. The Company elected to early adopt ASU 2016-13 on January 1, 2021 after finalizing data and model validation and our internal governance framework. The guidance was applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at January 1, 2021. However, certain provisions of the guidance are only required to be applied on a prospective basis. Results for periods beginning after January 1, 2021 and presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable US GAAP. The Company recorded a net increase in retained earnings of $ 2.4 million upon adoption of ASU 2016-13. The transition adjustment includes a decrease in the ACL on loans of $ 4.5 million, a decrease in the ACL on purchased receivables of $ 73,000 , and an increase in the ACL on unfunded commitments of $ 1.2 million, net of the corresponding net decrease in deferred tax assets of $ 954,000 . 14 Accounting pronouncements to be implemented in future periods In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Report of Financial Reporting ("ASU 2020-04"). ASU 2020-04 was issued to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. The last expedient is a one-time election to sell or transfer debt securities classified as held to maturity. The expedients are in effect from March 12, 2020, through December 31, 2022. The Company will be able to use the expedients in this guidance to manage through the transition away from LIBOR, specifically for our loan portfolio, derivative contracts, and bond portfolio. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, ("ASU 2021-01"). The amendments in ASU 2021-01 are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments clarify certain optional expedients and exceptions in Topic 848 for contract modifications apply to derivatives that are affected by the discounting transition. LIBOR is a widely-referenced benchmark rate, which is published in five currencies and a range of tenors, and seeks to estimate the cost at which banks can borrow on an unsecured basis from other banks. The administrator of LIBOR, ICE Benchmark Administration, published a consultation in December 2020 regarding its intention to cease the publication of LIBOR after December 31, 2021, with the exception of certain tenors of U.S. dollar (USD) LIBOR that it proposed would remain available for use in legacy contracts or as otherwise enumerated by financial regulators until June 30, 2023. The Company has some assets and liabilities referenced to LIBOR, such as commercial loans, derivatives, debt securities, and junior subordinated debentures. As of September 30, 2021, we had approximately $ 191.8 million of assets, including $ 119.5 million in commercial loans and $ 72.3 million in debt securities, and $ 10.0 million of liabilities in the form of our junior subordinated debentures linked to USD LIBOR. These amounts exclude derivative assets and liabilities on our consolidated balance sheet. As of September 30, 2021, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $ 154.8 million. Of this amount, $ 72.4 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers. An additional $ 72.4 million in notional value represent corresponding swap agreements with third party financial institutions that offset the commercial loan swaps. Swap agreements with third party institutions are $ 82.4 million, including an interest rate swap agreement for $ 10.0 million in notional value related to our junior subordinated debentures. Each of the USD LIBOR-linked amounts referenced above are expected to vary in future periods as current contracts expire with potential replacement contracts using an alternative reference rate. In an effort to mitigate the risks associated with a transition away from LIBOR, our Asset Liability Committee has undertaken initiatives to: (i) develop more robust fallback language and disclosures related to the LIBOR transition, (ii) develop a plan to seek to amend legacy contracts to reference such fallback language or alternative reference rates, (iii) enhance systems to support commercial loans, securities, and derivatives linked to the Secured Overnight Financing Rate and other alternative reference rates, (iv) develop and evaluate internal guidance, policies and procedures focused on the transition away from LIBOR to alternative reference rate products, and (v) prepare and disseminate internal and external communications regarding the LIBOR transition. ASU 2021-01 does not have a material impact on the Company's consolidated financial statements. 2. Cash and Cash Equivalents The Company is no longer 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 Company is required to maintain a $ 300,000 and $ 250,000 balance with a correspondent bank for outsourced servicing of ATMs as of September 30, 2021 and December 31, 2020, respectively. 15 As of September 30, 2021 and December 31, 2020, the Company was required to maintain a $ 100,000 and $ 2.8 million balance with a correspondent bank to collateralize the initial margin and the fair value exposure, respectively, of its interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures. 3. Investment Securities Marketable Equity Securities The Company held marketable equity securities with fair values of $ 8.6 million and $ 9.1 million at September 30, 2021 and December 31, 2020, respectively. The gross realized and unrealized gains (losses) recognized on marketable equity securities in other operating income in the Company's Consolidated Statements of Income were as follows: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2021 2020 2021 2020 Unrealized gain (loss) on marketable equity securities ($ 67 ) $ 375 $ 27 ($ 347 ) Gain on sale of marketable equity securities, net 36 — 67 98 Total ($ 31 ) $ 375 $ 94 ($ 249 ) Debt securities Debt securities have been classified in the financial statements as available for sale or held to maturity. The following table summarizes the amortized cost, estimated fair value, and ACL of debt securities and the corresponding amounts of gross unrealized gains and losses of available-for-sale securities recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses of held to maturity securities at the periods indicated: (In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value September 30, 2021 Securities available for sale U.S. Treasury and government sponsored entities $ 300,674 $ 465 ($ 1,315 ) $ — $ 299,824 Municipal securities 820 30 — — 850 Corporate bonds 34,969 462 ( 20 ) — 35,411 Collateralized loan obligations 43,038 23 ( 24 ) — 43,037 Total securities available for sale $ 379,501 $ 980 ($ 1,359 ) $ — $ 379,122 (In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value September 30, 2021 Securities held to maturity Corporate bonds $ 20,000 $ — ($ 736 ) $ 19,264 Allowance for credit losses — — — — Total securities held to maturity, net of ACL $ 20,000 $ — ($ 736 ) $ 19,264 16 (In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2020 Securities available for sale U.S. Treasury and government sponsored entities $ 173,318 $ 1,330 ($ 47 ) $ 174,601 Municipal securities 820 36 — 856 Corporate bonds 29,951 546 ( 5 ) 30,492 Collateralized loan obligations 41,782 44 ( 142 ) 41,684 Total securities available for sale $ 245,871 $ 1,956 ($ 194 ) $ 247,633 Securities held to maturity Corporate bonds $ 10,000 $ — $ — $ 10,000 Total securities held to maturity $ 10,000 $ — $ — $ 10,000 Gross unrealized losses on available for sale 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, 2021 and December 31, 2020 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, 2021: Securities available for sale U.S. Treasury and government sponsored entities $ 276,140 ($ 1,315 ) $ — $ — $ 276,140 ($ 1,315 ) Corporate bonds $ 5,013 ($ 20 ) $ — $ — $ 5,013 ($ 20 ) Collateralized loan obligations 4,976 ( 24 ) — — 4,976 ( 24 ) Total $ 286,129 ($ 1,359 ) $ — $ — $ 286,129 ($ 1,359 ) December 31, 2020: Securities available for sale U.S. Treasury and government sponsored entities $ 31,270 ($ 47 ) $ — $ — $ 31,270 ($ 47 ) Corporate bonds 3,198 ( 5 ) — — 3,198 ( 5 ) Collateralized loan obligations 23,670 ( 118 ) 2,967 ( 24 ) 26,637 ( 142 ) Total $ 58,138 ($ 170 ) $ 2,967 ($ 24 ) $ 61,105 ($ 194 ) Management evaluates available for sale debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. At September 30, 2021, the Company had 33 available for sale securities in an unrealized loss position without an ACL. At September 30, 2021, the Company had two held to maturity securities in an unrealized loss position without an ACL. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of September 30, 2021, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no losses have been recognized in the Company's Consolidated Statements of Income. At September 30, 2021 and December 31, 2020, $ 59.3 million and $ 77.9 million in securities were pledged for deposits and borrowings, respectively. 17 The amortized cost and estimated fair values of debt securities at September 30, 2021, 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 US Treasury and government sponsored entities Within 1 year $ 4,998 $ 5,076 1-5 years 285,356 284,446 5-10 years 10,320 10,302 Total $ 300,674 $ 299,824 Corporate bonds Within 1 year $ 2,240 $ 2,242 1-5 years $ 37,696 $ 37,993 5-10 years 15,033 15,013 Total $ 54,969 $ 55,248 Collateralized loan obligations 5-10 years $ 43,038 $ 43,037 Total $ 43,038 $ 43,037 Municipal securities 1-5 years $ 820 $ 850 Total $ 820 $ 850 There were no proceeds from sales of investment securities for the three and nine-month periods ending September 30, 2021 and 2020. A summary of interest income for the three and nine-month periods ending September 30, 2021 and 2020, on available for sale investment securities are as follows: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2021 2020 2021 2020 US Treasury and government sponsored entities $ 552 $ 680 $ 1,568 $ 2,839 Other 272 237 840 1,040 Total taxable interest income $ 824 $ 917 $ 2,408 $ 3,879 Municipal securities $ 4 $ 23 $ 13 $ 72 Total tax-exempt interest income $ 4 $ 23 $ 13 $ 72 Total $ 828 $ 940 $ 2,421 $ 3,951 18 4. Loans and Allowance for Credit Losses Loans Held for Sale Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of September 30, 2021 and December 31, 2020. Loans Held for Investment The Company adopted ASU 2016-13 effective January 1, 2021. Upon adoption, the Company changed its loan segments for purposes of the calculation of the ACL. Prior to January 1, 2021, the Company's loan segments were based on a combination of loan purpose and loan collateral. Effective January 1, 2021 and thereafter, the Company's loan segments are primarily based on loan collateral. The following table presents the Company's loan segments as of December 31, 2020 under the legacy segmentation and the new segmentation under ASU 2016-13: (In Thousands) Pre-ASU 2016-13 Commercial loans $ 780,058 Real estate construction one-to-four family 38,467 Real estate construction other 80,315 Real estate term owner occupied 163,597 Real estate term non-owner occupied 309,074 Real estate term other 46,620 Consumer secured by 1st deeds of trust 15,585 Consumer other 22,069 Subtotal 1,455,785 Unearned loan fees, net ( 11,735 ) Total portfolio loans $ 1,444,050 Post-ASU 2016-13 Commercial & industrial loans $ 619,304 Commercial real estate: Owner occupied properties 234,364 Non-owner occupied and multifamily properties 394,860 Residential real estate: 1-4 family residential properties secured by first liens 33,463 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 18,114 1-4 family residential construction loans 32,760 Other construction, land development and raw land loans 84,352 Obligations of states and political subdivisions in the US 15,274 Agricultural production, including commercial fishing 13,093 Consumer loans 5,794 Other loans 4,407 Subtotal $ 1,455,785 Unearned loan fees, net ($ 11,735 ) Total portfolio loans $ 1,444,050 19 The following table presents amortized cost and unpaid principal balance of loans for the periods indicated: September 30, 2021 December 31, 2020 (In Thousands) Amortized Cost Unpaid Principal Difference Amortized Cost Unpaid Principal Difference Commercial & industrial loans $ 504,305 $ 513,482 ($ 9,177 ) $ 612,254 $ 619,304 ($ 7,050 ) Commercial real estate: Owner occupied properties 292,021 293,346 ( 1,325 ) 233,320 234,363 ( 1,043 ) Non-owner occupied and multifamily properties 443,258 446,688 ( 3,430 ) 392,452 394,860 ( 2,408 ) Residential real estate: 1-4 family residential properties secured by first liens 29,548 29,627 ( 79 ) 33,415 33,510 ( 95 ) 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 18,749 18,626 123 18,236 18,114 122 1-4 family residential construction loans 36,386 36,591 ( 205 ) 32,500 32,760 ( 260 ) Other construction, land development and raw land loans 73,313 73,832 ( 519 ) 83,463 84,351 ( 888 ) Obligations of states and political subdivisions in the US 17,470 17,636 ( 166 ) 15,318 15,274 44 Agricultural production, including commercial fishing 27,573 27,692 ( 119 ) 12,968 13,093 ( 125 ) Consumer loans 5,014 4,973 41 5,734 5,794 ( 60 ) Other loans 3,020 3,035 ( 15 ) 4,390 4,407 ( 17 ) Total 1,450,657 1,465,528 ( 14,871 ) 1,444,050 1,455,830 ( 11,780 ) Allowance for credit losses ( 13,816 ) ( 21,136 ) $ 1,436,841 $ 1,465,528 ($ 14,871 ) $ 1,422,914 $ 1,455,830 ($ 11,780 ) The difference between the amortized cost and unpaid principal balance is primarily net deferred origination fees totaling $ 14.9 million and $ 11.7 million at September 30, 2021 and December 31, 2020, respectively, and premiums and discounts associated with acquired loans totaling $ 9,000 and $ 47,000 at September 30, 2021 and December 31, 2020, respectively. Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 6.3 million and $ 7.1 million at September 30, 2021 and December 31, 2020, respectively, and was included in other assets in the Consolidated Balance Sheets. Amortized cost in the above table includes $ 203.4 million and $ 304.6 million as of September 30, 2021 and December 31, 2020, respectively, in PPP loans administered by the U.S. Small Business Administration ("SBA") within the Commercial & industrial loan segment. 20 Allowance for Credit Losses The activity in the ACL related to loans held for investment is as follows: Three Months Ended September 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2021 Commercial & industrial loans $ 4,291 ($ 332 ) $ — $ 23 $ 3,982 Commercial real estate: Owner occupied properties 3,340 151 — 2 3,493 Non-owner occupied and multifamily properties 3,841 35 — — 3,876 Residential real estate: 1-4 family residential properties secured by first liens 630 ( 154 ) — — 476 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 340 ( 42 ) — 9 307 1-4 family residential construction loans 231 ( 47 ) — — 184 Other construction, land development and raw land loans 1,670 ( 391 ) — — 1,279 Obligations of states and political subdivisions in the US 39 ( 3 ) — — 36 Agricultural production, including commercial fishing 57 32 — 5 94 Consumer loans 94 ( 11 ) — — 83 Other loans 6 — — — 6 Total $ 14,539 ($ 762 ) $ — $ 39 $ 13,816 Three Months Ended September 30, Beginning Balance Provision (benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2020 Commercial $ 7,366 $ 285 ($ 56 ) $ 600 $ 8,195 Real estate construction 1-4 family 690 10 — — 700 Real estate construction other 1,215 58 — — 1,273 Real estate term owner occupied 2,533 21 ( 85 ) — 2,469 Real estate term non-owner occupied 5,421 61 — — 5,482 Real estate term other 702 55 — 1 758 Consumer secured by 1st deed of trust 258 ( 2 ) — — 256 Consumer other 447 ( 7 ) — 3 443 Unallocated 2,021 86 — — 2,107 Total $ 20,653 $ 567 ($ 141 ) $ 604 $ 21,683 21 Nine Months Ended September 30, Beginning Balance Impact of adopting ASC 326 Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2021 Commercial $ 7,973 ($ 7,973 ) $— $— $— — Real estate construction 1-4 family 679 ( 679 ) — — — — Real estate construction other 1,179 ( 1,179 ) — — — — Real estate term owner occupied 2,625 ( 2,625 ) — — — — Real estate term non-owner occupied 5,133 ( 5,133 ) — — — — Real estate term other 779 ( 779 ) — — — — Consumer secured by 1st deed of trust 261 ( 261 ) — — — — Consumer other 400 ( 400 ) — — — — Unallocated 2,107 ( 2,107 ) — — — — Commercial & industrial loans — 4,348 ( 328 ) ( 273 ) 235 3,982 Commercial real estate: Owner occupied properties — 3,579 ( 92 ) — 6 3,493 Non-owner occupied and multifamily properties — 4,944 ( 1,068 ) — — 3,876 Residential real estate: 1-4 family residential properties secured by first liens — 673 ( 197 ) — — 476 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — 419 ( 141 ) — 29 307 1-4 family residential construction loans — 454 ( 270 ) — — 184 Other construction, land development and raw land loans — 1,994 ( 715 ) — — 1,279 Obligations of states and political subdivisions in the US — 44 ( 8 ) — — 36 Agricultural production, including commercial fishing — 49 25 — 20 94 Consumer loans — 118 ( 37 ) — 2 83 Other loans — 3 3 — — 6 Total $ 21,136 ($ 4,511 ) ($ 2,828 ) ($ 273 ) $ 292 $ 13,816 Nine Months Ended September 30, Beginning Balance Provision (benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2020 Commercial $ 6,604 $ 1,946 ($ 1,011 ) $ 656 $ 8,195 Real estate construction 1-4 family $ 643 $ 57 $ — $ — $ 700 Real estate construction other 1,017 256 — — 1,273 Real estate term owner occupied 2,188 366 ( 85 ) — 2,469 Real estate term non-owner occupied 5,180 302 — — 5,482 Real estate term other 671 85 — 2 758 Consumer secured by 1st deed of trust 270 ( 14 ) — — 256 Consumer other 436 5 ( 14 ) 16 443 Unallocated 2,079 28 — — 2,107 Total $ 19,088 $ 3,031 ($ 1,110 ) $ 674 $ 21,683 The Company adopted ASU 2016-13 effective January 1, 2021. Upon adoption, the Company established an ACL of $ 16.6 million. As of September 30, 2021 the ACL decreased to $ 13.8 million. The Company primarily uses a DCF method to estimate ACL for loans. The Company utilizes and forecasts unemployment in Alaska as the primary loss driver in the DCF model. The Company also utilizes and forecasts either the one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Consistent forecasts of the loss drivers are used across the loan segments. 22 At September 30, 2021, as compared to January 1, 2021, the Company forecasted a significantly lower unemployment rate in Alaska, a slightly lower one-year percentage change in the national commercial real estate price index, and a slightly higher one-year percentage change in the Alaska home price index over the reasonable and supportable forecast period. Specifically regarding the forecasts used to calculate the September 30, 2021 ACL, management expects unemployment to remain consistent with actual levels observed in Alaska as of August 2021. This rate is above pre-pandemic levels over the forecast period, but is lower than rates previously projected by management. Management's projections for economic indicators as of September 30, 2021 improved slightly as compared to June 30, 2021. The Company also applies qualitative factors in our CECL model, and these factors also improved in the third quarter as compared to the second quarter of 2021 due to increases in oil prices and improvement in loan portfolio quality trends. Additionally, the ACL for individually impaired loans decreased during the third quarter of 2021 due to pay downs. These factors, which decreased the ACL during the third quarter of 2021, were only partially offset by an increase in loan balances. The following table presents loans individually and collectively evaluated for impairment and their respective allowance for credit loss allocations as of December 31, 2020, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13: (In Thousands) Loan Evaluation ALLL Allocations Individually Collectively Total Individually Collectively Total Commercial $ 7,786 $ 764,682 $ 772,468 $ 13 $ 7,960 $ 7,973 Real estate construction 1-4 family 702 $ 37,478 38,180 — 679 679 Real estate construction other — $ 79,403 79,403 — 1,179 1,179 Real estate term owner occupied 6,962 $ 155,762 162,724 — 2,625 2,625 Real estate term non-owner occupied 770 $ 306,477 307,247 — 5,133 5,133 Real estate term other 1,467 $ 44,763 46,230 — 779 779 Consumer secured by 1st deed of trust 259 $ 15,289 15,548 — 261 261 Consumer other 82 $ 22,168 22,250 — 400 400 Unallocated — — — — 2,107 2,107 Total $ 18,028 $ 1,426,022 $ 1,444,050 $ 13 $ 21,123 $ 21,136 23 The following table presents information pertaining to impaired loans as of December 31, 2020, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13: Impaired Loans With a Valuation Allowance Impaired Loans Without a Valuation Allowance (In Thousands) Recorded Investment Unpaid Principal Related Allowance Recorded Investment Unpaid Principal Commercial $ 308 $ 308 $ 13 $ 7,478 $ 8,287 Real estate construction 1-4 family — — — 702 702 Real estate construction other — — — — — Real estate term owner occupied — — — 6,962 7,047 Real estate term non-owner occupied — — — 771 771 Real estate term other — — — 1,467 1,467 Consumer secured by 1st deed of trust — — — 258 258 Consumer other — — — 82 87 Total $ 308 $ 308 $ 13 $ 17,720 $ 18,619 The following table presents average impaired loans information, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13, and interest recognized on such loans, for the three and nine-month periods ended September 30, 2020: Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 (In Thousands) Average Impaired Loans Interest Recognized Average Impaired Loans Interest Recognized Commercial $ 12,892 $ 65 $ 13,161 $ 95 Real estate construction 1-4 family 808 — 970 — Real estate construction other — — — — Real estate term owner occupied 6,707 49 6,378 78 Real estate term non-owner occupied 490 3 333 7 Real estate term other 1,562 7 1,572 14 Consumer secured by 1st deed of trust 272 5 275 9 Consumer other 86 — 88 — Total $ 22,817 $ 129 $ 22,777 $ 203 Credit Quality Information As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management utilizes a loan risk grading system called the Asset Quality Rating (“AQR”) system to assign a risk classification to each of its loans. The risk classification is a dual rating system that contemplates both probability of default and risk of loss given default. Loans are graded on a scale of 1 to 10 and, loans graded 1 – 6 are considered “pass” grade loans. Loans graded 7 or higher are considered "classified" loans. A description of the general characteristics of the AQR risk classifications are as follows: Pass grade loans – 1 through 6: The borrower demonstrates sufficient cash flow to fund debt service, including acceptable profit margins, cash flows, liquidity and other balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The Company has competent management with an acceptable track record. The category does not include loans with undue or unwarranted credit risks that constitute identifiable weaknesses. Classified loans: Special Mention – 7: A "special mention" credit has weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date. Substandard – 8: A "substandard" credit is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Northrim Bank will sustain some loss if the deficiencies are not corrected. 24 Doubtful – 9: An asset classified "doubtful" has all the weaknesses inherent in one that is classified "substandard-8" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. The loan has substandard characteristics, and available information suggests that it is unlikely that the loan will be repaid in its entirety. Loss – 10: An asset classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future. The following tables present the Company's portfolio of risk-rated loans by grade and by year of origination. Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. September 30, 2021 2021 2020 2019 2018 2017 Prior Total (In Thousands) Commercial & industrial loans Pass $ 252,274 $ 75,997 $ 41,196 $ 38,516 $ 23,534 $ 52,902 $ 484,419 Classified 6,334 521 3,591 3,795 548 5,097 19,886 Total commercial & industrial loans $ 258,608 $ 76,518 $ 44,787 $ 42,311 $ 24,082 $ 57,999 $ 504,305 Commercial real estate: Owner occupied properties Pass $ 56,599 $ 94,373 $ 39,839 $ 15,415 $ 14,763 $ 62,377 $ 283,366 Classified — 1,432 — 532 — 6,691 8,655 Total commercial real estate owner occupied properties $ 56,599 $ 95,805 $ 39,839 $ 15,947 $ 14,763 $ 69,068 $ 292,021 Non-owner occupied and multifamily properties Pass $ 66,449 $ 79,472 $ 67,466 $ 34,569 $ 20,273 $ 164,676 $ 432,905 Classified — — — — 10,353 — 10,353 Total commercial real estate non-owner occupied and multifamily properties $ 66,449 $ 79,472 $ 67,466 $ 34,569 $ 30,626 $ 164,676 $ 443,258 Residential real estate: 1-4 family residential properties secured by first liens Pass $ 3,744 $ 7,979 $ 3,816 $ 642 $ 1,774 $ 9,571 $ 27,526 Classified — 1,318 486 — — 218 2,022 Total residential real estate 1-4 family residential properties secured by first liens $ 3,744 $ 9,297 $ 4,302 $ 642 $ 1,774 $ 9,789 $ 29,548 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens Pass $ 3,041 $ 2,609 $ 3,817 $ 4,038 $ 264 $ 4,705 $ 18,474 Classified — — — 261 — 14 275 Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $ 3,041 $ 2,609 $ 3,817 $ 4,299 $ 264 $ 4,719 $ 18,749 1-4 family residential construction loans Pass $ 19,068 $ 1,564 $ 4,329 $ 112 $ — $ 11,204 $ 36,277 Classified — — — — 109 — 109 Total residential real estate 1-4 family residential construction loans $ 19,068 $ 1,564 $ 4,329 $ 112 $ 109 $ 11,204 $ 36,386 Other construction, land development and raw land loans Pass $ 27,179 $ 20,869 $ 10,849 $ 3,697 $ 144 $ 5,881 $ 68,619 Classified — — — 3,171 — 1,523 4,694 Total other construction, land development and raw land loans $ 27,179 $ 20,869 $ 10,849 $ 6,868 $ 144 $ 7,404 $ 73,313 Obligations of states and political subdivisions in the US Pass $ 52 $ 3,112 $ 3,150 $ 373 $ 2,740 $ 8,043 $ 17,470 25 Classified — — — — — — — Total obligations of states and political subdivisions in the US $ 52 $ 3,112 $ 3,150 $ 373 $ 2,740 $ 8,043 $ 17,470 Agricultural production, including commercial fishing Pass $ 16,235 $ 6,598 $ 1,130 $ 1,150 $ 781 $ 1,679 $ 27,573 Classified — — — — — — — Total agricultural production, including commercial fishing $ 16,235 $ 6,598 $ 1,130 $ 1,150 $ 781 $ 1,679 $ 27,573 Consumer loans Pass $ 854 $ 936 $ 693 $ 427 $ 318 $ 1,786 $ 5,014 Classified — — — — — — — Total consumer loans $ 854 $ 936 $ 693 $ 427 $ 318 $ 1,786 $ 5,014 Other loans Pass $ 495 $ 1,692 $ 439 $ 165 $ — $ 229 $ 3,020 Classified — — — — — — — Total other loans $ 495 $ 1,692 $ 439 $ 165 $ — $ 229 $ 3,020 Total loans Pass $ 445,990 $ 295,201 $ 176,724 $ 99,104 $ 64,591 $ 323,053 $ 1,404,663 Classified 6,334 3,271 4,077 7,759 11,010 13,543 45,994 Total loans $ 452,324 $ 298,472 $ 180,801 $ 106,863 $ 75,601 $ 336,596 $ 1,450,657 Total pass loans $ 445,990 $ 295,201 $ 176,724 $ 99,104 $ 64,591 $ 323,053 $ 1,404,663 Government guarantees ( 203,664 ) ( 22,169 ) ( 16,800 ) ( 5,212 ) ( 409 ) ( 1,537 ) ( 249,791 ) Total pass loans, net of government guarantees $ 242,326 $ 273,032 $ 159,924 $ 93,892 $ 64,182 $ 321,516 $ 1,154,872 Total classified loans $ 6,334 $ 3,271 $ 4,077 $ 7,759 $ 11,010 $ 13,543 $ 45,994 Government guarantees ( 1,501 ) ( 1,289 ) — — ( 9,570 ) ( 1,123 ) ( 13,483 ) Total classified loans, net government guarantees $ 4,833 $ 1,982 $ 4,077 $ 7,759 $ 1,440 $ 12,420 $ 32,511 The following table presents the Company's portfolio of risk-rated loans by grade as of December 31, 2020: Pass Classified Total (In Thousands) December 31, 2020 Commercial $ 758,362 $ 14,106 $ 772,468 Real estate construction 1-4 family 37,093 1,087 38,180 Real estate construction other 79,403 — 79,403 Real estate term owner occupied 152,734 9,990 162,724 Real estate term non-owner occupied 289,555 17,692 307,247 Real estate term other 42,900 3,330 46,230 Consumer secured by 1st deed of trust 15,404 144 15,548 Consumer other 22,144 106 22,250 Portfolio loans 1,397,595 46,455 1,444,050 Government guarantees ( 334,639 ) ( 14,587 ) ( 349,226 ) Portfolio loans, net of government guarantees $ 1,062,956 $ 31,868 $ 1,094,824 26 Past Due Loans: The following tables present an aging of contractually past due loans: (In Thousands) 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Greater Than 90 Days Past Due Still Accruing September 30, 2021 Commercial & industrial loans $ 266 $ 19 $ 4,227 $ 4,512 $ 499,793 $ 504,305 $ — Commercial real estate: Owner occupied properties — — 1,219 1,219 290,802 292,021 — Non-owner occupied and multifamily properties — — — — 443,258 443,258 — Residential real estate: 1-4 family residential properties secured by first liens — 168 — 168 29,380 29,548 — 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 44 — 139 183 18,566 18,749 — 1-4 family residential construction loans — — 109 109 36,277 36,386 — Other construction, land development and raw land loans — — 1,545 1,545 71,768 73,313 — Obligations of states and political subdivisions in the US — — — — 17,470 17,470 — Agricultural production, including commercial fishing — — — — 27,573 27,573 — Consumer loans — — — — 5,014 5,014 — Other loans — — — — 3,020 3,020 — Total $ 310 $ 187 $ 7,239 $ 7,736 $ 1,442,921 $ 1,450,657 $ — December 31, 2020 Commercial & industrial loans $ 242 $ 229 $ 2,675 $ 3,146 $ 609,108 $ 612,254 $ — Commercial real estate: Owner occupied properties 2,203 — 2,459 4,662 228,658 233,320 449 Non-owner occupied and multifamily properties — — — — 392,452 392,452 — Residential real estate: 1-4 family residential properties secured by first liens 446 — — 446 32,969 33,415 — 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 38 — 139 177 18,059 18,236 — 1-4 family residential construction loans — — 702 702 31,798 32,500 — Other construction, land development and raw land loans — — 1,545 1,545 81,918 83,463 — Obligations of states and political subdivisions in the US — — — — 15,318 15,318 — Agricultural production, including commercial fishing — — — — 12,968 12,968 — Consumer loans — — 272 272 5,462 5,734 — Other loans — — — — 4,390 4,390 — Total $ 2,929 $ 229 $ 7,792 $ 10,950 $ 1,433,100 $ 1,444,050 $ 449 27 Nonaccrual loans: Nonaccrual loans net of government guarantees totaled $ 11.5 million and $ 9.6 million at September 30, 2021 and December 31, 2020, respectively. The following table presents loans on nonaccrual status and loans on nonaccrual status for which there was no related allowance for credit losses: September 30, 2021 December 31, 2020 (In Thousands) Nonaccrual Nonaccrual With No ACL Nonaccrual Nonaccrual With No ACL Commercial & industrial loans $ 4,974 $ 1,179 $ 3,848 $ 3,513 Commercial real estate: Owner occupied properties 3,640 3,640 4,620 4,582 Residential real estate: 1-4 family residential properties secured by first liens 1,950 1,464 160 160 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 275 275 242 221 1-4 family residential construction loans 109 109 702 702 Other construction, land development and raw land loans 1,545 1,545 1,545 1,545 Consumer loans — — 3 — Total nonaccrual loans 12,493 8,212 11,120 10,723 Government guarantees on nonaccrual loans ( 1,017 ) ( 1,017 ) ( 1,483 ) ( 1,483 ) Net nonaccrual loans $ 11,476 $ 7,195 $ 9,637 $ 9,240 There was no interest on nonaccrual loans reversed through interest income during three and nine-month periods ending September 30, 2021. There was no interest on nonaccrual loans reversed through interest income during the three-month period ending September 30, 2020 and $ 12,000 in interest on nonaccrual loans reversed through interest income during the nine-month period ending September 30, 2020, respectively. There was no interest earned on nonaccrual loans with a principal balance during the three and nine-month periods ending September 30, 2021 and September 30, 2020, respectively. However, the Company recognized interest income of $ 198,000 and $ 780,000 in the three-month periods ending September 30, 2021 and 2020 and $ 565,000 and $ 986,000 in the nine-month periods ending September 30, 2021 and 2020, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero. 28 Troubled Debt Restructurings: Loans classified as TDRs totaled $ 7.0 million and $ 7.9 million at September 30, 2021 and December 31, 2020, 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 Coronavirus Aid, Relief, and Economic Security ("CARES") Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 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. 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: Loan Modifications due to COVID-19 as of September 30, 2021 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $ 49,888 $ 7,533 $ 57,421 Number of modifications 21 3 24 Loan Modifications due to COVID-19 as of December 31, 2020 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $ 43,379 $ 22,165 $ 65,544 Number of modifications 23 11 34 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. The following table presents the breakout between newly restructured loans that occurred during the nine months ended September 30, 2021 and restructured loans that occurred prior to 2021 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, 2020. The disclosed restructurings were not related to COVID-19 modifications. Accrual Status Nonaccrual Status Total Modifications (In Thousands) New Troubled Debt Restructurings Commercial & industrial loans $ — $ 249 $ 249 Commercial real estate: Owner occupied properties — 360 360 Other construction, land development and raw land loans — 578 578 Subtotal $ — $ 1,187 $ 1,187 Existing Troubled Debt Restructurings $ 2,382 $ 3,467 $ 5,849 Total $ 2,382 $ 4,654 $ 7,036 29 The following tables present newly restructured loans that occurred during the nine months ended September 30, 2021 and 2020, by concession (terms modified): September 30, 2021 Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications (In Thousands) Pre-Modification Outstanding Recorded Investment: Commercial & industrial loans 1 $ — $ 254 $ — $ — $ 254 Commercial real estate: Owner occupied properties 1 — 360 — — 360 Other construction, land development and raw land loans 1 — 577 — — 360 Total 3 $ — $ 1,191 $ — $ — $ 974 Post-Modification Outstanding Recorded Investment: Commercial & industrial loans 1 $ — $ 249 $ — $ — $ 249 Commercial real estate: Owner occupied properties 1 — 360 — — 360 Other construction, land development and raw land loans 1 — 577 — — 577 Total 3 $ — $ 1,186 $ — $ — $ 1,186 September 30, 2020 Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications (In Thousands) Pre-Modification Outstanding Recorded Investment: Commercial & industrial loans 2 $ — $ 3,249 $ 164 $ — $ 3,413 Total 2 $ — $ 3,249 $ 164 $ — $ 3,413 Post-Modification Outstanding Recorded Investment: Commercial & industrial loans 2 $ — $ 1,565 $ 163 $ — $ 1,728 Total 2 $ — $ 1,565 $ 163 $ — $ 1,728 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, 2021 on loans that were newly classified as TDRs during the same period. As of December 31, 2020, all TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment. There were no TDRs with specific impairment at December 31, 2020. The Company had no TDRs that defaulted within twelve months of restructure and defaulted during the nine months ended September 30, 2021 and 2020, respectively. 5. Purchased Receivables Purchased receivables are carried at their principal amount outstanding, net of an allowance for credit losses, and have a maturity of less than one year . There were no purchased receivables past due at September 30, 2021 or December 31, 2020, and there were no restructured purchased receivables at September 30, 2021 or December 31, 2020. 30 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. There were no nonperforming purchased receivables as of September 30, 2021 and December 31, 2020, respectively. The following table summarizes the components of net purchased receivables for the periods indicated: (In Thousands) September 30, 2021 December 31, 2020 Purchased receivables $ 20,118 $ 13,995 Allowance for credit losses - purchased receivables — ( 73 ) Total $ 20,118 $ 13,922 The following table sets forth information regarding changes in the ACL on purchased receivables for the three and nine-month periods ending September 30, 2021 and 2020, respectively: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2021 2020 2021 2020 Balance, beginning of period $ — $ 93 $ — $ 94 Charge-offs — — — — Recoveries — — — — Charge-offs net of recoveries — — — — Benefit for purchased receivables — ( 6 ) — ( 7 ) Balance, end of period $ — $ 87 $ — $ 87 6. 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, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2021 2020 2021 2020 Balance, beginning of period $ 12,835 $ 10,721 $ 11,218 $ 11,920 Additions for new MSR capitalized 1,703 1,373 4,896 3,032 Changes in fair value: Due to changes in model inputs of assumptions (1) ( 928 ) ( 699 ) ( 1,092 ) ( 2,291 ) Other (2) ( 530 ) ( 806 ) ( 1,942 ) ( 2,072 ) Balance, end of period $ 13,080 $ 10,589 $ 13,080 $ 10,589 (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. 31 The following table details information related to our serviced mortgage loan portfolio as of September 30, 2021 and December 31, 2020: (In Thousands) September 30, 2021 December 31, 2020 Balance of mortgage loans serviced for others $ 750,327 $ 683,117 MSR as a percentage of serviced loans 1.74 % 1.64 % The Company recognized servicing fees of $ 745,000 and $ 671,000 during the three-month periods ending September 30, 2021 and 2020, respectively, and $ 2.2 million and $ 2 million during the nine-month periods ending September 30, 2021 and 2020, 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, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 Constant prepayment rate 12.31 % 13.05 % Discount rate 8.00 % 7.75 % Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at September 30, 2021 and December 31, 2020 were as follows: (In Thousands) September 30, 2021 December 31, 2020 Aggregate portfolio principal balance $ 750,327 $ 683,117 Weighted average rate of note 3.36 % 3.62 % September 30, 2021 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change Constant prepayment rate 12.31 % 24.63 % 36.19 % Discount rate 8.00 % 7.00 % 6.00 % Fair value MSR $ 13,080 $ 9,134 $ 6,894 Percentage of MSR 1.74 % 1.22 % 0.92 % December 31, 2020 Constant prepayment rate 13.05 % 26.11 % 38.97 % Discount rate 7.75 % 6.75 % 5.75 % Fair value MSR $ 11,218 $ 7,455 $ 5,404 Percentage of MSR 1.64 % 1.09 % 0.79 % 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 32 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 rights asset ("CSR") has a carrying value $ 1.3 million at both September 30, 2021 and December 31, 2020, 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 $ 274.6 million at September 30, 2021 and December 31, 2020, respectively. Key assumptions used in measuring the fair value of the CSR as of September 30, 2021 and December 31, 2020 include a constant prepayment rate of 9.66 % and a discount rate of 9.46 %. 7. Leases The Company's lease commitments consist primarily of agreements to lease land and office facilities that it occupies to operate several of its retail branch locations that are classified as operating leases and are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities. As of September 30, 2021, the Company has operating lease ROU assets of $ 11.4 million and operating lease liabilities of $ 11.3 million. As of December 31, 2020, the Company had operating lease ROU assets of $ 12.4 million and operating lease liabilities of $ 12.4 million. The Company did not have any agreements that are classified as finance leases as of September 30, 2021 or December 31, 2020. The following table presents additional information about the Company's operating leases: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2021 2020 2021 2020 Lease Cost Operating lease cost (1) $ 688 $ 710 $ 2,106 $ 2,111 Short term lease cost (1) 7 9 20 26 Total lease cost $ 695 $ 719 $ 2,126 $ 2,137 Other information Operating leases - operating cash flows $ 1,970 $ 2,012 Weighted average lease term - operating leases, in years 10.55 10.85 Weighted average discount rate - operating leases 3.19 % 3.30 % (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 2021 (Three months) $ 644 2022 2,477 2023 2,068 2024 1,920 2025 1,817 Thereafter 4,926 Total minimum lease payments $ 13,852 Less: amount of lease payment representing interest ( 2,518 ) Present value of future minimum lease payments $ 11,334 33 8. 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 $ 8.3 million as of September 30, 2021 and $ 10.7 million as of December 31, 2020 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 $ 224.0 million and $ 196.0 million at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021, the notional amount of interest rate swaps is made up of 20 variable to fixed rate swaps to commercial loan customers totaling $ 112.0 million, and 20 fixed to variable rate swaps with a counterparty totaling $ 112.0 million. Changes in fair value from these 20 interest rate swaps offset each other in the first nine months of 2021. The Company recognized $ 195,000 and $ 726,000 in fee income related to interest rate swaps in the three-month periods ending September 30, 2021 and 2020, and $ 390,000 and $ 743,000 in fee income related to interest rate swaps in the nine-month periods ending September 30, 2021 and 2020, 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 1.49 % as of September 30, 2021. The Company pledged $ 2.9 million in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of September 30, 2021 and December 31, 2020. Changes in the fair value of this interest rate swap are reported in other comprehensive income on the Consolidated Statements of Income. The unrealized loss on this interest rate swap was $ 0.9 million as of September 30, 2021 and the unrealized loss was $ 1.7 million as of December 31, 2020. 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 $ 169.4 million and $ 150.3 million at September 30, 2021 and December 31, 2020, respectively. Changes in the value of RML's interest rate derivatives are recorded in mortgage banking income on the Consolidated Statements of Income. None of these derivatives are designated as hedging instruments. 34 The following table presents the fair value of derivatives not designated as hedging instruments at September 30, 2021 and December 31, 2020: (In Thousands) Asset Derivatives September 30, 2021 December 31, 2020 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other assets $ 6,132 $ 7,387 Interest rate lock commitments Other assets 3,248 4,034 Retail interest rate contracts Other assets 126 — Total $ 9,506 $ 11,421 (In Thousands) Liability Derivatives September 30, 2021 December 31, 2020 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other liabilities $ 6,132 $ 7,387 Retail interest rate contracts Other liabilities — 880 Total $ 6,132 $ 8,267 The following table presents the net gains (losses) of derivatives not designated as hedging instruments for periods indicated below: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) Income Statement Location 2021 2020 2021 2020 Retail interest rate contracts Mortgage banking income ($ 413 ) ($ 1,823 ) $ 1,400 ($ 6,525 ) Interest rate lock commitments Mortgage banking income 199 1,781 ( 802 ) 5,372 Total ($ 214 ) ($ 42 ) $ 598 ($ 1,153 ) 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. 35 The following table summarizes the derivatives that have a right of offset as of September 30, 2021 and December 31, 2020: September 30, 2021 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 $ 6,132 $ — $ 6,132 $ — $ — $ 6,132 Retail interest rate contracts 126 — 126 — — 126 Liability Derivatives Interest rate swaps $ 6,132 $ — $ 6,132 $ — $ 6,132 $ — December 31, 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 $ 7,387 $ — $ 7,387 $ — $ — $ 7,387 Liability Derivatives Interest rate swaps $ 7,387 $ — $ 7,387 $ — $ 7,387 $ — Retail interest rate contracts 880 — 880 — — 880 9. 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 36 adjustments to reflect nonperformance risk in the measurement of fair value. Although the Company has determined that the majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2021, 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 write-down 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. 37 Estimated fair values as of the periods indicated are as follows: September 30, 2021 December 31, 2020 (In Thousands) Carrying Amount Fair Value Carrying Amount Fair Value Financial assets: Level 1 inputs: Cash, due from banks and deposits in other banks $ 492,279 $ 492,279 $ 115,965 $ 115,965 Investment securities available for sale 121,787 121,787 58,865 58,865 Marketable equity securities 8,551 8,551 9,052 9,052 Level 2 inputs: Investment securities available for sale 256,485 256,485 188,768 188,768 Investment in Federal Home Loan Bank stock 3,110 3,110 2,551 2,551 Loans held for sale 106,224 106,224 146,178 146,178 Accrued interest receivable 7,546 7,546 7,979 7,979 Interest rate swaps 6,132 6,132 7,387 7,387 Level 3 inputs: Investment securities held to maturity 20,000 19,264 10,000 10,000 Loans 1,450,657 1,419,567 1,444,051 1,414,179 Purchased receivables, net 20,118 20,118 13,922 13,922 Interest rate lock commitments 3,248 3,248 4,034 4,034 Mortgage servicing rights 13,080 13,080 11,218 11,218 Commercial servicing rights 1,278 1,278 1,310 1,310 Financial liabilities: Level 2 inputs: Deposits $ 2,296,541 $ 2,297,426 $ 1,824,981 $ 1,826,990 Borrowings 14,605 14,809 14,817 15,538 Accrued interest payable 129 129 65 65 Interest rate swaps 7,032 7,032 9,122 9,122 Retail interest rate contracts — — 880 880 Level 3 inputs: Junior subordinated debentures 10,310 9,833 10,310 10,475 38 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, 2021 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 299,824 $ 102,014 $ 197,810 $ — Municipal securities 850 — 850 — Corporate bonds 35,411 19,773 15,638 — Collateralized loan obligations 43,037 — 43,037 — Total available for sale securities $ 379,122 $ 121,787 $ 257,335 $ — Marketable equity securities $ 8,551 $ 8,551 $ — $ — Total marketable equity securities $ 8,551 $ 8,551 $ — $ — Interest rate swaps 6,132 — 6,132 — Interest rate lock commitments 3,248 — — 3,248 Mortgage servicing rights 13,080 — — 13,080 Commercial servicing rights 1,278 — — 1,278 Retail interest rate contracts 126 — 126 — Total other assets $ 23,864 $ — $ 6,258 $ 17,606 Liabilities: Interest rate swaps $ 7,032 $ — $ 7,032 $ — Total other liabilities $ 7,032 $ — $ 7,032 $ — December 31, 2020 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 174,601 $ 37,548 $ 137,053 $ — Municipal securities 856 — 856 — Corporate bonds 30,492 21,317 9,175 — Collateralized loan obligations 41,684 — 41,684 — Total available for sale securities $ 247,633 $ 58,865 $ 188,768 $ — Marketable equity securities $ 9,052 $ 9,052 $ — $ — Total marketable securities $ 9,052 $ 9,052 $ — $ — Interest rate swaps 7,387 — 7,387 — Interest rate lock commitments 4,034 — — 4,034 Mortgage servicing rights 11,218 — — 11,218 Commercial servicing rights 1,310 — — 1,310 Total other assets $ 23,949 $ — $ 7,387 $ 16,562 Liabilities: Interest rate swaps $ 9,122 $ — $ 9,122 $ — Retail interest rate contracts 880 — 880 — Total other liabilities $ 10,002 $ — $ 10,002 $ — 39 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, 2021 and 2020: (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, 2021 Interest rate lock commitments $ 3,044 ($ 867 ) $ 7,428 ($ 6,357 ) $ 3,248 $ 3,248 Mortgage servicing rights 12,835 ( 1,458 ) 1,703 — 13,080 — Commercial servicing rights 1,292 ( 58 ) 44 — 1,278 — Total $ 17,171 ($ 2,383 ) $ 9,175 ($ 6,357 ) $ 17,606 $ 3,248 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 (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, 2021 Interest rate lock commitments $ 4,034 ($ 2,881 ) $ 23,879 ($ 21,784 ) $ 3,248 $ 3,248 Mortgage servicing rights 11,218 ( 3,034 ) 4,896 — 13,080 — Commercial servicing rights 1,310 ( 134 ) 102 — 1,278 — Total $ 16,562 ($ 6,049 ) $ 28,877 ($ 21,784 ) $ 17,606 $ 3,248 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 There were no changes in unrealized gains and losses for the three and nine-month periods ending September 30, 2021 and 2020 included in other comprehensive income for recurring Level 3 fair value measurements. 40 As of and for the periods ending September 30, 2021 and December 31, 2020, 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, 2021 Loans measured for impairment $ 4,282 $ — $ — $ 4,282 Total $ 4,282 $ — $ — $ 4,282 December 31, 2020 Loans measured for impairment $ 308 $ — $ — $ 308 Total $ 308 $ — $ — $ 308 The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three and nine-month periods ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2021 2020 2021 2020 Loans measured for impairment ($ 122 ) $ 10 $ 650 $ 24 Total loss from nonrecurring measurements ($ 122 ) $ 10 $ 650 $ 24 41 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, 2021 and December 31, 2020: Financial Instrument Valuation Technique Unobservable Input Weighted Average Rate Range September 30, 2021 Loans measured for impairment In-house valuation of collateral Discount rate 10 % - 100 % Interest rate lock commitment External pricing model Pull through rate 92.46 % Mortgage servicing rights Discounted cash flow Constant prepayment rate 9.93 % - 14.02 % Discount rate 8 % Commercial servicing rights Discounted cash flow Constant prepayment rate 7.38 % - 9.94 % Discount rate 9.46 % December 31, 2020 Loans measured for impairment In-house valuation of collateral Discount rate 30 % Interest rate lock commitment External pricing model Pull through rate 90.65 % Mortgage servicing rights Discounted cash flow Constant prepayment rate 7.77 % - 13.17 % Discount rate 0.00 % - 7.75 % Commercial servicing rights Discounted cash flow Constant prepayment rate 7.38 % - 9.94 % Discount rate 9.46 % 42 10. 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, 2021, the Community Banking segment operated 17 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, 2021 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 20,541 $ 741 $ 21,282 Interest expense 813 37 850 Net interest income 19,728 704 20,432 Benefit for credit losses ( 1,106 ) — ( 1,106 ) Other operating income 2,765 9,893 12,658 Other operating expense 14,849 7,685 22,534 Income before provision for income taxes 8,750 2,912 11,662 Provision for income taxes 1,955 830 2,785 Net income $ 6,795 $ 2,082 $ 8,877 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 credit 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 for income taxes 1,249 2,745 3,994 Net income $ 4,915 $ 6,940 $ 11,855 43 Nine Months Ended September 30, 2021 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 59,816 $ 2,315 $ 62,131 Interest expense 2,886 128 3,014 Net interest income 56,930 2,187 59,117 Provision for credit losses ( 3,021 ) — ( 3,021 ) Other operating income 7,811 34,875 42,686 Other operating expense 43,064 23,133 66,197 Income before provision for income taxes 24,698 13,929 38,627 Provision for income taxes 5,257 3,967 9,224 Net income $ 19,441 $ 9,962 $ 29,403 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 credit 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 September 30, 2021 (In Thousands) Community Banking Home Mortgage Lending Consolidated Total assets $ 2,467,842 $ 142,104 $ 2,609,946 Loans held for sale $ — $ 106,224 $ 106,224 December 31, 2020 (In Thousands) Community Banking Home Mortgage Lending Consolidated Total assets $ 1,935,871 $ 185,927 $ 2,121,798 Loans held for sale $ — $ 146,178 $ 146,178 44