NORTHRIM BANCORP INC 10-Q

ITEM 1. FINANCIAL STATEMENTS 2 CONSOLIDATED FINANCIAL STATEMENTS NORTHRIM BANCORP, INC. Consolidated Balance Sheets (Unaudited) June 30, 2022 December 31, 2021 (In Thousands, Except Share Data) ASSETS Cash and due from banks $ 24,035 $ 20,805 Interest bearing deposits in other banks 312,888 625,022 Investment securities available for sale, at fair value 612,027 426,684 Marketable equity securities 9,122 8,420 Investment securities held to maturity, at amortized cost 29,750 20,000 Investment in Federal Home Loan Bank stock 3,824 3,107 Loans held for sale 63,080 73,650 Loans 1,405,709 1,413,886 Allowance for credit losses, loans ( 11,537 ) ( 11,739 ) Net loans 1,394,172 1,402,147 Purchased receivables, net 15,277 6,987 Mortgage servicing rights, at fair value 16,301 13,724 Other real estate owned, net 5,638 5,638 Premises and equipment, net 37,106 37,164 Operating lease right-of-use assets 9,875 11,001 Goodwill 15,017 15,017 Other intangible assets, net 980 992 Other assets 62,062 54,361 Total assets $ 2,611,154 $ 2,724,719 LIABILITIES Deposits: Demand $ 830,156 $ 887,824 Interest-bearing demand 666,283 692,683 Savings 349,208 348,164 Money market 319,843 314,996 Certificates of deposit less than $250,000 96,630 100,851 Certificates of deposit $250,000 and greater 73,270 77,113 Total deposits 2,335,390 2,421,631 Borrowings 14,302 14,508 Junior subordinated debentures 10,310 10,310 Operating lease liabilities 9,846 10,965 Other liabilities 26,017 29,488 Total liabilities 2,395,865 2,486,902 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, 5,681,089 and 6,014,813 issued and outstanding at June 30, 2022 and December 31, 2021, respectively 5,681 6,015 Additional paid-in capital 17,716 31,162 Retained earnings 211,232 204,046 Accumulated other comprehensive loss, net of tax ( 19,340 ) ( 3,406 ) Total shareholders' equity 215,289 237,817 Total liabilities and shareholders' equity $ 2,611,154 $ 2,724,719 See notes to consolidated financial statements 3 NORTHRIM BANCORP, INC. Consolidated Statements of Income (Unaudited) Three Months Ended Six Months Ended June 30, June 30, (In Thousands, Except Per Share Data) 2022 2021 2022 2021 Interest and Dividend Income Interest and fees on loans and loans held for sale $ 19,807 $ 18,963 $ 38,075 $ 38,387 Interest on investment securities available for sale 1,926 815 3,061 1,593 Dividends on marketable equity securities 113 126 225 213 Interest on investment securities held to maturity 352 265 625 511 Dividends on Federal Home Loan Bank stock 28 23 56 46 Interest on deposits in other banks 766 61 1,008 99 Total Interest and Dividend Income 22,992 20,253 43,050 40,849 Interest Expense Interest expense on deposits 599 879 1,174 1,828 Interest expense on borrowings 87 88 173 148 Interest expense on junior subordinated debentures 94 94 187 188 Total Interest Expense 780 1,061 1,534 2,164 Net Interest Income 22,212 19,192 41,516 38,685 Provision (benefit) for credit losses 463 ( 427 ) 313 ( 1,915 ) Net Interest Income After Provision (Benefit) for Credit Losses 21,749 19,619 41,203 40,600 Other Operating Income Mortgage banking income 5,900 11,360 12,882 24,982 Bankcard fees 927 879 1,731 1,619 Purchased receivable income 566 575 968 1,107 Service charges on deposit accounts 402 308 776 598 Gain on sale of marketable equity securities, net — 31 — 31 Keyman life insurance proceeds — — 2,002 — Unrealized (loss) gain on marketable equity securities ( 810 ) 178 ( 1,232 ) 94 Other income 822 801 1,503 1,597 Total Other Operating Income 7,807 14,132 18,630 30,028 Other Operating Expense Salaries and other personnel expense 15,401 14,917 29,507 29,645 Data processing expense 2,311 2,206 4,303 4,241 Occupancy expense 1,748 1,869 3,474 3,529 Marketing expense 814 672 1,239 1,076 Professional and outside services 708 642 1,430 1,266 Insurance expense 516 329 1,082 643 OREO expense, net rental income and gains on sale 19 47 7 11 Intangible asset amortization expense 6 9 12 18 Other operating expense 1,715 1,645 3,285 3,234 Total Other Operating Expense 23,238 22,336 44,339 43,663 Income Before Provision for Income Taxes 6,318 11,415 15,494 26,965 Provision for income taxes 1,523 3,070 3,473 6,439 Net Income $ 4,795 $ 8,345 $ 12,021 $ 20,526 Earnings Per Share, Basic $ 0.83 $ 1.34 $ 2.05 $ 3.30 Earnings Per Share, Diluted $ 0.83 $ 1.33 $ 2.03 $ 3.27 Weighted Average Shares Outstanding, Basic 5,750,873 6,206,913 5,844,455 6,213,392 Weighted Average Shares Outstanding, Diluted 5,805,870 6,277,265 5,902,287 6,280,369 See notes to consolidated financial statements 4 NORTHRIM BANCORP, INC. Consolidated Statements of Comprehensive Income (Unaudited) 2010 Three Months Ended June 30, Six Months Ended June 30, (In Thousands) 2022 2021 2022 2021 Net income $ 4,795 $ 8,345 $ 12,021 $ 20,526 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized holding (losses) arising during the period ($ 7,715 ) ($ 90 ) ($ 24,017 ) ($ 1,608 ) Derivatives and hedging activities: Unrealized holding (losses) gains arising during the period 827 ( 587 ) 1,754 673 Income tax benefit related to unrealized gains and losses 1,958 189 6,329 266 Other comprehensive (loss), net of tax ( 4,930 ) ( 488 ) ( 15,934 ) ( 669 ) Comprehensive (loss) income ($ 135 ) $ 7,857 ($ 3,913 ) $ 19,857 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, 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 Repurchase of common stock ( 30 ) ( 30 ) ( 1,174 ) — — ( 1,204 ) Other comprehensive loss, 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 Cash dividend on common stock ($ 0.38 per share) — — — ( 2,352 ) — ( 2,352 ) Stock-based compensation expense — — 332 — — 332 Exercise of stock options and vesting of restricted stock units, net 26 26 ( 169 ) — — ( 143 ) Repurchase of common stock ( 188 ) ( 188 ) ( 7,930 ) — — ( 8,118 ) Other comprehensive loss, net of tax — — — — ( 2,490 ) ( 2,490 ) Net income — — — 8,114 — 8,114 Balance as of December 31, 2021 6,015 $ 6,015 $ 31,162 $ 204,046 ($ 3,406 ) $ 237,817 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, 2022 6,015 $ 6,015 $ 31,162 $ 204,046 ($ 3,406 ) $ 237,817 Cash dividend on common stock ($ 0.41 per share) — — — ( 2,471 ) — ( 2,471 ) Stock-based compensation expense — — 187 — — 187 Repurchase of common stock ( 133 ) ( 133 ) ( 5,790 ) — — ( 5,923 ) Other comprehensive loss, net of tax — — — — ( 11,004 ) ( 11,004 ) Net income — — — 7,226 — 7,226 Balance as of March 31, 2022 5,882 $ 5,882 $ 25,559 $ 208,801 ($ 14,410 ) $ 225,832 Cash dividend on common stock ($ 0.41 per share) — — — ( 2,364 ) — ( 2,364 ) Stock-based compensation expense — — 190 — — 190 Repurchase of common stock ( 201 ) ( 201 ) ( 8,033 ) — — ( 8,234 ) Other comprehensive loss, net of tax — — — — ( 4,930 ) ( 4,930 ) Net income — — — 4,795 — 4,795 Balance as of June 30, 2022 5,681 $ 5,681 $ 17,716 $ 211,232 ($ 19,340 ) $ 215,289 See notes to consolidated financial statements 7 NORTHRIM BANCORP, INC. Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, (In Thousands) 2022 2021 Operating Activities: Net income $ 12,021 $ 20,526 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Gain on sale of securities, net — ( 31 ) Depreciation and amortization of premises and equipment 1,585 1,632 Amortization of software 587 574 Intangible asset amortization 12 18 Amortization of investment security premium, net of discount accretion 347 223 Unrealized loss (gain) on marketable equity securities 1,232 ( 94 ) Deferred tax (benefit) expense — 958 Stock-based compensation 377 509 Deferred loan fees and amortization, net of costs ( 3,247 ) 5,710 Provision (benefit) for credit losses 313 ( 1,915 ) Additions to home mortgage servicing rights carried at fair value ( 2,115 ) ( 3,193 ) Change in fair value of home mortgage servicing rights carried at fair value ( 462 ) 1,576 Change in fair value of commercial servicing rights carried at fair value 48 76 Gain on sale of loans ( 8,569 ) ( 21,265 ) Proceeds from the sale of loans held for sale 353,737 648,901 Origination of loans held for sale ( 334,598 ) ( 587,277 ) Gain on sale of other real estate owned — ( 189 ) Proceeds from keyman life insurance ( 2,002 ) — Net changes in assets and liabilities: (Increase) in accrued interest receivable ( 1,271 ) 132 Decrease in other assets 3,324 6,277 (Decrease) in other liabilities ( 6,010 ) ( 4,698 ) Net Cash Provided by Operating Activities 15,309 68,450 Investing Activities: Investment in securities: Purchases of investment securities available for sale ( 214,703 ) ( 173,968 ) Purchases of marketable equity securities ( 1,937 ) ( 493 ) Purchases of FHLB stock ( 727 ) ( 570 ) Purchases of investment securities held to maturity ( 9,750 ) ( 10,000 ) Proceeds from sales/calls/maturities of securities available for sale 5,000 82,575 Proceeds from sales of marketable equity securities — 47 Proceeds from redemption of FHLB stock 10 7 (Increase) decrease in purchased receivables, net ( 8,290 ) 1,422 Decrease (increase) in loans, net 11,116 ( 49,921 ) Proceeds from sale of other real estate owned — 679 Proceeds from keyman life insurance 2,002 — Purchases of software ( 14 ) ( 76 ) Purchases of premises and equipment ( 1,527 ) ( 1,732 ) Net Cash (Used) by Investing Activities ( 218,820 ) ( 152,030 ) Financing Activities: (Decrease) increase in deposits ( 86,241 ) 321,457 (Decrease) in borrowings ( 206 ) ( 137 ) Repurchase of common stock ( 14,157 ) ( 2,212 ) Proceeds from the issuance of common stock — 5 Cash dividends paid ( 4,789 ) ( 4,613 ) Net Cash (Used) Provided by Financing Activities ( 105,393 ) 314,500 Net Change in Cash and Cash Equivalents ( 308,904 ) 230,920 8 Cash and Cash Equivalents at Beginning of Period 645,827 115,965 Cash and Cash Equivalents at End of Period $ 336,923 $ 346,885 Supplemental Information: Income taxes paid $ 40 $ 1,852 Interest paid $ 1,471 $ 2,132 Transfer of loans to other real estate owned $ — $ 274 Non-cash lease liability arising from obtaining right of use assets $ — $ 79 Cash dividends declared but not paid $ 46 $ 45 See notes to consolidated financial statements 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation and Significant Accounting Policies The accompanying unaudited consolidated financial statements and corresponding footnotes have been prepared by Northrim BanCorp, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. The year-end Consolidated Balance Sheet data was derived from the Company's audited financial statements. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company owns a 100% interest in Residential Mortgage Holding Company, LLC, the parent company of Residential Mortgage, LLC (collectively "RML") and consolidates their balance sheets and income statement into its financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company determined that it operates in two primary operating segments: Community Banking and Home Mortgage Lending. The Company has evaluated subsequent events and transactions for potential recognition or disclosure. Operating results for the interim period ended June 30, 2022 are not necessarily indicative of the results anticipated for the year ending December 31, 2022. 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, 2021. 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, 2021. There have been no significant changes in our application of these accounting policies in 2022. Reclassification of Prior Period 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 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. 10 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, ceased the publication of one-week and two-month LIBOR, as well as all non-US Dollar LIBOR tenors as of January 1, 2022. 1-month, 3-month, 6-month, and 12-month US Dollar LIBOR will continue to be published through and will 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 1-month, 3-month, and 12-month US Dollar LIBOR, such as commercial loans, derivatives, debt securities, and junior subordinated debentures. As of June 30, 2022, we had approximately $ 179.1 million of assets, including $ 101.0 million in commercial loans and $ 78.1 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 June 30, 2022, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $ 150.8 million. Of this amount, $ 70.0 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers. An additional $ 70.8 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 $ 80.0 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 is not expected to have a material impact on the Company's consolidated financial statements. In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). The amendments in ASU 2022-02 eliminate the accounting guidance for troubled debt restructurings ("TDRs") by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs which includes an assessment of whether the creditor has granted a concession, an entity must evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6. ASU 2022-02 is effective for the Company for fiscal years beginning after December 15, 2022. The Company may elect to apply the updated guidance on TDR recognition and measurement by using a modified retrospective transition method, which would result in a cumulative-effect adjustment to retained earnings, or to adopt the amendments prospectively. The Company intends to elect to adopt the updated guidance on TDR recognition and measurement prospectively; therefore the guidance will be applied to modifications occurring after the date of adoption. The amendments on TDR disclosures and vintage disclosures must be adopted prospectively. The Company does not believe that ASU 2022-02 will have a material impact on the Company's consolidated financial statements. 11 2. Investment Securities Marketable Equity Securities The Company held marketable equity securities with fair values of $ 9.1 million and $ 8.4 million at June 30, 2022 and December 31, 2021, 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 June 30, Six Months Ended June 30, (In Thousands) 2022 2021 2022 2021 Unrealized (loss) gain on marketable equity securities ($ 810 ) $ 178 ($ 1,232 ) $ 94 Gain on sale of marketable equity securities, net — 31 — 31 Total ($ 810 ) $ 209 ($ 1,232 ) $ 125 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 the Allowance for Credit Losses ("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 June 30, 2022 Securities available for sale U.S. Treasury and government sponsored entities $ 546,885 $ 115 ($ 25,661 ) $ — $ 521,339 Municipal securities 820 — ( 13 ) — 807 Corporate bonds 32,709 2 ( 708 ) — 32,003 Collateralized loan obligations 59,432 — ( 1,554 ) — 57,878 Total securities available for sale $ 639,846 $ 117 ($ 27,936 ) $ — $ 612,027 (In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value June 30, 2022 Securities held to maturity Corporate bonds $ 29,750 $ — ($ 3,379 ) $ 26,371 Allowance for credit losses — — — — Total securities held to maturity, net of ACL $ 29,750 $ — ($ 3,379 ) $ 26,371 (In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value December 31, 2021 Securities available for sale U.S. Treasury and government sponsored entities $ 345,514 $ 333 ($ 4,367 ) $ — $ 341,480 Municipal securities 820 20 — — 840 Corporate bonds 32,721 302 ( 77 ) — 32,946 Collateralized loan obligations 51,431 9 ( 22 ) — 51,418 Total securities available for sale $ 430,486 $ 664 ($ 4,466 ) $ — $ 426,684 12 (In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2021 Securities held to maturity Corporate bonds $ 20,000 $ — ($ 836 ) $ 19,164 Allowance for credit losses — — — — Total securities held to maturity, net of ACL $ 20,000 $ — ($ 836 ) $ 19,164 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 June 30, 2022 and December 31, 2021 were as follows: Less Than 12 Months More Than 12 Months Total (In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses June 30, 2022 Securities available for sale U.S. Treasury and government sponsored entities $ 372,559 ($ 18,154 ) $ 102,375 ($ 7,507 ) $ 474,934 ($ 25,661 ) Corporate bonds 28,584 ( 708 ) — — 28,584 ( 708 ) Collateralized loan obligations 57,878 ( 1,554 ) — — 57,878 ( 1,554 ) Municipal securities 807 ( 13 ) — — 807 ( 13 ) Total $ 459,828 ($ 20,429 ) $ 102,375 ($ 7,507 ) $ 562,203 ($ 27,936 ) December 31, 2021: Securities available for sale U.S. Treasury and government sponsored entities $ 292,845 ($ 4,012 ) $ 21,743 ($ 355 ) $ 314,588 ($ 4,367 ) Corporate bonds 4,953 ( 77 ) — — 4,953 ( 77 ) Collateralized loan obligations 29,470 ( 22 ) — — 29,470 ( 22 ) Total $ 327,268 ($ 4,111 ) $ 21,743 ($ 355 ) $ 349,011 ($ 4,466 ) 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 June 30, 2022, the Company had 79 available for sale securities in an unrealized loss position without an ACL. At June 30, 2022, the Company had four 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 June 30, 2022, 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 June 30, 2022 and December 31, 2021, $ 54.7 million and $ 59.5 million in securities were pledged for deposits and borrowings, respectively. The amortized cost and estimated fair values of debt securities at June 30, 2022, 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. 13 (In Thousands) Amortized Cost Fair Value US Treasury and government sponsored entities 1-5 years $ 546,885 $ 521,339 Total $ 546,885 $ 521,339 Corporate bonds 1-5 years $ 40,694 $ 38,967 5-10 years 21,765 21,258 Total $ 62,459 $ 60,225 Collateralized loan obligations 1-5 years $ 5,000 $ 4,786 5-10 years 26,940 26,405 Over 10 years 27,492 26,687 Total $ 59,432 $ 57,878 Municipal securities 1-5 years $ 820 $ 807 Total $ 820 $ 807 There were no proceeds from sales of investment securities for the three and six-month periods ending June 30, 2022 and 2021. A summary of interest income for the three and six-month periods ending June 30, 2022 and 2021, on available for sale investment securities are as follows: Three Months Ended June 30, Six Months Ended June 30, (In Thousands) 2022 2021 2022 2021 US Treasury and government sponsored entities $ 1,432 $ 516 $ 2,238 $ 1,016 Other 489 294 814 568 Total taxable interest income $ 1,921 $ 810 $ 3,052 $ 1,584 Municipal securities $ 5 $ 5 $ 9 $ 9 Total tax-exempt interest income $ 5 $ 5 $ 9 $ 9 Total $ 1,926 $ 815 $ 3,061 $ 1,593 14 3. 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 June 30, 2022 and December 31, 2021. Loans Held for Investment The following table presents amortized cost and unpaid principal balance of loans for the periods indicated: June 30, 2022 December 31, 2021 (In Thousands) Amortized Cost Unpaid Principal Difference Amortized Cost Unpaid Principal Difference Commercial & industrial loans $ 394,841 $ 397,154 ($ 2,313 ) $ 448,338 $ 454,106 ($ 5,768 ) Commercial real estate: Owner occupied properties 313,174 314,761 ( 1,587 ) 300,200 301,623 ( 1,423 ) Non-owner occupied and multifamily properties 446,592 449,987 ( 3,395 ) 435,311 438,631 ( 3,320 ) Residential real estate: 1-4 family residential properties secured by first liens 37,298 37,346 ( 48 ) 32,542 32,602 ( 60 ) 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 21,953 21,821 132 19,610 19,489 121 1-4 family residential construction loans 43,915 44,215 ( 300 ) 36,222 36,542 ( 320 ) Other construction, land development and raw land loans 87,163 87,669 ( 506 ) 88,094 88,604 ( 510 ) Obligations of states and political subdivisions in the US 24,005 24,152 ( 147 ) 16,403 16,565 ( 162 ) Agricultural production, including commercial fishing 29,482 29,638 ( 156 ) 27,959 28,082 ( 123 ) Consumer loans 4,092 4,054 38 4,801 4,763 38 Other loans 3,194 3,208 ( 14 ) 4,406 4,422 ( 16 ) Total 1,405,709 1,414,005 ( 8,296 ) 1,413,886 1,425,429 ( 11,543 ) Allowance for credit losses ( 11,537 ) ( 11,739 ) $ 1,394,172 $ 1,414,005 ($ 8,296 ) $ 1,402,147 $ 1,425,429 ($ 11,543 ) The difference between the amortized cost and unpaid principal balance is net deferred origination fees totaling $ 8.3 million and $ 11.5 million at June 30, 2022 and December 31, 2021, respectively. Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 5.3 million and $ 5.5 million at June 30, 2022 and December 31, 2021, respectively, and was included in other assets in the Consolidated Balance Sheets. Amortized cost in the above table includes $ 31.9 million and $ 118.2 million as of June 30, 2022 and December 31, 2021, respectively, in Paycheck Protection Program ("PPP") loans administered by the U.S. Small Business Administration ("SBA") within the Commercial & industrial loan segment. 15 Allowance for Credit Losses The activity in the ACL related to loans held for investment is as follows: Three Months Ended June 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2022 Commercial & industrial loans $ 2,901 $ 123 ($ 166 ) $ 103 $ 2,961 Commercial real estate: Owner occupied properties 2,513 60 — — 2,573 Non-owner occupied and multifamily properties 3,063 44 — — 3,107 Residential real estate: 1-4 family residential properties secured by first liens 510 110 — — 620 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 301 17 — 9 327 1-4 family residential construction loans 210 21 — — 231 Other construction, land development and raw land loans 1,550 ( 88 ) — — 1,462 Obligations of states and political subdivisions in the US 52 7 — — 59 Agricultural production, including commercial fishing 128 ( 8 ) — 7 127 Consumer loans 75 ( 12 ) — 1 64 Other loans 7 ( 1 ) — — 6 Total $ 11,310 $ 273 ($ 166 ) $ 120 $ 11,537 2021 Commercial & industrial loans $ 4,269 $ 105 ($ 110 ) $ 27 $ 4,291 Commercial real estate: Owner occupied properties 3,366 ( 28 ) — 2 3,340 Non-owner occupied and multifamily properties 3,704 137 — — 3,841 Residential real estate: 1-4 family residential properties secured by first liens 813 ( 183 ) — — 630 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 342 ( 12 ) — 10 340 1-4 family residential construction loans 260 ( 29 ) — — 231 Other construction, land development and raw land loans 1,821 ( 151 ) — — 1,670 Obligations of states and political subdivisions in the US 36 3 — — 39 Agricultural production, including commercial fishing 46 4 — 7 57 Consumer loans 104 ( 10 ) — — 94 Other loans 3 3 — — 6 Total $ 14,764 ($ 161 ) ($ 110 ) $ 46 $ 14,539 16 Six Months Ended June 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2022 Commercial & industrial loans $ 3,027 $ 279 ($ 461 ) $ 116 $ 2,961 Commercial real estate: Owner occupied properties 3,176 ( 603 ) — — 2,573 Non-owner occupied and multifamily properties 2,930 177 — — 3,107 Residential real estate: 1-4 family residential properties secured by first liens 439 181 — — 620 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 215 91 — 21 327 1-4 family residential construction loans 120 111 — — 231 Other construction, land development and raw land loans 1,635 ( 173 ) — — 1,462 Obligations of states and political subdivisions in the US 32 27 — — 59 Agricultural production, including commercial fishing 91 21 — 15 127 Consumer loans 67 ( 4 ) — 1 64 Other loans 7 ( 1 ) — — 6 Total $ 11,739 $ 106 ($ 461 ) $ 153 $ 11,537 2021 Commercial & industrial loans $ 4,348 $ 4 ($ 273 ) $ 212 $ 4,291 Commercial real estate: Owner occupied properties 3,579 ( 243 ) — 4 3,340 Non-owner occupied and multifamily properties 4,944 ( 1,103 ) — — 3,841 Residential real estate: 1-4 family residential properties secured by first liens 673 ( 43 ) — — 630 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 419 ( 99 ) — 20 340 1-4 family residential construction loans 454 ( 223 ) — — 231 Other construction, land development and raw land loans 1,994 ( 324 ) — — 1,670 Obligations of states and political subdivisions in the US 44 ( 5 ) — — 39 Agricultural production, including commercial fishing 49 ( 7 ) — 15 57 Consumer loans 118 ( 26 ) — 2 94 Other loans 3 3 — — 6 Total $ 16,625 ($ 2,066 ) ($ 273 ) $ 253 $ 14,539 At June 30, 2022, as compared to March 31, 2022 and December 31, 2021, the Company forecasted a lower unemployment rate over the reasonable and supportable forecast period. In the second quarter, the ACL increased because an increase in loan balances more than offset the decrease in the forecast for unemployment, changes in the characteristics of loans, and a decrease in the ACL for loans individually evaluated. In the six months ending June 30, 2022, the ACL decreased as compared to the same six month period of 2021 because the decrease in the forecast for unemployment and changes in the characteristics of loans were only partially offset by increases in loan balances. 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: 17 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. 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. June 30, 2022 2022 2021 2020 2019 2018 Prior Total (In Thousands) Commercial & industrial loans Pass $ 97,229 $ 126,148 $ 50,617 $ 21,259 $ 29,661 $ 57,889 $ 382,803 Classified 2,689 5,459 — 119 2,950 821 12,038 Total commercial & industrial loans $ 99,918 $ 131,607 $ 50,617 $ 21,378 $ 32,611 $ 58,710 $ 394,841 Commercial real estate: Owner occupied properties Pass $ 35,493 $ 70,745 $ 81,000 $ 38,694 $ 13,415 $ 65,980 $ 305,327 Classified — — 1,331 — 498 6,018 7,847 Total commercial real estate owner occupied properties $ 35,493 $ 70,745 $ 82,331 $ 38,694 $ 13,913 $ 71,998 $ 313,174 Non-owner occupied and multifamily properties Pass $ 26,141 $ 82,850 $ 74,798 $ 56,709 $ 33,807 $ 161,854 $ 436,159 Classified — — — 277 6 10,150 10,433 Total commercial real estate non-owner occupied and multifamily properties $ 26,141 $ 82,850 $ 74,798 $ 56,986 $ 33,813 $ 172,004 $ 446,592 Residential real estate: 1-4 family residential properties secured by first liens Pass $ 8,410 $ 9,846 $ 6,490 $ 3,402 $ 494 $ 8,373 $ 37,015 Classified — — — — 90 193 283 Total residential real estate 1-4 family residential properties secured by first liens $ 8,410 $ 9,846 $ 6,490 $ 3,402 $ 584 $ 8,566 $ 37,298 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens Pass $ 3,219 $ 5,467 $ 2,570 $ 2,861 $ 3,447 $ 4,109 $ 21,673 Classified — — — — 270 10 280 18 Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $ 3,219 $ 5,467 $ 2,570 $ 2,861 $ 3,717 $ 4,119 $ 21,953 1-4 family residential construction loans Pass $ 21,804 $ 8,522 $ 441 $ 481 $ — $ 12,558 $ 43,806 Classified — — — — — 109 109 Total residential real estate 1-4 family residential construction loans $ 21,804 $ 8,522 $ 441 $ 481 $ — $ 12,667 $ 43,915 Other construction, land development and raw land loans Pass $ 5,651 $ 41,340 $ 19,578 $ 9,402 $ 3,396 $ 5,945 $ 85,312 Classified — — — — 369 1,482 1,851 Total other construction, land development and raw land loans $ 5,651 $ 41,340 $ 19,578 $ 9,402 $ 3,765 $ 7,427 $ 87,163 Obligations of states and political subdivisions in the US Pass $ 285 $ 9,669 $ 2,667 $ 1,864 $ 282 $ 9,238 $ 24,005 Classified — — — — — — — Total obligations of states and political subdivisions in the US $ 285 $ 9,669 $ 2,667 $ 1,864 $ 282 $ 9,238 $ 24,005 Agricultural production, including commercial fishing Pass $ 3,549 $ 18,683 $ 3,764 $ 678 $ 1,073 $ 1,735 $ 29,482 Classified — — — — — — — Total agricultural production, including commercial fishing $ 3,549 $ 18,683 $ 3,764 $ 678 $ 1,073 $ 1,735 $ 29,482 Consumer loans Pass $ 770 $ 499 $ 541 $ 397 $ 306 $ 1,570 $ 4,083 Classified — — — — — 9 9 Total consumer loans $ 770 $ 499 $ 541 $ 397 $ 306 $ 1,579 $ 4,092 Other loans Pass $ 568 $ 1,143 $ 1,598 $ 408 $ — ($ 523 ) $ 3,194 Classified — — — — — — — Total other loans $ 568 $ 1,143 $ 1,598 $ 408 $ — ($ 523 ) $ 3,194 Total loans Pass $ 203,119 $ 374,912 $ 244,064 $ 136,155 $ 85,881 $ 328,728 $ 1,372,859 Classified 2,689 5,459 1,331 396 4,183 18,792 32,850 Total loans $ 205,808 $ 380,371 $ 245,395 $ 136,551 $ 90,064 $ 347,520 $ 1,405,709 Total pass loans $ 203,119 $ 374,912 $ 244,064 $ 136,155 $ 85,881 $ 328,728 $ 1,372,859 Government guarantees ( 4,441 ) ( 62,412 ) ( 11,051 ) ( 13,290 ) ( 3,117 ) ( 4,898 ) ( 99,209 ) Total pass loans, net of government guarantees $ 198,678 $ 312,500 $ 233,013 $ 122,865 $ 82,764 $ 323,830 $ 1,273,650 Total classified loans $ 2,689 $ 5,459 $ 1,331 $ 396 $ 4,183 $ 18,792 $ 32,850 Government guarantees ( 2,420 ) ( 4,913 ) ( 1,198 ) — — ( 9,818 ) ( 18,349 ) Total classified loans, net government guarantees $ 269 $ 546 $ 133 $ 396 $ 4,183 $ 8,974 $ 14,501 December 31, 2021 2021 2020 2019 2018 2017 Prior Total (In Thousands) Commercial & industrial loans Pass $ 227,376 $ 54,478 $ 29,846 $ 37,339 $ 23,205 $ 44,554 $ 416,798 Classified 18,853 714 3,564 3,118 517 4,774 31,540 Total commercial & industrial loans $ 246,229 $ 55,192 $ 33,410 $ 40,457 $ 23,722 $ 49,328 $ 448,338 Commercial real estate: Owner occupied properties Pass $ 81,533 $ 83,975 $ 39,254 $ 14,841 $ 14,452 $ 57,717 $ 291,772 Classified — 1,399 — 522 — 6,507 8,428 19 Total commercial real estate owner occupied properties $ 81,533 $ 85,374 $ 39,254 $ 15,363 $ 14,452 $ 64,224 $ 300,200 Non-owner occupied and multifamily properties Pass $ 77,205 $ 77,961 $ 61,147 $ 34,307 $ 19,833 $ 154,561 $ 425,014 Classified — — — 10 10,286 1 10,297 Total commercial real estate non-owner occupied and multifamily properties $ 77,205 $ 77,961 $ 61,147 $ 34,317 $ 30,119 $ 154,562 $ 435,311 Residential real estate: 1-4 family residential properties secured by first liens Pass $ 7,756 $ 8,023 $ 3,689 $ 531 $ 1,466 $ 8,812 $ 30,277 Classified 417 1,077 472 90 — 209 2,265 Total residential real estate 1-4 family residential properties secured by first liens $ 8,173 $ 9,100 $ 4,161 $ 621 $ 1,466 $ 9,021 $ 32,542 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens Pass $ 5,806 $ 2,535 $ 3,229 $ 3,464 $ 259 $ 4,046 $ 19,339 Classified — — — 259 — 12 271 Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $ 5,806 $ 2,535 $ 3,229 $ 3,723 $ 259 $ 4,058 $ 19,610 1-4 family residential construction loans Pass $ 21,409 $ 1,056 $ 1,707 $ 62 $ — $ 11,879 $ 36,113 Classified — — — — 109 — 109 Total residential real estate 1-4 family residential construction loans $ 21,409 $ 1,056 $ 1,707 $ 62 $ 109 $ 11,879 $ 36,222 Other construction, land development and raw land loans Pass $ 39,624 $ 26,458 $ 11,044 $ 3,315 $ 139 $ 5,544 $ 86,124 Classified — — — 460 — 1,510 1,970 Total other construction, land development and raw land loans $ 39,624 $ 26,458 $ 11,044 $ 3,775 $ 139 $ 7,054 $ 88,094 Obligations of states and political subdivisions in the US Pass $ 4,120 $ 812 $ 1,875 $ 343 $ 2,733 $ 6,520 $ 16,403 Classified — — — — — — — Total obligations of states and political subdivisions in the US $ 4,120 $ 812 $ 1,875 $ 343 $ 2,733 $ 6,520 $ 16,403 Agricultural production, including commercial fishing Pass $ 19,970 $ 3,929 $ 810 $ 1,118 $ 741 $ 1,391 $ 27,959 Classified — — — — — — — Total agricultural production, including commercial fishing $ 19,970 $ 3,929 $ 810 $ 1,118 $ 741 $ 1,391 $ 27,959 Consumer loans Pass $ 873 $ 815 $ 653 $ 403 $ 291 $ 1,766 $ 4,801 Classified — — — — — — — Total consumer loans $ 873 $ 815 $ 653 $ 403 $ 291 $ 1,766 $ 4,801 Other loans Pass $ 2,028 $ 1,645 $ 430 $ 95 $ — $ 208 $ 4,406 Classified — — — — — — — Total other loans $ 2,028 $ 1,645 $ 430 $ 95 $ — $ 208 $ 4,406 Total loans Pass $ 487,700 $ 261,687 $ 153,684 $ 95,818 $ 63,119 $ 296,998 $ 1,359,006 Classified 19,270 3,190 4,036 4,459 10,912 13,013 54,880 Total loans $ 506,970 $ 264,877 $ 157,720 $ 100,277 $ 74,031 $ 310,011 $ 1,413,886 Total pass loans $ 487,700 $ 261,687 $ 153,684 $ 95,818 $ 63,119 $ 296,998 $ 1,359,006 Government guarantees ( 145,713 ) ( 12,725 ) ( 14,429 ) ( 3,299 ) ( 306 ) ( 6,562 ) ( 183,034 ) Total pass loans, net of government guarantees $ 341,987 $ 248,962 $ 139,255 $ 92,519 $ 62,813 $ 290,436 $ 1,175,972 Total classified loans $ 19,270 $ 3,190 $ 4,036 $ 4,459 $ 10,912 $ 13,013 $ 54,880 20 Government guarantees ( 7,201 ) ( 1,259 ) — — — ( 10,571 ) ( 19,031 ) Total classified loans, net government guarantees $ 12,069 $ 1,931 $ 4,036 $ 4,459 $ 10,912 $ 2,442 $ 35,849 21 Past Due Loans: The following tables present an aging of contractually past due loans as of the periods presented: (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 June 30, 2022 Commercial & industrial loans $ 246 $ 132 $ 387 $ 765 $ 394,076 $ 394,841 $ — Commercial real estate: Owner occupied properties 737 1,076 1,813 311,361 313,174 — Non-owner occupied and multifamily properties — — — — 446,592 446,592 — Residential real estate: 1-4 family residential properties secured by first liens 65 — 147 212 37,086 37,298 — 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — — 133 133 21,820 21,953 — 1-4 family residential construction loans — — 109 109 43,806 43,915 — Other construction, land development and raw land loans — — 1,546 1,546 85,617 87,163 — Obligations of states and political subdivisions in the US — — — — 24,005 24,005 — Agricultural production, including commercial fishing — — — — 29,482 29,482 — Consumer loans — — — — 4,092 4,092 — Other loans — — — — 3,194 3,194 — Total $ 1,048 $ 132 $ 3,398 $ 4,578 $ 1,401,131 $ 1,405,709 $ — December 31, 2021 Commercial & industrial loans $ 206 $ 51 $ 469 $ 726 $ 447,612 $ 448,338 $ — Commercial real estate: Owner occupied properties 12 — 1,176 1,188 299,012 300,200 — Non-owner occupied and multifamily properties — — — — 435,311 435,311 — Residential real estate: 1-4 family residential properties secured by first liens — — 90 90 32,452 32,542 — 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — — 139 139 19,471 19,610 — 1-4 family residential construction loans — — 109 109 36,113 36,222 — Other construction, land development and raw land loans — — 1,636 1,636 86,458 88,094 — Obligations of states and political subdivisions in the US — — — — 16,403 16,403 — Agricultural production, including commercial fishing — — — — 27,959 27,959 — Consumer loans — — — — 4,801 4,801 — Other loans — — — — 4,406 4,406 — Total $ 218 $ 51 $ 3,619 $ 3,888 $ 1,409,998 $ 1,413,886 $ — Nonaccrual loans: Nonaccrual loans net of government guarantees totaled $ 7.3 million and $ 10.7 million at June 30, 2022 and December 31, 2021, respectively. The following table presents loans on nonaccrual status and loans on nonaccrual status 22 for which there was no related ACL. All loans with no ACL are individually evaluated for credit losses in the Company's Current Expected Credit Losses methodology. June 30, 2022 December 31, 2021 (In Thousands) Nonaccrual Nonaccrual With No ACL Nonaccrual Nonaccrual With No ACL Commercial & industrial loans $ 3,496 $ 3,496 $ 4,350 $ 4,298 Commercial real estate: Owner occupied properties 2,352 2,348 3,506 3,506 Residential real estate: 1-4 family residential properties secured by first liens 219 219 1,778 1,778 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 280 207 271 215 1-4 family residential construction loans 109 109 109 109 Other construction, land development and raw land loans 1,545 1,545 1,636 1,636 Consumer loans — — — — Total nonaccrual loans 8,001 7,924 11,650 11,542 Government guarantees on nonaccrual loans ( 683 ) ( 683 ) ( 978 ) ( 978 ) Net nonaccrual loans $ 7,318 $ 7,241 $ 10,672 $ 10,564 There was no interest on nonaccrual loans reversed through interest income during three-month period ending June 30, 2022 and $ 2,000 in interest on nonaccrual loans reversed through interest income during the six-month period ending June 30, 2022. There was no interest on nonaccrual loans reversed through interest income during the three and six-month periods ending June 30, 2021. There was no interest earned on nonaccrual loans with a principal balance during the three and six-month periods ending June 30, 2022 and June 30, 2021, respectively. However, the Company recognized interest income of $ 873,000 and $ 232,000 in the three-month periods ending June 30, 2022 and 2021, respectively, and $ 930,000 and $ 366,000 in the six-month periods ending June 30, 2022 and 2021, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero. 23 Troubled Debt Restructurings: Loans classified as TDRs totaled $ 8.9 million and $ 10.6 million at June 30, 2022 and December 31, 2021, 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 December 31, 2021. 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 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 June 30, 2022 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $ 23,573 $ — $ 23,573 Number of modifications 5 — 5 Loan Modifications due to COVID-19 as of December 31, 2021 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $ 49,219 $ — $ 49,219 Number of modifications 16 — 16 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. There were no newly restructured loans that occurred during the six months ended June 30, 2022. As discussed above, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 between March 1, 2020 and December 31, 2021 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019. The disclosed loan restructurings were not related to COVID-19 modifications. Accrual Status Nonaccrual Status Total Modifications (In Thousands) Existing Troubled Debt Restructurings $ 3,008 $ 5,844 $ 8,852 Total $ 3,008 $ 5,844 $ 8,852 24 The following table presents newly restructured loans that occurred during the six months ended June 30, 2021, by concession (terms modified): June 30, 2021 Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications (In Thousands) Pre-Modification Outstanding Recorded Investment: Commercial - AQR substandard 1 $ — $ 254 $ — $ — $ 254 Total 1 $ — $ 254 $ — $ — $ 254 Post-Modification Outstanding Recorded Investment: Commercial - AQR substandard 1 $ — $ 251 $ — $ — $ 251 Total 1 $ — $ 251 $ — $ — $ 251 The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs. There were no in charge-offs in the six months ended June 30, 2022 on loans that were newly classified as TDRs during the same period. There were no loans that defaulted during the six months ended June 30, 2022 and 2021, respectively, that were restructured in the previous twelve months. 4. Purchased Receivables Purchased receivables are carried at their principal amount outstanding, net of an ACL, and have a maturity of less than one year . There were no purchased receivables past due at June 30, 2022 or December 31, 2021, and there were no restructured purchased receivables at June 30, 2022 or December 31, 2021. 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 June 30, 2022 or December 31, 2021. There was no activity and no balance in the ACL for purchased receivables as of June 30, 2022 or December 31, 2021. The following table summarizes the components of net purchased receivables for the periods indicated: (In Thousands) June 30, 2022 December 31, 2021 Purchased receivables $ 15,277 $ 6,987 Allowance for credit losses - purchased receivables — — Total $ 15,277 $ 6,987 25 5. Servicing Rights Mortgage servicing rights The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three and six-month periods ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, (In Thousands) 2022 2021 2022 2021 Balance, beginning of period $ 15,422 $ 11,657 $ 13,724 $ 11,218 Additions for new MSR capitalized 1,128 1,745 2,115 3,193 Changes in fair value: Due to changes in model inputs of assumptions (1) ( 225 ) 16 967 ( 164 ) Other (2) ( 24 ) ( 583 ) ( 505 ) ( 1,412 ) Balance, end of period $ 16,301 $ 12,835 $ 16,301 $ 12,835 (1) Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates. (2) Represents changes due to collection/realization of expected cash flows over time. The following table details information related to our serviced mortgage loan portfolio as of June 30, 2022 and December 31, 2021: (In Thousands) June 30, 2022 December 31, 2021 Balance of mortgage loans serviced for others $ 818,266 $ 772,764 MSR as a percentage of serviced loans 1.99 % 1.78 % The Company recognized servicing fees of $ 804,000 and $ 707,000 during the three-month periods ending June 30, 2022 and 2021, respectively, and $ 1.6 million and $ 1.4 million during the six-month periods ending June 30, 2022 and 2021, respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income. The following table outlines the weighted average key assumptions used in measuring the fair value of MSR as of June 30, 2022 and December 31, 2021: June 30, 2022 December 31, 2021 Constant prepayment rate 7.37 % 11.80 % Discount rate 9.25 % 8.00 % 26 Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at June 30, 2022 and December 31, 2021 were as follows: (In Thousands) June 30, 2022 December 31, 2021 Aggregate portfolio principal balance $ 818,266 $ 772,764 Weighted average rate of note 3.28 % 3.31 % June 30, 2022 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change Constant prepayment rate 7.37 % 14.75 % 22.12 % Discount rate 9.25 % 8.25 % 7.25 % Fair value MSR $ 16,301 $ 12,424 $ 9,885 Percentage of MSR 1.99 % 1.52 % 1.21 % December 31, 2021 Constant prepayment rate 11.80 % 23.59 % 34.57 % Discount rate 8.00 % 7.00 % 6.00 % Fair value MSR $ 13,724 $ 9,612 $ 7,256 Percentage of MSR 1.78 % 1.24 % 0.94 % The above tables show the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four family Alaska Housing Finance Corporation/FNMA/FHLMC serviced home loan. The above tables reference a 100 basis point and 200 basis point decrease in discount rates. These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSR is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time. Commercial servicing rights The commercial servicing rights asset ("CSR") has a carrying value $ 1.1 million at both June 30, 2022 and December 31, 2021, 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 $ 254.5 million and $ 259.8 million at June 30, 2022 and December 31, 2021, respectively. Key assumptions used in measuring the fair value of the CSR as of June 30, 2022 and December 31, 2021 include a constant prepayment rate of 16.08 % and a discount rate of 9.94 %. 6. 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 June 30, 2022, the Company has operating lease ROU assets of $ 9.9 million and operating lease liabilities of $ 9.8 million. As of December 31, 2021, the Company had operating lease ROU assets of $ 11.0 million and operating lease liabilities of $ 11.0 million. The Company did not have any agreements that are classified as finance leases as of June 30, 2022 or December 31, 2021. 27 The following table presents additional information about the Company's operating leases: Three Months Ended June 30, Six Months Ended June 30, (In Thousands) 2022 2021 2022 2021 Lease Cost Operating lease cost (1) $ 672 $ 702 $ 1,353 $ 1,418 Short term lease cost (1) 5 6 17 13 Total lease cost $ 677 $ 708 $ 1,370 $ 1,431 Other information Operating leases - operating cash flows $ 1,278 $ 1,323 Weighted average lease term - operating leases, in years 10.79 10.80 Weighted average discount rate - operating leases 3.26 % 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 2022 (Six months) $ 1,224 2023 2,109 2024 1,961 2025 1,858 2026 721 Thereafter 4,266 Total minimum lease payments $ 12,139 Less: amount of lease payment representing interest ( 2,293 ) Present value of future minimum lease payments $ 9,846 28 7. 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 under regulatory guidelines, 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 $ 569,000 as of June 30, 2022 and $ 8.2 million as of December 31, 2021 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 $ 213.0 million and $ 212.6 million at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, the notional amount of interest rate swaps is made up of 19 variable to fixed rate swaps to commercial loan customers totaling $ 106.5 million, and 19 fixed to variable rate swaps with a counterparty totaling $ 106.5 million. Changes in fair value from these 19 interest rate swaps offset each other in the first six months of 2022. The Company recognized $ 87,000 and $ 90,000 in fee income related to interest rate swaps in the three and six-month periods ending June 30, 2022, respectively, and $ 103,000 and $ 195,000 in fee income related to interest rate swaps in the three and six-month periods ending June 30, 2021, 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 3.20 % as of June 30, 2022. The Company pledged $ 130,000 in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of June 30, 2022 and $ 2.9 million as of December 31, 2021. Changes in the fair value of this interest rate swap are reported in other comprehensive income on the Consolidated Statements of Income. The unrealized gain on this interest rate swap was $ 798,000 as of June 30, 2022 and the unrealized loss was $ 1.0 million as of December 31, 2021. 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 $ 116.2 million and $ 81.6 million at June 30, 2022 and December 31, 2021, 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. 29 The following table presents the fair value of derivatives not designated as hedging instruments at June 30, 2022 and December 31, 2021: (In Thousands) Asset Derivatives June 30, 2022 December 31, 2021 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other assets $ 8,316 $ 6,030 Interest rate lock commitments Other assets 2,567 1,387 Retail interest rate contracts Other assets — 166 Total $ 10,883 $ 7,583 (In Thousands) Liability Derivatives June 30, 2022 December 31, 2021 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other liabilities $ 8,316 $ 6,030 Retail interest rate contracts Other liabilities 376 — Total $ 8,692 $ 6,030 The following table presents the net gains (losses) of derivatives not designated as hedging instruments for periods indicated below: Three Months Ended June 30, Six Months Ended June 30, (In Thousands) Income Statement Location 2022 2021 2022 2021 Retail interest rate contracts Mortgage banking income $ 391 ($ 1,187 ) $ 2,951 $ 1,813 Interest rate lock commitments Mortgage banking income 829 369 349 ( 1,001 ) Total $ 1,220 ($ 818 ) $ 3,300 $ 812 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. 30 The following table summarizes the derivatives that have a right of offset as of June 30, 2022 and December 31, 2021: June 30, 2022 Gross amounts not offset in the Statement of Financial Position (In Thousands) Gross amounts of recognized assets and liabilities Gross amounts offset in the Statement of Financial Position Net amounts of assets and liabilities presented in the Statement of Financial Position Financial Instruments Collateral Posted Net Amount Asset Derivatives Interest rate swaps $ 8,316 $ — $ 8,316 $ — $ — $ 8,316 Liability Derivatives Interest rate swaps $ 8,316 $ — $ 8,316 $ — $ 569 $ 7,747 Retail interest rate contracts 376 — 376 — — 376 December 31, 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 $ 6,030 $ — $ 6,030 $ — $ — $ 6,030 Retail interest rate contracts 166 — 166 — — 166 Liability Derivatives Interest rate swaps $ 6,030 $ — $ 6,030 $ — $ 6,030 $ — 8. 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. Derivative instruments: The fair value of the interest rate lock commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Company has determined that the majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation 31 adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2022, 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 Other Real Estate Owned ("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. 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. 32 Estimated fair values as of the periods indicated are as follows: June 30, 2022 December 31, 2021 (In Thousands) Carrying Amount Fair Value Carrying Amount Fair Value Financial assets: Level 1 inputs: Cash, due from banks and deposits in other banks $ 336,923 $ 336,923 $ 645,827 $ 645,827 Investment securities available for sale 313,082 313,082 141,531 141,531 Marketable equity securities 9,122 9,122 8,420 8,420 Level 2 inputs: Investment securities available for sale 298,945 298,945 285,153 285,153 Investment in Federal Home Loan Bank stock 3,824 3,824 3,107 3,107 Loans held for sale 63,080 63,080 73,650 73,650 Accrued interest receivable 8,117 8,117 6,846 6,846 Interest rate swaps 8,316 8,316 6,030 6,030 Retail interest rate contracts — — 166 166 Level 3 inputs: Investment securities held to maturity 29,750 26,371 20,000 19,164 Loans 1,405,709 1,342,962 1,413,886 1,396,486 Purchased receivables, net 15,277 15,277 6,987 6,987 Interest rate lock commitments 2,567 2,567 1,387 1,387 Mortgage servicing rights 16,301 16,301 13,724 13,724 Commercial servicing rights 1,069 1,069 1,084 1,084 Financial liabilities: Level 2 inputs: Deposits $ 2,335,390 $ 2,332,869 $ 2,421,631 $ 2,422,215 Borrowings 14,302 12,907 14,508 14,727 Accrued interest payable 94 94 31 31 Interest rate swaps 8,316 8,316 6,985 6,985 Level 3 inputs: Junior subordinated debentures 10,310 9,578 10,310 9,727 33 The following table sets forth the balances as of the periods indicated of assets and liabilities measured at fair value on a recurring basis: (In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) June 30, 2022 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 521,339 $ 281,079 $ 240,260 $ — Municipal securities 807 — 807 — Corporate bonds 32,003 32,003 — — Collateralized loan obligations 57,878 — 57,878 — Total available for sale securities $ 612,027 $ 313,082 $ 298,945 $ — Marketable equity securities $ 9,122 $ 9,122 $ — $ — Total marketable equity securities $ 9,122 $ 9,122 $ — $ — Interest rate swaps $ 8,316 $ — $ 8,316 $ — Interest rate lock commitments 2,567 — — 2,567 Mortgage servicing rights 16,301 — — 16,301 Commercial servicing rights 1,069 — — 1,069 Total other assets $ 28,253 $ — $ 8,316 $ 19,937 Liabilities: Interest rate swaps $ 8,316 $ — $ 8,316 $ — Retail interest rate contracts 376 — 376 — Total other liabilities $ 8,692 $ — $ 8,692 $ — December 31, 2021 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 341,480 $ 115,686 $ 225,794 $ — Municipal securities 840 — 840 — Corporate bonds 32,946 25,845 7,101 — Collateralized loan obligations 51,418 — 51,418 — Total available for sale securities $ 426,684 $ 141,531 $ 285,153 $ — Marketable equity securities $ 8,420 $ 8,420 $ — $ — Total marketable securities $ 8,420 $ 8,420 $ — $ — Interest rate swaps $ 6,030 $ — $ 6,030 $ — Interest rate lock commitments 1,387 — — 1,387 Mortgage servicing rights 13,724 — — 13,724 Commercial servicing rights 1,084 — — 1,084 Retail interest rate contracts 166 — 166 — Total other assets $ 22,391 $ — $ 6,196 $ 16,195 Liabilities: Interest rate swaps $ 6,985 $ — $ 6,985 $ — Total other liabilities $ 6,985 $ — $ 6,985 $ — 34 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 six-month periods ended June 30, 2022 and 2021: (In Thousands) Beginning balance Change included in earnings Purchases and issuances Sales and settlements Ending balance Net change in unrealized gains (losses) relating to items held at end of period Three Months Ended June 30, 2022 Interest rate lock commitments $ 965 ($ 520 ) $ 3,863 ($ 1,741 ) $ 2,567 $ 2,567 Mortgage servicing rights 15,422 ( 249 ) 1,128 — 16,301 — Commercial servicing rights 1,091 ( 22 ) — — 1,069 — Total $ 17,478 ($ 791 ) $ 4,991 ($ 1,741 ) $ 19,937 $ 2,567 Three Months Ended June 30, 2021 Interest rate lock commitments $ 2,713 ($ 867 ) $ 7,183 ($ 5,985 ) $ 3,044 $ 3,044 Mortgage servicing rights 11,657 ( 567 ) 1,745 — 12,835 — Commercial servicing rights 1,327 ( 53 ) 18 — 1,292 — Total $ 15,697 ($ 1,487 ) $ 8,946 ($ 5,985 ) $ 17,171 $ 3,044 (In Thousands) Beginning balance Change included in earnings Purchases and issuances Sales and settlements Ending balance Net change in unrealized gains (losses) relating to items held at end of period Six Months Ended June 30, 2022 Interest rate lock commitments $ 1,387 ($ 1,029 ) $ 8,212 ($ 6,004 ) $ 2,567 $ 2,567 Mortgage servicing rights 13,724 462 2,115 — 16,301 — Commercial servicing rights 1,084 ( 48 ) 33 — 1,069 — Total $ 16,195 ($ 615 ) $ 10,360 ($ 6,004 ) $ 19,937 $ 2,567 Six Months Ended June 30, 2021 Interest rate lock commitments $ 4,034 ($ 2,014 ) $ 16,451 ($ 15,427 ) $ 3,044 $ 3,044 Mortgage servicing rights 11,218 ( 1,576 ) 3,193 — 12,835 — Commercial servicing rights 1,310 ( 76 ) 58 — 1,292 — Total $ 16,562 ($ 3,666 ) $ 19,702 ($ 15,427 ) $ 17,171 $ 3,044 There were no changes in unrealized gains and losses for the three and six-month periods ending June 30, 2022 and 2021 included in other comprehensive income for recurring Level 3 fair value measurements. 35 As of and for the periods ending June 30, 2022 and December 31, 2021, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis. For loans individually measured for credit losses, 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. The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three and six-month periods ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, (In Thousands) 2022 2021 2022 2021 Loans individually measured for credit losses ($ 89 ) ($ 213 ) $ — $ 772 Total loss from nonrecurring measurements ($ 89 ) ($ 213 ) $ — $ 772 Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3) The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at June 30, 2022 and December 31, 2021: Financial Instrument Valuation Technique Unobservable Input Weighted Average Rate Range June 30, 2022 Interest rate lock commitment External pricing model Pull through rate 91.85 % Mortgage servicing rights Discounted cash flow Constant prepayment rate 7.34 % - 8.73 % Discount rate 9.25 % Commercial servicing rights Discounted cash flow Constant prepayment rate 12.30 % - 16.57 % Discount rate 9.94 % December 31, 2021 Interest rate lock commitment External pricing model Pull through rate 93.27 % Mortgage servicing rights Discounted cash flow Constant prepayment rate 9.25 % - 14.21 % Discount rate 8.00 % Commercial servicing rights Discounted cash flow Constant prepayment rate 12.30 % - 16.57 % Discount rate 9.94 % 36 9. Segment Information The Company's operations are managed along two operating segments: Community Banking and Home Mortgage Lending. The Community Banking segment's principal business focus is the offering of loan and deposit products to business and consumer customers in its primary market areas. As of June 30, 2022, 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 June 30, 2022 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 22,369 $ 623 $ 22,992 Interest expense 766 14 780 Net interest income 21,603 609 22,212 Provision for credit losses 463 — 463 Other operating income 1,907 5,900 7,807 Other operating expense 16,415 6,823 23,238 Income before provision for income taxes 6,632 ( 314 ) 6,318 Provision for income taxes 1,605 ( 82 ) 1,523 Net income $ 5,027 ($ 232 ) $ 4,795 Three Months Ended June 30, 2021 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 19,476 $ 777 $ 20,253 Interest expense 1,008 53 1,061 Net interest income 18,468 724 19,192 Benefit for credit losses ( 427 ) — ( 427 ) Other operating income 2,772 11,360 14,132 Other operating expense 14,551 7,785 22,336 Income before provision for income taxes 7,116 4,299 11,415 Provision for income taxes 1,850 1,220 3,070 Net income $ 5,266 $ 3,079 $ 8,345 37 Six Months Ended June 30, 2022 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 42,019 $ 1,031 $ 43,050 Interest expense 1,507 27 1,534 Net interest income 40,512 1,004 41,516 Provision for credit losses 313 — 313 Other operating income 5,748 12,882 18,630 Other operating expense 31,246 13,093 44,339 Income before provision for income taxes 14,701 793 15,494 Provision for income taxes 3,246 227 3,473 Net income $ 11,455 $ 566 $ 12,021 Six Months Ended June 30, 2021 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 39,275 $ 1,574 $ 40,849 Interest expense 2,073 91 2,164 Net interest income 37,202 1,483 38,685 Benefit for credit losses ( 1,915 ) — ( 1,915 ) Other operating income 5,046 24,982 30,028 Other operating expense 28,215 15,448 43,663 Income before provision for income taxes 15,948 11,017 26,965 Provision for income taxes 3,302 3,137 6,439 Net income $ 12,646 $ 7,880 $ 20,526 June 30, 2022 (In Thousands) Community Banking Home Mortgage Lending Consolidated Total assets $ 2,511,565 $ 99,589 $ 2,611,154 Loans held for sale $ — $ 63,080 $ 63,080 December 31, 2021 (In Thousands) Community Banking Home Mortgage Lending Consolidated Total assets $ 2,615,433 $ 109,286 $ 2,724,719 Loans held for sale $ — $ 73,650 $ 73,650 38