NORTHRIM BANCORP INC 10-Q

ITEM 1. FINANCIAL STATEMENTS 2 CONSOLIDATED FINANCIAL STATEMENTS NORTHRIM BANCORP, INC. Consolidated Balance Sheets (Unaudited) September 30, 2022 December 31, 2021 (In Thousands, Except Share Data) ASSETS Cash and due from banks $ 20,334 $ 20,805 Interest bearing deposits in other banks 386,587 625,022 Investment securities available for sale, at fair value 651,921 426,684 Marketable equity securities 11,149 8,420 Investment securities held to maturity, at amortized cost 36,750 20,000 Investment in Federal Home Loan Bank stock 3,820 3,107 Loans held for sale 49,356 73,650 Loans 1,407,266 1,413,886 Allowance for credit losses, loans ( 11,982 ) ( 11,739 ) Net loans 1,395,284 1,402,147 Purchased receivables, net 4,785 6,987 Mortgage servicing rights, at fair value 17,709 13,724 Other real estate owned, net 5,638 5,638 Premises and equipment, net 36,931 37,164 Operating lease right-of-use assets 10,434 11,001 Goodwill 15,017 15,017 Other intangible assets, net 973 992 Other assets 70,826 54,361 Total assets $ 2,717,514 $ 2,724,719 LIABILITIES Deposits: Demand $ 861,378 $ 887,824 Interest-bearing demand 757,422 692,683 Savings 344,975 348,164 Money market 309,690 314,996 Certificates of deposit less than $250,000 100,022 100,851 Certificates of deposit $250,000 and greater 65,848 77,113 Total deposits 2,439,335 2,421,631 Borrowings 14,199 14,508 Junior subordinated debentures 10,310 10,310 Operating lease liabilities 10,430 10,965 Other liabilities 32,541 29,488 Total liabilities 2,506,815 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 September 30, 2022 and December 31, 2021, respectively 5,681 6,015 Additional paid-in capital 17,907 31,162 Retained earnings 218,499 204,046 Accumulated other comprehensive loss, net of tax ( 31,388 ) ( 3,406 ) Total shareholders' equity 210,699 237,817 Total liabilities and shareholders' equity $ 2,717,514 $ 2,724,719 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) 2022 2021 2022 2021 Interest and Dividend Income Interest and fees on loans and loans held for sale $ 22,130 $ 19,900 $ 60,205 $ 58,287 Interest on investment securities available for sale 2,922 828 5,983 2,421 Dividends on marketable equity securities 161 115 386 328 Interest on investment securities held to maturity 413 262 1,038 773 Dividends on Federal Home Loan Bank stock 34 28 90 74 Interest on deposits in other banks 1,899 149 2,907 248 Total Interest and Dividend Income 27,559 21,282 70,609 62,131 Interest Expense Interest expense on deposits 1,064 667 2,238 2,495 Interest expense on borrowings 88 89 260 237 Interest expense on junior subordinated debentures 96 94 284 282 Total Interest Expense 1,248 850 2,782 3,014 Net Interest Income 26,311 20,432 67,827 59,117 Benefit for credit losses ( 353 ) ( 1,106 ) ( 40 ) ( 3,021 ) Net Interest Income After Benefit for Credit Losses 26,664 21,538 67,867 62,138 Other Operating Income Mortgage banking income 5,734 9,893 18,616 34,875 Bankcard fees 992 878 2,723 2,497 Purchased receivable income 561 530 1,529 1,637 Service charges on deposit accounts 432 345 1,208 943 Unrealized (loss) gain on marketable equity securities 33 ( 67 ) ( 1,199 ) 27 Gain on sale of marketable equity securities, net — 36 — 67 Keyman life insurance proceeds — — 2,002 — Other income 920 1,043 2,423 2,640 Total Other Operating Income 8,672 12,658 27,302 42,686 Other Operating Expense Salaries and other personnel expense 14,510 15,756 44,017 45,401 Data processing expense 2,315 2,198 6,618 6,439 Occupancy expense 1,710 1,707 5,184 5,236 Professional and outside services 894 703 2,324 1,969 Insurance expense 545 322 1,627 965 Marketing expense 524 533 1,763 1,609 OREO expense, net rental income and gains on sale 109 ( 378 ) 116 ( 367 ) Intangible asset amortization expense 7 9 19 27 Other operating expense 1,672 1,684 4,957 4,918 Total Other Operating Expense 22,286 22,534 66,625 66,197 Income Before Provision for Income Taxes 13,050 11,662 28,544 38,627 Provision for income taxes 2,925 2,785 6,398 9,224 Net Income $ 10,125 $ 8,877 $ 22,146 $ 29,403 Earnings Per Share, Basic $ 1.77 $ 1.43 $ 3.82 $ 4.73 Earnings Per Share, Diluted $ 1.76 $ 1.42 $ 3.79 $ 4.69 Weighted Average Shares Outstanding, Basic 5,681,089 6,196,260 5,790,000 6,207,681 Weighted Average Shares Outstanding, Diluted 5,740,494 6,265,602 5,848,625 6,274,634 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) 2022 2021 2022 2021 Net income $ 10,125 $ 8,877 $ 22,146 $ 29,403 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized holding (losses) arising during the period ($ 17,518 ) ($ 533 ) ($ 41,535 ) ($ 2,141 ) Derivatives and hedging activities: Unrealized holding (losses) gains arising during the period 684 162 2,438 835 Income tax benefit related to unrealized gains and losses 4,786 106 11,115 372 Other comprehensive (loss), net of tax ( 12,048 ) ( 265 ) ( 27,982 ) ( 934 ) Comprehensive (loss) income ($ 1,923 ) $ 8,612 ($ 5,836 ) $ 28,469 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 Cash dividend on common stock ($ 0.50 per share) — — — ( 2,858 ) — ( 2,858 ) Stock-based compensation expense — — 191 — — 191 Other comprehensive loss, net of tax — — — — ( 12,048 ) ( 12,048 ) Net income — — — 10,125 — 10,125 Balance as of September 30, 2022 5,681 $ 5,681 $ 17,907 $ 218,499 ($ 31,388 ) $ 210,699 See notes to consolidated financial statements 7 NORTHRIM BANCORP, INC. Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (In Thousands) 2022 2021 Operating Activities: Net income $ 22,146 $ 29,403 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Gain on sale of securities, net — ( 67 ) Depreciation and amortization of premises and equipment 2,361 2,473 Amortization of software 881 868 Intangible asset amortization 19 27 Amortization of investment security premium, net of discount accretion 496 367 Unrealized loss (gain) on marketable equity securities 1,199 ( 27 ) Deferred tax (benefit) expense — 958 Stock-based compensation 568 741 Deferred loan fees and amortization, net of costs ( 3,570 ) 3,128 Benefit for credit losses ( 40 ) ( 3,021 ) Additions to home mortgage servicing rights carried at fair value ( 3,378 ) ( 4,896 ) Change in fair value of home mortgage servicing rights carried at fair value ( 607 ) 3,034 Change in fair value of commercial servicing rights carried at fair value 123 134 Gain on sale of loans ( 12,306 ) ( 29,222 ) Proceeds from the sale of loans held for sale 539,984 939,618 Origination of loans held for sale ( 503,384 ) ( 870,442 ) Gain on sale of other real estate owned — ( 577 ) Proceeds from keyman life insurance ( 2,002 ) — Net changes in assets and liabilities: (Increase) decrease in accrued interest receivable ( 1,649 ) 433 Decrease in other assets 5,123 5,504 (Decrease) in other liabilities ( 5,123 ) ( 4,515 ) Net Cash Provided by Operating Activities 40,841 73,921 Investing Activities: Investment in securities: Purchases of investment securities available for sale ( 274,263 ) ( 259,016 ) Purchases of marketable equity securities ( 3,933 ) ( 493 ) Purchases of FHLB stock ( 728 ) ( 571 ) Purchases of investment securities held to maturity ( 16,750 ) ( 10,000 ) Proceeds from sales/calls/maturities of securities available for sale 7,000 125,092 Proceeds from sales of marketable equity securities — 1,017 Proceeds from redemption of FHLB stock 15 12 (Increase) decrease in purchased receivables, net 2,202 ( 6,196 ) Decrease (increase) in loans, net 11,230 ( 9,990 ) Proceeds from sale of other real estate owned — 2,228 Proceeds from keyman life insurance 2,002 — Purchases of software ( 14 ) ( 76 ) Purchases of premises and equipment ( 2,128 ) ( 1,981 ) Net Cash (Used) by Investing Activities ( 275,367 ) ( 159,974 ) Financing Activities: Increase in deposits 17,704 471,560 (Decrease) in borrowings ( 309 ) ( 212 ) Repurchase of common stock ( 14,157 ) ( 3,416 ) Proceeds from the issuance of common stock — 1,381 Cash dividends paid ( 7,618 ) ( 6,946 ) Net Cash (Used) Provided by Financing Activities ( 4,380 ) 462,367 Net Change in Cash and Cash Equivalents ( 238,906 ) 376,314 8 Cash and Cash Equivalents at Beginning of Period 645,827 115,965 Cash and Cash Equivalents at End of Period $ 406,921 $ 492,279 Supplemental Information: Income taxes paid $ 640 $ 4,577 Interest paid $ 2,678 $ 2,950 Transfer of loans to other real estate owned $ — $ 274 Loans made to facilitate sales of other real estate owned $ — $ 1,012 Non-cash lease liability arising from obtaining right of use assets $ — $ 79 Cash dividends declared but not paid $ 75 $ 71 Cumulative effect adjustment to retained earnings $ — $ 2,400 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, 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 September 30, 2022, we had approximately $ 159.9 million of assets, including $ 83.8 million in commercial loans and $ 76.1 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 September 30, 2022, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $ 148.4 million. Of this amount, $ 69.2 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers. An additional $ 69.2 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 $ 79.2 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 $ 11.1 million and $ 8.4 million at September 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 September 30, Nine Months Ended September 30, (In Thousands) 2022 2021 2022 2021 Unrealized gain (loss) on marketable equity securities $ 33 ($ 67 ) ($ 1,199 ) $ 27 Gain on sale of marketable equity securities, net — 36 — 67 Total $ 33 ($ 31 ) ($ 1,199 ) $ 94 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 September 30, 2022 Securities available for sale U.S. Treasury and government sponsored entities $ 606,302 $ — ($ 42,230 ) $ — $ 564,072 Municipal securities 820 — ( 24 ) — 796 Corporate bonds 30,703 23 ( 785 ) — 29,941 Collateralized loan obligations 59,433 — ( 2,321 ) — 57,112 Total securities available for sale $ 697,258 $ 23 ($ 45,360 ) $ — $ 651,921 (In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value September 30, 2022 Securities held to maturity Corporate bonds $ 36,750 $ — ($ 5,056 ) $ 31,694 Allowance for credit losses — — — — Total securities held to maturity, net of ACL $ 36,750 $ — ($ 5,056 ) $ 31,694 (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 September 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 September 30, 2022 Securities available for sale U.S. Treasury and government sponsored entities $ 304,642 ($ 13,125 ) $ 259,430 ($ 29,105 ) $ 564,072 ($ 42,230 ) Corporate bonds 15,196 ( 67 ) 4,307 ( 718 ) 19,503 ( 785 ) Collateralized loan obligations 52,433 ( 2,000 ) 4,679 ( 321 ) 57,112 ( 2,321 ) Municipal securities 796 ( 24 ) — — 796 ( 24 ) Total $ 373,067 ($ 15,216 ) $ 268,416 ($ 30,144 ) $ 641,483 ($ 45,360 ) 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 September 30, 2022, the Company had 86 available for sale securities in an unrealized loss position without an ACL. At September 30, 2022, the Company had five 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, 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 September 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 September 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 Within 1 year $ 30,065 $ 29,497 1-5 years 576,237 534,575 Total $ 606,302 $ 564,072 Corporate bonds 1-5 years $ 40,703 $ 38,555 5-10 years 26,750 26,184 Total $ 67,453 $ 64,739 Collateralized loan obligations 1-5 years $ 5,000 $ 4,619 5-10 years 26,940 26,214 Over 10 years 27,493 26,279 Total $ 59,433 $ 57,112 Municipal securities 1-5 years $ 820 $ 796 Total $ 820 $ 796 There were no proceeds from sales of investment securities for the three and nine-month periods ending September 30, 2022 and 2021. A summary of interest income for the three and nine-month periods ending September 30, 2022 and 2021, on available for sale investment securities are as follows: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2022 2021 2022 2021 US Treasury and government sponsored entities $ 2,137 $ 552 $ 4,375 $ 1,568 Other 781 272 1,595 840 Total taxable interest income $ 2,918 $ 824 $ 5,970 $ 2,408 Municipal securities $ 4 $ 4 $ 13 $ 13 Total tax-exempt interest income $ 4 $ 4 $ 13 $ 13 Total $ 2,922 $ 828 $ 5,983 $ 2,421 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 September 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: September 30, 2022 December 31, 2021 (In Thousands) Amortized Cost Unpaid Principal Difference Amortized Cost Unpaid Principal Difference Commercial & industrial loans $ 375,833 $ 377,674 ($ 1,841 ) $ 448,338 $ 454,106 ($ 5,768 ) Commercial real estate: Owner occupied properties 329,813 331,385 ( 1,572 ) 300,200 301,623 ( 1,423 ) Non-owner occupied and multifamily properties 449,760 453,242 ( 3,482 ) 435,311 438,631 ( 3,320 ) Residential real estate: 1-4 family residential properties secured by first liens 39,208 39,244 ( 36 ) 32,542 32,602 ( 60 ) 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 23,176 23,029 147 19,610 19,489 121 1-4 family residential construction loans 47,779 48,004 ( 225 ) 36,222 36,542 ( 320 ) Other construction, land development and raw land loans 77,442 78,266 ( 824 ) 88,094 88,604 ( 510 ) Obligations of states and political subdivisions in the US 24,830 24,835 ( 5 ) 16,403 16,565 ( 162 ) Agricultural production, including commercial fishing 32,073 32,236 ( 163 ) 27,959 28,082 ( 123 ) Consumer loans 4,168 4,127 41 4,801 4,763 38 Other loans 3,184 3,197 ( 13 ) 4,406 4,422 ( 16 ) Total 1,407,266 1,415,239 ( 7,973 ) 1,413,886 1,425,429 ( 11,543 ) Allowance for credit losses ( 11,982 ) ( 11,739 ) $ 1,395,284 $ 1,415,239 ($ 7,973 ) $ 1,402,147 $ 1,425,429 ($ 11,543 ) The difference between the amortized cost and unpaid principal balance is net deferred origination fees totaling $ 8.0 million and $ 11.5 million at September 30, 2022 and December 31, 2021, respectively. Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 4.6 million and $ 5.5 million at September 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 $ 11.3 million and $ 118.2 million as of September 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 September 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2022 Commercial & industrial loans $ 2,961 ($ 1,344 ) ($ 45 ) $ 1,325 $ 2,897 Commercial real estate: Owner occupied properties 2,573 132 — 55 2,760 Non-owner occupied and multifamily properties 3,107 120 — — 3,227 Residential real estate: 1-4 family residential properties secured by first liens 620 73 — 5 698 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 327 30 — 9 366 1-4 family residential construction loans 231 50 — — 281 Other construction, land development and raw land loans 1,462 15 — — 1,477 Obligations of states and political subdivisions in the US 59 4 — — 63 Agricultural production, including commercial fishing 127 13 — — 140 Consumer loans 64 3 ( 3 ) 2 66 Other loans 6 1 — — 7 Total $ 11,537 ($ 903 ) ($ 48 ) $ 1,396 $ 11,982 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 16 Nine Months Ended September 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2022 Commercial & industrial loans $ 3,027 ($ 1,065 ) ($ 506 ) $ 1,441 $ 2,897 Commercial real estate: Owner occupied properties 3,176 ( 471 ) — 55 2,760 Non-owner occupied and multifamily properties 2,930 297 — — 3,227 Residential real estate: 1-4 family residential properties secured by first liens 439 254 — 5 698 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 215 121 — 30 366 1-4 family residential construction loans 120 161 — — 281 Other construction, land development and raw land loans 1,635 ( 158 ) — — 1,477 Obligations of states and political subdivisions in the US 32 31 — — 63 Agricultural production, including commercial fishing 91 34 — 15 140 Consumer loans 67 ( 1 ) ( 3 ) 3 66 Other loans 7 — — — 7 Total $ 11,739 ($ 797 ) ($ 509 ) $ 1,549 $ 11,982 2021 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 $ 16,625 ($ 2,828 ) ($ 273 ) $ 292 $ 13,816 The ACL on loans increased at September 30, 2022, as compared to June 30, 2022 primarily due to an increase in the Company's forecasted unemployment rate over the reasonable and supportable forecast period, and this increase was only partially offset by a decrease in non-government guaranteed loan balances. The ACL on loans also increased at September 30, 2022, as compared to December 31, 2021; however, this increase was primarily due to an increase in non-government guaranteed 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 borrower 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. September 30, 2022 2022 2021 2020 2019 2018 Prior Total (In Thousands) Commercial & industrial loans Pass $ 146,662 $ 97,528 $ 43,070 $ 20,251 $ 10,710 $ 42,069 $ 360,290 Classified 139 9,087 1,296 99 2,895 2,027 15,543 Total commercial & industrial loans $ 146,801 $ 106,615 $ 44,366 $ 20,350 $ 13,605 $ 44,096 $ 375,833 Commercial real estate: Owner occupied properties Pass $ 39,723 $ 79,521 $ 88,235 $ 35,145 $ 13,396 $ 67,189 $ 323,209 Classified — — — — 168 6,436 6,604 Total commercial real estate owner occupied properties $ 39,723 $ 79,521 $ 88,235 $ 35,145 $ 13,564 $ 73,625 $ 329,813 Non-owner occupied and multifamily properties Pass $ 48,606 $ 83,078 $ 73,444 $ 59,521 $ 17,058 $ 157,691 $ 439,398 Classified — — — 275 5 10,082 10,362 Total commercial real estate non-owner occupied and multifamily properties $ 48,606 $ 83,078 $ 73,444 $ 59,796 $ 17,063 $ 167,773 $ 449,760 Residential real estate: 1-4 family residential properties secured by first liens Pass $ 16,382 $ 9,846 $ 6,301 $ 2,566 $ 480 $ 3,421 $ 38,996 Classified — — — — 81 131 212 Total residential real estate 1-4 family residential properties secured by first liens $ 16,382 $ 9,846 $ 6,301 $ 2,566 $ 561 $ 3,552 $ 39,208 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens Pass $ 5,629 $ 5,571 $ 2,437 $ 2,988 $ 3,220 $ 3,079 $ 22,924 Classified — — — — 243 9 252 18 Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $ 5,629 $ 5,571 $ 2,437 $ 2,988 $ 3,463 $ 3,088 $ 23,176 1-4 family residential construction loans Pass $ 29,616 $ 5,350 $ 61 $ — $ — $ 12,643 $ 47,670 Classified — — — — — 109 109 Total residential real estate 1-4 family residential construction loans $ 29,616 $ 5,350 $ 61 $ — $ — $ 12,752 $ 47,779 Other construction, land development and raw land loans Pass $ 15,264 $ 31,615 $ 14,932 $ 4,574 $ 3,589 $ 5,632 $ 75,606 Classified — — — — 369 1,467 1,836 Total other construction, land development and raw land loans $ 15,264 $ 31,615 $ 14,932 $ 4,574 $ 3,958 $ 7,099 $ 77,442 Obligations of states and political subdivisions in the US Pass $ 11,360 $ 9,694 $ 3,525 $ — $ 251 $ — $ 24,830 Classified — — — — — — — Total obligations of states and political subdivisions in the US $ 11,360 $ 9,694 $ 3,525 $ — $ 251 $ — $ 24,830 Agricultural production, including commercial fishing Pass $ 6,624 $ 18,377 $ 3,857 $ 669 $ 939 $ 1,607 $ 32,073 Classified — — — — — — — Total agricultural production, including commercial fishing $ 6,624 $ 18,377 $ 3,857 $ 669 $ 939 $ 1,607 $ 32,073 Consumer loans Pass $ 1,133 $ 458 $ 511 $ 364 $ 271 $ 1,423 $ 4,160 Classified — — — — — 8 8 Total consumer loans $ 1,133 $ 458 $ 511 $ 364 $ 271 $ 1,431 $ 4,168 Other loans Pass $ 242 $ 1,129 $ 1,325 $ 398 $ — $ 90 $ 3,184 Classified — — — — — — — Total other loans $ 242 $ 1,129 $ 1,325 $ 398 $ — $ 90 $ 3,184 Total loans Pass $ 321,241 $ 342,167 $ 237,698 $ 126,476 $ 49,914 $ 294,844 $ 1,372,340 Classified 139 9,087 1,296 374 3,761 20,269 34,926 Total loans $ 321,380 $ 351,254 $ 238,994 $ 126,850 $ 53,675 $ 315,113 $ 1,407,266 Total pass loans $ 321,241 $ 342,167 $ 237,698 $ 126,476 $ 49,914 $ 294,844 $ 1,372,340 Government guarantees ( 28,553 ) ( 41,099 ) ( 10,580 ) ( 13,066 ) ( 3,038 ) ( 5,171 ) ( 101,507 ) Total pass loans, net of government guarantees $ 292,688 $ 301,068 $ 227,118 $ 113,410 $ 46,876 $ 289,673 $ 1,270,833 Total classified loans $ 139 $ 9,087 $ 1,296 $ 374 $ 3,761 $ 20,269 $ 34,926 Government guarantees — ( 8,178 ) ( 1,167 ) — — ( 12,152 ) ( 21,497 ) Total classified loans, net government guarantees $ 139 $ 909 $ 129 $ 374 $ 3,761 $ 8,117 $ 13,429 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 September 30, 2022 Commercial & industrial loans $ 2,596 $ 3,082 $ 223 $ 5,901 $ 369,932 $ 375,833 $ — Commercial real estate: Owner occupied properties — — 824 824 328,989 329,813 — Non-owner occupied and multifamily properties 275 275 — 550 449,210 449,760 — Residential real estate: 1-4 family residential properties secured by first liens 70 — — 70 39,138 39,208 — 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 22 — 130 152 23,024 23,176 — 1-4 family residential construction loans — — 109 109 47,670 47,779 — Other construction, land development and raw land loans 1,600 — 1,545 3,145 74,297 77,442 — Obligations of states and political subdivisions in the US — — — — 24,830 24,830 — Agricultural production, including commercial fishing — — — — 32,073 32,073 — Consumer loans — — — — 4,168 4,168 — Other loans — — — — 3,184 3,184 — Total $ 4,563 $ 3,357 $ 2,831 $ 10,751 $ 1,396,515 $ 1,407,266 $ — 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 $ 6.5 million and $ 10.7 million at September 30, 2022 and December 31, 2021, respectively. The following table presents loans on nonaccrual status and loans on nonaccrual 22 status for the periods presented 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. September 30, 2022 December 31, 2021 (In Thousands) Nonaccrual Nonaccrual With No ACL Nonaccrual Nonaccrual With No ACL Commercial & industrial loans $ 3,228 $ 3,228 $ 4,350 $ 4,298 Commercial real estate: Owner occupied properties 1,531 1,531 3,506 3,506 Non-owner occupied and multifamily properties 275 275 — — Residential real estate: 1-4 family residential properties secured by first liens 151 151 1,778 1,778 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 252 203 271 215 1-4 family residential construction loans 109 109 109 109 Other construction, land development and raw land loans 1,546 1,546 1,636 1,636 Total nonaccrual loans 7,092 7,043 11,650 11,542 Government guarantees on nonaccrual loans ( 619 ) ( 619 ) ( 978 ) ( 978 ) Net nonaccrual loans $ 6,473 $ 6,424 $ 10,672 $ 10,564 There was no interest on nonaccrual loans reversed through interest income during three-month period ending September 30, 2022 and $ 2,000 in interest on nonaccrual loans reversed through interest income during the nine-month period ending September 30, 2022. There was no interest on nonaccrual loans reversed through interest income during the three and nine-month periods ending September 30, 2021. There was no interest earned on nonaccrual loans with a principal balance during either the three and nine-month periods ending September 30, 2022 and September 30, 2021. However, the Company recognized interest income of $ 1.2 million and $ 419,000 in the three-month periods ending September 30, 2022 and 2021, respectively, and $ 2.1 million and $ 785,000 in the nine-month periods ending September 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 $ 8.1 million and $ 10.6 million at September 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 September 30, 2022 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $ 8,439 $ — $ 8,439 Number of modifications 2 — 2 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 $ 8.4 million in COVID-19 loan accommodations as of September 30, 2022 are scheduled to return to normal principal and interest payments in the fourth quarter of 2022. 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. There were no newly restructured loans that occurred during the nine months ended September 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 on the table below were not related to COVID-19 modifications. Accrual Status Nonaccrual Status Total Modifications (In Thousands) Troubled Debt Restructurings $ 3,033 $ 5,075 $ 8,108 Total $ 3,033 $ 5,075 $ 8,108 24 The following table presents newly restructured loans that occurred during the nine months ended September 30, 2021, 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 - AQR substandard 1 $ — $ 254 $ — $ — $ 254 Commercial real estate: Owner occupied properties 1 — 360 — — 360 Other construction, land development and raw land loans 1 — 577 — — 577 Total 3 $ — $ 1,191 $ — $ — $ 1,191 Post-Modification Outstanding Recorded Investment: Commercial - AQR substandard 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 The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs. There were no charge-offs in the nine months ended September 30, 2022 on loans that were newly classified as TDRs during the same period. There were no loans that defaulted during the nine months ended September 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 September 30, 2022 or December 31, 2021, and there were no restructured purchased receivables at September 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 September 30, 2022 or December 31, 2021. There was no activity and no balance in the ACL for purchased receivables as of September 30, 2022 or December 31, 2021. The following table summarizes the components of net purchased receivables for the dates indicated: (In Thousands) September 30, 2022 December 31, 2021 Purchased receivables $ 4,785 $ 6,987 Allowance for credit losses - purchased receivables — — Total $ 4,785 $ 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 nine-month periods ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2022 2021 2022 2021 Balance, beginning of period $ 16,301 $ 12,835 $ 13,724 $ 11,218 Additions for new MSR capitalized 1,263 1,703 3,378 4,896 Changes in fair value: Due to changes in model inputs of assumptions (1) 555 ( 928 ) 1,522 ( 1,092 ) Other (2) ( 410 ) ( 530 ) ( 915 ) ( 1,942 ) Balance, end of period $ 17,709 $ 13,080 $ 17,709 $ 13,080 (1) Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates. (2) Represents changes due to collection/realization of expected cash flows over time. The following table details information related to our serviced mortgage loan portfolio as of September 30, 2022 and December 31, 2021: (In Thousands) September 30, 2022 December 31, 2021 Balance of mortgage loans serviced for others $ 859,288 $ 772,764 MSR as a percentage of serviced loans 2.06 % 1.78 % The Company recognized servicing fees of $ 858,000 and $ 745,000 during the three-month periods ending September 30, 2022 and 2021, respectively, and $ 2.4 million and $ 2.2 million during the nine-month periods ending September 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 September 30, 2022 and December 31, 2021: September 30, 2022 December 31, 2021 Constant prepayment rate 7.27 % 11.80 % Discount rate 10.00 % 8.00 % 26 Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at September 30, 2022 and December 31, 2021 were as follows: (In Thousands) September 30, 2022 December 31, 2021 Aggregate portfolio principal balance $ 859,288 $ 772,764 Weighted average rate of note 3.36 % 3.31 % September 30, 2022 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change Constant prepayment rate 7.27 % 14.54 % 21.82 % Discount rate 10.00 % 9.00 % 8.00 % Fair value MSR $ 17,709 $ 14,009 $ 11,560 Percentage of MSR 2.06 % 1.63 % 1.35 % 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 of $ 1.1 million at both September 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 $ 255.9 million and $ 259.8 million at September 30, 2022 and December 31, 2021, respectively. Key assumptions used in measuring the fair value of the CSR as of September 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 September 30, 2022, the Company has operating lease ROU assets of $ 10.4 million and operating lease liabilities of $ 10.4 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 September 30, 2022 or December 31, 2021. 27 The following table presents additional information about the Company's operating leases: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2022 2021 2022 2021 Lease Cost Operating lease cost (1) $ 693 $ 688 $ 2,046 $ 2,106 Short term lease cost (1) 9 7 26 20 Total lease cost $ 702 $ 695 $ 2,072 $ 2,126 Other information Operating leases - operating cash flows $ 1,901 $ 1,970 Weighted average lease term - operating leases, in years 10.39 10.55 Weighted average discount rate - operating leases 3.28 % 3.19 % (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 (Three months) $ 645 2023 2,477 2024 2,187 2025 1,995 2026 861 Thereafter 4,581 Total minimum lease payments $ 12,746 Less: amount of lease payment representing interest ( 2,316 ) Present value of future minimum lease payments $ 10,430 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 $ 549,000 as of September 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 $ 211.0 million and $ 212.6 million at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022, the notional amount of interest rate swaps is made up of 19 variable to fixed rate swaps to commercial loan customers totaling $ 105.5 million, and 19 fixed to variable rate swaps with a counterparty totaling $ 105.5 million. Changes in fair value from these 19 interest rate swaps offset each other in the first nine months of 2022. The Company recognized zero and $ 90,000 in fee income related to interest rate swaps in the three and nine-month periods ending September 30, 2022, respectively, and $ 195,000 and $ 390,000 in fee income related to interest rate swaps in the three and nine-month periods ending September 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 4.66 % as of September 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 September 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 $ 1.5 million as of September 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 $ 74.7 million and $ 81.6 million at September 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 September 30, 2022 and December 31, 2021: (In Thousands) Asset Derivatives September 30, 2022 December 31, 2021 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other assets $ 13,374 $ 6,030 Interest rate lock commitments Other assets 354 1,387 Retail interest rate contracts Other assets 593 166 Total $ 14,321 $ 7,583 (In Thousands) Liability Derivatives September 30, 2022 December 31, 2021 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other liabilities $ 13,374 $ 6,030 Total $ 13,374 $ 6,030 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 2022 2021 2022 2021 Retail interest rate contracts Mortgage banking income $ 1,347 ($ 413 ) $ 4,297 $ 1,400 Interest rate lock commitments Mortgage banking income ( 1,365 ) 199 ( 1,016 ) ( 802 ) Total ($ 18 ) ($ 214 ) $ 3,281 $ 598 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 September 30, 2022 and December 31, 2021: September 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 $ 13,374 $ — $ 13,374 $ — $ — $ 13,374 Retail interest rate contracts 593 — 593 — — 593 Liability Derivatives Interest rate swaps $ 13,374 $ — $ 13,374 $ — $ 549 $ 12,825 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 31 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, 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: September 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 $ 406,921 $ 406,921 $ 645,827 $ 645,827 Investment securities available for sale 361,802 361,802 141,531 141,531 Marketable equity securities 11,149 11,149 8,420 8,420 Level 2 inputs: Investment securities available for sale 290,119 290,119 285,153 285,153 Investment in Federal Home Loan Bank stock 3,820 3,820 3,107 3,107 Loans held for sale 49,356 49,356 73,650 73,650 Accrued interest receivable 8,495 8,495 6,846 6,846 Interest rate swaps 14,856 14,856 6,030 6,030 Retail interest rate contracts 593 593 166 166 Level 3 inputs: Investment securities held to maturity 36,750 31,694 20,000 19,164 Loans 1,407,266 1,313,253 1,413,886 1,396,486 Purchased receivables, net 4,785 4,785 6,987 6,987 Interest rate lock commitments 354 354 1,387 1,387 Mortgage servicing rights 17,709 17,709 13,724 13,724 Commercial servicing rights 1,067 1,067 1,084 1,084 Financial liabilities: Level 2 inputs: Deposits $ 2,439,335 $ 2,435,738 $ 2,421,631 $ 2,422,215 Borrowings 14,199 11,883 14,508 14,727 Accrued interest payable 135 135 31 31 Interest rate swaps 13,374 13,374 6,985 6,985 Level 3 inputs: Junior subordinated debentures 10,310 10,047 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) September 30, 2022 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 564,072 $ 331,861 $ 232,211 $ — Municipal securities 796 — 796 — Corporate bonds 29,941 29,941 — — Collateralized loan obligations 57,112 — 57,112 — Total available for sale securities $ 651,921 $ 361,802 $ 290,119 $ — Marketable equity securities $ 11,149 $ 11,149 $ — $ — Total marketable equity securities $ 11,149 $ 11,149 $ — $ — Interest rate swaps $ 14,856 $ — $ 14,856 $ — Interest rate lock commitments 354 — — 354 Mortgage servicing rights 17,709 — — 17,709 Commercial servicing rights 1,067 — — 1,067 Retail interest rate contracts 593 — — 593 Total other assets $ 34,579 $ — $ 14,856 $ 19,723 Liabilities: Interest rate swaps $ 13,374 $ — $ 13,374 $ — Total other liabilities $ 13,374 $ — $ 13,374 $ — 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 nine-month periods ended September 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 September 30, 2022 Interest rate lock commitments $ 2,567 ($ 370 ) $ 2,976 ($ 4,819 ) $ 354 $ 354 Mortgage servicing rights 16,301 145 1,263 — 17,709 — Commercial servicing rights 1,069 ( 75 ) 73 — 1,067 — Total $ 19,937 ($ 300 ) $ 4,312 ($ 4,819 ) $ 19,130 $ 354 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 (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, 2022 Interest rate lock commitments $ 1,387 ($ 1,399 ) $ 11,189 ($ 10,823 ) $ 354 $ 354 Mortgage servicing rights 13,724 607 3,378 — 17,709 — Commercial servicing rights 1,084 ( 123 ) 106 — 1,067 — Total $ 16,195 ($ 915 ) $ 14,673 ($ 10,823 ) $ 19,130 $ 354 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 There were no changes in unrealized gains and losses for the three and nine-month periods ending September 30, 2022 and 2021 included in other comprehensive income for recurring Level 3 fair value measurements. 35 As of and for the periods ending September 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 nine-month periods ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2022 2021 2022 2021 Loans individually measured for credit losses $ — ($ 122 ) $ — $ 650 Total loss from nonrecurring measurements $ — ($ 122 ) $ — $ 650 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, 2022 and December 31, 2021: Financial Instrument Valuation Technique Unobservable Input Weighted Average Rate Range September 30, 2022 Interest rate lock commitment External pricing model Pull through rate 96.1 % Mortgage servicing rights Discounted cash flow Constant prepayment rate 7.23 % - 8.68 % Discount rate 10.00 % 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 September 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 September 30, 2022 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 26,900 $ 659 $ 27,559 Interest expense 1,232 16 1,248 Net interest income 25,668 643 26,311 Benefit for credit losses ( 353 ) — ( 353 ) Other operating income 2,938 5,734 8,672 Other operating expense 15,977 6,309 22,286 Income before provision for income taxes 12,982 68 13,050 Provision for income taxes 2,911 14 2,925 Net income $ 10,071 $ 54 $ 10,125 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 37 Nine Months Ended September 30, 2022 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 68,919 $ 1,690 $ 70,609 Interest expense 2,739 43 2,782 Net interest income 66,180 1,647 67,827 Benefit for credit losses ( 40 ) — ( 40 ) Other operating income 8,686 18,616 27,302 Other operating expense 47,223 19,402 66,625 Income before provision for income taxes 27,683 861 28,544 Provision for income taxes 6,157 241 6,398 Net income $ 21,526 $ 620 $ 22,146 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 Benefit 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 September 30, 2022 (In Thousands) Community Banking Home Mortgage Lending Consolidated Total assets $ 2,631,930 $ 85,584 $ 2,717,514 Loans held for sale $ — $ 49,356 $ 49,356 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