NORTHRIM BANCORP INC 10-Q

ITEM 1. FINANCIAL STATEMENTS 2 CONSOLIDATED FINANCIAL STATEMENTS NORTHRIM BANCORP, INC. Consolidated Balance Sheets (Unaudited) September 30, 2023 December 31, 2022 (In Thousands, Except Share Data) ASSETS Cash and due from banks $ 31,276 $ 27,747 Interest bearing deposits in other banks 79,952 231,603 Investment securities available for sale, at fair value 652,150 677,029 Marketable equity securities 10,615 10,740 Investment securities held to maturity, at amortized cost 36,750 36,750 Investment in Federal Home Loan Bank stock 6,334 3,816 Loans held for sale 63,151 27,538 Loans 1,720,091 1,501,785 Allowance for credit losses, loans ( 16,491 ) ( 13,838 ) Net loans 1,703,600 1,487,947 Purchased receivables, net 34,578 19,994 Mortgage servicing rights, at fair value 19,396 18,635 Other real estate owned, net 150 — Premises and equipment, net 40,920 37,821 Operating lease right-of-use assets 9,673 9,868 Goodwill 15,017 15,017 Other intangible assets, net 956 967 Other assets 85,671 68,846 Total assets $ 2,790,189 $ 2,674,318 LIABILITIES Deposits: Demand $ 764,647 $ 797,434 Interest-bearing demand 875,814 767,686 Savings 265,799 320,917 Money market 230,814 308,317 Certificates of deposit less than $250,000 169,797 115,330 Certificates of deposit $250,000 and greater 121,059 77,527 Total deposits 2,427,930 2,387,211 Borrowings 63,781 14,095 Junior subordinated debentures 10,310 10,310 Operating lease liabilities 9,673 9,865 Other liabilities 53,236 34,208 Total liabilities 2,564,930 2,455,689 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, 5,548,436 and 5,700,728 issued and outstanding at September 30, 2023 and December 31, 2022, respectively 5,548 5,701 Additional paid-in capital 12,005 17,784 Retained earnings 232,747 224,225 Accumulated other comprehensive loss, net of tax ( 25,041 ) ( 29,081 ) Total shareholders' equity 225,259 218,629 Total liabilities and shareholders' equity $ 2,790,189 $ 2,674,318 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) 2023 2022 2023 2022 Interest and Dividend Income Interest and fees on loans and loans held for sale $ 29,097 $ 22,130 $ 79,104 $ 60,205 Interest on investment securities available for sale 4,012 2,922 11,942 5,983 Dividends on marketable equity securities 199 161 542 386 Interest on investment securities held to maturity 473 413 1,420 1,038 Dividends on Federal Home Loan Bank stock 43 34 114 90 Interest on deposits in other banks 584 1,899 2,901 2,907 Total Interest and Dividend Income 34,408 27,559 96,023 70,609 Interest Expense Interest expense on deposits 7,138 1,064 17,835 2,238 Interest expense on borrowings 825 88 1,381 260 Interest expense on junior subordinated debentures 95 96 283 284 Total Interest Expense 8,058 1,248 19,499 2,782 Net Interest Income 26,350 26,311 76,524 67,827 Provision (benefit) for credit losses 1,190 ( 353 ) 2,957 ( 40 ) Net Interest Income After Provision (Benefit) for Credit Losses 25,160 26,664 73,567 67,867 Other Operating Income Mortgage banking income 4,405 5,734 10,326 18,616 Purchased receivable income 1,180 561 3,175 1,529 Bankcard fees 1,022 992 2,916 2,723 Service charges on deposit accounts 550 432 1,512 1,208 Unrealized gain (loss) on marketable equity securities 12 33 ( 445 ) ( 1,199 ) Keyman life insurance proceeds — — — 2,002 Other income 833 920 2,406 2,423 Total Other Operating Income 8,002 8,672 19,890 27,302 Other Operating Expense Salaries and other personnel expense 15,657 14,510 46,324 44,017 Data processing expense 2,589 2,315 7,321 6,618 Occupancy expense 1,857 1,710 5,611 5,184 Professional and outside services 803 894 2,326 2,324 Insurance expense 640 545 1,844 1,627 Marketing expense 499 524 1,996 1,763 Intangible asset amortization expense 4 7 11 19 OREO expense, net rental income and gains on sale ( 784 ) 109 ( 766 ) 116 Other operating expense 1,631 1,672 5,521 4,957 Total Other Operating Expense 22,896 22,286 70,188 66,625 Income Before Provision for Income Taxes 10,266 13,050 23,269 28,544 Provision for income taxes 1,892 2,925 4,488 6,398 Net Income $ 8,374 $ 10,125 $ 18,781 $ 22,146 Earnings Per Share, Basic $ 1.50 $ 1.77 $ 3.34 $ 3.82 Earnings Per Share, Diluted $ 1.48 $ 1.76 $ 3.30 $ 3.79 Weighted Average Common Shares Outstanding, Basic 5,569,238 5,681,089 5,630,948 5,790,000 Weighted Average Common Shares Outstanding, Diluted 5,624,906 5,740,494 5,688,687 5,848,625 See notes to consolidated financial statements 4 NORTHRIM BANCORP, INC. Consolidated Statements of Comprehensive Income (Loss) (Unaudited) 2010 Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2023 2022 2023 2022 Net income $ 8,374 $ 10,125 $ 18,781 $ 22,146 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized holding gains (losses) arising during the period $ 1,320 ($ 17,518 ) $ 5,025 ($ 41,535 ) Derivatives and hedging activities: Unrealized holding gains arising during the period 639 684 621 2,438 Income tax benefit related to unrealized (gains) and losses ( 557 ) 4,786 ( 1,606 ) 11,115 Other comprehensive income (loss), net of tax 1,402 ( 12,048 ) 4,040 ( 27,982 ) Comprehensive income (loss) $ 9,776 ($ 1,923 ) $ 22,821 ($ 5,836 ) 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, 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 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 Cash dividend on common stock ($ 0.50 per share) — — — ( 2,869 ) — ( 2,869 ) Stock-based compensation expense — — 174 — — 174 Exercise of stock options and vesting of restricted stock units, net 20 20 ( 297 ) — — ( 277 ) Other comprehensive gain, net of tax — — — — 2,307 2,307 Net income — — — 8,595 — 8,595 Balance as of December 31, 2022 5,701 $ 5,701 $ 17,784 $ 224,225 ($ 29,081 ) $ 218,629 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, 2023 5,701 $ 5,701 $ 17,784 $ 224,225 ($ 29,081 ) $ 218,629 Cash dividend on common stock ($ 0.60 per share) — — — ( 3,444 ) — ( 3,444 ) Stock-based compensation expense — — 140 — — 140 Repurchase of common stock ( 28 ) ( 28 ) ( 1,299 ) — — ( 1,327 ) Other comprehensive gain, net of tax — — — — 5,597 5,597 Net income — — — 4,830 — 4,830 Balance as of March 31, 2023 5,673 $ 5,673 $ 16,625 $ 225,611 ($ 23,484 ) $ 224,425 Cash dividend on common stock ($ 0.60 per share) — — — ( 3,432 ) — ( 3,432 ) Stock-based compensation expense — — 225 — — 225 Repurchase of common stock ( 62 ) ( 62 ) ( 2,439 ) — — ( 2,501 ) Other comprehensive loss, net of tax — — — — ( 2,958 ) ( 2,958 ) Net income — — — 5,577 — 5,577 Balance as of June 30, 2023 5,611 $ 5,611 $ 14,411 $ 227,756 ($ 26,442 ) $ 221,336 Cash dividend on common stock ($ 0.60 per share) — — — ( 3,384 ) — ( 3,384 ) Stock-based compensation expense — — 254 — — 254 Exercise of stock options and vesting of restricted stock units, net — — ( 12 ) — — ( 12 ) Repurchase of common stock ( 63 ) ( 63 ) ( 2,648 ) — — ( 2,711 ) Other comprehensive gain, net of tax — — — — 1,402 1,402 Net income — — — 8,374 — 8,374 Balance as of September 30, 2023 5,548 $ 5,548 $ 12,005 $ 232,746 ($ 25,040 ) $ 225,259 See notes to consolidated financial statements 7 NORTHRIM BANCORP, INC. Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (In Thousands) 2023 2022 Operating Activities: Net income $ 18,781 $ 22,146 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Depreciation and amortization of premises and equipment 2,430 2,361 Amortization of software 865 881 Intangible asset amortization 11 19 Amortization of investment security premium, net of discount accretion 376 496 Unrealized loss on marketable equity securities 445 1,199 Stock-based compensation 619 568 Deferred loan fees and amortization, net of costs ( 324 ) ( 3,570 ) Provision (benefit) for credit losses 2,957 ( 40 ) Additions to home mortgage servicing rights carried at fair value ( 2,440 ) ( 3,378 ) Change in fair value of home mortgage servicing rights carried at fair value 1,679 ( 607 ) Change in fair value of commercial servicing rights carried at fair value 144 123 Gain on sale of loans ( 6,366 ) ( 12,306 ) Proceeds from the sale of loans held for sale 267,165 539,984 Origination of loans held for sale ( 296,412 ) ( 503,384 ) Gain on sale of other real estate owned ( 929 ) — Impairment on other real estate owned 123 — Proceeds from keyman life insurance — ( 2,002 ) Net changes in assets and liabilities: (Increase) in accrued interest receivable ( 3,265 ) ( 1,649 ) Decrease in other assets 1,903 5,123 Increase (Decrease) in other liabilities 1,127 ( 5,123 ) Net Cash (Used) Provided by Operating Activities ( 11,111 ) 40,841 Investing Activities: Investment in securities: Purchases of investment securities available for sale ( 6,000 ) ( 274,263 ) Purchases of marketable equity securities ( 324 ) ( 3,933 ) Purchases of FHLB stock ( 5,441 ) ( 728 ) Purchases of investment securities held to maturity — ( 16,750 ) Proceeds from sales/calls/maturities of securities available for sale 35,528 7,000 Proceeds from redemption of FHLB stock 2,923 15 (Increase) decrease in purchased receivables, net ( 14,584 ) 2,202 (Increase) decrease in loans, net ( 218,121 ) 11,230 Proceeds from sale of other real estate owned 929 — Proceeds from keyman life insurance — 2,002 Purchases of software ( 104 ) ( 14 ) Purchases of premises and equipment ( 5,529 ) ( 2,128 ) Net Cash (Used) by Investing Activities ( 210,723 ) ( 275,367 ) Financing Activities: Increase in deposits 40,719 17,704 Increase (decrease) in borrowings 49,686 ( 309 ) Repurchase of common stock ( 6,539 ) ( 14,157 ) Cash dividends paid ( 10,154 ) ( 7,618 ) Net Cash Provided (Used) by Financing Activities 73,712 ( 4,380 ) Net Change in Cash and Cash Equivalents ( 148,122 ) ( 238,906 ) Cash and Cash Equivalents at Beginning of Period 259,350 645,827 Cash and Cash Equivalents at End of Period $ 111,228 $ 406,921 8 Supplemental Information: Income taxes paid $ 2,031 $ 640 Interest paid $ 18,340 $ 2,678 Noncash commitments to invest in Low Income Housing Tax Credit Partnerships $ 14,273 $ — Transfer of loans to other real estate owned $ 273 $ — Non-cash lease liability arising from obtaining right of use assets $ 423 $ — Cash dividends declared but not paid $ 106 $ 75 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, 2023 are not necessarily indicative of the results anticipated for the year ending December 31, 2023. 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, 2022. 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, 2022. There have been no significant changes in our application of these accounting policies in 2023. 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 implemented in 2023 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. The Company adopted ASU 2022-02 on January 1, 2023. The Company elected to adopt the updated guidance on TDR recognition and measurement prospectively; therefore the guidance is applied to modifications occurring after the date of adoption. The amendments on TDR disclosures and vintage disclosures must be adopted prospectively. The adoption of ASU 2022-02 did not have a material impact on the Company's consolidated financial position or results of operations. Accounting pronouncements to be implemented in future periods In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method ("ASU 2023-02"). Under current GAAP, an entity can only elect to apply the proportional amortization method to investments in low income housing tax credit ("LIHTC") structures. The amendments in ASU 2023-02 allow entities to elect to account for equity investments made primarily for the purpose of receiving income tax credits using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, if certain conditions are met. ASU 2023-02 provides amendments to paragraph ASC 323-740-25-1, which sets forth the conditions needed to apply the proportional amortization 10 method. The amendments make certain limited changes to those conditions to clarify their application to a broader group of tax credit investment programs. However, the conditions in substance remain consistent with current GAAP. The amendments in this ASU 2023-02 also eliminate certain LIHTC-specific guidance to align the accounting more closely for LIHTCs with the accounting for other equity investments in tax credit structures and require that the delayed equity contribution guidance in paragraph ASC 323-740-25-3 applies only to tax equity investments accounted for using the proportional amortization method. ASU 2023-02 is effective for the Company for fiscal years beginning after December 15, 2023 and must be applied on either a modified retrospective or a retrospective basis. The Company does not have any equity investments made primarily for the purpose of receiving income tax credits except for LIHTC structures, which it accounts for using the proportional amortization method. The Company does not believe that the adoption of ASU 2023-02 will have a material impact on the Company's consolidated financial statements. 2. Investment Securities Marketable Equity Securities The Company held marketable equity securities with fair values of $ 10.6 million and $ 10.7 million at September 30, 2023 and December 31, 2022, 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) 2023 2022 2023 2022 Unrealized gain (loss) on marketable equity securities $ 12 $ 33 ($ 445 ) ($ 1,199 ) Gain on sale of marketable equity securities, net — — — — Total $ 12 $ 33 ($ 445 ) ($ 1,199 ) 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, 2023 Securities available for sale U.S. Treasury and government sponsored entities $ 614,215 $ — ($ 35,580 ) $ — $ 578,635 Municipal securities 820 — ( 11 ) — 809 Corporate bonds 14,015 50 ( 587 ) — 13,478 Collateralized loan obligations 60,164 — ( 936 ) — 59,228 Total securities available for sale $ 689,214 $ 50 ($ 37,114 ) $ — $ 652,150 (In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value September 30, 2023 Securities held to maturity Corporate bonds $ 36,750 $ — ($ 4,517 ) $ 32,233 Allowance for credit losses — — — — Total securities held to maturity, net of ACL $ 36,750 $ — ($ 4,517 ) $ 32,233 11 (In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value December 31, 2022 Securities available for sale U.S. Treasury and government sponsored entities $ 634,582 $ 1 ($ 39,422 ) $ — $ 595,161 Municipal securities 820 — ( 25 ) — 795 Corporate bonds 24,281 37 ( 674 ) — 23,644 Collateralized loan obligations 59,434 — ( 2,005 ) — 57,429 Total securities available for sale $ 719,117 $ 38 ($ 42,126 ) $ — $ 677,029 (In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2022 Securities held to maturity Corporate bonds $ 36,750 $ — ($ 4,111 ) $ 32,639 Allowance for credit losses — — — — Total securities held to maturity, net of ACL $ 36,750 $ — ($ 4,111 ) $ 32,639 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, 2023 and December 31, 2022 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, 2023 Securities available for sale U.S. Treasury and government sponsored entities $ 42,827 ($ 658 ) $ 535,809 ($ 34,922 ) $ 578,636 ($ 35,580 ) Corporate bonds — — 6,431 ( 587 ) 6,431 ( 587 ) Collateralized loan obligations 9,874 ( 126 ) 49,354 ( 810 ) 59,228 ( 936 ) Municipal securities — — 809 ( 11 ) 809 ( 11 ) Total $ 52,701 ($ 784 ) $ 592,403 ($ 36,330 ) $ 645,104 ($ 37,114 ) December 31, 2022: Securities available for sale U.S. Treasury and government sponsored entities $ 282,319 ($ 8,876 ) $ 302,840 ($ 30,546 ) $ 585,159 ($ 39,422 ) Corporate bonds 13,216 ( 43 ) 4,394 ( 631 ) 17,610 ( 674 ) Collateralized loan obligations 22,309 ( 632 ) 35,120 ( 1,373 ) 57,429 ( 2,005 ) Municipal securities 795 ( 25 ) — — 795 ( 25 ) Total $ 318,639 ($ 9,576 ) $ 342,354 ($ 32,550 ) $ 660,993 ($ 42,126 ) 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, 2023, the Company had 82 available for sale securities in an unrealized loss position without an ACL. At September 30, 2023, 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 12 approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of September 30, 2023, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, primarily changes in interest rates, and therefore no losses have been recognized in the Company's Consolidated Statements of Income. At September 30, 2023 and December 31, 2022, carrying amounts of $ 168.4 million and $ 59.3 million in securities were pledged for deposits and borrowings, respectively. The amortized cost and estimated fair values of debt securities at September 30, 2023, are distributed by contractual maturity as shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. (In Thousands) Amortized Cost Fair Value US Treasury and government sponsored entities Within 1 year $ 134,494 $ 132,302 1-5 years 479,721 446,333 Total $ 614,215 $ 578,635 Corporate bonds Within 1 year $ 2,000 $ 1,981 1-5 years 22,015 20,836 5-10 years 26,750 25,842 Total $ 50,765 $ 48,659 Collateralized loan obligations 5-10 years $ 29,670 $ 29,450 Over 10 years 30,494 29,778 Total $ 60,164 $ 59,228 Municipal securities Within 1 year $ 820 $ 809 Total $ 820 $ 809 There were no proceeds from sales of investment securities for the three or nine-month periods ending September 30, 2023 and 2022. A summary of interest income for the three and nine-month periods ending September 30, 2023 and 2022, on available for sale investment securities are as follows: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2023 2022 2023 2022 US Treasury and government sponsored entities $ 2,794 $ 2,137 $ 8,424 $ 4,375 Other 1,214 781 3,505 1,595 Total taxable interest income $ 4,008 $ 2,918 $ 11,929 $ 5,970 Municipal securities $ 4 $ 4 $ 13 $ 13 Total tax-exempt interest income $ 4 $ 4 $ 13 $ 13 Total $ 4,012 $ 2,922 $ 11,942 $ 5,983 13 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, 2023 and December 31, 2022. Loans Held for Investment The following table presents amortized cost and unpaid principal balance of loans, categorized by the segments used in the Company's Current Expected Credit Losses (“CECL”) methodology to assess credit risk, for the periods indicated: September 30, 2023 December 31, 2022 (In Thousands) Amortized Cost Unpaid Principal Difference Amortized Cost Unpaid Principal Difference Commercial & industrial loans $ 415,898 $ 417,695 ($ 1,797 ) $ 358,128 $ 359,900 ($ 1,772 ) Commercial real estate: Owner occupied properties 357,455 359,019 ( 1,564 ) 349,973 351,580 ( 1,607 ) Non-owner occupied and multifamily properties 506,256 509,939 ( 3,683 ) 482,270 486,021 ( 3,751 ) Residential real estate: 1-4 family residential properties secured by first liens 180,849 180,719 130 73,381 73,674 ( 293 ) 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 27,535 27,342 193 20,259 20,103 156 1-4 family residential construction loans 32,185 32,374 ( 189 ) 44,000 44,314 ( 314 ) Other construction, land development and raw land loans 119,716 120,909 ( 1,193 ) 99,182 100,075 ( 893 ) Obligations of states and political subdivisions in the US 30,463 30,465 ( 2 ) 32,539 32,540 ( 1 ) Agricultural production, including commercial fishing 40,923 41,143 ( 220 ) 34,099 34,263 ( 164 ) Consumer loans 5,986 5,930 56 4,335 4,293 42 Other loans 2,825 2,842 ( 17 ) 3,619 3,632 ( 13 ) Total 1,720,091 1,728,377 ( 8,286 ) 1,501,785 1,510,395 ( 8,610 ) Allowance for credit losses ( 16,491 ) ( 13,838 ) $ 1,703,600 $ 1,728,377 ($ 8,286 ) $ 1,487,947 $ 1,510,395 ($ 8,610 ) The difference between the amortized cost and unpaid principal balance is net deferred origination fees totaling $ 8.3 million at September 30, 2023 and $ 8.6 million at December 31, 2022. Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 8.0 million and $ 5.5 million at September 30, 2023 and December 31, 2022, respectively, and is included in other assets in the Consolidated Balance Sheets. Amortized cost in the above table includes $ 3.2 million and $ 7.1 million as of September 30, 2023 and December 31, 2022, respectively, in Paycheck Protection Program loans administered by the U.S. Small Business Administration ("SBA") within the Commercial & industrial loan segment. 14 Allowance for Credit Losses The table below presents activity in the ACL related to loans held for investment for the periods indicated. The ACL for loans held for investment increased $ 2.7 million from December 31, 2022 primarily due to higher non-government guaranteed loan balances as well as a decrease in estimated prepayment rates in the Company's discounted cash flow model given the current economic environment. These changes were only partially offset by a decrease in the Company's forecasted future unemployment rates. Three Months Ended September 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2023 Commercial & industrial loans $ 3,418 ($ 55 ) ($ 91 ) $ 181 $ 3,453 Commercial real estate: Owner occupied properties 2,807 ( 15 ) — — 2,792 Non-owner occupied and multifamily properties 3,260 ( 36 ) — — 3,224 Residential real estate: 1-4 family residential properties secured by first liens 3,206 334 — — 3,540 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 423 78 — 5 506 1-4 family residential construction loans 206 ( 31 ) — — 175 Other construction, land development and raw land loans 1,996 480 — — 2,476 Obligations of states and political subdivisions in the US 88 ( 11 ) — — 77 Agricultural production, including commercial fishing 162 2 — — 164 Consumer loans 74 4 — 1 79 Other loans 5 — — — 5 Total $ 15,645 $ 750 ($ 91 ) $ 187 $ 16,491 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 15 Nine Months Ended September 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance (In Thousands) 2023 Commercial & industrial loans $ 2,914 $ 412 ($ 140 ) $ 267 $ 3,453 Commercial real estate: Owner occupied properties 3,094 ( 302 ) — — 2,792 Non-owner occupied and multifamily properties 3,615 ( 391 ) — — 3,224 Residential real estate: 1-4 family residential properties secured by first liens 1,413 2,127 — — 3,540 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 389 100 — 17 506 1-4 family residential construction loans 312 ( 137 ) — — 175 Other construction, land development and raw land loans 1,803 673 — — 2,476 Obligations of states and political subdivisions in the US 79 ( 2 ) — — 77 Agricultural production, including commercial fishing 145 19 — — 164 Consumer loans 68 21 ( 14 ) 4 79 Other loans 6 ( 1 ) — — 5 Total $ 13,838 $ 2,519 ($ 154 ) $ 288 $ 16,491 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 16 The following table shows gross charge-offs by grade and by year of loan origination for the periods indicated: Nine Months Ended September 30, (In Thousands) 2023 2022 2021 2020 2019 Prior Total 2023 Commercial & industrial loans $ — $ — $ 49 $ — $ — $ 91 $ 140 Consumer loans — 1 — — — 13 14 Total $ — $ 1 $ 49 $ — $ — $ 104 $ 154 Credit Quality Information As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management utilizes a loan risk grading system called the Asset Quality Rating (“AQR”) system to assign a risk classification to each of its loans. The risk classification is a dual rating system that contemplates both probability of default and risk of loss given default. Loans are graded on a scale of 1 to 10 and, loans graded 1 – 6 are considered “pass” grade loans. Loans graded 7 or higher are considered “classified” loans. A description of the general characteristics of the AQR risk classifications are as follows: Pass grade loans – 1 through 6: The borrower demonstrates sufficient cash flow to fund debt service, including acceptable profit margins, cash flows, liquidity and other balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The 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, 2023 2023 2022 2021 2020 2019 Prior Total (In Thousands) Commercial & industrial loans Pass $ 96,467 $ 123,831 $ 58,372 $ 24,947 $ 14,227 $ 48,281 $ 366,125 Classified 3,916 18,880 17,231 7,235 65 2,446 49,773 Total commercial & industrial loans $ 100,383 $ 142,711 $ 75,603 $ 32,182 $ 14,292 $ 50,727 $ 415,898 Commercial real estate: Owner occupied properties Pass $ 26,585 $ 68,242 $ 72,939 $ 83,211 $ 30,245 $ 73,253 $ 354,475 17 Classified — — — 1,152 — 1,828 2,980 Total commercial real estate owner occupied properties $ 26,585 $ 68,242 $ 72,939 $ 84,363 $ 30,245 $ 75,081 $ 357,455 Non-owner occupied and multifamily properties Pass $ 38,234 $ 95,181 $ 83,998 $ 69,550 $ 56,536 $ 153,324 $ 496,823 Classified — — — — — 9,433 9,433 Total commercial real estate non-owner occupied and multifamily properties $ 38,234 $ 95,181 $ 83,998 $ 69,550 $ 56,536 $ 162,757 $ 506,256 Residential real estate: 1-4 family residential properties secured by first liens Pass $ 114,314 $ 48,278 $ 5,120 $ 4,736 $ 2,434 $ 5,835 $ 180,717 Classified — — — — — 132 132 Total residential real estate 1-4 family residential properties secured by first liens $ 114,314 $ 48,278 $ 5,120 $ 4,736 $ 2,434 $ 5,967 $ 180,849 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens Pass $ 10,648 $ 5,283 $ 2,446 $ 1,452 $ 2,324 $ 5,053 $ 27,206 Classified — — — — — 329 329 Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $ 10,648 $ 5,283 $ 2,446 $ 1,452 $ 2,324 $ 5,382 $ 27,535 1-4 family residential construction loans Pass $ 16,057 $ 6,205 $ 1,118 $ 21 $ — $ 8,675 $ 32,076 Classified — — — — — 109 109 Total residential real estate 1-4 family residential construction loans $ 16,057 $ 6,205 $ 1,118 $ 21 $ — $ 8,784 $ 32,185 Other construction, land development and raw land loans Pass $ 18,172 $ 53,412 $ 33,797 $ 3,186 $ 1,479 $ 7,897 $ 117,943 Classified — — — — — 1,773 1,773 Total other construction, land development and raw land loans $ 18,172 $ 53,412 $ 33,797 $ 3,186 $ 1,479 $ 9,670 $ 119,716 Obligations of states and political subdivisions in the US Pass $ — $ 30,341 $ — $ — $ — $ 122 $ 30,463 Classified — — — — — — — Total obligations of states and political subdivisions in the US $ — $ 30,341 $ — $ — $ — $ 122 $ 30,463 Agricultural production, including commercial fishing Pass $ 7,842 $ 9,892 $ 17,095 $ 3,567 $ 589 $ 1,938 $ 40,923 Classified — — — — — — — Total agricultural production, including commercial fishing $ 7,842 $ 9,892 $ 17,095 $ 3,567 $ 589 $ 1,938 $ 40,923 Consumer loans Pass $ 2,791 $ 1,094 $ 282 $ 394 $ 279 $ 1,133 $ 5,973 Classified — 13 — — — — 13 Total consumer loans $ 2,791 $ 1,107 $ 282 $ 394 $ 279 $ 1,133 $ 5,986 Other loans Pass $ 590 $ 190 $ 313 $ 1,379 $ 331 $ 22 $ 2,825 Classified — — — — — — — Total other loans $ 590 $ 190 $ 313 $ 1,379 $ 331 $ 22 $ 2,825 Total loans Pass $ 331,700 $ 441,949 $ 275,480 $ 192,443 $ 108,444 $ 305,533 $ 1,655,549 Classified 3,916 18,893 17,231 8,387 65 16,050 64,542 Total loans $ 335,616 $ 460,842 $ 292,711 $ 200,830 $ 108,509 $ 321,583 $ 1,720,091 Total pass loans $ 331,700 $ 441,949 $ 275,480 $ 192,443 $ 108,444 $ 305,533 $ 1,655,549 Government guarantees ( 842 ) ( 8,194 ) ( 19,164 ) ( 2,469 ) ( 12,321 ) ( 7,726 ) ( 50,716 ) Total pass loans, net of government guarantees $ 330,858 $ 433,755 $ 256,316 $ 189,974 $ 96,123 $ 297,807 $ 1,604,833 18 Total classified loans $ 3,916 $ 18,893 $ 17,231 $ 8,387 $ 65 $ 16,050 $ 64,542 Government guarantees ( 3,849 ) ( 16,896 ) ( 15,331 ) ( 7,259 ) — ( 8,500 ) ( 51,835 ) Total classified loans, net government guarantees $ 67 $ 1,997 $ 1,900 $ 1,128 $ 65 $ 7,550 $ 12,707 December 31, 2022 2022 2021 2020 2019 2018 Prior Total (In Thousands) Commercial & industrial loans Pass $ 157,555 $ 86,543 $ 37,147 $ 17,881 $ 9,844 $ 40,571 $ 349,541 Classified 137 4,879 397 91 2,737 346 8,587 Total commercial & industrial loans $ 157,692 $ 91,422 $ 37,544 $ 17,972 $ 12,581 $ 40,917 $ 358,128 Commercial real estate: Owner occupied properties Pass $ 66,955 $ 70,777 $ 90,496 $ 32,564 $ 13,233 $ 69,701 $ 343,726 Classified — — 1,261 — 165 4,821 6,247 Total commercial real estate owner occupied properties $ 66,955 $ 70,777 $ 91,757 $ 32,564 $ 13,398 $ 74,522 $ 349,973 Non-owner occupied and multifamily properties Pass $ 94,412 $ 82,352 $ 71,407 $ 58,033 $ 16,905 $ 149,223 $ 472,332 Classified — — — 274 3 9,661 9,938 Total commercial real estate non-owner occupied and multifamily properties $ 94,412 $ 82,352 $ 71,407 $ 58,307 $ 16,908 $ 158,884 $ 482,270 Residential real estate: 1-4 family residential properties secured by first liens Pass $ 52,117 $ 5,088 $ 6,001 $ 2,535 $ 462 $ 6,968 $ 73,171 Classified — — — — 79 131 210 Total residential real estate 1-4 family residential properties secured by first liens $ 52,117 $ 5,088 $ 6,001 $ 2,535 $ 541 $ 7,099 $ 73,381 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens Pass $ 6,992 $ 3,376 $ 2,041 $ 2,763 $ 2,781 $ 2,060 $ 20,013 Classified — — — 239 7 246 Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $ 6,992 $ 3,376 $ 2,041 $ 2,763 $ 3,020 $ 2,067 $ 20,259 1-4 family residential construction loans Pass $ 26,860 $ 3,897 $ 61 $ — $ — $ 13,073 $ 43,891 Classified — — — — — 109 109 Total residential real estate 1-4 family residential construction loans $ 26,860 $ 3,897 $ 61 $ — $ — $ 13,182 $ 44,000 Other construction, land development and raw land loans Pass $ 38,673 $ 42,448 $ 5,740 $ 1,713 $ 3,675 $ 5,112 $ 97,361 Classified — — — — 369 1,452 1,821 Total other construction, land development and raw land loans $ 38,673 $ 42,448 $ 5,740 $ 1,713 $ 4,044 $ 6,564 $ 99,182 Obligations of states and political subdivisions in the US Pass $ 32,319 $ — $ — $ — $ 219 $ 1 $ 32,539 Classified — — — — — — — Total obligations of states and political subdivisions in the US $ 32,319 $ — $ — $ — $ 219 $ 1 $ 32,539 Agricultural production, including commercial fishing Pass $ 9,748 $ 17,692 $ 3,740 $ 604 $ 879 $ 1,436 $ 34,099 Classified — — — — — — — Total agricultural production, including commercial fishing $ 9,748 $ 17,692 $ 3,740 $ 604 $ 879 $ 1,436 $ 34,099 Consumer loans Pass $ 1,513 $ 363 $ 481 $ 345 $ 235 $ 1,391 $ 4,328 19 Classified — — — — — 7 7 Total consumer loans $ 1,513 $ 363 $ 481 $ 345 $ 235 $ 1,398 $ 4,335 Other loans Pass $ 1,291 $ 330 $ 1,547 $ 384 $ — $ 67 $ 3,619 Classified — — — — — — — Total other loans $ 1,291 $ 330 $ 1,547 $ 384 $ — $ 67 $ 3,619 Total loans Pass $ 488,435 $ 312,866 $ 218,661 $ 116,822 $ 48,233 $ 289,603 $ 1,474,620 Classified 137 4,879 1,658 365 3,592 16,534 27,165 Total loans $ 488,572 $ 317,745 $ 220,319 $ 117,187 $ 51,825 $ 306,137 $ 1,501,785 Total pass loans $ 488,435 $ 312,866 $ 218,661 $ 116,822 $ 48,233 $ 289,603 $ 1,474,620 Government guarantees ( 25,172 ) ( 36,531 ) ( 9,751 ) ( 12,885 ) ( 2,964 ) ( 5,314 ) ( 92,617 ) Total pass loans, net of government guarantees $ 463,263 $ 276,335 $ 208,910 $ 103,937 $ 45,269 $ 284,289 $ 1,382,003 Total classified loans $ 137 $ 4,879 $ 1,658 $ 365 $ 3,592 $ 16,534 $ 27,165 Government guarantees — ( 4,396 ) ( 1,135 ) — — ( 9,293 ) ( 14,824 ) Total classified loans, net government guarantees $ 137 $ 483 $ 523 $ 365 $ 3,592 $ 7,241 $ 12,341 20 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, 2023 Commercial & industrial loans $ 3,748 $ — $ 297 $ 4,045 $ 411,853 $ 415,898 $ — Commercial real estate: Owner occupied properties — — 271 271 357,184 357,455 — Non-owner occupied and multifamily properties 380 — — 380 505,876 506,256 — Residential real estate: 1-4 family residential properties secured by first liens — — 28 28 180,821 180,849 28 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — — 159 159 27,376 27,535 — 1-4 family residential construction loans — — 109 109 32,076 32,185 — Other construction, land development and raw land loans — 1,545 1,545 118,171 119,716 — Obligations of states and political subdivisions in the US — — — — 30,463 30,463 — Agricultural production, including commercial fishing — — — — 40,923 40,923 — Consumer loans — 13 — 13 5,973 5,986 — Other loans — — — — 2,825 2,825 — Total $ 4,128 $ 13 $ 2,409 $ 6,550 $ 1,713,541 $ 1,720,091 $ 28 December 31, 2022 Commercial & industrial loans $ 37 $ 521 $ 56 $ 614 $ 357,514 $ 358,128 $ — Commercial real estate: Owner occupied properties — — 798 798 349,175 349,973 — Non-owner occupied and multifamily properties — — 274 274 481,996 482,270 — Residential real estate: 1-4 family residential properties secured by first liens 60 79 72 211 73,170 73,381 — 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 112 — 127 239 20,020 20,259 — 1-4 family residential construction loans — — 109 109 43,891 44,000 — Other construction, land development and raw land loans — — 1,545 1,545 97,637 99,182 — Obligations of states and political subdivisions in the US — — — — 32,539 32,539 — Agricultural production, including commercial fishing — — — — 34,099 34,099 — Consumer loans 6 80 — 86 4,249 4,335 — Other loans — — — — 3,619 3,619 — Total $ 215 $ 680 $ 2,981 $ 3,876 $ 1,497,909 $ 1,501,785 $ — 21 Nonaccrual loans: Nonaccrual loans net of government guarantees totaled $ 5.0 million and $ 6.4 million at September 30, 2023 and December 31, 2022, respectively. The following table presents loans on nonaccrual status and loans on nonaccrual 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 CECL methodology. September 30, 2023 December 31, 2022 (In Thousands) Nonaccrual Nonaccrual With No ACL Nonaccrual Nonaccrual With No ACL Commercial & industrial loans $ 4,254 $ 4,056 $ 3,294 $ 3,287 Commercial real estate: Owner occupied properties 306 271 1,457 1,457 Non-owner occupied and multifamily properties — — 274 274 Residential real estate: 1-4 family residential properties secured by first liens 53 — 151 144 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 225 119 246 198 1-4 family residential construction loans 109 109 109 109 Other construction, land development and raw land loans 1,545 1,545 1,545 1,545 Total nonaccrual loans 6,492 6,100 7,076 7,014 Government guarantees on nonaccrual loans ( 1,455 ) ( 1,455 ) ( 646 ) ( 646 ) Net nonaccrual loans $ 5,037 $ 4,645 $ 6,430 $ 6,368 There was no interest on nonaccrual loans reversed through interest income during three and nine-month periods ending September 30, 2023. There was no interest on nonaccrual loans reversed through interest income during the three-month period ending September 30, 2022 and $ 2,000 interest on nonaccrual loans reversed through interest income during the nine-month period ending September 30, 2022. There was no interest earned on nonaccrual loans with a principal balance during the three and nine-month periods ending September 30, 2023 and September 30, 2022. However, the Company recognized interest income of $ 200,000 and $ 1.2 million in the three-month periods ending September 30, 2023 and 2022, respectively, and $ 584,000 and $ 2.1 million in the nine-month periods ending September 30, 2023 and 2022, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero. Loan Modifications: The Company modifies loans to borrowers experiencing financial difficulty as a normal part of our business. These modifications include providing term extensions/modifications, payment modifications, interest rate modifications, or, on rare occasions, principal forgiveness. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL. The Company may provide multiple types of concessions on one loan. As discussed in Note 1, the Company adopted ASU 2022-02 effective January 1, 2023. ASU 2022-02 eliminates the accounting guidance for loans classified as TDRs. TDRs totaled $ 5.1 million at December 31, 2022. The following table shows the amortized cost basis of the loans that were both experiencing financial difficulty and modified as of the dates indicated, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below: 22 Three Months Ended September 30, 2023 Term Modification Term and payment modifications Total Modifications Percentage of Class of Financing Receivable (In Thousands) Commercial real estate: Owner occupied properties $ — $ 271 $ 271 0.08 % Residential real estate: 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 119 — 119 0.43 % 1-4 family residential construction loans 109 — 109 0.34 % Other construction, land development and raw land loans 968 577 1,545 1.29 % Total $ 1,196 $ 848 $ 2,044 0.12 % Nine Months Ended September 30, 2023 Term Modification Payment Modification Term and payment modifications Total Modifications Percentage of Class of Financing Receivable (In Thousands) Commercial & industrial loans $ 1,511 $ 1,985 $ — $ 3,496 0.84 % Commercial real estate: Owner occupied properties — — 271 271 0.08 % Residential real estate: 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 119 — — 119 0.43 % 1-4 family residential construction loans 109 — — 109 0.34 % Other construction, land development and raw land loans 968 — 577 1,545 1.29 % Total $ 2,707 $ 1,985 $ 848 $ 5,540 0.32 % The Company has no outstanding commitments to the borrowers included in the previous table. The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty as of the dates indicated: Three Months Ended September 30, 2023 Principal Forgiveness Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (months) (In Thousands) Commercial real estate: Owner occupied properties — — % 5 Residential real estate: 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — — % 5 1-4 family residential construction loans — — % 5 Other construction, land development and raw land loans — — % 5 23 Nine Months Ended September 30, 2023 Principal Forgiveness Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (months) (In Thousands) Commercial & industrial loans $ — — % 20 Commercial real estate: Owner occupied properties — — % 5 Residential real estate: 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — — % 5 1-4 family residential construction loans — — % 5 Other construction, land development and raw land loans — — % 5 The Company monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the payment performance of such loans as of the dates indicated: September 30, 2023 30-59 Days Past Due 60-89 Days Past Due Greater Than 89 Days Past Due Total Past Due (In Thousands) Commercial real estate: Owner occupied properties $ — $ — $ 271 $ 271 Residential real estate: 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — — 119 119 1-4 family residential construction loans — — 109 109 Other construction, land development and raw land loans — — 1,545 1,545 Total $ — $ — $ 2,044 $ 2,044 The following table presents the amortized cost basis of loans that had a payment default during the three-months ended September 30, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty: September 30, 2023 Term modification Term and payment modification (In Thousands) Commercial real estate: Owner occupied properties $ — $ 271 Residential real estate: 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 119 — 1-4 family residential construction loans 109 — Other construction, land development and raw land loans 968 577 Total $ 1,196 $ 848 Upon the Company's determination that a modified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. 24 The provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company has elected to adopt these provisions of the CARES Act. As of September 30, 2023, the Company has no loan modifications related to COVID-19, which are not classified as TDRs. At December 31, 2022, the Company had made the following types of loan modifications related to COVID-19 with a principal balance outstanding of: Loan Modifications due to COVID-19 as of December 31, 2022 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans $ 999 $ — $ 999 Number of modifications 1 — 1 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, 2023 or December 31, 2022, and there were no restructured purchased receivables at September 30, 2023 or December 31, 2022. 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, 2023 or December 31, 2022. There was no activity and no balance in the ACL for purchased receivables as of September 30, 2023 or December 31, 2022. The following table summarizes the components of net purchased receivables for the dates indicated: (In Thousands) September 30, 2023 December 31, 2022 Purchased receivables $ 34,578 $ 19,994 Allowance for credit losses - purchased receivables — — Total $ 34,578 $ 19,994 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, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2023 2022 2023 2022 Balance, beginning of period $ 18,248 $ 16,301 $ 18,635 $ 13,724 Additions for new MSR capitalized 1,458 1,263 2,440 3,378 Changes in fair value: Due to changes in model inputs of assumptions (1) — 555 ( 215 ) 1,522 Other (2) ( 310 ) ( 410 ) ( 1,464 ) ( 915 ) Balance, end of period $ 19,396 $ 17,709 $ 19,396 $ 17,709 25 (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, 2023 and December 31, 2022: (In Thousands) September 30, 2023 December 31, 2022 Balance of mortgage loans serviced for others $ 982,098 $ 898,840 Weighted average rate of note 3.82 % 3.47 % MSR as a percentage of serviced loans 1.97 % 2.07 % The Company recognized servicing fees of $ 937,000 and $ 858,000 during the three-month periods ending September 30, 2023 and 2022, respectively, and $ 2.7 million and $ 2.4 million during the nine-month periods ending September 30, 2023 and 2022, 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 MSRs and the sensitivity of the current fair value of MSRs to immediate adverse changes in those assumptions as of the dates indicated. See Note 8 for additional information on key assumptions for MSRs. (In Thousands) September 30, 2023 December 31, 2022 Fair value of MSRs $ 19,396 $ 18,635 Expected weighted-average life (in years) 10.82 9.46 Key assumptions: Constant prepayment rate 1 7.88 % 6.64 % Impact on fair value from 10% adverse change ($ 536 ) ($ 518 ) Impact on fair value from 25% adverse change ($ 984 ) ($ 1,233 ) Discount rate 10.97 % 11.25 % Impact on fair value from 100 basis point increase ($ 821 ) ($ 635 ) Impact on fair value from 200 basis point increase ($ 1,579 ) ($ 1,224 ) Cost to service assumptions ($ per loan) $ 82 $ 91 Impact on fair value from 10% adverse change ($ 156 ) ($ 153 ) Impact on fair value from 25% adverse change ($ 389 ) ($ 382 ) 1 Prepayment speeds are influenced by mortgage interest rates as well as our estimation of drivers of borrower behavior. These sensitivities in the preceding table are hypothetical and caution should be exercised when relying on this data. Changes in value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in the value may not be linear. Also, the effect of a variation in a particular assumption on the value of the MSR held is calculated independently without changing any other assumptions. In reality, changes in one factor may result in changes in others, which might magnify or counteract the sensitivities. Commercial servicing rights The commercial servicing rights asset ("CSR") has a carrying value of $ 2.1 million at September 30, 2023 and December 31, 2022, respectively, and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets. Total commercial loans serviced for others were $ 283.7 million and $ 285.3 million at September 30, 2023 and December 31, 2022, respectively. Key assumptions used in measuring the fair value of the CSR as of September 30, 2023 and December 31, 2022 include a constant prepayment rate of 10.19 % and a discount rate of 12.00 %. 26 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, 2023, the Company has operating lease ROU assets of $ 9.7 million and operating lease liabilities of $ 9.7 million. As of December 31, 2022, the Company had operating lease ROU assets of $ 9.9 million and operating lease liabilities of $ 9.9 million. The Company did not have any agreements that are classified as finance leases as of September 30, 2023 or December 31, 2022. The following table presents additional information about the Company's operating leases for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2023 2022 2023 2022 Lease Cost Operating lease cost (1) $ 708 $ 693 $ 2,109 $ 2,046 Short term lease cost (1) 36 9 115 26 Total lease cost $ 744 $ 702 $ 2,224 $ 2,072 Other information Operating leases - operating cash flows $ 1,966 $ 1,901 Weighted average lease term - operating leases, in years 10.23 10.39 Weighted average discount rate - operating leases 3.54 % 3.28 % (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 2023 (Three months) $ 662 2024 2,637 2025 2,285 2026 1,130 2027 731 Thereafter 4,418 Total minimum lease payments $ 11,863 Less: amount of lease payment representing interest ( 2,190 ) Present value of future minimum lease payments $ 9,673 27 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 $ 552,000 as of September 30, 2023 and $ 553,000 as of December 31, 2022, 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 $ 219.8 million and $ 226.2 million at September 30, 2023 and December 31, 2022, respectively. At September 30, 2023, the notional amount of interest rate swaps is made up of 20 variable to fixed rate swaps to commercial loan customers totaling $ 109.9 million, and 20 fixed to variable rate swaps with a counterparty totaling $ 109.9 million. Changes in fair value from these 20 interest rate swaps offset each other in the first nine months of 2023. The Company recognized no fee income related to interest rate swaps in the three-month periods ending September 30, 2023 and 2022, respectively, and $ 61,000 and $ 90,000 in fee income related to interest rate swaps in the nine-month periods ending September 30, 2023 and 2022, 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. As of September 30, 2023, the floating rate that the dealer pays is equal to the three month Secured Overnight Financing Rate, also known as SOFR, plus 1.63 % which reprices quarterly on the payment date. This rate was 7.04 % as of September 30, 2023. 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, 2023 and $ 130,000 as of December 31, 2022. 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, net of tax on this interest rate swap was $ 1.5 million as of September 30, 2023 and the unrealized gain, net of tax was $ 1.0 million as of December 31, 2022. 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 $ 50.1 million and $ 29.1 million at September 30, 2023 and December 31, 2022, 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. 28 The following table presents the fair value of derivatives not designated as hedging instruments at September 30, 2023 and December 31, 2022: (In Thousands) Asset Derivatives September 30, 2023 December 31, 2022 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other assets $ 15,797 $ 12,725 Interest rate lock commitments Other assets 518 440 Retail interest rate contracts Other assets 145 — Total $ 16,460 $ 13,165 (In Thousands) Liability Derivatives September 30, 2023 December 31, 2022 Balance Sheet Location Fair Value Fair Value Interest rate swaps Other liabilities $ 15,797 $ 12,725 Retail interest rate contracts Other liabilities — 3 Total $ 15,797 $ 12,728 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 2023 2022 2023 2022 Retail interest rate contracts Mortgage banking income $ 84 $ 1,347 $ 375 $ 4,297 Interest rate lock commitments Mortgage banking income ( 312 ) ( 1,365 ) 46 ( 1,016 ) Total ($ 228 ) ($ 18 ) $ 421 $ 3,281 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. 29 The following table summarizes the derivatives that have a right of offset as of September 30, 2023 and December 31, 2022: September 30, 2023 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 $ 15,797 $ — $ 15,797 $ — $ — $ 15,797 Retail interest rate contracts 145 — 145 — — 145 Liability Derivatives Interest rate swaps $ 15,797 $ — $ 15,797 $ — $ 15,797 $ — December 31, 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 $ 12,725 $ — $ 12,725 $ — $ — $ 12,725 Liability Derivatives Interest rate swaps $ 12,725 $ — $ 12,725 $ — $ 12,725 $ — Retail interest rate contracts 3 — 3 — — 3 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 30 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, 2023, 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. 31 Estimated fair values as of the periods indicated are as follows: September 30, 2023 December 31, 2022 (In Thousands) Carrying Amount Fair Value Carrying Amount Fair Value Financial assets: Level 1 inputs: Cash, due from banks and deposits in other banks $ 111,228 $ 111,228 $ 259,350 $ 259,350 Investment securities available for sale 327,468 327,468 356,837 356,837 Marketable equity securities 10,615 10,615 10,740 10,740 Level 2 inputs: Investment securities available for sale 324,682 324,682 320,192 320,192 Investment in Federal Home Loan Bank stock 6,334 6,334 3,816 3,816 Loans held for sale 63,151 63,151 27,538 27,538 Interest rate swaps 17,279 17,279 14,179 14,179 Retail interest rate contracts 145 145 — — Level 3 inputs: Investment securities held to maturity 36,750 32,233 36,750 32,639 Loans 1,720,091 1,594,495 1,501,785 1,408,350 Purchased receivables, net 34,578 34,578 19,994 19,994 Interest rate lock commitments 518 518 440 440 Mortgage servicing rights 19,396 19,396 18,635 18,635 Commercial servicing rights 2,118 2,118 2,129 2,129 Financial liabilities: Level 2 inputs: Deposits $ 2,427,930 $ 2,424,081 $ 2,387,211 $ 2,383,975 Borrowings 63,781 61,374 14,095 12,382 Interest rate swaps 15,797 15,797 12,725 12,725 Retail interest rate contracts — — 3 3 Level 3 inputs: Junior subordinated debentures 10,310 11,391 10,310 11,266 32 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, 2023 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 578,635 $ 313,990 $ 264,645 $ — Municipal securities 809 — 809 — Corporate bonds 13,478 13,478 — — Collateralized loan obligations 59,228 — 59,228 — Total available for sale securities $ 652,150 $ 327,468 $ 324,682 $ — Marketable equity securities $ 10,615 $ 10,615 $ — $ — Total marketable equity securities $ 10,615 $ 10,615 $ — $ — Interest rate swaps $ 17,872 $ — $ 17,872 $ — Interest rate lock commitments 518 — — 518 Mortgage servicing rights 19,396 — — 19,396 Commercial servicing rights 2,118 — — 2,118 Retail interest rate contracts 145 — 145 — Total other assets $ 40,049 $ — $ 18,017 $ 22,032 Liabilities: Interest rate swaps $ 15,797 $ — $ 15,797 $ — Total other liabilities $ 15,797 $ — $ 15,797 $ — December 31, 2022 Assets: Available for sale securities U.S. Treasury and government sponsored entities $ 595,161 $ 333,193 $ 261,968 $ — Municipal securities 795 — 795 — Corporate bonds 23,644 23,644 — — Collateralized loan obligations 57,429 — 57,429 — Total available for sale securities $ 677,029 $ 356,837 $ 320,192 $ — Marketable equity securities $ 10,740 $ 10,740 $ — $ — Total marketable securities $ 10,740 $ 10,740 $ — $ — Interest rate swaps $ 14,178 $ — $ 14,178 $ — Interest rate lock commitments 440 — — 440 Mortgage servicing rights 18,635 — — 18,635 Commercial servicing rights 2,129 — — 2,129 Total other assets $ 35,382 $ — $ 14,178 $ 21,204 Liabilities: Interest rate swaps $ 12,725 $ — $ 12,725 $ — Retail interest rate contracts 3 — 3 — Total other liabilities $ 12,728 $ — $ 12,728 $ — 33 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, 2023 and 2022: (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, 2023 Interest rate lock commitments $ 851 ($ 267 ) $ 2,021 ($ 2,087 ) $ 518 $ 518 Mortgage servicing rights 18,248 ( 310 ) 1,458 — 19,396 — Commercial servicing rights 2,139 ( 39 ) 18 — 2,118 — Total $ 21,238 ($ 616 ) $ 3,497 ($ 2,087 ) $ 22,032 $ 518 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 (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, 2023 Interest rate lock commitments $ 440 ($ 819 ) $ 6,253 ($ 5,356 ) $ 518 $ 518 Mortgage servicing rights 18,635 ( 1,679 ) 2,440 — 19,396 — Commercial servicing rights 2,129 ( 144 ) 133 — 2,118 — Total $ 21,204 ($ 2,642 ) $ 8,826 ($ 5,356 ) $ 22,032 $ 518 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 There were no changes in unrealized gains and losses for the three and nine-month periods ending September 30, 2023 and 2022 included in other comprehensive income for recurring Level 3 fair value measurements. As of and for the periods ending September 30, 2023 and December 31, 2022, except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis. For loans 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. 34 (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, 2023 Other real estate owned $ 150 $ — $ 150 $ — Total $ 150 $ — $ 150 $ — December 31, 2022 Loans individually measured for credit losses $ — $ — $ — $ — Total $ — $ — $ — $ — The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three and nine-month periods ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, (In Thousands) 2023 2022 2023 2022 Other real estate owned $ 123 $ — $ 123 $ — Total loss from nonrecurring measurements $ 123 $ — $ 123 $ — Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3) The following tables provide 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, 2023 and December 31, 2022: Financial Instrument Valuation Technique - Recurring Basis Unobservable Input Weighted Average Rate Range September 30, 2023 Interest rate lock commitment External pricing model Pull through rate 93.62 % Mortgage servicing rights Discounted cash flow Constant prepayment rate 7.48 % - 15.13 % Discount rate 9.50 % - 11.00 % Commercial servicing rights Discounted cash flow Constant prepayment rate 4.19 % - 22.87 % Discount rate 12.00 % December 31, 2022 Interest rate lock commitment External pricing model Pull through rate 93.18 % Mortgage servicing rights Discounted cash flow Constant prepayment rate 6.62 % - 7.43 % Discount rate 11.25 % Commercial servicing rights Discounted cash flow Constant prepayment rate 4.19 % - 22.87 % Discount rate 12.00 % Financial Instrument Valuation Technique - Nonrecurring Basis Unobservable Input Weighted Average Rate Range September 30, 2023 Other real estate owned Fair value of collateral Estimated capital costs to complete improvements 45 % 35 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, 2023, the Community Banking segment operated 19 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, 2023 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 31,341 $ 3,067 $ 34,408 Interest expense 7,291 767 8,058 Net interest income 24,050 2,300 26,350 Provision for credit losses 1,190 — 1,190 Other operating income 3,597 4,405 8,002 Other operating expense 16,945 5,951 22,896 Income before provision for income taxes 9,512 754 10,266 Provision for income taxes 1,710 182 1,892 Net income $ 7,802 $ 572 $ 8,374 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 36 Nine Months Ended September 30, 2023 (In Thousands) Community Banking Home Mortgage Lending Consolidated Interest income $ 89,509 $ 6,514 $ 96,023 Interest expense 18,007 1,492 19,499 Net interest income 71,502 5,022 76,524 Provision for credit losses 2,957 — 2,957 Other operating income 9,564 10,326 19,890 Other operating expense 52,168 18,020 70,188 Income (loss) before provision for income taxes 25,941 ( 2,672 ) 23,269 Provision for income taxes 5,216 ( 728 ) 4,488 Net income (loss) $ 20,725 ($ 1,944 ) $ 18,781 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 September 30, 2023 (In Thousands) Community Banking Home Mortgage Lending Consolidated Total assets $ 2,528,430 $ 261,759 $ 2,790,189 Loans held for sale $ — $ 63,151 $ 63,151 December 31, 2022 (In Thousands) Community Banking Home Mortgage Lending Consolidated Total assets $ 2,550,578 $ 123,740 $ 2,674,318 Loans held for sale $ — $ 27,538 $ 27,538 37