| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
(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 March 31, 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 |
March 31, 2022: | | | | | | |
Securities available for sale | | | | | | |
U.S. Treasury and government sponsored entities | $301,435 | | ($14,981) | | $72,868 | | ($4,652) | | $374,303 | | ($19,633) | |
Corporate bonds | 7,838 | | (377) | | — | | — | | 7,838 | | (377) | |
Collateralized loan obligations | 54,079 | | (361) | | — | | — | | 54,079 | | (361) | |
Municipal securities | 815 | | (5) | | — | | — | | 815 | | (5) | |
| | | | | | |
| | | | | | |
Total | $364,167 | | ($15,724) | | $72,868 | | ($4,652) | | $437,035 | | ($20,376) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
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 March 31, 2022, the Company had 61 available for sale securities in an unrealized loss position without an ACL. At March 31, 2022, the Company had three 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 March 31, 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 March 31, 2022 and December 31, 2021, $57.5 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 March 31, 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.
| | | | | | | | | | | |
(In Thousands) | Amortized Cost | | Fair Value |
US Treasury and government sponsored entities | | | |
Within 1 year | $5,000 | | | $5,007 | |
1-5 years | 410,485 | | | 390,948 | |
| | | |
Total | $415,485 | | | $395,955 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Corporate bonds | | | |
| | | |
1-5 years | $37,687 | | | $37,250 | |
5-10 years | 19,779 | | | 18,133 | |
Total | $57,466 | | | $55,383 | |
Collateralized loan obligations | | | |
1-5 years | $5,000 | | | $4,938 | |
5-10 years | 23,939 | | | 23,796 | |
Over 10 years | 30,493 | | | 30,337 | |
Total | $59,432 | | | $59,071 | |
Municipal securities | | | |
| | | |
1-5 years | $820 | | | $815 | |
| | | |
Total | $820 | | | $815 | |
There were no proceeds from sales of investment securities for the three-month periods ending March 31, 2022 and 2021.
A summary of interest income for the three-month periods ending March 31, 2022 and 2021, on available for sale investment securities are as follows:
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | |
(In Thousands) | 2022 | | 2021 | | | |
US Treasury and government sponsored entities | $806 | | | $500 | | | | |
| | | | | | |
Other | 325 | | | 274 | | | | |
Total taxable interest income | $1,131 | | | $774 | | | | |
Municipal securities | $4 | | | $4 | | | | |
Total tax-exempt interest income | $4 | | | $4 | | | | |
Total | $1,135 | | | $778 | | | | |
4. Loans and Allowance for Credit Losses
Loans Held for Sale
Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of March 31, 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:
| | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | December 31, 2021 |
(In Thousands) | Amortized Cost | Unpaid Principal | Difference | Amortized Cost | Unpaid Principal | Difference |
Commercial & industrial loans | $404,789 | | $408,451 | | ($3,662) | | $448,338 | | $454,106 | | ($5,768) | |
Commercial real estate: | | | | | | |
Owner occupied properties | 304,595 | | 306,070 | | (1,475) | | 300,200 | | 301,623 | | (1,423) | |
Non-owner occupied and multifamily properties | 428,618 | | 431,855 | | (3,237) | | 435,311 | | 438,631 | | (3,320) | |
Residential real estate: | | | | | | |
1-4 family residential properties secured by first liens | 31,241 | | 31,300 | | (59) | | 32,542 | | 32,602 | | (60) | |
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | 19,523 | | 19,400 | | 123 | | 19,610 | | 19,489 | | 121 | |
1-4 family residential construction loans | 38,836 | | 39,146 | | (310) | | 36,222 | | 36,542 | | (320) | |
Other construction, land development and raw land loans | 91,328 | | 91,819 | | (491) | | 88,094 | | 88,604 | | (510) | |
Obligations of states and political subdivisions in the US | 20,938 | | 21,090 | | (152) | | 16,403 | | 16,565 | | (162) | |
Agricultural production, including commercial fishing | 29,217 | | 29,358 | | (141) | | 27,959 | | 28,082 | | (123) | |
Consumer loans | 4,618 | | 4,580 | | 38 | | 4,801 | | 4,763 | | 38 | |
Other loans | 3,684 | | 3,699 | | (15) | | 4,406 | | 4,422 | | (16) | |
Total | 1,377,387 | | 1,386,768 | | (9,381) | | 1,413,886 | | 1,425,429 | | (11,543) | |
Allowance for credit losses | (11,310) | | | | (11,739) | | | |
| $1,366,077 | | $1,386,768 | | ($9,381) | | $1,402,147 | | $1,425,429 | | ($11,543) | |
The difference between the amortized cost and unpaid principal balance is net deferred origination fees totaling $9.4 million and $11.5 million at March 31, 2022 and December 31, 2021, respectively.
Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $5.4 million and $5.5 million at March 31, 2022 and December 31, 2021, respectively, and was included in other assets in the Consolidated Balance Sheets.
Amortized cost in the above table includes $64.3 million and $118.2 million as of March 31, 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.
Allowance for Credit Losses
The activity in the ACL related to loans held for investment is as follows:
| | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, | Beginning Balance | | Credit Loss Expense (Benefit) | Charge-offs | Recoveries | Ending Balance |
| (In Thousands) |
2022 | | | | | | |
Commercial & industrial loans | $3,027 | | | $156 | | ($295) | | $13 | | $2,901 | |
Commercial real estate: | | | | | | |
Owner occupied properties | 3,176 | | | (663) | | — | | — | | 2,513 | |
Non-owner occupied and multifamily properties | 2,930 | | | 133 | | — | | — | | 3,063 | |
Residential real estate: | | | | | | |
1-4 family residential properties secured by first liens | 439 | | | 71 | | — | | — | | 510 | |
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | 215 | | | 74 | | — | | 12 | | 301 | |
1-4 family residential construction loans | 120 | | | 90 | | — | | — | | 210 | |
Other construction, land development and raw land loans | 1,635 | | | (85) | | — | | — | | 1,550 | |
Obligations of states and political subdivisions in the US | 32 | | | 20 | | — | | — | | 52 | |
Agricultural production, including commercial fishing | 91 | | | 29 | | — | | 8 | | 128 | |
Consumer loans | 67 | | | 8 | | — | | — | | 75 | |
Other loans | 7 | | | — | | — | | — | | 7 | |
Total | $11,739 | | | ($167) | | ($295) | | $33 | | $11,310 | |
2021 | | | | | | |
Commercial & industrial loans | $4,348 | | | ($101) | | ($163) | | $185 | | $4,269 | |
Commercial real estate: | | | | | | |
Owner occupied properties | 3,579 | | | (215) | | — | | 2 | | 3,366 | |
Non-owner occupied and multifamily properties | 4,944 | | | (1,240) | | — | | — | | 3,704 | |
Residential real estate: | | | | | | |
1-4 family residential properties secured by first liens | 673 | | | 140 | | — | | — | | 813 | |
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | 419 | | | (87) | | — | | 10 | | 342 | |
1-4 family residential construction loans | 454 | | | (194) | | — | | — | | 260 | |
Other construction, land development and raw land loans | 1,994 | | | (173) | | — | | — | | 1,821 | |
Obligations of states and political subdivisions in the US | 44 | | | (8) | | — | | — | | 36 | |
Agricultural production, including commercial fishing | 49 | | | (11) | | — | | 8 | | 46 | |
Consumer loans | 118 | | | (16) | | — | | 2 | | 104 | |
Other loans | 3 | | | — | | — | | — | | 3 | |
Total | $16,625 | | | ($1,905) | | ($163) | | $207 | | $14,764 | |
At March 31, 2022, as compared to December 31, 2021, the Company forecasted a significantly lower unemployment rate over the reasonable and supportable forecast period. For most loan segments, an increase in loan balances more than offset the decrease in the forecast for unemployment and changes in the characteristics of loans. However, increases in loan balances were more than offset by changes in the makeup of the underlying loans in the owner occupied commercial real estate and other construction segments. The primary reason for the decreases in the ACL in these segments is a shorter expected life, which results in a decrease in the ACL in a discounted cash flow ("DCF") Current Expected Credit Losses ("CECL") model.
Credit Quality Information
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management utilizes a loan risk grading system called the Asset Quality Rating (“AQR”) system to assign a risk classification to each of its loans. The risk classification is a dual rating system that contemplates both probability of default and risk of loss given default. Loans are graded on a scale of 1 to 10 and, loans graded 1 – 6 are considered “pass” grade loans. Loans graded 7 or higher are considered "classified" loans. A description of the general characteristics of the AQR risk classifications are as follows:
Pass grade loans – 1 through 6: The borrower demonstrates sufficient cash flow to fund debt service, including acceptable profit margins, cash flows, liquidity and other balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The Company has competent management with an acceptable track record. The category does not include loans with undue or unwarranted credit risks that constitute identifiable weaknesses.
Classified loans:
Special Mention – 7: A "special mention" credit has weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date.
Substandard – 8: A "substandard" credit is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Northrim Bank will sustain some loss if the deficiencies are not corrected.
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.
| | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total |
| (In Thousands) |
Commercial & industrial loans | | | | | | | |
Pass | $46,524 | | $171,908 | | $52,630 | | $30,871 | | $32,130 | | $62,733 | | $396,796 | |
Classified | 2,647 | | 563 | | 166 | | 13 | | 3,034 | | 1,570 | | 7,993 | |
Total commercial & industrial loans | $49,171 | | $172,471 | | $52,796 | | $30,884 | | $35,164 | | $64,303 | | $404,789 | |
| | | | | | | |
Commercial real estate: | | | | | | | |
Owner occupied properties | | | | | | | |
Pass | $8,232 | | $85,813 | | $79,996 | | $38,621 | | $14,219 | | $68,938 | | $295,819 | |
Classified | — | | — | | 1,364 | | — | | 510 | | 6,902 | | 8,776 | |
Total commercial real estate owner occupied properties | $8,232 | | $85,813 | | $81,360 | | $38,621 | | $14,729 | | $75,840 | | $304,595 | |
| | | | | | | |
Non-owner occupied and multifamily properties | | | | | |
Pass | $6,610 | | $73,643 | | $75,974 | | $57,236 | | $34,050 | | $170,879 | | $418,392 | |
Classified | — | | — | | — | | — | | 8 | | 10,218 | | 10,226 | |
Total commercial real estate non-owner occupied and multifamily properties | $6,610 | | $73,643 | | $75,974 | | $57,236 | | $34,058 | | $181,097 | | $428,618 | |
| | | | | | | |
Residential real estate: | | | | | | | |
1-4 family residential properties secured by first liens | | | | | |
Pass | $972 | | $11,979 | | $6,994 | | $3,433 | | $517 | | $6,238 | | $30,133 | |
Classified | — | | 285 | | 531 | | — | | 90 | | 202 | | 1,108 | |
Total residential real estate 1-4 family residential properties secured by first liens | $972 | | $12,264 | | $7,525 | | $3,433 | | $607 | | $6,440 | | $31,241 | |
| | | | | | | |
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | | |
Pass | $971 | | $5,500 | | $2,501 | | $3,110 | | $3,242 | | $3,934 | | $19,258 | |
Classified | — | | — | | — | | — | | 253 | | 12 | | 265 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | $971 | | $5,500 | | $2,501 | | $3,110 | | $3,495 | | $3,946 | | $19,523 | |
| | | | | | | |
1-4 family residential construction loans | | | | | | | |
Pass | $8,877 | | $16,208 | | $653 | | $1,137 | | $— | | $11,852 | | $38,727 | |
Classified | — | | — | | — | | — | | — | | 109 | | 109 | |
Total residential real estate 1-4 family residential construction loans | $8,877 | | $16,208 | | $653 | | $1,137 | | $— | | $11,961 | | $38,836 | |
| | | | | | | |
Other construction, land development and raw land loans | | | | |
Pass | $966 | | $44,143 | | $25,438 | | $9,915 | | $3,347 | | $5,563 | | $89,372 | |
Classified | — | | — | | — | | — | | 460 | | 1,496 | | 1,956 | |
Total other construction, land development and raw land loans | $966 | | $44,143 | | $25,438 | | $9,915 | | $3,807 | | $7,059 | | $91,328 | |
| | | | | | | |
Obligations of states and political subdivisions in the US | | | | |
Pass | $— | | $7,829 | | $1,836 | | $1,868 | | $161 | | $9,244 | | $20,938 | |
Classified | — | | — | | — | | — | | — | | — | | — | |
Total obligations of states and political subdivisions in the US | $— | | $7,829 | | $1,836 | | $1,868 | | $161 | | $9,244 | | $20,938 | |
| | | | | | | |
Agricultural production, including commercial fishing | | | | |
Pass | $1,311 | | $19,958 | | $3,828 | | $806 | | $1,112 | | $2,202 | | $29,217 | |
Classified | — | | — | | — | | — | | — | | — | | — | |
Total agricultural production, including commercial fishing | $1,311 | | $19,958 | | $3,828 | | $806 | | $1,112 | | $2,202 | | $29,217 | |
| | | | | | | |
Consumer loans | | | | | | | |
Pass | $373 | | $699 | | $765 | | $617 | | $337 | | $1,827 | | $4,618 | |
Classified | — | | — | | — | | — | | — | | — | | — | |
Total consumer loans | $373 | | $699 | | $765 | | $617 | | $337 | | $1,827 | | $4,618 | |
| | | | | | | |
Other loans | | | | | | | |
Pass | $392 | | $1,110 | | $1,620 | | $417 | | $29 | | $116 | | $3,684 | |
Classified | — | | — | | — | | — | | — | | — | | — | |
Total other loans | $392 | | $1,110 | | $1,620 | | $417 | | $29 | | $116 | | $3,684 | |
| | | | | | | |
Total loans | | | | | | | |
Pass | $75,228 | | $438,790 | | $252,235 | | $148,031 | | $89,144 | | $343,526 | | $1,346,954 | |
Classified | 2,647 | | 848 | | 2,061 | | 13 | | 4,355 | | 20,509 | | 30,433 | |
Total loans | $77,875 | | $439,638 | | $254,296 | | $148,044 | | $93,499 | | $364,035 | | $1,377,387 | |
| | | | | | | |
Total pass loans | $75,228 | | $438,790 | | $252,235 | | $148,031 | | $89,144 | | $343,526 | | $1,346,954 | |
Government guarantees | (869) | | (94,725) | | (11,664) | | (13,422) | | (3,222) | | (3,795) | | (127,697) | |
Total pass loans, net of government guarantees | $74,359 | | $344,065 | | $240,571 | | $134,609 | | $85,922 | | $339,731 | | $1,219,257 | |
| | | | | | | |
Total classified loans | $2,647 | | $848 | | $2,061 | | $13 | | $4,355 | | $20,509 | | $30,433 | |
Government guarantees | (2,382) | | (507) | | (1,228) | | — | | — | | (10,453) | | (14,570) | |
Total classified loans, net government guarantees | $265 | | $341 | | $833 | | $13 | | $4,355 | | $10,056 | | $15,863 | |
| | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
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 | |
Past Due Loans: The following tables present an aging of contractually past due loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater Than 90 Days Past Due | | Total Past Due | | Current | | Total | | Greater Than 90 Days Past Due Still Accruing |
March 31, 2022 | | | | | | | | | | | | | |
Commercial & industrial loans | $305 | | | $166 | | | $418 | | | $889 | | | $403,900 | | | $404,789 | | | $— | |
Commercial real estate: | | | | | | | | | | | | | |
Owner occupied properties | 8 | | | — | | | 1,120 | | | 1,128 | | | 303,467 | | | 304,595 | | | — | |
Non-owner occupied and multifamily properties | 283 | | | — | | | — | | | 283 | | | 428,335 | | | 428,618 | | | — | |
Residential real estate: | | | | | | | | | | | | | |
1-4 family residential properties secured by first liens | 69 | | | — | | | 90 | | | 159 | | | 31,082 | | | 31,241 | | | — | |
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | 22 | | | — | | | 136 | | | 158 | | | 19,365 | | | 19,523 | | | — | |
1-4 family residential construction loans | — | | | — | | | 109 | | | 109 | | | 38,727 | | | 38,836 | | | — | |
Other construction, land development and raw land loans | — | | | — | | | 1,636 | | | 1,636 | | | 89,692 | | | 91,328 | | | — | |
Obligations of states and political subdivisions in the US | — | | | — | | | — | | | — | | | 20,938 | | | 20,938 | | | — | |
Agricultural production, including commercial fishing | — | | | — | | | — | | | — | | | 29,217 | | | 29,217 | | | — | |
Consumer loans | 11 | | | — | | | — | | | 11 | | | 4,607 | | | 4,618 | | | — | |
Other loans | — | | | — | | | — | | | — | | | 3,684 | | | 3,684 | | | — | |
Total | $698 | | | $166 | | | $3,509 | | | $4,373 | | | $1,373,014 | | | $1,377,387 | | | $— | |
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 $8.7 million and $10.7 million at March 31, 2022 and December 31, 2021, respectively. The following table presents loans on nonaccrual status and loans on nonaccrual
status for which there was no related allowance for credit losses. All loans with no allowance for credit losses are individually evaluated for credit losses in the Company's CECL methodology.
| | | | | | | | | | | | | | |
| March 31, 2022 | December 31, 2021 |
(In Thousands) | Nonaccrual | Nonaccrual With No ACL | Nonaccrual | Nonaccrual With No ACL |
| | | | |
Commercial & industrial loans | $4,014 | | $3,847 | | $4,350 | | $4,298 | |
Commercial real estate: | | | | |
Owner occupied properties | 3,362 | | 3,362 | | 3,506 | | 3,506 | |
| | | | |
Residential real estate: | | | | |
1-4 family residential properties secured by first liens | 223 | | 223 | | 1,778 | | 1,778 | |
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | 265 | | 211 | | 271 | | 215 | |
1-4 family residential construction loans | 109 | | 109 | | 109 | | 109 | |
Other construction, land development and raw land loans | 1,636 | | 1,636 | | 1,636 | | 1,636 | |
| | | | |
| | | | |
Consumer loans | — | | — | | — | | — | |
| | | | |
Total nonaccrual loans | 9,609 | | 9,388 | | 11,650 | | 11,542 | |
Government guarantees on nonaccrual loans | (907) | | (907) | | (978) | | (978) | |
Net nonaccrual loans | $8,702 | | $8,481 | | $10,672 | | $10,564 | |
There was $2,000 in interest on nonaccrual loans reversed through interest income during three-month period ending March 31, 2022. There was no interest on nonaccrual loans reversed through interest income during the three-month period ending March 31, 2021.
There was no interest earned on nonaccrual loans with a principal balance during the three-month periods ending March 31, 2022 and March 31, 2021, respectively. However, the Company recognized interest income of $57,000 and $134,000 in the three-month periods ending March 31, 2022 and 2021, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.
Troubled Debt Restructurings: Loans classified as TDRs totaled $10.0 million and $10.6 million at March 31, 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 March 31, 2022 |
(Dollars in thousands) | Interest Only | Full Payment Deferral | Total |
Portfolio loans | $45,074 | | $— | | $45,074 | |
Number of modifications | 13 | | — | | 13 | |
| | | | | | | | | | | |
Loan Modifications due to COVID-19 as of December 31, 2021 |
(Dollars in thousands) | Interest Only | Full Payment Deferral | Total |
Portfolio loans | $49,219 | | $— | | $49,219 | |
Number of modifications | 16 | | — | | 16 | |
The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:
Rate Modification: A modification in which the interest rate is changed.
Term Modification: A modification in which the maturity date, timing of payments, or frequency of payments is changed.
Payment Modification: A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time is included in this category.
Combination Modification: Any other type of modification, including the use of multiple categories above.
AQR pass graded loans included above in the impaired loan data are loans classified as TDRs. By definition, TDRs are considered impaired loans. All of the Company's TDRs are included in impaired loans.
There were no newly restructured loans that occurred during the three months ended March 31, 2022 or 2021, respectively. 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 restructurings were not related to COVID-19 modifications.
| | | | | | | | | | | | | | | | | |
| Accrual Status | | Nonaccrual Status | | Total Modifications |
(In Thousands) | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Existing Troubled Debt Restructurings | $2,978 | | | $7,062 | | | $10,040 | |
Total | $2,978 | | | $7,062 | | | $10,040 | |
The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs. There were no in charge-offs in the three months ended March 31, 2022 on loans that were newly classified as TDRs during the same period.
There were no loans that defaulted during the three months ended March 31, 2022 and 2021, respectively, that were restructured in the previous twelve months.
5. Purchased Receivables
Purchased receivables are carried at their principal amount outstanding, net of an allowance for credit losses, and have a maturity of less than one year. There were no purchased receivables past due at March 31, 2022 or December 31, 2021, and there were no restructured purchased receivables at March 31, 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 March 31, 2022 and December 31, 2021, respectively.
There was no activity and no balance in the ACL for purchased receivables as of March 31, 2022 and December 31, 2021.
The following table summarizes the components of net purchased receivables for the periods indicated:
| | | | | | | | |
(In Thousands) | March 31, 2022 | December 31, 2021 |
Purchased receivables | $8,552 | | $6,987 | |
Allowance for credit losses - purchased receivables | — | | — | |
Total | $8,552 | | $6,987 | |
6. Servicing Rights
Mortgage servicing rights
The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three-month periods ended March 31, 2022 and 2021:
| | | | | | | | | | |
| Three Months Ended March 31, | |
(In Thousands) | 2022 | 2021 | | |
| | | | |
Balance, beginning of period | $13,724 | | $11,218 | | | |
Additions for new MSR capitalized | 987 | | 1,448 | | | |
Changes in fair value: | | | | |
Due to changes in model inputs of assumptions (1) | 1,192 | | (180) | | | |
Other (2) | (481) | | (829) | | | |
Balance, end of period | $15,422 | | $11,657 | | | |
(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 March 31, 2022 and December 31, 2021:
| | | | | | | | |
(In Thousands) | March 31, 2022 | December 31, 2021 |
| | |
Balance of mortgage loans serviced for others | $789,382 | | $772,764 | |
MSR as a percentage of serviced loans | 1.95 | % | 1.78 | % |
The Company recognized servicing fees of $783,000 and $705,000 during the three-month periods ending March 31, 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 March 31, 2022 and December 31, 2021:
| | | | | | | | |
| March 31, 2022 | December 31, 2021 |
| | |
Constant prepayment rate | 8.93 | % | 11.80 | % |
Discount rate | 8.00 | % | 8.00 | % |
Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at March 31, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | |
(In Thousands) | | March 31, 2022 | December 31, 2021 |
Aggregate portfolio principal balance | | $789,382 | | $772,764 | |
Weighted average rate of note | | 3.27 | % | 3.31 | % |
| | | |
March 31, 2022 | Base | 1.0% Adverse Rate Change | 2.0% Adverse Rate Change |
Constant prepayment rate | 8.93 | % | 17.87 | % | 26.79 | % |
Discount rate | 8.00 | % | 7.00 | % | 6.00 | % |
Fair value MSR | $15,422 | | $11,213 | | $8,621 | |
Percentage of MSR | 1.95 | % | 1.42 | % | 1.09 | % |
| | | |
December 31, 2021 | | | |
Constant prepayment rate | 11.80 | % | 23.59 | % | 34.57 | % |
Discount rate | 8.00 | % | 7.00 | % | 6.00 | % |
Fair value MSR | $13,724 | | $9,612 | | $7,256 | |
Percentage of MSR | 1.78 | % | 1.24 | % | 0.94 | % |
The above tables show the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four family Alaska Housing Finance Corporation/FNMA/FHLMC serviced home loan. The above tables reference a 100 basis point and 200 basis point decrease in discount rates.
These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSR is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.
Commercial servicing rights
The commercial servicing rights asset ("CSR") has a carrying value $1.1 million at both March 31, 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 $261.6 million and $259.8 million at March 31, 2022 and December 31, 2021, respectively. Key assumptions used in measuring the fair value of the CSR as of March 31, 2022 and December 31, 2021 include a constant prepayment rate of 16.08% and a discount rate of 9.94%.
7. Leases
The Company's lease commitments consist primarily of agreements to lease land and office facilities that it occupies to operate several of its retail branch locations that are classified as operating leases and are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities. As of March 31, 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 March 31, 2022 or December 31, 2021.
The following table presents additional information about the Company's operating leases:
| | | | | | | | | | | | | |
| Three Months Ended March 31, | |
(In Thousands) | 2022 | 2021 | | |
Lease Cost | | | | |
| Operating lease cost(1) | $681 | | $695 | | | |
| Short term lease cost(1) | 12 | | 9 | | | |
| Total lease cost | $693 | | $704 | | | |
| | | | | |
Other information | | | | |
| Operating leases - operating cash flows | $644 | | $669 | | | |
| Weighted average lease term - operating leases, in years | 10.66 | 10.74 | | |
| Weighted average discount rate - operating leases | 3.23 | % | 3.29 | % | | |
(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 (Nine months) | $1,858 | |
2023 | 2,109 | |
2024 | 1,961 | |
2025 | 1,858 | |
2026 | 721 | |
Thereafter | 4,266 | |
Total minimum lease payments | $12,773 | |
Less: amount of lease payment representing interest | (2,371) | |
Present value of future minimum lease payments | $10,402 | |
8. Derivatives
Derivatives swaps related to community banking activities
The Company enters into commercial loan interest rate swap agreements with commercial banking customers which are offset with a corresponding swap agreement with a third party financial institution ("counterparty"). The Company has agreements with its counterparties that contain provisions that provide that if the Company fails to maintain its status as a "well-capitalized" institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. These agreements also require that the Company and the counterparty collateralize any fair value shortfalls that exceed $250,000 with eligible collateral, which includes cash and securities backed with the full faith and credit of the federal government. Similarly, the Company could be required to settle its obligations under the agreement if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels. The Company pledged $7.8 million as of March 31, 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 $210.4 million and $212.6 million at March 31, 2022 and December 31, 2021, respectively. At March 31, 2022, the notional amount of interest rate swaps is made up of 19 variable to fixed rate swaps to commercial loan customers totaling $105.2 million, and 19 fixed to variable rate swaps with a counterparty totaling $105.2 million. Changes in fair value from these 19 interest rate swaps offset each other in the first nine months of 2022. The Company recognized $3,000 and $92,000 in fee income related to interest rate swaps in the three-month periods ending March 31, 2022 and 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 2.20% as of March 31, 2022. The Company pledged $2.9 million in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of both March 31, 2022 and 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 loss on this interest rate swap was $28,000 as of March 31, 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 $130.2 million and $81.6 million at March 31, 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.
The following table presents the fair value of derivatives not designated as hedging instruments at March 31, 2022 and December 31, 2021:
| | | | | | | | | | | |
(In Thousands) | Asset Derivatives |
| | March 31, 2022 | December 31, 2021 |
| Balance Sheet Location | Fair Value | Fair Value |
| | | |
Interest rate swaps | Other assets | $6,531 | | $6,030 | |
Interest rate lock commitments | Other assets | 965 | | 1,387 | |
Retail interest rate contracts | Other assets | 1,055 | | 166 | |
Total | | $8,551 | | $7,583 | |
| | | | | | | | | | | |
(In Thousands) | Liability Derivatives |
| | March 31, 2022 | December 31, 2021 |
| Balance Sheet Location | Fair Value | Fair Value |
| | | |
Interest rate swaps | Other liabilities | $6,531 | | $6,030 | |
| | | |
Total | | $6,531 | | $6,030 | |
The following table presents the net gains (losses) of derivatives not designated as hedging instruments for periods indicated below:
| | | | | | | | | | | | | |
| | Three Months Ended March 31, | |
(In Thousands) | Income Statement Location | 2022 | 2021 | | |
Retail interest rate contracts | Mortgage banking income | $2,560 | | $3,000 | | | |
Interest rate lock commitments | Mortgage banking income | (480) | | (1,369) | | | |
Total | | $2,080 | | $1,631 | | | |
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.
The following table summarizes the derivatives that have a right of offset as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
March 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 | $6,531 | $— | | $6,531 | $— | | $— | | $6,531 | |
Retail interest rate contracts | 1,055 | | — | | 1,055 | — | | — | | 1,055 | |
| | | | | | |
Liability Derivatives | | | | | | |
Interest rate swaps | $6,531 | $— | | $6,531 | $— | | $6,531 | $— | |
| | | | | | |
| | | | | | |
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 | $— | |
| | | | | | |
9. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Investment securities available for sale and marketable equity securities: Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Servicing rights: MSR and CSR are measured at fair value on a recurring basis. These assets are classified as Level 3 as quoted prices are not available. In order to determine the fair value of MSR and CSR, the present value of net expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates, and ancillary fee income net of servicing costs. The model assumptions are also compared to publicly filed information from several large MSR holders, as available.
Derivative instruments: The fair value of the interest rate lock commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation
adjustments to reflect nonperformance risk in the measurement of fair value. Although the Company has determined that the majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 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.
The Company uses external sources to estimate fair value for projects that are not fully constructed as of the date of valuation. These projects are generally valued as if complete, with an appropriate allowance for cost of completion, including contingencies developed from external sources such as vendors, engineers and contractors. The Company believes that recording OREO that is not fully constructed based on as if complete values is more appropriate than recording OREO that is not fully constructed using as is values. We concluded that as-is-complete values are appropriate for these types of projects based on the accounting guidance for capitalization of project costs and subsequent measurement of the value of real estate. GAAP specifically states that estimates and cost allocations must be reviewed at the end of each reporting period and reallocated based on revised estimates. The Company adjusts the carrying value of OREO in accordance with this guidance for increases in estimated cost to complete that exceed the fair value of the real estate at the end of each reporting period.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Estimated fair values as of the periods indicated are as follows:
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| March 31, 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 | $532,808 | | | $532,808 | | | $645,827 | | | $645,827 | |
Investment securities available for sale | 208,681 | | | 208,681 | | | 141,531 | | | 141,531 | |
Marketable equity securities | 7,997 | | | 7,997 | | | 8,420 | | | 8,420 | |
| | | | | | | |
Level 2 inputs: | | | | | | | |
Investment securities available for sale | 279,666 | | | 279,666 | | | 285,153 | | | 285,153 | |
Investment in Federal Home Loan Bank stock | 3,828 | | | 3,828 | | | 3,107 | | | 3,107 | |
Loans held for sale | 49,980 | | | 49,980 | | | 73,650 | | | 73,650 | |
Accrued interest receivable | 7,165 | | | 7,165 | | | 6,846 | | | 6,846 | |
Interest rate swaps | 6,531 | | | 6,531 | | | 6,030 | | | 6,030 | |
Retail interest rate contracts | 1,055 | | | 1,055 | | | 166 | | | 166 | |
| | | | | | | |
Level 3 inputs: | | | | | | | |
Investment securities held to maturity | 24,750 | | | 22,877 | | | 20,000 | | | 19,164 | |
Loans | 1,377,387 | | | 1,335,959 | | | 1,413,886 | | | 1,396,486 | |
Purchased receivables, net | 8,552 | | | 8,552 | | | 6,987 | | | 6,987 | |
Interest rate lock commitments | 965 | | | 965 | | | 1,387 | | | 1,387 | |
Mortgage servicing rights | 15,422 | | 15,422 | | 13,724 | | | 13,724 | |
Commercial servicing rights | 1,091 | | 1,091 | | 1,084 | | | 1,084 | |
| | | | | | | |
Financial liabilities: | | | | | | | |
Level 2 inputs: | | | | | | | |
Deposits | $2,343,066 | | | $2,341,812 | | | $2,421,631 | | | $2,422,215 | |
| | | | | | | |
Borrowings | 14,404 | | | 13,330 | | | 14,508 | | | 14,727 | |
Accrued interest payable | 59 | | | 59 | | | 31 | | | 31 | |
Interest rate swaps | 6,559 | | | 6,559 | | | 6,985 | | | 6,985 | |
| | | | | | | |
| | | | | | | |
Level 3 inputs: | | | | | | | |
| | | | | | | |
Junior subordinated debentures | 10,310 | | | 9,766 | | | 10,310 | | | 9,727 | |
The following table sets forth the balances as of the periods indicated of assets and liabilities measured at fair value on a recurring basis:
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(In Thousands) | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
March 31, 2022 | | | | | | | |
Assets: | | | | | | | |
Available for sale securities | | | | | | | |
U.S. Treasury and government sponsored entities | $395,955 | | | $179,192 | | | $216,763 | | | $— | |
Municipal securities | 815 | | | — | | | 815 | | | — | |
| | | | | | | |
Corporate bonds | 32,506 | | | 29,489 | | | 3,017 | | | — | |
Collateralized loan obligations | 59,071 | | | — | | | 59,071 | | | — | |
Total available for sale securities | $488,347 | | | $208,681 | | | $279,666 | | | $— | |
Marketable equity securities | $7,997 | | | $7,997 | | | $— | | | $— | |
Total marketable equity securities | $7,997 | | | $7,997 | | | $— | | | $— | |
Interest rate swaps | $6,531 | | | $— | | | $6,531 | | | $— | |
Interest rate lock commitments | 965 | | | — | | | — | | | 965 | |
Mortgage servicing rights | 15,422 | | | — | | | — | | | 15,422 | |
Commercial servicing rights | 1,091 | | | — | | | — | | | 1,091 | |
Retail interest rate contracts | 1,055 | | | — | | | 1,055 | | | — | |
Total other assets | $25,064 | | | $— | | | $7,586 | | | $17,478 | |
Liabilities: | | | | | | | |
Interest rate swaps | $6,559 | | | $— | | | $6,559 | | | $— | |
| | | | | | | |
Total other liabilities | $6,559 | | | $— | | | $6,559 | | | $— | |
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 | | | $— | |
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-month periods ended March 31, 2022 and 2021:
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(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 March 31, 2022 | | | | | | |
Interest rate lock commitments | $1,387 | | ($509) | | $4,350 | | ($4,263) | | $965 | | $965 | |
Mortgage servicing rights | 13,724 | | 711 | | 987 | | — | | 15,422 | | — | |
Commercial servicing rights | 1,084 | | (26) | | 33 | | — | | 1,091 | | — | |
Total | $16,195 | | $176 | | $5,370 | | ($4,263) | | $17,478 | | $965 | |
Three Months Ended March 31, 2021 | | | | | | |
Interest rate lock commitments | $4,034 | | ($1,147) | | $9,268 | | ($9,442) | | $2,713 | | $2,713 | |
Mortgage servicing rights | 11,218 | | (1,009) | | 1,448 | | — | | 11,657 | | — | |
Commercial servicing rights | 1,310 | | (23) | | 40 | | — | | 1,327 | | — | |
Total | $16,562 | | ($2,179) | | $10,756 | | ($9,442) | | $15,697 | | $2,713 | |
There were no changes in unrealized gains and losses for the three-month periods ending March 31, 2022 and 2021 included in other comprehensive income for recurring Level 3 fair value measurements.
As of and for the periods ending March 31, 2022 and December 31, 2021, 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.
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(In Thousands) | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
March 31, 2022 | | | | | | | |
Loans individually measured for credit losses | $166 | | | $— | | | $— | | | $166 | |
| | | | | | | |
| | | | | | | |
Total | $166 | | | $— | | | $— | | | $166 | |
December 31, 2021 | | | | | | | |
Loans individually measured for credit losses | $— | | | $— | | | $— | | | $— | |
| | | | | | | |
| | | | | | | |
Total | $— | | | $— | | | $— | | | $— | |
The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three-month periods ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | |
(In Thousands) | 2021 | | 2020 | | | |
Loans individually measured for credit losses | $89 | | | $985 | | | | |
| | | | | | |
| | | | | | |
Total loss from nonrecurring measurements | $89 | | | $985 | | | | |
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 March 31, 2022 and December 31, 2021:
| | | | | | | | | | | |
Financial Instrument | Valuation Technique | Unobservable Input | Weighted Average Rate Range |
March 31, 2022 | | | |
Loans individually measured for credit losses | In-house valuation of collateral | Discount rate | 100% |
| | | |
| | | |
Interest rate lock commitment | External pricing model | Pull through rate | 94.37 | % |
Mortgage servicing rights | Discounted cash flow | Constant prepayment rate | 7.26% - 11.39% |
| | Discount rate | 8.00 | % |
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 | % |
10. Segment Information
The Company's operations are managed along two operating segments: Community Banking and Home Mortgage Lending. The Community Banking segment's principal business focus is the offering of loan and deposit products to business and consumer customers in its primary market areas. As of March 31, 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:
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| Three Months Ended March 31, 2022 |
(In Thousands) | Community Banking | | Home Mortgage Lending | | Consolidated |
| | | | | |
Interest income | $19,650 | | | $408 | | | $20,058 | |
Interest expense | 741 | | | 13 | | | 754 | |
Net interest income | 18,909 | | | 395 | | | 19,304 | |
Benefit for credit losses | (150) | | | — | | | (150) | |
Other operating income | 3,841 | | | 6,982 | | | 10,823 | |
| | | | | |
Other operating expense | 14,831 | | | 6,270 | | | 21,101 | |
Income before provision for income taxes | 8,069 | | | 1,107 | | | 9,176 | |
Provision for income taxes | 1,641 | | | 309 | | | 1,950 | |
Net income | $6,428 | | | $798 | | | $7,226 | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
(In Thousands) | Community Banking | | Home Mortgage Lending | | Consolidated |
| | | | | |
Interest income | $19,799 | | | $797 | | | $20,596 | |
Interest expense | 1,065 | | | 38 | | | 1,103 | |
Net interest income | 18,734 | | | 759 | | | 19,493 | |
Benefit for credit losses | (1,488) | | | — | | | (1,488) | |
Other operating income | 2,274 | | | 13,622 | | | 15,896 | |
| | | | | |
Other operating expense | 13,664 | | | 7,663 | | | 21,327 | |
Income before provision for income taxes | 8,832 | | | 6,718 | | | 15,550 | |
Provision for income taxes | 1,452 | | | 1,917 | | | 3,369 | |
Net income | $7,380 | | | $4,801 | | | $12,181 | |
| | | | | | | | | | | | | | | | | |
March 31, 2022 | | | | | |
(In Thousands) | Community Banking | | Home Mortgage Lending | | Consolidated |
| | | | | |
Total assets | $2,540,992 | | | $85,168 | | | $2,626,160 | |
Loans held for sale | $— | | | $49,980 | | | $49,980 | |
| | | | | | | | | | | | | | | | | |
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 | |