What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-04 compared with 2021-03-05 · 689 added, 796 removed, 1250 unchanged (54% of the section changed)

1 unchanged sentence

The following report, audited consolidated financial statements and the notes thereto are set forth in this Annual Report on Form 10-K on the pages indicated:

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm ( Moss Adams LLP , Everett, Washington , PCAOB ID:

Consolidated Balance Sheets at December 31, 2021 and 20 20

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective January 1, 2021, due to the adoption of Accounting Standards Codification Topic 326:

Financial Instruments – Credit Losses (“Topic 326”).

The Company adopted the new credit loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

Basis for Opinions

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Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses

As described in Notes 1 and 6 to the consolidated financial statements, the Company’s allowance for loan losses balance was $21.1 million at December 31, 2020.

The allowance for loan losses is management’s best estimate of probable losses inherent in its loan portfolio and is based on historical loss experience by loan segment and class with adjustments for current events and conditions.

These factors include, among others, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, specific credit risks, industry concentrations, and unidentified losses inherent in the current loan portfolio.

We identified management’s asset quality ratings of loans, determination of qualitative factors, including the estimation of the unallocated general valuation allowance component of the allowance for loan losses, which is based on general economic conditions and other qualitative risk factors both internal and external to the Company, both of which are used in the allowance for loan losses calculation, as a critical audit matter.

The Company uses credit quality indicators, including internally determined asset quality risk ratings, to stratify loans into pools and to estimate inherent loss rates for each of the loan pools, which are used in the calculation of the allowance for loan losses.

Determination of the asset quality ratings involves significant management judgement.

The unallocated general valuation allowance portion of the allowance for loan losses is used to estimate losses and is based on management’s evaluation of various factors that are not captured in the historical credit loss factors utilized in the asset quality risk rating-based component or on the specific impairment component.

Such factors include uncertainties in identifying triggering events that directly correlate to subsequent loss rates, uncertainties in economic conditions, risk factors that have not yet manifested themselves in loss allocation factors, and historical loss experience data that may not precisely correspond to the current portfolio.

In addition, the unallocated reserve may fluctuate based upon the direction of various risk indicators, such as the risk as to current economic conditions, the level and trend of charge offs or recoveries, and the risk of heightened imprecision or inconsistency of appraisals used in estimating real estate values.

Auditing management’s judgments regarding the determination of asset quality ratings and unallocated general valuation allowance portion of the allowance for loan losses involved a high degree of subjectivity.

Allowance for Credit Losses - Loans

As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for credit losses - loans balance was $11.7 million at December 31, 2021.

The allowance for credit losses – loans is management’s best estimate of current expected credit losses in its loan portfolio and is estimated using either a discounted cash flow method or a weighted average remaining life method, depending on the nature and size of the loan pool.

The estimate of current expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of loans.

Historical loss experience is the starting point for estimating expected credit losses.

Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics using qualitative factors.

We identified management’s estimation and application of management’s forecast of economic conditions used in the calculation of probabilities of default in the allowance for credit losses – loans as a critical audit matter.

The forecast of economic conditions component of the allowance for credit losses - loans is used to compare the conditions that existed during the historical period to current conditions and future expectations, and to make adjustments to the historical data accordingly.

Auditing management’s judgments regarding the estimation and application of forecasted economic conditions portion of the allowance for credit losses - loans involved a high degree of subjectivity.

The primary procedures we performed to address the critical audit matters included:

• Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for loan losses, including controls over the accuracy of asset quality ratings of loans and the determination of the qualitative factors, including the unallocated general valuation allowance component of the allowance for loan losses.

• Testing a risk-based targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in accordance with its policies, and that the asset quality ratings for the loans are reasonable.

• Obtaining management’s analysis and supporting documentation related to the qualitative factors, including the unallocated general valuation allowance, and testing whether the general economic conditions and other qualitative risk factors both internal and external to the Company used in the calculation of the allowance for loan losses are in accordance with the Company’s policies and are supported by the analysis provided by management.

• Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for loan losses, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, application of the loan asset quality ratings determined by management and used in the calculation, application of the qualitative factors, including the unallocated general valuation allowance determined by management and used in the calculation, and recalculation of the allowance for loan losses balance.

• Performing an independent sensitivity analysis to evaluate the reasonableness of the qualitative factors, including the unallocated general valuation allowance used by management to account for inherent losses that are not captured in the calculation of the allowance for loan losses based on historical loss rates alone.

• Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for credit losses – loans, including controls over the estimation and application of forecast of economic conditions.

• Obtaining management’s analysis and supporting documentation related to the forecast of economic conditions used to determine the probabilities of default, and testing whether the forecasts of economic conditions used in the calculation of the allowance for credit losses on loans are reasonable and supportable.

• Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses – loans, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, application of forecasted economic conditions used in the calculation of determining probabilities of default, and recalculation of the impact of the forecast on the allowance for credit losses – loans balance.

/s/ Moss Adams LLP

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Marketable equity securities 8,420 9,052

Investment securities held to maturity 10,000 —

Total portfolio investments 266,685 284,083

Investment securities held to maturity, at amortized cost 20,000 10,000

Investment in Federal Home Loan Bank stock 3,107 2,551

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Loans 1,413,886 1,444,050

Allowance for loan losses ( 21,136 ) ( 19,088 )

Allowance for credit losses, loans ( 11,739 ) ( 21,136 )

Net loans 1,402,147 1,422,914

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Retained earnings 204,046 173,498

Accumulated other comprehensive income, net of tax 18 431

Accumulated other comprehensive (loss) income, net of tax ( 3,406 ) 18

Total shareholders' equity 237,817 221,575

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Net Interest Income 80,827 70,665 64,442

Provision (benefit) for loan losses 2,432 ( 1,175 ) ( 500 )

Net Interest Income After Provision (Benefit) for Loan Losses 68,233 65,617 61,708

(Benefit) provision for credit losses ( 4,099 ) 2,432 ( 1,175 )

Net Interest Income After (Benefit) Provision for Credit Losses 84,926 68,233 65,617

Other Operating Income

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Gain on sale of marketable equity securities, net 67 98 —

Unrealized gain (loss) on marketable equity securities 61 911 ( 625 )

Unrealized (loss) gain on marketable equity securities ( 101 ) 61 911

Gain on sale of investment securities available for sale, net — — 23

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Compensation expense - RML acquisition payments — — 468

Impairment of equity method investment — — 804

OREO (income) expense, net of rental income and gains on sale ( 432 ) ( 242 ) ( 193 )

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Securities available for sale:

Unrealized holding gains (losses) arising during the period $ 411 $ 2,866 ($ 692 )

Unrealized holding (losses) gains arising during the period ($ 5,564 ) $ 411 $ 2,866

Reclassification of net gains included in net income (net of tax

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Derivatives and hedging activities:

Unrealized holding (losses) gains arising during the period ( 1,201 ) ( 1,142 ) 423

Unrealized holding gains (losses) during the period 780 ( 1,201 ) ( 1,142 )

Income tax benefit (expense) related to unrealized gains and losses 1,360 377 ( 757 )

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Repurchase of common stock ( 348 ) ( 348 ) ( 12,221 ) — — ( 12,569 )

Other comprehensive loss, net of tax — — — — ( 59 ) ( 59 )

Cumulative effect of adoption of accounting principles related to premium amortization of investment securities — — — ( 62 ) — ( 62 )

Reclassification for cumulative effect of adoption of accounting principles related to fair value measurement of equity securities — — — 191 ( 191 ) —

Other comprehensive income, net of tax — — — — 951 951

Net income — — — 20,691 — 20,691

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Repurchase of common stock ( 327 ) ( 327 ) ( 9,649 ) — — ( 9,976 )

Other comprehensive income, net of tax — — — — 951 951

Other comprehensive (loss), net of tax — — — — ( 413 ) ( 413 )

Cumulative effect of adoption of accounting principles related to equity compensation expense — — 139 ( 139 ) — —

Net income — — — 32,888 — 32,888

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Other comprehensive (loss), net of tax — — — — ( 3,424 ) ( 3,424 )

Cumulative effect of adoption of accounting principles related to equity compensation expense — — 139 ( 139 ) — —

Cumulative effect of adoption of ASU 2016-13 — — — 2,400 — 2,400

Net income — — — 37,517 — 37,517

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Amortization of investment security premium, net of discount accretion 529 19 ( 15 )

Unrealized (gain) loss on marketable equity securities ( 61 ) ( 911 ) 625

Deferred tax expense 555 711 3,014

Unrealized loss (gain) on marketable equity securities 101 ( 61 ) ( 911 )

Deferred tax (income) expense ( 1,298 ) 555 711

Stock-based compensation 1,073 943 832

Deferral of loan fees and amortization, net of costs ( 192 ) 6,650 598

Provision (benefit) for loan losses 2,432 ( 1,175 ) ( 500 )

Provision (benefit) for credit losses ( 4,099 ) 2,432 ( 1,175 )

Benefit for purchased receivables — ( 21 ) ( 96 )

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Gain on sale of other real estate owned ( 685 ) ( 391 ) ( 380 )

Impairment on equity method investment — — 804

Net changes in assets and liabilities:

(Increase) decrease in accrued interest receivable ( 3,467 ) 305 ( 432 )

(Increase) decrease in other assets ( 15,096 ) 6,395 ( 2,512 )

Increase (decrease) in other liabilities 12,415 2,411 ( 5,233 )

Net Cash (Used) Provided by Operating Activities ( 36,454 ) ( 821 ) 25,150

Decrease (increase) in accrued interest receivable 1,133 ( 3,467 ) 305

Decrease (increase) in other assets 12,739 ( 15,096 ) 6,395

(Decrease) increase in other liabilities ( 9,695 ) 12,415 2,411

Net Cash Provided (Used) by Operating Activities 111,989 ( 36,454 ) ( 821 )

Investing Activities:

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Decrease (increase) in purchased receivables, net 6,935 10,472 ( 9,871 )

Increase in loans, net ( 408,365 ) ( 58,879 ) ( 31,852 )

Decrease (increase) in loans, net 28,975 ( 408,365 ) ( 58,879 )

Proceeds from sale of other real estate owned 2,610 797 1,299

Investment in other real estate owned — — ( 144 )

Purchases of software ( 170 ) ( 416 ) ( 721 )

Proceeds from sales of premises and equipment — — 3

Purchases of premises and equipment ( 2,338 ) ( 2,849 ) ( 2,318 )

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Financing Activities:

Increase (decrease) in deposits 452,630 144,263 ( 30,195 )

Increase in deposits 596,650 452,630 144,263

(Decrease) increase in securities sold under repurchase agreements — — ( 34,278 )

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Cash dividends paid ( 9,388 ) ( 8,844 ) ( 8,512 )

Net Cash Provided (Used) by Financing Activities 439,820 90,627 ( 31,099 )

Net Cash Provided by Financing Activities 576,962 439,820 90,627

Net Change in Cash and Cash Equivalents 529,862 20,541 17,886

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Transfer of loans to other real estate owned $ 274 $ 652 $ —

Loans made to facilitate sales of other real estate owned $ 1,012 $ — $ —

Non-cash lease liability arising from obtaining right of use assets $ 79 $ 370 $ 1,234

Cash dividends declared but not paid $ 92 $ 98 $ 89

Cumulative effect adjustment to retained earnings $ 2,400 ($ 139 ) $ —

See notes to consolidated financial statements

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(the “Company”), is a publicly traded bank holding company headquartered in Anchorage, Alaska that is primarily engaged in the delivery of business and personal banking services through its wholly-owned banking subsidiary, Northrim Bank ("the Bank").

The Bank also engages in retail mortgage origination services through its wholly-owned subsidiary, Residential Mortgage Holding Company, LLC (“RML”).

The Bank also engages in retail mortgage origination services through its wholly-owned subsidiary, Residential Mortgage Holding Company, LLC, the parent company of Residential Mortgage, LLC (collectively “RML”).

Additionally, the Bank through its wholly-owned subsidiary, Northrim Funding Services ("NFS"), operates a factoring division in Bellevue, Washington.

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As of December 31, 2021, the Company had one wholly-owned business trust subsidiary, Northrim Statutory Trust 2 ("Trust 2") that was formed to issue trust preferred securities and related common securities of Trust 2.

The Company has not consolidated the accounts of Trust 2 in its consolidated financial statements in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB”) ASC 810, Consolidation (“ASC 810”).

The Company has not consolidated the accounts of Trust 2 in its consolidated financial statements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”).

As a result, the junior subordinated debentures issued by the Company to Trust 2 are reflected on the Company’s consolidated balance sheet as junior subordinated debentures.

The Company has determined that PWA and Homestate are not variable interest entities and therefore, the Company does not consolidate the balance sheets and income statements of PWA or Homestate into its financial statements.

The Company's investments in PWA and Homestate are accounted for as equity method investments.

The Company owns a 24 % interest in PWA and a 30 % interest in Homestate Mortgage Company, LLC, and these investments are accounted for as equity method investments.

Results of PWA and Homestate are included in "Other income" in our Consolidated Statements of Income.

Investments in associated companies are presented on a one-line basis in the caption “Other assets” in our Consolidated Balance Sheets.

Investments in other companies are presented on a one-line basis in the caption “Other assets” in our Consolidated Balance Sheets.

Operating Segments:

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For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with other banks, federal funds sold, and securities with original maturities of less than 90 days at acquisition.

Marketable Securities:

Marketable securities are equity investments excluding those accounted for under the equity method of accounting or those that result in consolidation of the investee.

Marketable securities are stated at fair value.

Equity Securities:

Marketable equity securities are stated at fair value.

Changes in fair value are included in "Unrealized gain (loss) on marketable equity securities" in our Consolidated Statements of Income.

Non-marketable equity securities are accounted for under the equity method of accounting and are included in other assets in our Consolidated Balance Sheets.

The Company performs an impairment analysis on it's non-marketable equity securities when events or circumstances indicate impairment potentially exists.

Investment Securities:

Securities available for sale are stated at fair value with unrealized holding gains and losses, net of tax, excluded from earnings and reported as a separate component of other comprehensive income, unless an unrealized loss is deemed other than temporary.

Gains and losses on available for sale securities sold are determined on a specific identification basis.

Debt securities are classified as available for sale if the Company intends and has the ability to hold those securities for an indefinite period of time, but not necessarily to maturity.

Any decision to sell a debt security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors.

Premiums and discounts are amortized over the life of the related investment security as an adjustment to yield using the effective interest method.

Dividend and interest income are recognized when earned.

Securities available for sale are stated at fair value.

Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.

Unrealized holding gains or losses are included in other comprehensive income as a separate component of shareholders' equity, net of tax.

Held to maturity securities are stated at cost, adjusted for amortization of premium and accretion of discount on a level-yield basis.

The Company has the ability and intent to hold these securities to maturity.

The Company amortizes purchase premiums for callable debt securities to the earliest call date.

A decline in the market value of any available for sale or held to maturity security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security.

Unrealized investment securities losses are evaluated at least quarterly on a specific identification basis to determine whether such declines in value should be considered "other than temporary" and therefore be subject to immediate loss recognition in income.

Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value of the security is below the carrying value primarily due to changes in interest rates and there has not been significant deterioration in the financial condition of the issuer.

Other factors that may be considered in determining whether a decline in the value is "other than temporary" include the financial condition, capital strength, and near-term prospects of the issuer;

actions of commercial banks or other lenders relative to the continued extension of credit facilities to the issuer of the security;

recommendations of investment advisors or market analysts;

and ratings by recognized rating agencies.

The Company amortizes purchase premiums for callable debt securities to the earliest call date and discounts are accreted over the contractual life.

Allowance for Credit Losses - Investment Securities:

For available for sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.

Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes.

Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings.

The ACL may be reversed if conditions change.

However, if the Company intends to sell an impaired available for sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis.

Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in such a situation.

In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors.

Changes in the ACL are recorded as provision for (or reversal of) credit loss expense.

Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

The ACL on held to maturity securities is estimated on a collective basis by major security type.

At December 31, 2021, the Company’s held to maturity securities consisted of investments in corporate bonds.

Expected credit losses for these securities are estimated using a discounted cash flow ("DCF") methodology which considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

Accrued interest receivable is excluded from the estimate of credit losses.

Federal Home Loan Bank Stock:

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Loans held for sale:

The Company designates loans held for sale as either carried at fair value or the lower of cost or fair value at origination.

The Company designates loans held for sale as either carried at fair value or the lower of cost or fair value at loan level at origination.

Loans held for sale include residential mortgage loans that have been originated for sale in the secondary market.

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Loan origination fees received in excess of direct origination costs are deferred and accreted to interest income using the interest method in accordance with ASC 310 over the life of the loan.

Loan balances are charged-off to the Allowance when management believes that collection of principal is unlikely.

Loan balances are charged-off to the ACL when management believes that collection of principal is unlikely.

Interest income on loans is accrued and recognized on the principal amount outstanding except for loans in a nonaccrual status.

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Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms.

The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, unless the loan is collateral dependent, in which case the impairment is measured by using the fair value of the loan’s collateral.

Nonperforming loans greater than $ 50,000 are individually evaluated for impairment based upon the borrower’s overall financial condition, resources, and payment record, and the prospects for support from any financially responsible guarantors.

The Company uses either in-house evaluations or external appraisals to estimate the fair value of collateral-dependent impaired loans as of each reporting date.

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 estimated value of the collateral, the location and type of collateral 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 appraisals 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 classifies fair value measurements on loans as level 3 valuations in the fair value hierarchy because of their use of unobservable inputs..

When the fair value measurement of the impaired loan is less than the recorded amount of the loan, an impairment is recognized by recording a charge-off to the Allowance or by designating a specific reserve in accordance with GAAP.

The Company’s policy is to record cash payments received on impaired loans that are not also nonaccrual loans in the same manner that cash payments are applied to performing loans.

A loan is classified as a troubled debt restructuring ("TDR") when a borrower is experiencing financial difficulties that lead to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider.

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Interest on TDRs will be accrued at the restructured rates when it is anticipated that no loss of original principal will occur, and the interest can be collected, which is generally after a period of six months.

The Company classifies fair value measurements on loans as level 3 valuations in the fair value hierarchy because of their use of unobservable inputs.

Acquired Loans:

Loans are recorded at their fair value at the acquisition date.

Credit discounts are included in the determination of fair value;

therefore, an allowance for loan losses is not recorded at the acquisition date.

Purchased loans are evaluated upon acquisition and classified as either purchased credit impaired or purchased non-credit-impaired.

Purchased credit impaired loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments.

Purchased credit impaired loans were individually evaluated for credit impairment at acquisition using expected future cash flows or the estimated value of underlying collateral.

A purchased credit impaired loan will be removed from impaired loans only if the loan is sold, foreclosed, or assets are received in full satisfaction of the loan, and it will be removed from impaired loans at its carrying value.

If an individual loan is removed, the difference between its relative carrying amount and its cash, fair value of the collateral, or other assets received will be recognized in other income immediately as a gain and would not affect the effective yield used to recognize the accretable yield on purchased credit impaired loans.

The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference.

The nonaccretable difference represents our estimate of the credit losses expected to occur and was considered in determining the fair value of the purchased credit impaired loans as of the acquisition date.

Subsequent to the acquisition date, any increases in expected cash flows over those expected at purchase date in excess of fair value are adjusted through an increase to the accretable yield on a prospective basis.

The purchased credit impaired loans are and will continue to be subject to the Company’s internal and external credit review and monitoring.

If credit deterioration is experienced subsequent to the initial acquisition fair value amount, such deterioration will be measured, and a charge-off will be recorded.

For purchased non-credit-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the estimated life of the loans.

For the purpose of estimating the Allowance, as of December 31, 2018, the Company evaluated the credit quality of purchased non-credit-impaired loans separately from loans that were originated by the Company and applied different qualitative factors to these loans.

For the purpose of estimating the subsequent to December 31, 2018, the Company evaluated the credit quality of purchased non-credit-impaired loans together with loans that were originated by the Company.

Purchased non-credit-impaired loans that have been identified as impaired subsequent to the merger are included in the Company's normal process for reporting impaired loans and calculation of a specific valuation allowance.

Allowance for Loan Losses:

The Allowance for Loan Losses is management’s best estimate of probable losses inherent in its loan portfolio as of the balance sheet date.

The Allowance methodology is based on historical loss experience by loan segment and class with adjustments for current events and conditions.

The Company’s process for determining the appropriate level of the Allowance for probable loan losses is designed to account for credit deterioration as it occurs.

The provision for loan losses reflects loan quality trends, including levels of and trends related to past due and nonaccrual loans, net charge-offs or recoveries, and other factors.

The Company has identified the following segments:

commercial, real estate construction one-to-four family, real estate construction other, real estate term owner occupied, real estate term non-owner occupied, real estate

term other, consumer loans secured by 1 st deeds of trust, and other consumer loans.

Then the Company further disaggregates each segment into the following classes, which are also known as asset quality ratings:

pass (grades 1-6), special mention (grade 7), substandard (grade 8), doubtful (grade 9), and loss (grade 10).

The level of the Allowance reflects management’s continuing evaluation of loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, specific credit risks, industry concentrations, and unidentified losses inherent in the current loan portfolio.

Portions of the allowance may be allocated for specific credits;

however, the entire allowance is available for any credit that, in management’s judgment, should be charged off.

While management utilizes its best judgment and information available, the ultimate adequacy of the Allowance is dependent upon a variety of factors beyond the Company’s control including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classification.

The Company’s Allowance consists of three elements:

(1) specific valuation allowances based on probable losses on specific loans, (2) general valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted as necessary to reflect the impact of current conditions, and (3) unallocated general valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the Company.

The specific valuation allowance is an allocated allowance for impaired loans.

This analysis is based upon a specific analysis for each impaired loan that is collateral dependent, including appraisals and in-house evaluations on loans secured by real property, management’s assessment of the current market, recent payment history, and an evaluation of other sources of repayment.

The Company obtains appraisals on real and personal property that secure its loans during the loan origination process in accordance with regulatory guidance and its loan policy.

The Company then estimates a general allocated allowance for all other loans that were not impaired as of the balance sheet date using a formula-based approach that includes average historical loss factors that are adjusted for quantitative and qualitative factors.

After the portfolio has been disaggregated into segments and classes, the Company calculates a general reserve for each segment and class based on the average five year loss history for each segment and class.

This general reserve is then adjusted for qualitative factors, by segment and class.

Qualitative factors are based on management’s assessment of current trends that may cause losses inherent in the current loan portfolio to differ significantly from historical losses.

Some factors that management considers in determining the qualitative adjustment to the general reserve include our concentration of large borrowers;

national and local economic trends;

general business conditions;

economic, political, and industry specific factors that affect resource development in Alaska;

underwriting policies and standards;

trends in local real estate markets;

effects of various political activities;

peer group data;

and internal factors such as underwriting policies and expertise of the Company’s employees.

The unallocated general valuation portion of the Allowance is based on several factors, including the level of the Allowance as compared to total loans and nonperforming loans in light of current economic conditions.

This portion of the Allowance is based upon management’s evaluation of various factors that are not directly measured in the determination of the allocated portions of the Allowance and it is deemed “unallocated” because it is not allocated to any segment or class of the loan portfolio.

This portion of the Allowance provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component or in the specific impairment component of the Allowance and acknowledges the inherent imprecision of all loss prediction models.

In addition, the unallocated reserve may fluctuate based upon the direction of various risk indicators.

Examples of such factors include the risk as to current economic conditions, the level and trend of charge offs or recoveries, and the risk of heightened imprecision or inconsistency of appraisals used in estimating real estate values.

Although this allocation process may not accurately predict credit losses by loan type or in aggregate, the total allowance for credit losses is available to absorb losses that may arise from any loan type or category.

Based on our methodology and its components, management believes the resulting Allowance is adequate and appropriate for the risk identified in the Company's loan portfolio.

While management believes that it uses the best information available to determine the Allowance, unforeseen market conditions and other events could result in adjustment to the Allowance, and net income could be significantly affected if circumstances differed substantially from the assumptions used in making the final determination.

Our banking regulators, as an integral part of their examination process, periodically review the Company's Allowance.

Our regulators may require the Company to recognize additions to the Allowance based on their judgments related to information available to them at the time of their examinations.

Reserve for Unfunded Loan Commitments and Letters of Credit:

The Company maintains a separate reserve for losses related to unfunded loan commitments and letters of credit.

The determination of the adequacy of the reserve is based on periodic evaluations of the unfunded credit facilities including assessment of historical losses and current economic conditions.

The allowance for unfunded loan commitments and letters of credit is included in other liabilities on the Consolidated Balance Sheets, with changes to the balance charged against other operating expense.

Purchased Receivables:

The Bank, through NFS, purchases accounts receivable from its customers.

The purchased receivables are carried at their principal amount outstanding, net of a reserve for anticipated losses that have not yet been identified.

Loans purchased without more-than-insignificant credit deterioration are recorded at their fair value at the acquisition date.

Loans purchased with more-than-insignificant credit deterioration will be recorded with their applicable allowance for credit loss to determine amortized cost basis.

Allowance for Credit Losses - Loans :

Under the current expected credit loss model adopted by the Company on January 1, 2021, the ACL on loans is a valuation allowance estimated at each balance sheet date that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the loan is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs.

In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner.

Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.

Expected credit losses are reflected in the ACL through a provision for or (reversal) of credit loss expense.

When the Company deems all or a portion of a financial asset to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount.

The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible when management believes that collection of principal is unlikely.

Subsequent recoveries, if any, are credited to the ACL when received.

The Company measures expected credit losses of financial assets on a collective (pool) basis, when the financial assets share similar risk characteristics.

Depending on the nature and size of the pool of financial assets with similar risk characteristics, the Company uses either a DCF method or a weighted average remaining life method to estimate expected credit losses quantitatively.

The weighted average remaining life method uses exposure at default, along with the expected credit losses adjusted for prepayments to calculate the required allowance.

The Company utilizes peer historical loss data to estimate credit losses under the weighted average remaining life method.

Under the DCF method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD").

Under the DCF method the combination of adjustments for the credit expectations PD and LGD, and timing expectations (prepayment, curtailment, and time to recovery), produces an expected cash flow stream at the instrument level.

Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”).

An ACL is established for the difference between the instrument’s NPV and amortized cost basis.

In addition to the quantitative portion of the ACL derived using either the DCF or weighted average remaining life method, the Company also considers the effects of the qualitative factors in its calculation of expected losses in the loan

The qualitative factor methodology is based on quantitative metrics, but also includes a high degree of subjectivity and changes in any of the metrics could have a significant impact on our calculation of the allowance.

Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for expected credit losses and are not included in the collective evaluation.

Loans are identified for individual evaluation during regular credit reviews of the portfolio.

A loan is generally identified for individual evaluation when management determines that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments.

When we identify a loan for individual evaluation, we measure expected credit losses using DCF, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral.

In these cases, we use the current fair value of the collateral, less selling costs, instead of DCF.

The analysis of collateral dependent loans includes external appraisals or in-house evaluations on loans secured by real property, management’s assessment of the current market, recent payment history and an evaluation of other sources of repayment.

The Company’s determination of which method to use is based upon several factors.

The Company uses external appraisals to estimate fair value for projects that are not fully constructed as of the date of valuation.

The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets.

The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.

The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR.

The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default.

Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL.

TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.

If we determine that the value of an individually evaluated loan is less than the recorded investment in the loan, we either recognize an allowance for credit losses specific to that loan, or charge-off the deficit balance on collateral dependent loans if it is determined that such amount represents a confirmed loss.

Subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.

Paycheck Protection Program ("PPP") and other loans guaranteed by the U.S.

With the passage of the PPP, the Company has actively participated in assisting its customers with applications for loans through the program.

Loans funded through the PPP program are fully guaranteed by the U.S.

government subject to certain representations and warranties.

This guarantee exists at the inception of the loans and throughout the lives of the loans and was not entered into separately and apart from the loans.

ASC 326 requires credit enhancements that mitigate credit losses, such as the U.S.

government guarantee on PPP loans, to be considered in estimating credit losses.

The guarantee is considered “embedded” and, therefore, is considered when estimating credit loss on the PPP loans and other loans guaranteed by the U.S.

Given that the loans are fully guaranteed by the U.S.

government and absent any specific loss information on any of our guaranteed loans, the Company does not carry an ACL on its PPP and other loans guaranteed by the U.S.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures:

The Company enters into various types of transactions that involve financial instruments with off-balance sheet risk, including commitments to extend credit and standby letters of credit issued to meet customer financing needs.

We apply the same credit standards to these commitments as in all of our lending activities and include these commitments in our lending risk evaluations.

The Company’s exposure to credit loss in the event of nonperformance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.

Such financial instruments are recorded when they are funded.

The Company records an ACL on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to provision for credit loss expense in the Company’s consolidated statements of income.

The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the

current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s consolidated balance sheets.

Purchased Receivables and related Allowance for Credit Losses:

The Company purchases accounts receivable from its customers.

The purchased receivables are carried at amortized cost, net of an ACL.

Management measures expected credit losses on purchased receivables by evaluating each receivable individually.

Each quarter, management reviews purchased receivable asset balances compared to assets eligible for advancement of funds in order to determine the exposure to loss for the Company.

Exposure is zero when outstanding balances exceed assets eligible for advancement.

Management may determine that an ACL is appropriate for individual purchased receivables based on asset specific facts and circumstances.

Fees charged to the customer are earned while the balances of the purchases are outstanding, which is typically less than one year.

The Company maintains a separate reserve for losses related to purchased receivable assets.

The determination of the adequacy of the reserve is based on periodic evaluations of purchased receivable assets including an assessment of historical losses and current economic conditions.

The reserve for purchased receivable assets is included in the balance of these accounts on a net basis on the consolidated balance sheets, with changes to the balance charged against other operating expense.

Changes in the ACL are recorded as provision for (or reversal of) credit loss expense.

Other Real Estate Owned:

Other real estate owned ("OREO") represents properties acquired through foreclosure or its equivalent.

OREO represents properties acquired through foreclosure or its equivalent.

Prior to foreclosure, the carrying value is adjusted to the fair value, less cost to sell, of the real estate to be acquired by an adjustment to the Allowance.

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Amortization of intangible assets is included in other operating expense in the Consolidated Statements of Income.

The Company performs a goodwill impairment analysis at the segment level on an annual basis.

The Company performs a goodwill impairment analysis at each reporting unit on an annual basis.

Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists.

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Purchased software is carried at amortized cost and is amortized using the straight-line method over its estimated useful life or the term of the agreement.

Also included in other assets is the net deferred tax asset, bank owned life insurance carried at cash surrender value, net of premium charges, accrued interest receivable, taxes receivable, rate lock derivatives, and the Company’s equity method investments.The

Company performs an impairment analysis on it's equity method investments when events or circumstances indicate impairment potentially exists.

The Company records all derivatives on the Consolidated Balance Sheets at fair value.

The accounting for change in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate the derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.

The accounting for change in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate the

derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.

Interest rate swaps that are designated as a cash flow hedge and satisfy the hedge accounting requirements involve the receipt of variable amounts from a counter-party in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

For derivatives which are designed as cash flow hedges and satisfy hedge accounting requirements, the effective portion of changes in the fair value of the derivative is recorded in accumulated other comprehensive income (loss).

The fair value of the Company's derivatives is determined using discounted cash flow analysis using observable market based inputs.

The fair value of the Company's derivatives is determined using DCF analysis using observable market based inputs.

The Company considers all free-standing derivatives not designated in a hedging relationship as economic hedges and recognizes these derivatives as either assets or liabilities in the balance sheet.

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For derivative instruments executed with the same counterparty under a master netting arrangement, we do not offset fair value amounts of interest rate swaps in liability positions with interest rate swaps in asset positions.

For further detail, see Note 21.

For further detail, see Note 20 of the notes to the Company's Consolidated Financial Statements included in Part II.

Item 8 of this report.

Transfers or sales of financial assets:

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Fair values are based on quoted market prices, quoted market prices for similar assets, or if market prices are not available, then the fair value is estimated using discounted cash flow analysis with assumptions for credit losses, prepayments and discount rates that are corroborated by and verified against market observable data, where possible.

Revenue Recognition:

The majority of the Company's revenues come from interest income on loans and investment securities, as well as other non-interest income including mortgage banking income, bankcard fees, purchased receivable income, and service charges on deposits.

The Company recognizes income in accordance with the applicable accounting guidance for these revenue sources.

The Company's revenues that are within the scope of ASC Topic 606 are presented within other operating income and include bankcard fees, service charges on deposits, and other non-interest income including merchant services fees, commissions from sales of mutual funds and other investments, safety deposit box rental fees, bank check and other check fees, and other miscellaneous revenue streams.

Revenue within the contracts with customers guidance is recognized when obligations under the terms of a contract with customers are satisfied.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services.

When the amount of consideration is variable, the Company will only recognize revenue to the extent that it is probable that the cumulative amount recognized will not be subject to a significant reversal in the future.

Substantially all of the Company's contracts with customers have expected durations of one year or less and payments are typically due when or as the services are rendered or shortly thereafter.

When third parties are involved in providing services to customers, the Company recognizes revenue on a gross basis when it has control over those services being provided to the customer;

otherwise, revenue is recognized for the net amount of any fee or commission.

Advertising, promotion, and marketing costs are expensed as incurred.

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Stock Incentive Plans:

The Company has stock-based employee compensation plans as more fully discussed in Note 23, Stock-Based Compensation.

The Company has stock-based employee compensation plans as more fully discussed in Note 22, Stock-Based Compensation to the Company's Consolidated Financial Statements included in Part II.

Item 8 of this report.

Compensation cost is recognized for stock options and restricted stock units issued to employees based on the fair value of these awards at the date of grant.

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Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

The effect on deferred taxes of a change in tax rates is recognized in income in the period

that includes the enactment date.

Our policy is to recognize interest and penalties on unrecognized tax benefits in “Other operating expense" in the Consolidated Statements of Income.

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Earnings per share is calculated using the weighted average number of shares and dilutive common stock equivalents outstanding during the period.

Stock options and restricted stock units, as described in Note 23, are considered to be common stock equivalents.

Stock options and restricted stock units, as described in Note 22 of the notes to the Company's Consolidated Financial Statements included in Part II.

Item 8 of this report, are considered to be common stock equivalents.

Potentially dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive.

Anti-dilutive shares outstanding related to options to acquire common stock for the year ended December 31, 2020 totaled 45,062 and for the year ended December 31, 2018 totaled 44,721 .

There were no anti-dilutive shares outstanding related to options to acquire common stock in 2019.

Anti-dilutive shares outstanding related to options to acquire common stock for the year ended December 31, 2020 totaled 45,062 .

There were no anti-dilutive shares outstanding related to options to acquire common stock in 2021 or 2019.

Information used to calculate earnings per share was as follows:

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At December 31, 2021 and 2020, the Company had $ 572.7 million and $ 728.2 million, respectively, in commercial and construction loans.

At December 31, 2020, commercial loans included $ 310.5 million in Payment Protection Program ("PPP") loans administered by the U.S.

At December 31, 2021, commercial loans included $ 118.2 million in PPP loans administered by the U.S.

Small Business Administration ("SBA").

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Accounting pronouncements implemented in 2021

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”).

ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including allowing entities to elect an accounting policy to account for forfeitures as they occur by reversing compensation expense when the award is forfeited instead of estimating future forfeitures that will occur when recognizing compensation expense related to share-based payment awards.

The Company elected to account for forfeitures as they occur in accordance with the guidance in ASU 2016-09 on January 1, 2020, which resulted in a $ 139,000 decrease in beginning retained earnings through a cumulative-effect adjustment.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (“ASU 2017-04”).

ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.

The Company adopted ASU 2017-04 on January 1, 2020.

The adoption of ASU 2017-04 did not have a material impact on the Company’s consolidated financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”).

ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits.

The Company adopted ASU 2018-13 on January 1, 2020.

The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial position or results of operations.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04").

ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

The expedients and exceptions provided by ASU 2020-04 do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.

The Company adopted ASU 2020-04 as of March 31, 2020.

The adoption of ASU 2020-04 did not have a material impact on the Company’s consolidated financial position or results of operations because no contract modifications have been made to date.

Accounting pronouncements to be implemented in future periods

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13” or "CECL").

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13” or “CECL”).

ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.

Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.

Under ASU 2016-13 financial institutions and other organizations will use forward-looking information to better inform their credit loss estimates but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.

ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio.

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However, on October 16, 2019 the FASB voted to delay ASU 2016-13 for Smaller Reporting Companies.

The Company has elected Small Reporting Company status, which changes the effective date for ASU 2016-13 for the Company to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2022.

The Company had elected Small Reporting Company status, which changes the effective date for ASU 2016-13 for the Company to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2022.

Early application was permitted for specified periods.

The Company early adopted ASU 2016-13 on January 1, 2021 after finalizing data and model validation and our internal governance framework.

The Company elected to early adopt ASU 2016-13 on January 1, 2021 after finalizing data and model validation and our internal governance framework.

The guidance was applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at January 1, 2021.

However, certain provisions of the guidance are only required to be applied on a prospective basis.

CECL is not prescriptive in the methodology used to determine the expected credit loss estimate.

Therefore, management has flexibility in selecting the methodology.

The expected credit losses must be estimated over a financial asset's contractual term, adjusted for prepayments utilizing quantitative and qualitative factors.

There are also specific considerations

for purchased credit-deteriorated, troubled debt restructured, and collateral dependent loans.

CECL also applies to the reserve for unfunded commitments.

The combination of the current expected credit loss, qualitative factors, collateral dependent, troubled debt restructuring, purchased credit deteriorated, and the reserve for unfunded commitments represent the allowance for credit losses ("ACL").

The estimate of expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

Historical loss experience is the starting point for estimating expected credit losses.

Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics – e.g.

underwriting standards, portfolio mix or asset terms, and differences in economic conditions – both current conditions and reasonable and supportable forecasts.

When the Company is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset, it has estimated expected credit losses for the remaining life using an approach that reverts to historical credit loss information.

The Company utilizes complex models to obtain reasonable and supportable forecasts;

most of the models calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD").

The PD measures the probability that a loan will default within a given time horizon and primarily measures the adequacy of the debtor's cash flow as the primary source of repayment of the loan.

The LGD is the expected loss which would be realized presuming a default has occurred and primarily measures the value of the collateral or other secondary source of repayment related to the collateral.

The ACL is measured on a collective (pool) basis when similar characteristics exist.

The Company has selected models at the portfolio level using a risk-based approach, with larger, more complex portfolios having more complex models.

For ACL calculation purposes, management considered the financial and economic environment at the time of assessment and different economic scenarios that differed in the levels of severity and sensitivity to the ACL results.

Management determined the use of a third-party baseline economic forecast was reasonable and supportable as it is from a credible subject matter experts and institution.

In this baseline scenario, the probability that the economy will perform better than this consensus is equal to the probability that it will perform worse.

Loss factors from the models, prepayment speeds, and qualitative factors are inputs into the Company's CECL accounting application.

Once this information is aggregated, the Company uses two methods to calculate the current expected credit loss:

1) the discounted cash flow ("DCF") method, which is used for approximately 97 % of all loans and the reserve for unfunded commitments and 2) a weighted average remaining life method for the remainder of the loan portfolio where loan level data constraints preclude the use of the DCF method.

The DCF method utilizes the effective interest rate of individual assets to discount the expected credit losses adjusted for prepayments.

The difference in the net present value and the amortized cost of the asset will result in the required allowance.

The weighted average remaining life method uses the exposure at default, along with the expected credit losses adjusted for prepayments to calculate the required allowance.

Adoption of CECL as of January 1, 2021 resulted in an allowance for loan losses of $ 16.6 million, which is a $ 4.5 million decrease in the allowance under the incurred loss model as of December 31, 2020.

This decrease will increase the Company's total shareholder's equity by $ 3.2 million.

Adoption of CECL as of January 1, 2021 resulted in a reserve for unfunded commitments of $ 1.4 million, which is a $ 1.2 million increase in the reserve under the incurred loss model as of December 31, 2020.

This increase will decrease the Company's total shareholder's equity by $ 880,000 .

We will recognize an ACL for available-for-sale and held-to-maturity debt securities.

The ACL on available-for-sale debt securities will be subject to a limitation based on the fair value of the debt securities.

Based on the credit quality of our existing debt securities portfolio, we do not expect the ACL for held-to-maturity and available-for-sale debt securities to be significant.

As of December 31, 2020, the Company holds one newly issued debt security that is classified as held-to-maturity.

Results for periods beginning after January 1, 2021 and presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable US GAAP.

The Company recorded a net increase in retained earnings of $ 2.4 million upon adoption of ASU 2016-13.

The transition adjustment includes a decrease in the ACL on loans of $ 4.5 million, a decrease in the ACL on purchased receivables of $ 73,000 , and an increase in the ACL on unfunded commitments of $ 1.2 million, net of the corresponding net decrease in deferred tax assets of $ 954,000 .

Accounting pronouncements to be implemented in future periods

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Report of Financial Reporting ("ASU 2020-04").

ASU 2020-04 was issued to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued.

The last expedient is a one-time election to sell or transfer debt securities classified as held to maturity.

The expedients are in effect from March 12, 2020, through December 31, 2022.

The Company will be able to use the expedients in this guidance to manage through the transition away from LIBOR, specifically for our loan portfolio, derivative contracts, and bond portfolio.

In January 2021, the FASB issued ASU No.

2021-01, Reference Rate Reform (Topic 848):

Scope, ("ASU 2021-01").

The amendments in ASU 2021-01 are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform.

The amendments clarify certain optional expedients and exceptions in Topic 848 for contract modifications apply to derivatives that are affected by the discounting transition.

LIBOR is a widely-referenced benchmark rate, which is published in five currencies and a range of tenors, and seeks to estimate the cost at which banks can borrow on an unsecured basis from other banks.

The administrator of LIBOR, ICE Benchmark Administration, published a consultation in December 2020 regarding its intention to cease the publication of LIBOR after December 31, 2021, with the exception of certain tenors of U.S.

dollar (USD) LIBOR that it proposed would remain available for use in legacy contracts or as otherwise enumerated by financial regulators until June 30, 2023.

The Company has some assets and liabilities referenced to LIBOR, such as commercial loans, derivatives, debt securities, and junior subordinated debentures.

As of December 31, 2021, we had approximately $ 180.5 million of assets, including $ 102.2 million in commercial loans and $ 78.1 million in debt securities, and $ 10.0 million of liabilities in the form of our junior subordinated debentures linked to USD LIBOR.

These amounts exclude derivative assets and liabilities on our consolidated balance sheet.

As of December 31, 2021, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $ 143.2 million.

Of this amount, $ 71.6 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers.

An additional $ 71.6 million in notional value represent corresponding swap agreements with third party financial institutions that offset the commercial loan swaps.

Swap agreements with third party institutions are $ 81.6 million, including an interest rate swap agreement for $ 10.0 million in notional value related to our junior subordinated debentures.

Each of the USD LIBOR-linked amounts referenced above are expected to vary in future periods as current contracts expire with potential replacement contracts using an alternative reference rate.

In an effort to mitigate the risks associated with a transition away from LIBOR, our Asset Liability Committee has undertaken initiatives to:

(i) develop more robust fallback language and disclosures related to the LIBOR transition, (ii) develop a plan to seek to amend legacy contracts to reference such fallback language or alternative reference rates, (iii) enhance systems to support commercial loans, securities, and derivatives linked to the Secured Overnight Financing Rate and other alternative reference rates, (iv) develop and evaluate internal guidance, policies and procedures focused on the transition away from LIBOR to alternative reference rate products, and (v) prepare and disseminate internal and external communications regarding the LIBOR transition.

ASU 2021-01 is not expected to have a material impact on the Company's consolidated financial statements.

NOTE 2 – Cash and Due from Banks

The Company is required to maintain cash balances or deposits with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank") sufficient to meet its statutory reserve requirements and for purposes of settling financial transactions and charges for Federal Reserve Bank services.

The average reserve requirement for the maintenance period, which included December 31, 2020, was zero .

The Company is no longer required to maintain minimum cash balances or deposits with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank").

The Company is required to maintain a $ 300,000 balance with a correspondent bank for outsourced servicing of ATMs.

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NOTE 4 - Investment Securities

The carrying values and approximate fair values of investment securities at the periods indicated are presented below:

(In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Marketable Equity Securities

The Company held marketable equity securities with fair values of $ 8.4 million and $ 9.1 million at December 31, 2021 and 2020, respectively.

The gross realized and unrealized gains (losses) recognized on marketable equity securities in other operating income in the Company's Consolidated Statements of Income for the periods indicated were as follows:

(In Thousands) 2021 2020 2019

Unrealized (loss) gain on marketable equity securities ($ 101 ) $ 61 $ 911

Gain on sale of marketable equity securities, net 67 98 —

Total ($ 34 ) $ 159 $ 911

Debt securities

Debt securities have been classified in the financial statements as available for sale or held to maturity.

The following table summarizes the amortized cost, estimated fair value, and ACL of debt securities and the corresponding amounts of gross unrealized gains and losses of available for sale securities recognized in accumulated other comprehensive income (loss) and 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

December 31, 2021

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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

Total securities held to maturity $ 10,000 $ — $ — $ 10,000

Allowance for credit losses — — — —

Total securities held to maturity, net of ACL $ 20,000 $ — ($ 836 ) $ 19,164

(In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

December 31, 2020

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Total securities available for sale $ 245,871 $ 1,956 ($ 194 ) $ 247,633

Securities held to maturity

Corporate bonds $ 10,000 $ — $ — $ 10,000

Total securities held to maturity $ 10,000 $ — $ — $ 10,000

Gross unrealized losses on investment 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 December 31, 2021 and 2020, were as follows:

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Treasury and government sponsored entities $ 31,270 ($ 47 ) $ — $ — $ 31,270 ($ 47 )

Corporate bonds 3,198 ( 5 ) — — 3,198 ( 5 )

Collateralized loan obligations 23,670 ( 118 ) 2,967 ( 24 ) 26,637 ( 142 )

Total $ 58,138 ($ 170 ) $ 2,967 ($ 24 ) $ 61,105 ($ 194 )

The unrealized losses on investments in both periods were caused by changes in interest rates.

At December 31, 2020 and 2019, there were 12 and 8 available for sale securities in an unrealized loss position, respectively, that have been in a loss position for less than twelve months.

There were 1 and 3 securities with unrealized losses at December 31, 2020 and 2019, respectively, that have been at a loss position for more than twelve months.

The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment.

The Company does not intend to sell, nor is it more likely than not that it will be required to sell, securities whose market value is less than carrying value.

Because it is more likely than not that the Company will hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

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 December 31, 2021 and 2020, there were 41 and 12 available for sale securities in an unrealized loss position without an ACL, respectively, that have been in a loss position for less than twelve months.

There were 3 and 1 available for sale securities without an ACL with unrealized losses at December 31, 2021 and 2020, respectively, that have been at a loss position for more than twelve months.

At December 31, 2021 and 2020, there were two and no held to maturity securities in an unrealized loss position without an ACL, respectively, that have been in a loss position for less than twelve months.

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 December 31, 2021, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no losses have been recognized in the Company's Consolidated Statements of Income.

At December 31, 2021 and 2020, $ 59.5 million and $ 77.9 million in securities were pledged for deposits and borrowings, respectively.

7 unchanged sentences

Corporate bonds

Within 1 year $ 2,241 $ 2,257 1.23 %

1-5 years $ 37,691 $ 37,912 2.41 %

3 unchanged sentences

1-5 years $ 5,000 $ 5,000 1.65 %

Over 10 years 32,999 32,964 1.60 %

5-10 years 46,431 46,418 1.39 %

Total $ 51,431 $ 51,418 1.42 %

7 unchanged sentences

Available for sale securities $ 4,219 $ 23 $ —

A summary of interest income for the years ending December 31, 2020, 2019, and 2018 on available for sale investment securities is as follows:

A summary of interest income for the years ending December 31, 2021, 2020, and 2019 on available for investment securities is as follows:

(In Thousands) 2021 2020 2019

5 unchanged sentences

Total $ 3,339 $ 4,832 $ 6,572

NOTE 5 - Loans and Credit Quality

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends in past due and nonaccrual loans, gross and net charge-offs, and movement in loan balances within the risk classifications.

The Company 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.

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.

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 either the repayment prospects for the asset or the Bank's credit position at some future date.

Special mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

Loans are currently protected, but are weak due to negative trends in the balance sheet and income statement.

Current cash flow may be insufficient to meet debt service, with prospects that the condition may not be temporary.

Profitability and key balance sheet ratios are below peers.

There is a lack of effective control over collateral or there are documentation deficiencies as well as a potential risk of payment default.

Collateral coverage is minimal in gross dollars or due to quality issues.

Financial information may be inadequate to show the recent condition of borrower.

The loan would not be approved as a new credit, and new loans would not be granted.

Management may not be adequately qualified or may have very limited prior experience with similar activities or markets.

The ability of management to cope with current conditions is questionable.

Internal conflict and turnover in key positions may be present.

Succession is unclear.

The borrower's asset quality is below average.

The capital base may be insufficient to cover capital losses.

Leverage is above average or increasing.

The industry outlook is generally negative but there are reasonable expectations of a turnaround within 12-18 months.

The firm may be new, resulting in competitive deficiencies in comparison to the older, more established firms in the industry.

Over-capacity may be evident in the industry.

Collateral and guarantor strength are comparable to Management Attention-6, but agings and certifications of accounts receivable and inventory are required and are not being provided on a regular basis.

Substandard – 8:

A "substandard" credit is inadequately protected by the current sound 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 the Bank will sustain some loss if the deficiencies are not corrected.

Loans have well-defined weaknesses where a payment default and/or a loss are possible, but not yet probable.

Cash flow is insufficient to service debt, with prospects that the condition is permanent.

Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower, and there is a likelihood that collateral will have to be liquidated and/or the guarantor called upon to repay the debt.

Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage.

Loan(s) may have been restructured at less than market terms or have been partially charged off.

If deficiencies are not corrected quickly, there is a probability of loss and the borrower’s ability to operate as a going concern may be deemed questionable/is questionable.

Management has no prior experience with similar activities, demonstrating inability to realistically address problems and meet commitments.

The borrower’s asset quality is poor.

The capital base is weak and insufficient to absorb continuing losses, and leverage is significantly above peers.

Liquidity is poor with significant reliance on short-term borrowing to support trade debt.

Key balance sheet ratios are substantially inferior to industry norms.

The industry is currently trending downward or demonstrating recovery from an adverse cycle.

The outlook is generally negative at this time.

Timing of recovery is unclear, but expectations are that market conditions will improve within 18 - 24 months.

The borrower has substantial competitive deficiencies when compared to other firms, such as excess capacity and over-supply, resulting in frequent and significant concessions and discounting.

Business failures are prevalent.

Collateral coverage is marginal or non-existent.

Collateral may be located outside the borrower’s market area.

There are no agings or certifications of accounts receivable and inventory being received from the borrower, and collateral has doubtful marketability/convertibility.

If guaranteed, the guarantor has limited outside worth and is highly leveraged with a poor credit report, which may reflect liens, collection problems, or lawsuits.

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.

Cash flow is insufficient to service debt.

The company has had a series of substantial losses.

If the current material adverse trends continue, it is unlikely the borrower will have the ability to meet the terms of the loan agreement.

It may be difficult to predict the exact amount of loss, but the probability of some loss is greater than 50%.

Loans are to be placed on non-accrual status when any portion is classified as doubtful.

Non-accrual loans would not be classified "doubtful" as long as the collateral appears adequate to retire the outstanding balance.

Management is clearly unable to address problems and meet commitments, and there is little expectation either of improvement or for sustaining the relationship with current management.

The company is highly illiquid with excessive leverage.

Key balance sheet ratios are at unacceptable levels, and downturn is severe.

Timing of recovery is undeterminable.

The company is unable to compete;

collateral and guarantees provide limited support.

An asset classified "loss" is considered uncollectable 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 loan has doubtful characteristics, but the loan will definitely not be repaid in full.

Debt service coverage clearly reflects the company's inability to service debt.

The borrower cannot generate sufficient cash flow to cover fixed charges.

All near-term and long-term trends concerning cash flow and earnings are negative.

The damage to the financial condition of the Company cannot be reversed at this point in time.

Collateral and guarantees provide no support.

The composition of the loan portfolio as of the periods indicated is as follows:

(In Thousands) Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deeds of trust Consumer other Total

December 31, 2020

AQR Pass $ 765,952 $ 37,380 $ 80,315 $ 153,607 $ 291,382 $ 43,290 $ 15,441 $ 21,963 $ 1,409,330

AQR Special Mention 6,241 385 — 3,028 17,097 2,154 — — 28,905

AQR Substandard 6,378 702 — 6,962 595 1,176 144 106 16,063

AQR Doubtful 1,487 — — — — — — — 1,487

NOTE 5 - 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 December 31, 2021 and 2020.

Loans Held for Investment

The Company adopted ASU 2016-13 effective January 1, 2021.

Upon adoption, the Company changed its loan segments for purposes of the calculation of the ACL.

Prior to January 1, 2021, the Company's loan segments were based on a combination of loan purpose and loan collateral.

Effective January 1, 2021 and thereafter, the Company's loan segments are primarily based on loan collateral.

The following table presents the Company's loan segments as of December 31, 2020 under the legacy segmentation and the new segmentation under ASU 2016-13:

(In Thousands) Pre-ASU 2016-13

Commercial loans $ 780,058

Real estate construction one-to-four family 38,467

Real estate construction other 80,315

Real estate term owner occupied 163,597

Real estate term non-owner occupied 309,074

Real estate term other 46,620

Consumer secured by 1st deeds of trust 15,585

Consumer other 22,069

Subtotal 1,455,785

Unearned origination fees, net of origination costs ( 11,735 )

Total loans $ 1,444,050

December 31, 2019

AQR Pass $ 394,107 $ 34,132 $ 61,808 $ 129,959 $ 295,482 $ 38,771 $ 15,860 $ 24,464 $ 994,583

AQR Special Mention 2,279 3,337 — 3,828 17,478 2,559 179 — 29,660

AQR Substandard 16,304 1,349 — 5,104 — 1,176 159 121 24,213

Unearned loan fees, net ( 11,735 )

Total portfolio loans $ 1,444,050

Post-ASU 2016-13

Commercial & industrial loans $ 619,304

Commercial real estate:

Owner occupied properties 234,364

Non-owner occupied and multifamily properties 394,860

Residential real estate:

1-4 family residential properties secured by first liens 33,463

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 18,114

1-4 family residential construction loans 32,760

Other construction, land development and raw land loans 84,352

Obligations of states and political subdivisions in the US 15,274

Agricultural production, including commercial fishing 13,093

Consumer loans 5,794

Other loans 4,407

Subtotal $ 1,455,785

Unearned origination fees, net of origination costs ( 5,085 )

Total loans $ 1,043,371

The above table includes $ 310.5 million in PPP loans administered by the SBA within the Commercial loan segment as of December 31, 2020.

Additionally, unearned origination fees, net of origination costs includes $ 5.9 million associated with SBA PPP loans as of December 31, 2020.

Unearned loan fees, net ($ 11,735 )

Total portfolio loans $ 1,444,050

The following table presents amortized cost and unpaid principal balance of loans for the periods indicated:

December 31, 2021 December 31, 2020

(In Thousands) Amortized Cost Unpaid Principal Difference Amortized Cost Unpaid Principal Difference

Commercial & industrial loans $ 448,338 $ 454,106 ($ 5,768 ) $ 612,254 $ 619,304 ($ 7,050 )

Commercial real estate:

Owner occupied properties 300,200 301,623 ( 1,423 ) 233,320 234,363 ( 1,043 )

Non-owner occupied and multifamily properties 435,311 438,631 ( 3,320 ) 392,452 394,860 ( 2,408 )

Residential real estate:

1-4 family residential properties secured by first liens 32,542 32,602 ( 60 ) 33,415 33,510 ( 95 )

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 19,610 19,489 121 18,236 18,114 122

1-4 family residential construction loans 36,222 36,542 ( 320 ) 32,500 32,760 ( 260 )

Other construction, land development and raw land loans 88,094 88,604 ( 510 ) 83,463 84,351 ( 888 )

Obligations of states and political subdivisions in the US 16,403 16,565 ( 162 ) 15,318 15,274 44

Agricultural production, including commercial fishing 27,959 28,082 ( 123 ) 12,968 13,093 ( 125 )

Consumer loans 4,801 4,763 38 5,734 5,794 ( 60 )

Other loans 4,406 4,422 ( 16 ) 4,390 4,407 ( 17 )

Total 1,413,886 1,425,429 ( 11,543 ) 1,444,050 1,455,830 ( 11,780 )

Allowance for credit losses ( 11,739 ) ( 21,136 )

$ 1,402,147 $ 1,425,429 ($ 11,543 ) $ 1,422,914 $ 1,455,830 ($ 11,780 )

The difference between the amortized cost and unpaid principal balance is primarily net deferred origination fees totaling $ 11.5 million and $ 11.7 million at December 31, 2021 and 2020, respectively, and premiums and discounts associated with acquired loans totaling $ 0 and $ 47,000 at December 31, 2021 and 2020, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 5.5 million and $ 7.1 million at December 31, 2021 and 2020, respectively, and was included in other assets in the Consolidated Balance Sheets.

Amortized cost in the above table includes $ 118.2 million and $ 304.6 million as of December 31, 2021 and 2020, respectively, in PPP loans administered by the SBA within the Commercial & industrial loan segment.

At December 31, 2021, approximately 75 % of the Company’s loans, excluding PPP loans, are secured by real estate and 1 % are unsecured.

2 unchanged sentences

The Company’s exposure to credit loss, if any, is the outstanding amount of the loan if the collateral is determined to be of no value.

Nonaccrual Loans

Nonaccrual loans net of government guarantees totaled $ 9.6 million and $ 14.0 million at December 31, 2020 and December 31, 2019, respectively.

Interest income which would have been earned on nonaccrual loans for 2020, 2019, and 2018 amounted to $ 856,000 , $ 1.3 million, and $ 1.3 million, respectively.

Additionally, the Company recognized interest income of $ 924,000 , $ 301,000 , and $ 159,000 in 2020, 2019, and 2018, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero.

Nonaccrual loans at the periods indicated, by segment are presented below:

(In Thousands) 30-59 Days

Past Due 60-89 Days

Past Due Greater Than

90 Days Past Due Current Total

December 31, 2020

Allowance for Credit Losses

The activity in the ACL related to loans held for investment is as follows:

Beginning Balance Impact of adopting ASC 326 Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance

(In Thousands)

Commercial $ 7,973 ($ 7,973 ) $— $— $— —

Real estate construction one-to-four family — — 702 — 702

Real estate construction 1-4 family 679 ( 679 ) — — — —

Real estate construction other 1,179 ( 1,179 ) — — — —

Real estate term owner occupied 2,625 ( 2,625 ) — — — —

Real estate term non-owner occupied 5,133 ( 5,133 ) — — — —

Real estate term other 779 ( 779 ) — — — —

Consumer secured by 1st deeds of trust — — — 63 63

Consumer secured by 1st deed of trust 261 ( 261 ) — — — —

Consumer other 400 ( 400 ) — — — —

Total nonaccrual loans 68 229 7,071 3,752 11,120

Government guarantees on nonaccrual loans ( 35 ) ( 258 ) — ( 1,228 ) ( 1,521 )

Net nonaccrual loans $ 33 ($ 29 ) $ 7,071 $ 2,524 $ 9,599

December 31, 2019

Unallocated 2,107 ( 2,107 ) — — — —

Commercial & industrial loans — 4,348 ( 122 ) ( 1,452 ) 253 3,027

Commercial real estate:

Owner occupied properties — 3,579 ( 412 ) — 9 3,176

Non-owner occupied and multifamily properties — 4,944 ( 2,014 ) — — 2,930

Residential real estate:

1-4 family residential properties secured by first liens — 673 ( 234 ) — — 439

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — 419 ( 242 ) — 38 215

1-4 family residential construction loans — 454 ( 334 ) — — 120

Other construction, land development and raw land loans — 1,994 ( 359 ) — — 1,635

Obligations of states and political subdivisions in the US — 44 ( 12 ) — — 32

Agricultural production, including commercial fishing — 49 11 — 31 91

Consumer loans — 118 ( 65 ) — 14 67

Other loans — 3 4 — — 7

Total $ 21,136 ($ 4,511 ) ($ 3,779 ) ($ 1,452 ) $ 345 $ 11,739

Beginning Balance Provision (benefit) Charge-offs Recoveries Ending Balance

(In Thousands)

Commercial $ 6,604 $ 1,680 ($ 1,021 ) $ 710 $ 7,973

Real estate construction one-to-four family — — 1,349 — 1,349

Real estate construction 1-4 family 643 36 — — 679

Real estate construction other 1,017 162 — — 1,179

Real estate term owner occupied 2,188 522 ( 85 ) — 2,625

Real estate term non-owner occupied 5,180 ( 47 ) — — 5,133

Real estate term other 671 106 — 2 779

Consumer secured by 1st deeds of trust — — — 68 68

Consumer secured by 1st deed of trust 270 ( 9 ) — — 261

Consumer other 436 ( 46 ) ( 15 ) 25 400

Total nonaccrual loans 1,937 474 6,010 6,935 15,356

Government guarantees on nonaccrual loans ( 268 ) — — ( 1,137 ) ( 1,405 )

Net nonaccrual loans $ 1,669 $ 474 $ 6,010 $ 5,798 $ 13,951

Past Due Loans

There was one past due loan greater than 90 days and still accruing interest at December 31, 2020 and no past due loans greater than 90 days and still accruing interest at December 31, 2019.

Past due loans and nonaccrual loans at the periods indicated are presented below by loan class:

(In Thousands) 30-59 Days

Accruing 60-89 Days

Accruing Greater Than

Accruing Total Past

Due Nonaccrual Current Total

December 31, 2020

Unallocated 2,079 28 — — 2,107

Total $ 19,088 $ 2,432 ($ 1,121 ) $ 737 $ 21,136

As of December 31, 2021 the ACL decreased to $ 11.7 million.

The Company primarily uses a DCF method to estimate ACL for loans.

The Company utilizes and forecasts unemployment in Alaska as the primary loss driver in the DCF model.

The Company also utilizes and forecasts either the one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses.

Consistent forecasts of the loss drivers are used across the loan segments.

At December 31, 2021, as compared to January 1, 2021, the Company forecasted a significantly lower unemployment rate in Alaska, a slightly higher one-year percentage change in the national commercial real estate price index, and a higher one-year percentage change in the Alaska home price index over the reasonable and supportable forecast period.

Specifically regarding the forecasts used to calculate the December 31, 2021 ACL, management expects unemployment to decline each quarter in 2022 as compare to actual levels observed in Alaska as of December 2021.

This rate is still above pre-pandemic levels over the forecast period, but is lower than rates previously projected by management.

The Company also applies qualitative factors in our CECL model, and these factors also improved as of December 31, 2021 as compared to January 1, 2021 due to increases in oil prices.

Additionally, the ACL for individually impaired loans decreased during the 2021 due to pay downs.

These factors, which decreased the ACL during 2021, were only partially offset by an increase in loan balances.

The following table presents loans individually and collectively evaluated for impairment and their respective allowance for credit loss allocations as of December 31, 2020, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:

(In Thousands) Loan Evaluation ALLL Allocations

Individually Collectively Total Individually Collectively Total

Commercial $ 7,786 $ 764,682 $ 772,468 $ 13 $ 7,960 $ 7,973

Real estate construction one-to-four family — — — — 702 37,765 38,467

Real estate construction 1-4 family 702 $ 37,478 38,180 — 679 679

Real estate construction other — $ 79,403 79,403 — 1,179 1,179

4 unchanged sentences

Consumer other 82 $ 22,168 22,250 — 400 400

Subtotal $ 888 $ — $ 449 $ 1,337 $ 11,120 $ 1,443,328 $ 1,455,785

Unearned origination fees, net of origination costs ( 11,735 )

Unallocated — — — — 2,107 2,107

Total $ 18,028 $ 1,426,022 $ 1,444,050 $ 13 $ 21,123 $ 21,136

December 31, 2019

The following table presents information pertaining to impaired loans as of December 31, 2020, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:

Impaired Loans With a Valuation Allowance Impaired Loans Without a Valuation Allowance

(In Thousands) Recorded Investment Unpaid Principal Related Allowance Recorded Investment Unpaid Principal

Commercial $ 308 $ 308 $ 13 $ 7,478 $ 8,287

Real estate construction one-to-four family — — — — 1,349 37,469 38,818

Real estate construction 1-4 family — — — 702 702

Real estate construction other — — — — —

4 unchanged sentences

Consumer other — — — 82 87

Subtotal $ 1,534 $ — $ — $ 1,534 $ 15,356 $ 1,031,566 $ 1,048,456

Unearned origination fees, net of origination costs ( 5,085 )

Total $ 308 $ 308 $ 13 $ 17,720 $ 18,619

Impaired Loans

At December 31, 2020 and 2019, the recorded investment in loans that are considered to be impaired was $ 18.0 million and $ 24.7 million, respectively.

The following table presents information about impaired loans by class for the years ended December 31, 2020 and 2019:

(In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance

The following table presents average impaired loans information, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13, and interest recognized on such loans, for the year ended December 31, 2020:

(In Thousands) Average Impaired Loans Interest Recognized

Commercial $ 10,964 $ 147

Real estate construction 1-4 family 781 —

Real estate construction other — —

Real estate term owner occupied 6,739 125

Real estate term non-owner occupied 562 29

Real estate term other 1,551 20

Consumer secured by 1st deed of trust 299 12

Consumer other 86 —

Total $ 20,982 $ 333

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 the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – 9:

The loan has substandard characteristics, and available information suggests that it is unlikely that the loan will be repaid in its entirety.

An asset classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted.

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.

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

Pass $ 2,028 $ 1,645 $ 430 $ 95 $ — $ 208 $ 4,406

Classified — — — — — — —

Total other loans $ 2,028 $ 1,645 $ 430 $ 95 $ — $ 208 $ 4,406

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

The following table presents the Company's portfolio of risk-rated loans by grade as of December 31, 2020:

Pass Classified Total

(In Thousands)

December 31, 2020

With no related allowance recorded

Commercial - AQR substandard $ 6,299 $ 6,979 $—

Commercial - AQR doubtful 1,179 1,308 —

Real estate construction one-to-four family - AQR substandard 702 702 —

Real estate term owner occupied - AQR substandard 6,962 7,047 —

Real estate term non-owner occupied - AQR pass 176 176 —

Real estate term non-owner occupied - AQR substandard 595 595 —

Real estate term other - AQR pass 291 291 —

Real estate term other - AQR substandard 1,176 1,176 —

Consumer secured by 1st deeds of trust - AQR pass 114 114 —

Consumer secured by 1st deeds of trust - AQR substandard 144 144 —

Consumer other - AQR substandard 82 87 —

Subtotal $ 17,720 $ 18,619 $—

With an allowance recorded

Commercial - AQR doubtful $ 308 $ 308 $ 13

Subtotal $ 308 $ 308 $ 13

Commercial - AQR substandard $ 6,299 $ 6,979 $ —

Commercial - AQR doubtful 1,487 1,616 13

Real estate construction one-to-four family - AQR substandard 702 702 —

Real estate term owner-occupied - AQR substandard 6,962 7,047 —

Real estate term non-owner occupied - AQR pass 176 176 —

Real estate term non-owner occupied - AQR substandard 595 595 —

Real estate term other - AQR pass 291 291 —

Real estate term other - AQR substandard 1,176 1,176 —

Consumer secured by 1st deeds of trust - AQR pass 114 114 —

Consumer secured by 1st deeds of trust - AQR substandard 144 144 —

Consumer other - AQR substandard 82 87 —

Commercial $ 758,362 $ 14,106 $ 772,468

Real estate construction 1-4 family 37,093 1,087 38,180

Real estate construction other 79,403 — 79,403

Real estate term owner occupied 152,734 9,990 162,724

Real estate term non-owner occupied 289,555 17,692 307,247

Real estate term other 42,900 3,330 46,230

Consumer secured by 1st deed of trust 15,404 144 15,548

Consumer other 22,144 106 22,250

Portfolio loans 1,397,595 46,455 1,444,050

Government guarantees ( 334,639 ) ( 14,587 ) ( 349,226 )

Portfolio loans, net of government guarantees $ 1,062,956 $ 31,868 $ 1,094,824

Past Due Loans

The following tables present an aging of contractually past due loans as of the periods indicated:

(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

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 $ —

(In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance

December 31, 2020

With no related allowance recorded

Commercial - AQR substandard $ 15,517 $ 15,582 $—

Real estate construction one-to-four family - AQR substandard 1,349 1,349 —

Real estate term owner occupied - AQR substandard 5,104 5,104 —

Real estate term non-owner occupied - AQR pass 178 178 —

Real estate term other - AQR pass 417 417 —

Real estate term other - AQR substandard 1,176 1,176 —

Consumer secured by 1st deeds of trust - AQR pass 122 122 —

Consumer secured by 1st deeds of trust - AQR substandard 159 163 —

Consumer other - AQR substandard 90 94 —

Subtotal $ 24,112 $ 24,185 $—

With an allowance recorded

Commercial - AQR substandard $ 561 $ 561 $ 17

Subtotal $ 561 $ 561 $ 17

Commercial - AQR substandard $ 16,078 $ 16,143 $ 17

Real estate construction one-to-four family - AQR substandard 1,349 1,349 —

Real estate term owner-occupied - AQR substandard 5,104 5,104 —

Real estate term non-owner occupied - AQR pass 178 178 —

Real estate term other - AQR pass 417 417 —

Real estate term other - AQR substandard 1,176 1,176 —

Consumer secured by 1st deeds of trust - AQR pass 122 122 —

Consumer secured by 1st deeds of trust - AQR substandard 159 163 —

Consumer other - AQR substandard 90 94 —

Commercial & industrial loans $ 242 $ 229 $ 2,675 $ 3,146 $ 609,108 $ 612,254 $ —

Commercial real estate:

Owner occupied properties 2,203 — 2,459 4,662 228,658 233,320 449

Non-owner occupied and multifamily properties — — — — 392,452 392,452 —

Residential real estate:

1-4 family residential properties secured by first liens 446 — — 446 32,969 33,415 —

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 38 — 139 177 18,059 18,236 —

1-4 family residential construction loans — — 702 702 31,798 32,500 —

Other construction, land development and raw land loans — — 1,545 1,545 81,918 83,463 —

Obligations of states and political subdivisions in the US — — — — 15,318 15,318 —

Agricultural production, including commercial fishing — — — — 12,968 12,968 —

Consumer loans — — 272 272 5,462 5,734 —

Other loans — — — — 4,390 4,390 —

Total $ 2,929 $ 229 $ 7,792 $ 10,950 $ 1,433,100 $ 1,444,050 $ 449

The unpaid principal balance included in the table above represents the recorded investment at the dates indicated, plus amounts charged-off for book purposes.

The following table summarizes our average recorded investment and interest income recognized on impaired loans for years ended December 31, 2020 and 2019, respectively:

Year Ended December 31, 2020 2019

(In Thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized

With no related allowance recorded

Commercial - AQR pass $ — $ — $ 532 $ 35

Commercial - AQR substandard 9,111 139 16,892 405

Commercial - AQR doubtful 433 — — —

Real estate construction one-to-four family - AQR substandard 781 — 1,933 —

Real estate term owner occupied - AQR substandard 6,739 125 5,747 113

Real estate term non-owner occupied - AQR pass 177 10 251 19

Real estate term non-owner occupied - AQR substandard 385 19 230 —

Real estate term other - AQR pass 362 20 448 31

Real estate term other - AQR substandard 1,189 — 1,046 —

Consumer secured by 1st deeds of trust - AQR pass 118 9 126 13

Consumer secured by 1st deeds of trust - AQR substandard 148 3 202 7

Consumer secured by 1st deeds of trust - AQR loss 33 — — —

Consumer other - AQR substandard 86 — 70 —

Subtotal $ 19,562 $ 325 $ 27,477 $ 623

With an allowance recorded

Commercial - AQR substandard $ 1,343 $ 8 $ 683 $ —

Commercial - AQR doubtful 77 — — —

Real estate term other - AQR substandard — — 163 —

Consumer secured by 1st deeds of trust - AQR substandard — — 72 —

Subtotal $ 1,420 $ 8 $ 918 $ —

Commercial - AQR pass $ — $ — $ 532 $ 35

Commercial - AQR substandard 10,454 147 17,575 405

Commercial - AQR doubtful 510 — — —

Real estate construction one-to-four family - AQR substandard 781 — 1,933 —

Real estate term owner-occupied - AQR substandard 6,739 125 5,747 113

Real estate term non-owner occupied - AQR pass 177 10 251 19

Real estate term non-owner occupied - AQR substandard 385 19 230 —

Real estate term other - AQR pass 362 20 448 31

Real estate term other - AQR substandard 1,189 — 1,209 —

Consumer secured by 1st deeds of trust - AQR pass 118 9 126 13

Consumer secured by 1st deeds of trust - AQR substandard 148 3 274 7

Consumer secured by 1st deeds of trust - AQR loss 33 — — —

Consumer other - AQR substandard 86 — 70 —

Total Impaired Loans $ 20,982 $ 333 $ 28,395 $ 623

The average recorded investment was $ 34.7 million, and interest income recognized on impaired loans was $ 847,000 for the year ended December 31, 2018.

Nonaccrual Loans

Nonaccrual loans net of government guarantees totaled $ 10.7 million and $ 9.6 million at December 31, 2021 and December 31, 2020, respectively.

The following table presents loans on nonaccrual status and loans on nonaccrual status for which there was no related allowance for credit losses:

December 31, 2021 December 31, 2020

(In Thousands) Nonaccrual Nonaccrual With No ACL Nonaccrual Nonaccrual With No ACL

Commercial & industrial loans $ 4,350 $ 4,298 $ 3,848 $ 3,513

Commercial real estate:

Owner occupied properties 3,506 3,506 4,620 4,582

Residential real estate:

1-4 family residential properties secured by first liens 1,778 1,778 160 160

1-4 family residential properties secured by junior liens

and revolving secured by 1-4 family first liens 271 215 242 221

1-4 family residential construction loans 109 109 702 702

Other construction, land development and raw land loans 1,636 1,636 1,545 1,545

Consumer loans — — 3 —

Total nonaccrual loans 11,650 11,542 11,120 10,723

Government guarantees on nonaccrual loans ( 978 ) ( 978 ) ( 1,483 ) ( 1,483 )

Net nonaccrual loans $ 10,672 $ 10,564 $ 9,637 $ 9,240

Interest income which would have been earned on nonaccrual loans for 2021, 2020, and 2019 amounted to $ 744,000 , $ 856,000 , and $ 1.3 million, respectively.

There was $ 10,000 interest on nonaccrual loans reversed through interest income in 2021, and there was $ 12,000 in interest on nonaccrual loans reversed through interest income in 2020.

There was no interest earned on nonaccrual loans with a principal balance during 2021 or 2020.

However, the Company recognized interest income of $ 1.6 million, $ 924,000 , and $ 301,000 in 2021, 2020, and 2019, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero.

Troubled Debt Restructurings

Loans classified as TDRs totaled $ 10.6 million and $ 7.9 million at December 31, 2021 and 2020, respectively.

A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession of some kind.

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.

1 unchanged sentence

The Company has elected to adopt these provisions of the CARES Act.

As of December 301 2020, 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:

As of December 31, 2021 and 2020, 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 December 31, 2021

(Dollars in thousands) Interest Only Full Payment Deferral Total

1 unchanged sentence

Number of modifications 16 1 17

Loan Modifications due to COVID-19 as of December 31, 2020

(Dollars in thousands) Interest Only Full Payment Deferral Total

Portfolio loans $ 43,379 $ 22,165 $ 65,544

Number of modifications 23 11 34

The Company has granted a variety of concessions to borrowers in the form of loan modifications.

8 unchanged sentences

Any other type of modification, including the use of multiple categories above.

AQR pass graded loans included above in the impaired loan data are loans classified as TDRs.

By definition, TDRs are considered impaired loans.

All of the Company’s TDRs are included in impaired loans.

The following table presents the breakout between newly restructured loans that occurred during 2021 and restructured loans that occurred prior to 2021 that are still included in portfolio loans.

4 unchanged sentences

New Troubled Debt Restructurings

Commercial - AQR substandard $ 1,590 $ 161 $ 1,751

Commercial & industrial loans $ — $ 3,118 $ 3,118

Commercial real estate:

Owner occupied properties — 350 350

Residential real estate:

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens — 139 139

Other construction, land development and raw land loans — 577 577

Subtotal — 4,184 4,184

5 unchanged sentences

Pre-Modification Outstanding Recorded Investment:

Commercial - AQR substandard 2 $ — $ 3,249 $ 164 $ — $ 3,413

Commercial & industrial loans 2 $ — $ 3,792 $ — $ — $ 3,792

Commercial real estate:

Owner occupied properties 1 — 360 — — 360

Residential real estate:

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 1 — — 139 — 139

Other construction, land development and raw land loans 1 — 577 — — 577

Total 5 $ — $ 4,729 $ 139 $ — $ 4,868

Post-Modification Outstanding Recorded Investment:

Commercial - AQR substandard 2 $ — $ 1,590 $ 161 $ — $ 1,751

Commercial & industrial loans 1 $ — $ 3,118 $ — $ — $ 3,118

Commercial real estate:

Owner occupied properties 1 — 350 — — 350

Residential real estate:

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 1 — — 139 — 139

Other construction, land development and raw land loans 1 — 577 — — 577

Total 4 $ — $ 4,045 $ 139 $ — $ 4,184

2 unchanged sentences

Pre-Modification Outstanding Recorded Investment:

Commercial - AQR substandard 7 $ — $ — $ 509 $ 2,585 $ 3,094

Real estate term owner occupied - AQR substandard 1 — — 192 — 192

Commercial & industrial loans 2 $ — $ 3,249 $ 164 $ — $ 3,413

Total 2 $ — $ 3,249 $ 164 $ — $ 3,413

Post-Modification Outstanding Recorded Investment:

Commercial - AQR substandard 7 $ — $ — $ 408 $ 2,561 $ 2,969

Real estate term owner occupied - AQR substandard 1 — — 182 — 182

Commercial & industrial loans 2 $ — $ 1,590 $ 161 $ — $ 1,751

Total 2 $ — $ 1,590 $ 161 $ — $ 1,751

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in TDRs at December 31, 2021.

There were zero charge-offs in 2020 on loans that were later classified as a TDR and there were $ 64,000 of charge-offs in 2019 on loans that were later classified as a TDR in 2019.

All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the Allowance.

There was one TDR with specific impairment at December 31, 2020 and none at December 31, 2019, respectively.

There were zero charge-offs in 2021 and 2020 on loans that were later classified as a TDR.

There were no loans that were restructured during 2021, 2020, or 2019 that also subsequently defaulted within the first twelve months of restructure in those same periods.

The following table presents TDRs that occurred during 2018 that subsequently defaulted during the twelve-months ended December 31, 2018:

December 31, 2018

Number of Contracts Recorded Investment

(In Thousands)

Troubled Debt Restructurings that Subsequently Defaulted:

Commercial - AQR substandard 4 $ 1,166

Real estate term owner occupied - AQR substandard 2 1,694

Total 6 $ 2,860

Loans to Related Parties

Certain directors, and companies of which directors are principal owners, have loans and other transactions such as architectural fees with the Company.

Certain directors, and companies of which directors are principal owners, have loans with the Company.

Such transactions are made on substantially the same terms, including interest rates and collateral required, as those prevailing for similar transactions of unrelated parties.

5 unchanged sentences

Balance, end of year $ 191 $ 217 $ 309

The Company had $ 15,000 of unfunded loan commitments to these directors or their related interests on December 31, 2020 and 2019.

The Company had $ 115,000 of unfunded loan commitments to these directors or their related interests on December 31, 2021 and $ 15,000 of unfunded loan commitments on December 31, 2020.

Pledged Loans

At December 31, 2021 and 2020, there were no loans pledged as collateral to secure public deposits.

NOTE 6 - Allowance for Loan Losses

The following table details activity in the Allowance for the periods indicated:

Balance, beginning of period $ 6,604 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079 $ 19,088

Charge-Offs ( 1,021 ) — — ( 85 ) — — — ( 15 ) — ( 1,121 )

Recoveries 710 — — — — 2 — 25 — 737

Provision (benefit) 1,680 36 162 522 ( 47 ) 106 ( 9 ) ( 46 ) 28 2,432

Balance, end of period $ 7,973 $ 679 $ 1,179 $ 2,625 $ 5,133 $ 779 $ 261 $ 400 $ 2,107 $ 21,136

Balance, end of period:

Individually evaluated

for impairment $ 13 $ — $ — $ — $ — $ — $ — $ — $ — $ 13

Balance, end of period:

Collectively evaluated

for impairment $ 7,960 $ 679 $ 1,179 $ 2,625 $ 5,133 $ 779 $ 261 $ 400 $ 2,107 $ 21,123

Balance, beginning of period $ 5,660 $ 675 $ 1,275 $ 2,027 $ 5,799 $ 716 $ 306 $ 426 $ 2,635 $ 19,519

Charge-Offs ( 195 ) — — — — — ( 4 ) ( 18 ) — ( 217 )

Recoveries 908 — — — — 28 — 25 — 961

Provision (benefit) 231 ( 32 ) ( 258 ) 161 ( 619 ) ( 73 ) ( 32 ) 3 ( 556 ) ( 1,175 )

Balance, end of period $ 6,604 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079 $ 19,088

Balance, end of period:

Individually evaluated

for impairment $ 17 $ — $ — $ — $ — $ — $ — $ — $ — $ 17

Balance, end of period:

Collectively evaluated

for impairment $ 6,587 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079 $ 19,071

Balance, beginning of period $ 6,172 $ 629 $ 1,566 $ 2,194 $ 6,043 $ 725 $ 315 $ 307 $ 3,510 $ 21,461

Charge-Offs ( 1,716 ) — — — — ( 28 ) ( 143 ) ( 39 ) — ( 1,926 )

Recoveries 442 — — — 3 12 27 — 484

Provision (benefit) 762 46 ( 291 ) ( 167 ) ( 244 ) 16 122 131 ( 875 ) ( 500 )

Balance, end of period $ 5,660 $ 675 $ 1,275 $ 2,027 $ 5,799 $ 716 $ 306 $ 426 $ 2,635 $ 19,519

Balance, end of period:

Individually evaluated

for impairment $ 14 $ — $ — $ — $ — $ — $ — $ — $ — $ 14

Balance, end of period:

Collectively evaluated

for impairment $ 5,646 $ 675 $ 1,275 $ 2,027 $ 5,799 $ 716 $ 306 $ 426 $ 2,635 $ 19,505

The following is a detail of the recorded investment, including unearned origination fees, net of origination costs, in the loan portfolio, segregated by amounts evaluated individually or collectively in the Allowance at the periods indicated:

December 31, 2020

Balance, end of period $ 772,468 $ 38,180 $ 79,403 $ 162,724 $ 307,247 $ 46,230 $ 15,548 $ 22,250 $ 1,444,050

Balance, end of period:

Individually evaluated

for impairment $ 7,786 $ 702 $ — $ 6,962 $ 770 $ 1,467 $ 259 $ 82 $ 18,028

Balance, end of period:

Collectively evaluated

for impairment $ 764,682 $ 37,478 $ 79,403 $ 155,762 $ 306,477 $ 44,763 $ 15,289 $ 22,168 $ 1,426,022

December 31, 2019

Balance, end of period $ 411,327 $ 38,503 $ 60,906 $ 138,181 $ 311,302 $ 42,200 $ 16,191 $ 24,761 $ 1,043,371

Balance, end of period:

Individually evaluated

for impairment $ 16,077 $ 1,349 $ — $ 5,104 $ 178 $ 1,594 $ 281 $ 90 $ 24,673

Balance, end of period:

Collectively evaluated

for impairment $ 395,250 $ 37,154 $ 60,906 $ 133,077 $ 311,124 $ 40,606 $ 15,910 $ 24,671 $ 1,018,698

The following represents the balance of the Allowance for the periods indicated segregated by segment and class:

(In Thousands) Total Commercial Real estate construction 1-4 family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deeds of trust Consumer other Unallocated

December 31, 2020

Individually evaluated for impairment

AQR Doubtful $ 13 $ 13 $ — $ — $ — $ — $ — $ — $ — $ —

Collectively evaluated for impairment:

AQR Pass 18,626 7,801 672 1,179 2,573 5,001 742 261 397 —

AQR Special Mention 384 156 7 — 52 132 37 — — —

AQR Substandard 6 3 — — — — — — 3 —

Unallocated 2,107 — — — — — — — — 2,107

$ 21,136 $ 7,973 $ 679 $ 1,179 $ 2,625 $ 5,133 $ 779 $ 261 $ 400 $ 2,107

December 31, 2019

Individually evaluated for impairment:

AQR Substandard $ 17 $ 17 $ — $ — $ — $ — $ — $ — $ — $ —

Collectively evaluated for impairment:

AQR Pass 16,399 6,514 588 1,017 2,125 4,829 629 266 431 —

AQR Special Mention 579 64 55 — 63 351 42 4 — —

AQR Substandard 14 9 — — — — — — 5 —

Unallocated 2,079 — — — — — — — — 2,079

$ 19,088 $ 6,604 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079

NOTE 6 - Purchased Receivables

We purchase accounts receivable from our business customers and provide them with short-term working capital.

We provide this service to our customers in Alaska and in Washington and the greater west coast through NFS.

Our purchased receivable activity is guided by policies that outline risk management, documentation, and approval limits.

The policies are reviewed and approved annually by the Board of Directors.

Purchased receivables are carried at their principal amount outstanding, net of a reserve for inherent losses that have not yet been identified, and have a maturity of less than one year .

Purchased receivable balances are charged against this reserve when management believes that collection of principal is unlikely.

Management evaluates the adequacy of the reserve for purchased receivable losses based on historical loss experience by segment and class of receivable and its assessment of current economic conditions.

As of December 31, 2020, the Company has one segment and class of 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 are no purchased receivables past due at December 31, 2021 or 2020, and there were no restructured purchased receivables in 2021, 2020, or 2019.

Income on purchased receivables is accrued and recognized on the balance outstanding using an effective interest method except when management believes doubt exists as to the collectability of the income or principal.

As of December 31, 2020, the Company is accruing income on all purchased receivable balances outstanding.

There were no nonperforming purchased receivables as of December 31, 2021 or 2020.

The following table summarizes the components of net purchased receivables at December 31, for the years indicated:

1 unchanged sentence

Purchased receivables $ 6,987 $ 13,995

Reserve for purchased receivable losses ( 73 ) ( 94 )

Allowance for credit losses - purchased receivables — ( 73 )

Total $ 6,987 $ 13,922

The following table sets forth information regarding changes in the purchased receivable reserve for the periods indicated:

The following table sets forth information regarding changes in the ACL on purchased receivables for the periods indicated:

(In Thousands) 2021 2020 2019

Balance at beginning of year $ 73 $ 94 $ 190

Reserve for (recovery from) purchased receivables ( 21 ) ( 96 ) ( 10 )

Impact of adopting ASC 326 ( 73 ) — —

Charge-offs — — —

Recoveries — — —

Charge-offs net of recoveries — — —

Benefit for purchased receivables — ( 21 ) ( 96 )

Balance at end of year $ — $ 73 $ 94

The Company recorded no charge-offs of purchased receivables in 2020, 2019, or 2018.

NOTE 8 - Other Real Estate Owned

At December 31, 2020 and 2019, the Company held $ 7.3 million and $ 7.0 million, respectively, as OREO.

The following table details net operating (income) expense related to OREO for the years indicated:

Years Ended December 31,

(In Thousands) 2020 2019 2018

OREO (income) expense, net rental income and gains on sale:

OREO operating expense $ 658 $ 693 $ 802

Impairment on OREO — — —

Rental income on OREO ( 509 ) ( 506 ) ( 541 )

Gains on sale of OREO ( 391 ) ( 380 ) ( 3 )

Total ($ 242 ) ($ 193 ) $ 258

NOTE 9 - Premises and Equipment

The following summarizes the components of premises and equipment at December 31 for the years indicated:

(In Thousands) Useful Life 2020 2019

Land $ 5,137 $ 5,137

Furniture and equipment 3 - 7 years

13,157 11,778

Tenant improvements 2 - 15 years

Buildings 39 years 37,618 36,205

Total Premises and Equipment 65,094 62,281

Accumulated depreciation and amortization ( 26,992 ) ( 23,859 )

Total Premises and Equipment, Net $ 38,102 $ 38,422

Depreciation expense and amortization of leasehold improvements was $ 3.1 million, $ 3.0 million, and $ 2.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Related Party Transactions:

The Company made no payments to related parties in 2020 or 2019 and $ 49,000 in payments to related parties for design consultation for Bank branches for the year ended December 31, 2018.

NOTE 7 - Servicing Rights

11 unchanged sentences

(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:

The following table details information related to our serviced mortgage loan portfolio as of the dates indicated:

(In Thousands) December 31, 2021 December 31, 2020

1 unchanged sentence

MSR as a percentage of serviced loans 1.78 % 1.64 %

The Company recognized servicing fees of $ 2.7 million, $ 2.4 million, and $ 1.9 million during 2020, 2019, and 2018, respectively, which includes contractually specified servicing fees and ancillary fees are included in "Mortgage banking income" as a component of other noninterest income in the Company's Consolidated Statements of Income.

The Company recognized servicing fees of $ 2.9 million, $ 2.7 million, and $ 2.4 million during 2021, 2020, and 2019, respectively, which includes contractually specified servicing fees and ancillary fees which are included in "Mortgage banking income" as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the key assumptions used in measuring the fair value of mortgage servicing rights as of December 31, 2021 and 2020:

16 unchanged sentences

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 note rates.

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.

9 unchanged sentences

Key assumptions used in measuring the fair value of CSRs as of December 31, 2021 and 2020 include a conditional prepayment rate of 16.08 % and 9.66 % and a discount rate of 9.94 % and 9.46 %, respectively.

NOTE 11 - Goodwill and Intangible Assets

A summary of goodwill and intangible assets at December 31, 2020 and 2019, is as follows:

NOTE 8 - Other Real Estate Owned

At December 31, 2021 and 2020, the Company held $ 5.6 million and $ 7.3 million, respectively, as OREO.

The following table details net operating (income) expense related to OREO for the years indicated:

Years Ended December 31,

(In Thousands) 2021 2020 2019

Intangible assets:

Goodwill $ 15,017 $ 15,017

Core deposit intangible 79 127

Trade name intangible 950 950

OREO (income) expense, net rental income and gains on sale:

OREO operating expense $ 777 $ 658 $ 693

Rental income on OREO ( 524 ) ( 509 ) ( 506 )

Gains on sale of OREO ( 685 ) ( 391 ) ( 380 )

Total ($ 432 ) ($ 242 ) ($ 193 )

The Company performed goodwill impairment testing at March 31, 2020, December 31, 2020 and December 31, 2019 in accordance with the policy described in Note 1 to the financial statements.

The Company's policy dictates that the Company will perform interim impairment testing when a triggering event occurs.

The Company performed the interim impairment test as of March 31, 2020 using a discounted cash flow approach.

The estimated fair value of each of the Company's segments exceeded its carrying value as of March 31, 2020, and management therefore concluded that no impairment existed at that time.

At December 31, 2020, the Company performed its annual impairment test using a quantitative assessment.

The Company estimated the fair value of the Company using two valuation methodologies including a control premium approach and a discounted cash flow approach.

We then compared the estimated fair value of each segment to the carrying value at December 31, 2020 and concluded that no impairment existed at that time.

The Company recorded amortization expense of its intangible assets of $ 48,000 , $ 60,000 , and $ 70,000 for the years ended December 31, 2020, 2019, and 2018, respectively.

Accumulated amortization for intangible assets was $ 6.0 million and $ 5.9 million at December 31, 2020 and 2019.

The future amortization expense required on these assets is as follows:

(In Thousands)

NOTE 9 - Premises and Equipment

The following summarizes the components of premises and equipment at December 31 for the years indicated:

(In Thousands) Useful Life 2021 2020

Land $ 5,137 $ 5,137

Furniture and equipment 3 - 7 years

14,287 13,157

Tenant improvements 2 - 15 years

Buildings 39 years 37,283 37,618

Total Premises and Equipment 67,101 65,094

Accumulated depreciation and amortization ( 29,937 ) ( 26,992 )

Total Premises and Equipment, Net $ 37,164 $ 38,102

Depreciation expense and amortization of leasehold improvements was $ 3.3 million, $ 3.1 million, and $ 3.0 million for the years ended December 31, 2021, 2020, and 2019, respectively.

NOTE 10 – Leases

We adopted ASU 2016-02 Leases (Topic 842) ("ASU 2016-02") using the modified retrospective approach with an effective date as of January 1, 2019.

Prior year financial statements were not recast under the new standard and, therefore, those amounts are not presented below.

We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.

The Company also elected the practical expedient on not separating lease components from nonlease components for all operating leases.

Additionally, the Company has elected to not apply ASU 2016-02 to short-term leases.

Short-term leases are those leases that, at the lease commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise.

The Company has lease agreements for land and office facilities that it occupies to operate several of its retail branch locations, as well as one storage facility, that are classified as operating leases and are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities.

Most of these leases contain options to extend the duration of the leases at management's discretion.

Management has recognized these renewal options as part of its ROU asset and lease liabilities when management is reasonably certain to exercise these options.

Whether or not management is reasonably certain to exercise such

an option is determined based on facts and circumstances for each individual lease.

However, if a renewal option is offered at below market terms, management considers the exercise of that option to be reasonably certain for the purposes of calculating its ROU assets and lease liabilities.

None of the Company's leases include residual value guarantees, and there are no restrictions or covenants imposed by these leases that impose significant additional financial obligations on the Company.

The Company uses the rate implicit in each lease as the discount rate to determine the lease liability, which is the present value of lease payments not yet paid at the lease commencement date.

If the rate implicit in each lease is not readily determinable, which is often the case, the Company uses its incremental borrowing rate as the discount rate.

The incremental borrowing rate is the rate that the Company would have incurred to borrow the funds necessary to purchase the leased asset over a similar term.

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") asset and lease liabilities.

As of December 31, 2021, the Company has operating lease ROU assets of $ 11.0 million and operating lease liabilities of $ 11.0 million.

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Present value of future minimum lease payments $ 10,965

NOTE 11 - Goodwill and Intangible Assets

A summary of goodwill and intangible assets at December 31, 2021 and 2020, is as follows:

(In Thousands) 2021 2020

Intangible assets:

Goodwill $ 15,017 $ 15,017

Core deposit intangible 42 79

Trade name intangible 950 950

Total $ 16,009 $ 16,046

The Company performed goodwill impairment testing at December 31, 2021 and December 31, 2020 in accordance with the policy described in Note 1 to the Company's Consolidated Financial Statements included in Part II.

Item 8 of this report.

At December 31, 2021, the Company performed its annual impairment test using a qualitative assessment.

Significant positive inputs to the qualitative assessment included the Company’s increasing net income as compared to historical trends;

the Company's increasing market share for deposits in our markets;

results of regulatory examinations;

peer comparisons of the Company's net interest margin;

trends in the Company’s cash flows;

improvements in the Alaskan economy in 2021;

increases in the volume of mortgage originations in Alaska;

increases in the Company's market share of mortgage originations;

and increases in the Company's stock price.

Significant negative inputs to the qualitative assessment included the the muted pace of growth in the Alaskan economy.

We believe that the positive inputs to the qualitative assessment noted above outweigh the negative inputs, and we therefore concluded that it is more likely than not that no impairment existed at that time.

The Company recorded amortization expense of its intangible assets of $ 37,000 , $ 48,000 , and $ 60,000 for the years ended December 31, 2021, 2020, and 2019, respectively.

Accumulated amortization for intangible assets was $ 6.0 million at both December 31, 2021 and 2020.

The future amortization expense required on these assets is as follows:

(In Thousands)

NOTE 12 - Other Assets

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Accrued interest receivable 6,846 7,979

Interest rate swaps not designated as hedging instruments 7,387 2,950

Interest rate swaps not designated as hedging instruments, at fair value 6,030 7,387

Bank owned life insurance, net 4,293 6,520

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Deferred taxes, net 3,278 1,980

Commercial servicing rights 1,310 1,214

Commercial servicing rights, at fair value 1,084 1,310

Repossessed assets — 231

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Total $ 54,361 $ 68,488

Equity Method Investments:

The Company applies the equity method of accounting for the following related entities:

• The Company owns a 24 % interest in PWA, an investment advisory, trust, and wealth management business located in Seattle, Washington.

• The Company owns a 30 % interest in Homestate Mortgage Company, LLC, a mortgage origination business located in Anchorage, Alaska.

Low Income Housing Partnerships:

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Total $ 177,964

The Company offers the Certificate of Deposit Account Registry Service® (CDARS®) and Insured Cash Sweep® (ICS®) service as a member of Promontory Interfinancial Network, LLCSM (Network).

When a Network member places a deposit using CDARS, that certificate of deposit is divided into amounts under the standard FDIC insurance maximum ($250,000) and is allocated among member banks, making the large deposit eligible for FDIC insurance.

The ICS service allows the Company to place customers’ funds through the Network into demand deposit accounts and/or money market accounts at FDIC-insured banks that are also members of the ICS Network in increments below the standard FDIC insurance maximum ($250,000) so that both principal and interest are eligible for FDIC insurance.

In addition to customer deposit placement, the CDARS and ICS service also allows placement of the Bank's own investment dollars.

The Company had $ 9.4 million CDARS certificates of deposits and $ 86.5 million ICS deposits at December 31, 2020 and $ 1.2 million CDARS certificates of deposits and $ 44.5 million ICS deposits at December 31, 2019.

At December 31, 2020 and 2019, the Company held $ 4.6 million and $ 1.6 million, in deposits for related parties, including directors, executive officers, and their affiliates.

Interest expense:

Interest expense on deposits is presented below:

(In Thousands) 2020 2019 2018

Interest-bearing demand accounts $ 108 $ 182 $ 8

Money market accounts 1,222 1,435 855

Savings accounts 717 1,083 744

Certificates of deposit $250,000 and greater 1,823 1,310 472

Certificates of deposit less than $250,000 1,409 951 228

Total $ 5,279 $ 4,961 $ 2,307

The Company offers IntraFi ® Network Deposits SM as a member of IntraFi® Network SM (Network).

When a Network member places a deposit using IntraFi Network Deposits, that certificate of deposit or deposit account is divided into amounts under the standard FDIC insurance maximum ($250,000) and is allocated among member banks, making the large deposit eligible for FDIC insurance.

In addition to customer deposit placement, the IntraFi Network Deposits also allows placement of the Bank's own investment dollars.

The Company had $ 24.0 million in IntraFi Network Deposits certificates of deposits and $ 223.7 million in IntraFi Network Deposits in deposit accounts at December 31, 2021 and $ 9.4 million in IntraFi Network Deposits certificates of deposits and $ 86.5 million in IntraFi Network Deposits in deposit accounts at December 31, 2020.

At December 31, 2021 and 2020, the Company held $ 3.6 million and $ 4.6 million, respectively, in deposits for related parties, including directors, executive officers, and their affiliates.

NOTE 14 - Borrowings

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Based on assets currently pledged and advances currently outstanding at December 31, 2021, the Company's available borrowing line is $ 271.8 million, representing approximately 10 % of total assets.

Additional advances of up to 45 % of eligible assets, or $ 946.2 million, are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Company’s assets.

Additional advances of up to 45 % of eligible assets, or $ 1.22 billion, are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Company’s assets.

The Company has outstanding FHLB advances of $ 14.5 million and $ 14.8 million as of December 31, 2021 and 2020, respectively, which were originated to match fund low income housing projects that qualify for long-term fixed interest rates.

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The Company paid less than $ 1,000 in interest in 2021 and 2020 on this agreement.

Company utilized the Federal Reserve Bank's PPPLF to fund SBA PPP loans during the second quarter of 2020, but has repaid those funds in full as of June 30, 2020.

The Company utilized the Federal Reserve Bank's PPPLF to fund SBA PPP loans during the second quarter of 2020, but has repaid those funds in full as of June 30, 2020.

This advance had an interest rate of 0.35%.

The Company is subject to provisions under Alaska state law, which generally limit the amount of the Bank's outstanding debt to 35 % of total assets or $ 736.0 million at December 31, 2020 and 15 % of total assets $ 244.7 million at December 31, 2019.

The Company is subject to provisions under Alaska state law, which generally limit the amount of the Bank's outstanding debt to 35 % of total assets or $ 948.0 million at December 31, 2021 and $ 736.0 million at December 31, 2020.

Securities sold under agreements to repurchase were zero for both December 31, 2021 and 2020.

The average balance outstanding of securities sold under agreement to repurchase during 2020 and 2019 was zero and $ 15.2 million, respectively, and the maximum outstanding at any month-end was zero and $ 36.6 million, respectively, during the same time periods.

The securities sold under agreement to repurchase were held by the FHLB under the Company’s control.

The future principal payments that are required on the Company’s borrowings as of December 31, 2021, are as follows:

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2,092 ( 1,141 ) 951

Reclassification for cumulative effect of adoption of accounting principles related to fair value measurement of equity securities ( 191 ) — ( 191 )

Balance at December 31, 2019 $ 965 ($ 534 ) $ 431

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NOTE 17 – Revenue

The Company's revenue is included in net interest income and other operating income on its Consolidated Statements of Income.

Topic 606 in the Accounting Standards Codification ("Topic 606") includes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.

The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our ongoing revenue-generating transactions are not subject to Topic 606, including revenue associated with financial instruments and revenue from loans and securities.

In addition, certain noninterest income streams such as fees associated with MSRs, purchased receivable income, financial guarantees, and derivatives are also not in scope of the guidance.

Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant services income, and commissions from the sales of mutual funds and other investments.

However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606.

Substantially all of the Company’s non-interest revenue is generated from contracts with customers.

Noninterest revenue streams in-scope of Topic 606 are discussed below.

The Company records revenue when control of the promised products or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those products or services.

All of the Company's revenue from contracts with customers in the scope of Topic 606 is recognized in non-interest income.

The following table presents the Company's sources other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2021, 2020 and 2019:

(In Thousands) December 31,

Other operating income 2021 2020 2019

In-scope of Topic 606:

Bankcard fees $ 3,389 $ 2,837 $ 2,976

Service charges on deposit accounts 1,297 1,102 1,557

Merchant fees 560 416 467

Commission income on the sale of mutual funds and annuity products 417 369 385

Other 826 743 812

Other operating income (in-scope of Topic 606) $ 6,489 $ 5,467 $ 6,197

Other operating income (out-of-scope of Topic 606) 45,774 57,861 31,149

Total other operating income $ 52,263 $ 63,328 $ 37,346

Bankcard fees

Bankcard fees are primarily comprised of debit card income and ATM fees.

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Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed.

Payments for service

charges on deposit accounts are primarily received immediately or in the following month through a direct charge to customers’ accounts.

Payments for service charges on deposit accounts are primarily received immediately or in the following month through a direct charge to customers’ accounts.

Other operating income consists of other recurring revenue streams such as merchant services income, commissions from sales of mutual funds and other investments, safety deposit box rental fees, bank check and other check fees, unrealized gains and losses on marketable securities, and other miscellaneous revenue streams.

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Payments are typically received immediately or in the following month.

The following presents other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2020, 2019 and 2018:

(In Thousands) December 31,

Other operating income 2020 2019 2018

In-scope of Topic 606:

Bankcard fees $ 2,837 $ 2,976 $ 2,811

Service charges on deposit accounts 1,102 1,557 1,508

Other 1,528 1,664 1,592

Other operating income (in-scope of Topic 606) $ 5,467 $ 6,197 $ 5,911

Other operating income (out-of-scope of Topic 606) 57,861 31,149 26,256

Total other operating income $ 63,328 $ 37,346 $ 32,167

Gains on the sale of OREO are also within the scope of Topic 606 and are recorded within other operating expense on the Company's Consolidated Statements of Income.

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Employees may elect to have a portion of their salary contributed to the 401(k) plan in accordance with Section 401(k) of the Internal Revenue Code of 1986.

The Company provides for a mandatory $ 1.00 match for each $1.00 contributed by employees of Northrim Bank up to 5.5 % of the employee’s eligible salary.

The Company provides for a mandatory $ 1.00 match for each $1.00 contributed by employees of the Bank up to 5.5 % of the employee’s eligible salary.

The Company provides for a mandatory $ 1.00 match for each $1.00 contributed by employees of RML up to 2 % of the employee’s eligible salary.

Northrim Bank or RML may increase the matching contribution at the discretion of the Board of Directors.

The Bank or RML may increase the matching contribution at the discretion of the Board of Directors.

The Company expensed $ 1.8 million, $ 1.7 million, and $ 1.4 million, in 2021, 2020, and 2019, respectively, for 401(k) contributions and included this expense in "Salaries and other personal expense" in the Consolidated Statements of Income.

On July 1, 1994, Northrim Bank implemented a Supplemental Executive Retirement Plan for executive officers of Northrim Bank whose retirement benefits under the 401(k) plan have been limited under provisions of the Internal Revenue Code.

On July 1, 1994, the Bank implemented a Supplemental Executive Retirement Plan for executive officers of the Bank whose retirement benefits under the 401(k) plan have been limited under provisions of the Internal Revenue Code.

Contributions to this plan totaled $ 281,000 , $ 290,000 , and $ 262,000 , in 2021, 2020, and 2019, respectively.

These expenses are included in "Salaries and other personnel expense" in the Consolidated Statements of Income.

At December 31,

2020 and 2019, the balance of the accrued liability for this plan was included in "Other liabilities" and totaled $ 2.1 million and $ 2.1 million, respectively.

RML has established a Supplemental Executive Retirement Plan ("SERP"), under which RML has agreed to make payment to certain key executives, based on contributions made by RML to the plan and a variable rate of return.

The SERP's assets primarily consist of the cash surrender value of life insurance policies.

At December 31, 2021 and 2020, the balance of the accrued liability for this plan was included in "Other liabilities" and totaled $ 2.2 million and $ 2.1 million, respectively.

RML has established a Supplemental Executive Retirement Plan ("SERP"), under which RML has agreed to make payment to certain key executives, based on contributions made by RML to the plan.

Contributions and earnings made to the participant accounts to the SERP are vested over ten years .

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Mortgage loans sold to investors may be sold with servicing rights released, for which the Company makes only standard legal representations and warranties as to meeting certain underwriting and collateral documentation standards.

In the past two years, the Company has had to repurchase one loan due to deficiencies in underwriting or loan documentation and has not realized significant losses related to this loans.

In the past two years, the Company has had to repurchase four loans due to deficiencies in underwriting or loan documentation and

has not realized significant losses related to these loans.

Management believes that any liabilities that may result from such recourse provisions are not significant.

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The Company does not expect that all of these commitments are likely to be fully drawn upon at any one time.

The Company has a reserve for losses related to these commitments and letters of credit that is recorded in "Other liabilities" on the Consolidated Balance Sheets.

The reserve was $ 187,000 and $ 152,000 as of December 31, 2020 and 2019, respectively.

The Company has an ACL related to these commitments and letters of credit that is recorded in "Other liabilities" on the Consolidated Balance Sheets.

The ACL for unfunded commitments was $ 1.1 million and $ 187,000 as of December 31, 2021 and 2020, respectively.

Capital Expenditures and Commitments:

At December 31, 2020, the Company has capital commitments related to the planned improvements of two of the Company’s existing branches, as well as a new branch location.

At December 31, 2020 the Company considers these commitments to be immaterial.

At December 31, 2021, the Company has no capital commitments.

There were no other material changes outside of the ordinary course of business to any of our material contractual obligations during 2021.

1 unchanged sentence

Interest rate swaps related to community banking activities

The Company enters into interest rate swaps with commercial banking customers which are offset with a corresponding swap agreement with a third party financial institution (“counterparty”).

The Company enters into commercial loans interest rate swaps 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.

2 unchanged sentences

The Company pledged $ 8.2 million and $ 10.7 million in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements as of December 31, 2021 and 2020, respectively.

The Company had interest rate swaps with an aggregate notional amount of $ 196.0 million and $ 94.4 million at December 31, 2020 and 2019, respectively.

At December 31, 2020, the notional amount of interest rate swaps is made up of sixteen variable to fixed rate swaps to commercial loan customers totaling $ 98.0 million, and sixteen fixed to variable rate swap with a counterparty totaling $ 98.0 million.

Changes in fair value from these thirty-two interest rate swaps offset each other in 2020 and 2019.

The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $ 212.6 million and $ 196.0 million at December 31, 2021 and 2020, respectively.

At December 31, 2021, the notional amount of interest rate swaps is made up of 19 variable to fixed rate swaps to commercial loan customers totaling $ 106.3 million, and 19 fixed to variable rate swap with a counterparty totaling $ 106.3 million.

Changes in fair value from these 38 interest rate swaps offset each other in 2021 and 2020.

The Company recognized $ 452,000 , $ 949,000 , and $ 964,000 in fee income related to interest rate swaps in 2021 and 2020, and 2019, respectively.

Interest rate swap income is recorded in "Other income" on the Consolidated Statements of Income.

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.

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Changes in the fair value of this interest rate swap are reported in other comprehensive income.

The unrealized loss on this interest rate swap was $ 1.7 million and $ 534,000 as of December 31, 2020 and 2019, respectively.

The unrealized loss on this interest rate swap was $ 1.0 million and $ 1.7 million as of December 31, 2021 and 2020, respectively.

Interest rate swaps related to home mortgage lending activities

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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 using interest rate swaps, 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.

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.

At December 31, 2021 and 2020, RML had commitments to originate mortgage loans held for sale totaling $ 81.6 million and $ 150.3 million, respectively.

1 unchanged sentence

None of these home mortgage lending derivatives are designated as hedging instruments.

The following table presents the fair value of derivatives not designated as hedging instruments:

The following table presents the fair value of derivatives not designated as hedging instruments as of the dates noted:

(In Thousands) Asset Derivatives

3 unchanged sentences

Interest rate lock commitments Other assets 1,387 4,034

Retail interest rate contracts Other assets 166 —

Total $ 7,583 $ 11,421

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Total $ 6,030 $ 8,267

The following table presents the net gains (losses) of derivatives not designated as hedging instruments:

The following table presents the net gains (losses) of derivatives not designated as hedging instruments as of the dates noted:

(In Thousands) Income Statement Location December 31, 2021 December 31, 2020

10 unchanged sentences

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 $ —

Retail interest rate contracts 880 — 880 — — 880

December 31, 2020 Gross amounts not offset in the Statement of Financial Position

10 unchanged sentences

In January 2021, the Company’s Board of Directors approved a plan whereby it would periodically repurchase for cash up to approximately 5 % of its shares of common stock in the open market.

At December, 31, 2020, there were no shares available under the stock repurchase program.

However, on February 1, 2021 the Company announced that its Board of Directors authorized the repurchase of up to an additional 313,000 shares of common stock.

At December, 31, 2021, there were 33,724 shares available under the stock repurchase program.

However, on January 28, 2022 the Company announced that its Board of Directors authorized the repurchase of up to an additional 300,000 shares of common stock.

The Company intends to continue to repurchase its stock from time to time depending upon market conditions.

The Company can make no assurances that it will continue this program or that it will authorize additional shares for repurchase.

During 2020, 2019 and 2018, 327,000 , 347,676 and 15,468 shares were repurchased, respectively.

During 2021, 2020 and 2019, 279,276 , 327,000 and 347,676 shares of common stock were repurchased, respectively.

NOTE 22 - Stock-Based Compensation

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This amount changes based on the fair value of the Company’s stock.

The total intrinsic value of options outstanding and exercisable as of December 31, 2020, 2019, and 2018 was $ 682,000 , $ 1.1 million, and $ 646,000 , respectively.

The total intrinsic value of options outstanding and exercisable as of December 31, 2021, 2020, and 2019 was $ 1.2 million, $ 682,000 , and $ 1.1 million, respectively.

The total intrinsic value of options exercised for the years ended December 31, 2021, 2020, and 2019 was $ 969,000 , zero , and $ 203,000 , respectively.

As noted above, the Company allows stock options to be exercised through cash or cashless transactions.

In 2020, 2019, and 2018 the Company received cash of zero , zero , and $ 195,000 , respectively, for cash stock option exercises.

In 2020, 2019, and 2018 the Company net settled zero , $ 282,000 , and $ 193,000 respectively, for cashless stock option exercises.

The Company withheld zero , $ 317,000 , and $ 227,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options in 2020, 2019, and 2018, respectively.

In 2021, 2020, and 2019 the Company received cash of zero , zero , and zero , respectively, for cash stock option exercises.

In 2021, 2020, and 2019 the Company net settled $ 1.4 million, zero , and $ 282,000 respectively, for cashless stock option exercises.

The Company withheld $ 1.7 million, zero , and $ 317,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options in 2021, 2020, and 2019, respectively.

For the years ended December 31, 2021, 2020 and 2019, the Company recognized $ 173,000 , $ 148,000 , and $ 143,000 , respectively, in stock option compensation expense as a component of "Salaries and other personnel expense".

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Outstanding at December 31, 2021 56,215 $ 34.74 2.29

The total intrinsic value of restricted stock units vested for the years ended December 31, 2020, 2019, and 2018 was $ 735,000 , $ 906,000 , and $ 654,000 , respectively.

The total intrinsic value of restricted stock units vested for the years ended December 31, 2021, 2020, and 2019 was $ 1.3 million, $ 735,000 , and $ 906,000 , respectively.

For the years ended December 31, 2021, 2020 and 2019, the Company recognized $ 900,000 , $ 795,000 , and $ 689,000 , respectively, in restricted stock unit compensation expense as a component of "Salaries and other personnel expense".

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Management believes, as of December 31, 2021, that the Company and Bank meets all capital adequacy requirements to which they are subject.

The Company and Bank are required to have a “conservation buffer,” consisting of a common equity Tier 1 capital amount equal to 2.5 % of risk-weighted assets.

An institution that does not meet the conservation buffer requirement will be subject to restrictions on certain activities including payment of dividends, stock repurchases, and discretionary bonuses to executive officers.

Management believes, as of December 31, 2020, that the Company and Bank meet all conservation buffer requirements to which they are subject.

NOTE 24 - Income Taxes

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Tax-exempt interest on investment securities and loans ( 238 ) ( 256 ) ( 300 )

Amortization of investment in low income housing tax credit partnerships 3,506 2,668 2,691

Amortization of investment in low income housing tax credit partnerships, net 3,163 2,712 2,316

Low income housing credits ( 3,694 ) ( 3,168 ) ( 2,721 )

Revaluation of deferred tax assets — — ( 470 )

Other ( 1,009 ) ( 282 ) ( 304 )

4 unchanged sentences

Allowance for loan losses $ 3,126 $ 5,772 $ 5,190

Other real estate owned 69 58 160

Loan fees, net of costs 1,956 ( 635 ) 741

Interest income, nonaccrual loans 482 419 609

Deferred compensation 1,344 1,130 1,224

Equity compensation 406 481 429

Loan discount 93 98 79

Fair market value adjustment on certificates of deposit 76 100 123

Operating lease liabilities 3,117 3,519 4,045

Accrued liabilities 1,826 1,391 1,173

Unrealized gain on available for sale investment securities 1,270 54 27

Other 837 1,258 537

4 unchanged sentences

Depreciation and amortization ( 1,515 ) ( 2,066 ) ( 1,848 )

FHLB stock repurchase and dividends ( 30 ) ( 174 ) ( 178 )

Operating lease right-of-use assets ( 3,128 ) ( 3,537 ) ( 4,067 )

Loan fees, net of costs ( 635 ) 741 818

Unrealized loss on available for sale investment securities, net ( 187 ) ( 384 ) 270

Unrealized loss on available for sale investment securities ( 189 ) ( 554 ) ( 411 )

Unrealized loss on marketable equity securities, net ( 159 ) ( 187 ) ( 169 )

Other ( 470 ) ( 513 ) ( 591 )

6 unchanged sentences

As of December 31, 2021, the Company had no unrecognized tax benefits.

In 2020 the Company reversed an accrual of $ 454,000 for a potential increase in tax expense related to an audit that was performed in 2018 by the State of Alaska for tax years 2014-2016.

The Company has appealed the State of Alaska's decision on this matter and reversed this accrual in the second quarter of 2020 because the Company believes that it is more likely than not that the court will rule in the Company's favor.

In 2020 the Company reversed an accrual of $ 454,000 for a potential increase in tax expense that was recorded in 2019 related to an audit that was performed in 2018 by the State of Alaska for tax years 2014-2016.

The Company appealed the initial audit decision and the appeal was ruled in the Company's favor in the first quarter of 2021.

In 2019 the Company reversed an accrual of $ 250,000 related to interest and penalties that was recognized in 2018.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment securities available for sale and marketable securities :

Investment securities available for sale and marketable equity securities:

Fair values are based on quoted market prices, where available.

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Servicing rights:

MSRs and CSRs are measured at fair value on a recurring basis.

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 MSRs and CSRs, the present value of net expected future cash flows is estimated.

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,

16 unchanged sentences

Any nonrecurring adjustments to fair value usually result from the writedown 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.

The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and loan individually evaluated for credit losses as of each reporting date.

In-house appraisals are considered Level 3 inputs and external appraisals are considered Level 2 inputs.

24 unchanged sentences

Investment in Federal Home Loan Bank Stock 3,107 3,107 2,551 2,551

Loans held for sale 73,650 73,650 146,178 146,178

Accrued interest receivable 6,846 6,846 7,979 7,979

Interest rate swaps 6,030 6,030 7,387 7,387

Retail interest rate contracts 166 166 — —

Level 3 inputs:

Investment securities held to maturity 20,000 19,164 10,000 10,000

Loans and loans held for sale 1,590,229 1,560,357 1,111,205 1,095,031

Loans 1,413,886 1,396,486 1,444,051 1,414,179

Purchased receivables, net 6,987 6,987 13,922 13,922

22 unchanged sentences

Total marketable equity securities $ 8,420 $ 8,420 $ — $ —

Corporate bonds $ 10,000 $ — $ — $ 10,000

Total held to maturity securities $ 10,000 $ — $ — $ 10,000

Interest rate swaps $ 6,030 $ — $ 6,030 $ —

2 unchanged sentences

Commercial servicing rights 1,084 — — 1,084

Retail interest rate contracts 166 — 166 —

Total other assets $ 22,225 $ — $ 6,030 $ 16,195

Interest rate swaps $ 6,985 $ — $ 6,985 $ —

Retail interest rate contracts 880 — 880 —

Total other liabilities $ 6,985 $ — $ 6,985 $ —

19 unchanged sentences

December 31, 2021

Investment securities held to maturity $ — $ — $ 10,000 $ — $ 10,000

Interest rate lock commitments $ 4,034 ($ 3,389 ) $ 28,229 ($ 27,487 ) $ 1,387

7 unchanged sentences

Total $ 13,944 ($ 11,305 ) $ 54,205 ($ 40,282 ) $ 16,562

During 2020 and 2019, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis, except for certain assets as shown in the following table.

For loans measured for impairment, the Company classifies fair value measurements using observable inputs, such as external appraisals, as Level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as Level 3 valuations in the fair value hierarchy.

As of and for the years ending December 31, 2021 and 2020, except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis.

For loans 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.

(In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)

December 31, 2021

Loans measured for impairment $ 308 $ — $ — $ 308

Loans individually measured for credit losses $ — $ — $ — $ —

Total $ — $ — $ — $ —

December 31, 2020

Loans measured for impairment $ 561 $ — $ — $ 561

Loans individually measured for credit losses $ 308 $ — $ — $ 308

Total $ 308 $ — $ — $ 308

The following table presents the (income) losses resulting from nonrecurring fair value adjustments for the periods ended December 31, 2020, 2019 and 2018, respectively:

The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the periods ended December 31, 2021, 2020 and 2019, respectively:

(In Thousands) 2021 2020 2019

Loans measured for impairment ($ 4 ) $ 3 ($ 952 )

Other operating expense - impairment on equity method investment — — 804

Loans individually measured for credit losses ($ 13 ) ($ 4 ) $ 3

Total (income) loss from nonrecurring measurements ($ 13 ) ($ 4 ) $ 3

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 at December 31, 2020 and 2019:

Financial Instrument Valuation Technique Unobservable Input Weighted Average or Rate Range

December 31, 2021

Loans measured for impairment In-house valuation of collateral Discount rate 30 %

Interest rate lock commitment External pricing model Pull through rate 93.27 %

4 unchanged sentences

December 31, 2020

Loans measured for impairment In-house valuation of collateral Discount rate 25 %

Loans individually measured for credit losses In-house valuation of collateral Discount rate 30 %

Interest rate lock commitment External pricing model Pull through rate 90.65 %

15 unchanged sentences

Net interest income 78,080 2,747 80,827

Provision for loan losses 2,432 — 2,432

Provision for credit losses ( 4,099 ) — ( 4,099 )

Other operating income 10,119 42,144 52,263

10 unchanged sentences

Net interest income 67,647 3,018 70,665

Benefit for loan losses ( 1,175 ) — ( 1,175 )

Provision for credit losses 2,432 — 2,432

Other operating income 10,693 52,635 63,328

Compensation expense, RML acquisition payments 468 — 468

Other operating expense 57,614 31,500 89,114

9 unchanged sentences

Net interest income 63,201 1,241 64,442

Provision for loan losses ( 500 ) — ( 500 )

Benefit for credit losses ( 1,175 ) — ( 1,175 )

Other operating income 13,145 24,201 37,346

Compensation expense, RML acquisition payments 468 — 468

Other operating expense 54,520 21,850 76,370

22 unchanged sentences

Retained earnings 204,046 173,498

Accumulated other comprehensive income 18 431

Accumulated other comprehensive (loss) income ( 3,406 ) 18

Total Shareholders' Equity 237,817 221,575

6 unchanged sentences

Equity in undistributed earnings from NISC 66 174 218

Income (loss) on marketable equity securities 61 911 ( 625 )

Gain on sale of marketable equity securities, net 67 98 —

Unrealized gain (loss) on marketable equity securities ( 101 ) 61 911

Other income 151 10 44

31 unchanged sentences

Cash and Cash Equivalents at end of year $ 35,546 $ 24,742 $ 25,294

NOTE 29 - Quarterly Results of Operations (Unaudited)

2020 Quarter Ended Dec.

30 June 30 March 31

(In Thousands Except Per Share Amounts)

Total interest income $ 20,579 $ 19,794 $ 19,004 $ 17,339

Total interest expense 1,355 1,500 1,547 1,649

Net interest income 19,224 18,294 17,457 15,690

(Benefit) provision for loan losses ( 599 ) 567 404 2,060

Other operating income 17,732 21,628 17,535 6,433

Other operating expense 24,147 23,506 22,674 18,787

Income before provision for income taxes 13,408 15,849 11,914 1,276

Provision for income taxes 3,308 3,994 2,014 243

Net income $ 10,100 $ 11,855 $ 9,900 $ 1,033

Earnings per share, basic $ 1.62 $ 1.87 $ 1.54 $ 0.16

Earnings per share, diluted $ 1.59 $ 1.84 $ 1.52 $ 0.16

2019 Quarter Ended Dec.

30 June 30 March 31

(In Thousands Except Per Share Amounts)

Total interest income $ 18,062 $ 17,837 $ 17,306 $ 16,878

Total interest expense 1,652 1,531 1,349 1,109

Net interest income 16,410 16,306 15,957 15,769

(Benefit) provision for loan losses ( 150 ) ( 2,075 ) 300 750

Other operating income 9,735 10,509 9,569 7,533

Compensation expense, RML acquisition payments 468 — — —

Other operating expense 20,147 19,324 19,819 17,080

Income before provision for income taxes 5,680 9,566 5,407 5,472

Provision for income taxes 1,100 2,028 1,146 1,160

Net income $ 4,580 $ 7,538 $ 4,261 $ 4,312

Earnings per share, basic $ 0.70 $ 1.13 $ 0.62 $ 0.63

Earnings per share, diluted $ 0.69 $ 1.11 $ 0.62 $ 0.62

2018 Quarter Ended Dec.

30 June 30 March 31

(In Thousands Except Per Share Amounts)

Total interest income $ 17,207 $ 16,580 $ 15,595 $ 14,795

Total interest expense 1,070 761 606 532

Net interest income 16,137 15,819 14,989 14,263

Benefit for loan losses ( 200 ) — ( 300 ) —

Other operating income 7,718 8,673 8,314 7,462

Other operating expense 18,300 18,099 16,606 16,795

Income before provision for income taxes 5,755 6,393 6,997 4,930

Provision for income taxes 907 1,129 1,167 868

Net income $ 4,848 $ 5,264 $ 5,830 $ 4,062

Earnings per share, basic $ 0.70 $ 0.77 $ 0.85 $ 0.59

Earnings per share, diluted $ 0.69 $ 0.75 $ 0.84 $ 0.58

NOTE 28 - Subsequent Events

The Company's Executive Vice President, General Counsel and Corporate Secretary, who also served as Northrim Bank's Executive Vice President, General Counsel, Chief Operating Officer and Corporate Secretary passed away on November 11, 2021.

The Company received $ 2.0 million in keyman life insurance proceeds on February 15, 2022 in connection with the death of this employee that will be reflected in the Company's Consolidated Statements of Net Income for the quarter ended March 31, 2022.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OF ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data