What changed in this filing

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Item 1. Financial Statements

2022-05-06 compared with 2021-11-03 · 224 added, 540 removed, 792 unchanged (49% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

September 30,

2022 December 31,

5 unchanged sentences

Investment securities held to maturity, at amortized cost 24,750 20,000

Total portfolio investments 407,673 266,685

Investment in Federal Home Loan Bank stock 3,828 3,107

1 unchanged sentence

Loans 1,377,387 1,413,886

Allowance for credit losses ( 13,816 ) ( 21,136 )

Allowance for credit losses, loans ( 11,310 ) ( 11,739 )

Net loans 1,366,077 1,402,147

22 unchanged sentences

Preferred stock, $ 1 par value, 2,500,000 shares authorized, none issued or outstanding

Common stock, $ 1 par value, 10,000,000 shares authorized, 6,177,300 and 6,251,004 issued and outstanding at September 30, 2021 and December 31, 2020, respectively

Common stock, $ 1 par value, 10,000,000 shares authorized, 5,881,708 and 6,014,813 issued and outstanding at March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital 25,559 31,162

Retained earnings 208,801 204,046

Accumulated other comprehensive (loss) income, net of tax ( 916 ) 18

Accumulated other comprehensive loss, net of tax ( 14,410 ) ( 3,406 )

Total shareholders' equity 225,832 237,817

3 unchanged sentences

Consolidated Statements of Income

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In Thousands, Except Per Share Data) 2022 2021

6 unchanged sentences

Interest on deposits in other banks 242 38

Total Interest Income 21,282 19,794 62,131 56,137

Total Interest and Dividend Income 20,058 20,596

Interest Expense

8 unchanged sentences

Mortgage banking income 6,982 13,622

Keyman life insurance proceeds 2,002 —

Bankcard fees 804 740

1 unchanged sentence

Service charges on deposit accounts 374 290

Interest rate swap income 195 726 390 743

Gain on sale of marketable equity securities, net 36 — 67 98

Unrealized gain (loss) on marketable equity securities ( 67 ) 375 27 ( 347 )

Unrealized (loss) on marketable equity securities ( 422 ) ( 84 )

Other income 681 796

5 unchanged sentences

Professional and outside services 722 624

Marketing expense 533 302 1,609 1,581

Insurance expense 566 314

Marketing expense 425 404

Intangible asset amortization expense 6 9

OREO (income) expense, net ( 378 ) 23 ( 367 ) 8

OREO (income) expense, net rental income and gains on sale ( 12 ) ( 36 )

Other operating expense 1,570 1,589

10 unchanged sentences

Consolidated Statements of Comprehensive Income

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(In Thousands) 2022 2021

2 unchanged sentences

Securities available for sale:

Unrealized (losses) gains arising during the period ($ 533 ) $ 54 ($ 2,141 ) $ 477

Unrealized holding (losses) arising during the period ($ 16,302 ) ($ 1,518 )

Derivatives and hedging activities:

Unrealized (losses) gains arising during the period 162 245 835 ( 1,622 )

Income tax benefit (expense) related to reclassifications and unrealized gains

and losses 106 ( 85 ) 372 479

Other comprehensive (loss) gain, net of tax ( 265 ) 214 ( 934 ) ( 666 )

Comprehensive income $ 8,612 $ 12,069 $ 28,469 $ 22,122

Unrealized holding gains arising during the period 927 1,260

Income tax benefit related to unrealized gains and losses 4,371 77

Other comprehensive (loss), net of tax ( 11,004 ) ( 181 )

Comprehensive (loss) income ($ 3,778 ) $ 12,000

See notes to consolidated financial statements

8 unchanged sentences

Stock-based compensation expense — — 280 — — 280

Exercise of stock options and vesting of restricted stock units, net 17 17 ( 295 ) — — ( 278 )

Repurchase of common stock ( 61 ) ( 61 ) ( 2,151 ) — — ( 2,212 )

Other comprehensive income, net of tax — — — — ( 181 ) ( 181 )

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 — — — 12,181 — 12,181

3 unchanged sentences

Stock-based compensation expense — — 229 — — 229

Exercise of stock options and vesting of restricted stock units, net 2 2 ( 8 ) — — ( 6 )

Other comprehensive income, net of tax — — — — ( 488 ) ( 488 )

26 unchanged sentences

Stock-based compensation expense — — 187 — — 187

Exercise of stock options and vesting of restricted stock units, net 17 17 ( 295 ) — — ( 278 )

Repurchase of common stock ( 133 ) ( 133 ) ( 5,790 ) — — ( 5,923 )

Other comprehensive loss, net of tax — — — — ( 11,004 ) ( 11,004 )

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

Net income — — — 7,226 — 7,226

Balance as of March 31, 2022 5,882 $ 5,882 $ 25,559 $ 208,801 ($ 14,410 ) $ 225,832

Cash dividend on common stock ($ 0.37 per share)

— — — ( 2,320 ) — ( 2,320 )

Stock-based compensation expense — — 229 — — 229

Other comprehensive loss, net of tax — — — — ( 488 ) ( 488 )

Net income — — — 8,345 — 8,345

Balance as of June 30, 2021 6,207 $ 6,207 $ 39,871 $ 191,791 ($ 651 ) $ 237,218

Cash dividend on common stock ($ 0.38 per share)

— — — ( 2,384 ) — ( 2,384 )

Stock-based compensation expense — — 232 — — 232

Exercise of stock options and vesting of restricted stock units, net — — — — — —

Repurchase of common stock ( 30 ) ( 30 ) ( 1,174 ) — — ( 1,204 )

Other comprehensive income, net of tax — — — — ( 265 ) ( 265 )

Net income — — — 8,877 — 8,877

Balance as of September 30, 2021 6,177 $ 6,177 $ 38,929 $ 198,284 ($ 916 ) $ 242,474

See notes to consolidated financial statements

1 unchanged sentence

Consolidated Statements of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31,

(In Thousands) 2022 2021

2 unchanged sentences

Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities:

Gain on sale of securities, net ( 67 ) ( 98 )

Loss on disposal of premises and equipment — 22

Depreciation and amortization of premises and equipment 798 789

2 unchanged sentences

Amortization of investment security premium, net of discount accretion 174 73

Unrealized (gain) loss on marketable equity securities ( 27 ) 347

Deferred tax expense (benefit) 587 ( 477 )

Unrealized loss on marketable equity securities 422 84

Deferred tax (benefit) expense — 958

Stock-based compensation 187 280

Deferred loan fees and amortization, net of costs ( 2,162 ) 6,042

(Benefit) provision for credit losses ( 3,021 ) 3,031

(Benefit) provision for purchased receivables — ( 7 )

(Benefit) for credit losses ( 150 ) ( 1,488 )

Additions to home mortgage servicing rights carried at fair value ( 987 ) ( 1,448 )

5 unchanged sentences

Gain on sale of other real estate owned — ( 31 )

Proceeds from keyman life insurance ( 2,002 ) —

Net changes in assets and liabilities:

Decrease (increase) in accrued interest receivable 433 ( 3,512 )

(Increase) decrease in other assets 5,875 ( 6,443 )

Increase (decrease) in other liabilities ( 3,139 ) 2,980

(Increase) in accrued interest receivable ( 319 ) ( 264 )

Decrease in other assets 1,149 2,718

(Decrease) in other liabilities ( 7,883 ) ( 6,686 )

Net Cash Provided (Used) by Operating Activities 19,845 44,583

6 unchanged sentences

Proceeds from sales/calls/maturities of securities available for sale — 46,442

Proceeds from sales of marketable equity securities 1,017 502

Proceeds from redemption of FHLB stock 5 4

(Increase) decrease in purchased receivables, net ( 1,565 ) 2,104

Increase in loans, net ( 9,990 ) ( 459,346 )

Decrease (increase) in loans, net 38,399 ( 111,146 )

Proceeds from sale of other real estate owned — 31

Proceeds from keyman life insurance 2,002 —

Purchases of software — ( 9 )

2 unchanged sentences

Financing Activities:

Increase in deposits 471,560 433,782

(Decrease) increase in borrowings ( 212 ) 4,846

(Decrease) increase in deposits ( 78,565 ) 226,336

(Decrease) in borrowings ( 104 ) ( 68 )

Repurchase of common stock ( 5,923 ) ( 2,212 )

1 unchanged sentence

Cash dividends paid ( 2,448 ) ( 2,293 )

Net Cash Provided by Financing Activities 460,991 423,375

Net Cash (Used) Provided by Financing Activities ( 87,040 ) 221,768

Net Change in Cash and Cash Equivalents ( 113,019 ) 87,625

2 unchanged sentences

Supplemental Information:

Income taxes paid $ 4,577 $ 1,940

Interest paid $ 726 $ 1,105

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

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

Non-cash lease liability arising from obtaining right of use assets $ — $ 79

Cash dividends declared but not paid $ 23 $ 20

Cumulative effect adjustment to retained earnings $ — $ 2,400

See notes to consolidated financial statements

10 unchanged sentences

The Company has evaluated subsequent events and transactions for potential recognition or disclosure.

Operating results for the interim period ended September 30, 2021 are not necessarily indicative of the results anticipated for the year ending December 31, 2021.

Operating results for the interim period ended March 31, 2022 are not necessarily indicative of the results anticipated for the year ending December 31, 2022.

These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

There have been no significant changes in our application of these accounting policies in 2021, except as noted below.

As a result of the adoption of Accounting Standards Codification ("ASC") 326 Financial Instruments - Credit Losses on January 1, 2020, the Company has updated the following significant accounting policies.

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 September 30, 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.

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 financing receivable 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 a DCF method or a weighted average remaining life method to estimate expected credit losses quantitatively.

The Company uses a DCF method for 8 of its 11 loan pools, which represent 96 % of the amortized cost basis of total loan pools at September 30, 2021.

The weighted average remaining life method is used for the remaining 3 loan pools primarily because loan level data constraints preclude the use of the DCF model.

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").

The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables.

The Company's regression models for PD utilize the Company's actual historical loan level default data.

The Company determines a reasonable and supportable forecast and applies that forecast to the regression model to estimate defaults over the forecast period.

Management leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the Company's four quarter forecast period.

Management utilizes and forecasts Alaska unemployment as a loss driver for all of the loans pools that utilized the DCF method.

Management also utilizes and forecasts either 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.

Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

Following the forecast period, the economic variables used to calculate PD revert to a historical average at a constant rate over an eight quarter reversion period.

Other assumptions relevant to the discounted cash flow model to derive the quantitative allowance include the LGD, which is the estimate of loss for a defaulted loan, prepayment speeds, and the discount rate applied to future cash flows.

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

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 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.

In summary, under the DCF method the combination of adjustments for 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.

The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses under the current expected credit loss model adopted by the Company on January 1, 2021:

Commercial & industrial - Commercial loans are loans for commercial, corporate and business purposes.

The Company’s commercial business loan portfolio is comprised of loans for a variety of purposes and across a variety of industries.

These loans include general commercial and industrial loans, loans to purchase capital equipment, and other business loans for working capital and operational purposes.

Commercial loans are generally secured by accounts receivable, inventory and other

business assets.

Also included in commercial loans are our Paycheck Protection Program ("PPP") loans originated during 2020 and 2021.

The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Commercial real estate - This category of loans consists of the following loan types:

Owner occupied - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including owner occupied commercial real estate loans primarily secured by commercial office or industrial buildings, warehouses or retail buildings where the owner of the building occupies the property.

Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal.

The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Non-owner occupied and multifamily - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including investment real estate loans that are primarily secured by office and industrial buildings, warehouses or retail buildings where the owner of the building does not occupy the property, non-owner occupied apartment or multifamily residential buildings, and various special purpose properties.

Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal.

Generally, these types of loans are thought to involve a greater degree of credit risk than owner occupied commercial real estate as they are more sensitive to adverse economic conditions.

The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Residential real estate - This category of loans consists of the following loan types:

1-4 family residential properties secured by first liens - This category of loans includes term loans secured by first liens on residential real estate.

The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens - This category of loans includes term loans primarily secured by junior liens on residential real estate and revolving credit lines that are secured by first liens on residential real estate.

Home equity revolving lines of credit and home equity term loans are included in this group of loans.

The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

1-4 family residential construction - This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of 1-4 family residential properties which will secure the loan.

These loans may also be secured by tracts or individual parcels of land on which 1-4 family residential properties are being constructed.

The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third-party.

The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Other construction, land development, and raw land - This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of owner occupied and non-owner occupied commercial properties, and loans secured by raw or improved land.

The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third-party.

Repayment of land secured loans are dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt.

The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Agricultural production, including commercial fishing - These loans are for the purpose of financing agricultural production, including growing and storing of crops, and for the purpose of financing fisheries and forestries, including loans to commercial fishermen.

These loans may be secured or unsecured, but any loans for these purposes that are secured by real estate are included in a real estate category.

The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool.

Consumer - Loans used for personal use, which may be secured or unsecured, and customer overdrafts.

The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.

Obligations of states and political subdivisions in the US - This category of loans includes all loans made to states, counties municipalities, school districts, drainage and sewer districts, and Indian tribes in the U.S.

These loans maybe be secured by any type of collateral, including real estate.

The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool.

Other - This category of loans includes all other loans that cannot properly be reported in one of the preceding categories.

The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool.

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 following qualitative factors in its calculation of expected losses in the loan portfolio:

• Lending strategy, policies, and procedures;

• Quality of internal loan review;

• Lending management and staff;

• Trends in underlying collateral values;

• Competition, legal, and regulatory changes;

• Economic and business conditions including fluctuations in the price of Alaska North slope crude oil;

• Changes in trends, volume and severity of adversely classified loans, nonaccrual loans, and delinquencies;

• Concentration of credit;

• Changes in the nature and volume of the loan portfolio.

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 appraisals on loans secured by real property, management’s assessment of the current market, recent payment history and an evaluation of other sources of repayment.

A loan that has been modified or renewed is considered a troubled debt restructuring (“TDR”) when two conditions are met:

1) the borrower is experiencing financial difficulty;

and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics.

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 and 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 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.

government at September 30, 2021 or December 31, 2020.

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.

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

Reclassification of Prior Year Presentation

There have been no significant changes in our application of these accounting policies in 2022.

Reclassification of Prior Period Presentation

Certain prior year amounts have been reclassified for consistency with the current period presentation.

1 unchanged sentence

Recent Accounting Pronouncements

Accounting pronouncements implemented in 2021

In June 2016, the Financial Accounting Standards Board ("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.

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.

These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.

In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

ASU 2016-13 is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2019, and must be applied prospectively.

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.

Early application was permitted for specified periods.

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.

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

12 unchanged sentences

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 September 30, 2021, we had approximately $ 191.8 million of assets, including $ 119.5 million in commercial loans and $ 72.3 million in debt securities, and $ 10.0 million of liabilities in the form of our junior subordinated debentures linked to USD LIBOR.

The administrator of LIBOR, ICE Benchmark Administration, ceased the publication of one-week and two-month LIBOR, as well as all non-US Dollar LIBOR tenors as of January 1, 2022.

1-month, 3-month, 6-month, and 12-month US Dollar LIBOR will continue to be published through and will remain available for use in legacy contracts or as otherwise enumerated by financial regulators until June 30, 2023.

The Company has some assets and liabilities referenced to 1-month, 3-month, and 12-month US Dollar LIBOR, such as commercial loans, derivatives, debt securities, and junior subordinated debentures.

As of March 31, 2022, we had approximately $ 180.5 million of assets, including $ 102.4 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 September 30, 2021, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $ 154.8 million.

As of March 31, 2022, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $ 151.6 million.

Of this amount, $ 70.8 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers.

5 unchanged sentences

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

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02").

The amendments in ASU 2022-02 eliminate the accounting guidance for troubled debt restructurings ("TDRs") by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Specifically, rather than applying the recognition and measurement guidance for TDRs which includes an assessment of whether the creditor has granted a concession, an entity must evaluate whether the modification represents a new loan or a continuation of an existing loan.

The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.

Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6.

ASU 2022-02 is effective for the Company for fiscal years beginning after December 15, 2022.

The Company may elect to apply the updated guidance on TDR recognition and measurement by using a modified retrospective transition method, which would result in a cumulative-effect adjustment to retained earnings, or to adopt the amendments prospectively.

The Company intends to elect to adopt the updated guidance on TDR recognition and measurement prospectively;

therefore the guidance will be applied to modifications occurring after the date of adoption.

The amendments on TDR disclosures and vintage disclosures must be adopted prospectively.

The Company does not believe that ASU 2022-02 will have a material impact on the Company's consolidated financial statements.

Cash and Cash Equivalents

The Company is no longer 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 the Federal Reserve Bank services.

The Company is required to maintain a $ 300,000 and $ 250,000 balance with a correspondent bank for outsourced servicing of ATMs as of September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021 and December 31, 2020, the Company was required to maintain a $ 100,000 and $ 2.8 million balance with a correspondent bank to collateralize the initial margin and the fair value exposure, respectively, of its interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures.

The Company is required to maintain a $ 300,000 and $ 250,000 balance with a correspondent bank for outsourced servicing of ATMs as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022 and December 31, 2021, the Company was required to maintain a $ 100,000 and $ 30,000 balance with a correspondent bank to collateralize the initial margin and the fair value exposure, respectively, of its interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures.

Investment Securities

Marketable Equity Securities

The Company held marketable equity securities with fair values of $ 8.6 million and $ 9.1 million at September 30, 2021 and December 31, 2020, respectively.

The Company held marketable equity securities with fair values of $ 8.0 million and $ 8.4 million at March 31, 2022 and December 31, 2021, respectively.

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

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(In Thousands) 2022 2021

Unrealized gain (loss) on marketable equity securities ($ 67 ) $ 375 $ 27 ($ 347 )

Unrealized loss on marketable equity securities ($ 422 ) ($ 84 )

Gain on sale of marketable equity securities, net — —

2 unchanged sentences

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 gross unrecognized gains and losses of held to maturity securities at the periods indicated:

The following table summarizes the amortized cost, estimated fair value, and the Allowance for Credit Losses ("ACL") of debt securities and the corresponding amounts of gross unrealized gains and losses of available-for-sale securities recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses of held to maturity securities at the periods indicated:

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

September 30, 2021

March 31, 2022

Securities available for sale

5 unchanged sentences

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

September 30, 2021

March 31, 2022

Securities held to maturity

2 unchanged sentences

Total securities held to maturity, net of ACL $ 24,750 $ — ($ 1,873 ) $ 22,877

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

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

December 31, 2021

5 unchanged sentences

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

Gross unrealized losses on available for sale securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2021 and December 31, 2020 were as follows:

Allowance for credit losses — — — —

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

Gross unrealized losses on available for sale securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2022 and December 31, 2021 were as follows:

Less Than 12 Months More Than 12 Months Total

(In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses

September 30, 2021:

March 31, 2022:

Securities available for sale

2 unchanged sentences

Collateralized loan obligations 54,079 ( 361 ) — — 54,079 ( 361 )

Municipal securities 815 ( 5 ) — — 815 ( 5 )

Total $ 364,167 ($ 15,724 ) $ 72,868 ($ 4,652 ) $ 437,035 ($ 20,376 )

7 unchanged sentences

Consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

At September 30, 2021, the Company had 33 available for sale securities in an unrealized loss position without an ACL.

At September 30, 2021, the Company had two held to maturity securities in an unrealized loss position without an ACL.

At March 31, 2022, the Company had 61 available for sale securities in an unrealized loss position without an ACL.

At March 31, 2022, the Company had three held to maturity securities in an unrealized loss position without an ACL.

Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.

The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

Accordingly, as of September 30, 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 September 30, 2021 and December 31, 2020, $ 59.3 million and $ 77.9 million in securities were pledged for deposits and borrowings, respectively.

The amortized cost and estimated fair values of debt securities at September 30, 2021, are distributed by contractual maturity as shown below.

Accordingly, as of March 31, 2022,

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

At March 31, 2022 and December 31, 2021, $ 57.5 million and $ 59.5 million in securities were pledged for deposits and borrowings, respectively.

The amortized cost and estimated fair values of debt securities at March 31, 2022, are distributed by contractual maturity as shown below.

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

3 unchanged sentences

1-5 years 410,485 390,948

5-10 years 10,320 10,302

Total $ 415,485 $ 395,955

Corporate bonds

Within 1 year $ 2,240 $ 2,242

1-5 years $ 37,687 $ 37,250

3 unchanged sentences

1-5 years $ 5,000 $ 4,938

5-10 years 23,939 23,796

Over 10 years 30,493 30,337

Total $ 59,432 $ 59,071

2 unchanged sentences

Total $ 820 $ 815

There were no proceeds from sales of investment securities for the three and nine-month periods ending September 30, 2021 and 2020.

A summary of interest income for the three and nine-month periods ending September 30, 2021 and 2020, on available for sale investment securities are as follows:

Three Months Ended September 30, Nine Months Ended September 30,

There were no proceeds from sales of investment securities for the three-month periods ending March 31, 2022 and 2021.

A summary of interest income for the three-month periods ending March 31, 2022 and 2021, on available for sale investment securities are as follows:

Three Months Ended March 31,

(In Thousands) 2022 2021

7 unchanged sentences

Loans Held for Sale

Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of September 30, 2021 and December 31, 2020.

Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of March 31, 2022 and December 31, 2021.

Loans Held for Investment

The 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 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 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:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

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

15 unchanged sentences

$ 1,366,077 $ 1,386,768 ($ 9,381 ) $ 1,402,147 $ 1,425,429 ($ 11,543 )

The difference between the amortized cost and unpaid principal balance is primarily net deferred origination fees totaling $ 14.9 million and $ 11.7 million at September 30, 2021 and December 31, 2020, respectively, and premiums and discounts associated with acquired loans totaling $ 9,000 and $ 47,000 at September 30, 2021 and December 31, 2020, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 6.3 million and $ 7.1 million at September 30, 2021 and December 31, 2020, respectively, and was included in other assets in the Consolidated Balance Sheets.

Amortized cost in the above table includes $ 203.4 million and $ 304.6 million as of September 30, 2021 and December 31, 2020, respectively, in PPP loans administered by the U.S.

The difference between the amortized cost and unpaid principal balance is net deferred origination fees totaling $ 9.4 million and $ 11.5 million at March 31, 2022 and December 31, 2021, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 5.4 million and $ 5.5 million at March 31, 2022 and December 31, 2021, respectively, and was included in other assets in the Consolidated Balance Sheets.

Amortized cost in the above table includes $ 64.3 million and $ 118.2 million as of March 31, 2022 and December 31, 2021, respectively, in Paycheck Protection Program ("PPP") loans administered by the U.S.

Small Business Administration ("SBA") within the Commercial & industrial loan segment.

1 unchanged sentence

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

Three Months Ended September 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance

Three Months Ended March 31, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance

(In Thousands)

13 unchanged sentences

Total $ 11,739 ($ 167 ) ($ 295 ) $ 33 $ 11,310

Three Months Ended September 30, Beginning Balance Provision (benefit) Charge-offs Recoveries Ending Balance

(In Thousands)

Commercial $ 7,366 $ 285 ($ 56 ) $ 600 $ 8,195

Real estate construction 1-4 family 690 10 — — 700

Real estate construction other 1,215 58 — — 1,273

Real estate term owner occupied 2,533 21 ( 85 ) — 2,469

Real estate term non-owner occupied 5,421 61 — — 5,482

Real estate term other 702 55 — 1 758

Consumer secured by 1st deed of trust 258 ( 2 ) — — 256

Consumer other 447 ( 7 ) — 3 443

Unallocated 2,021 86 — — 2,107

Total $ 20,653 $ 567 ($ 141 ) $ 604 $ 21,683

Nine Months Ended September 30, 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 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 deed of trust 261 ( 261 ) — — — —

Consumer other 400 ( 400 ) — — — —

Unallocated 2,107 ( 2,107 ) — — — —

Commercial & industrial loans $ 4,348 ($ 101 ) ($ 163 ) $ 185 $ 4,269

12 unchanged sentences

Total $ 16,625 ($ 1,905 ) ($ 163 ) $ 207 $ 14,764

Nine Months Ended September 30, Beginning Balance Provision (benefit) Charge-offs Recoveries Ending Balance

(In Thousands)

Commercial $ 6,604 $ 1,946 ($ 1,011 ) $ 656 $ 8,195

Real estate construction 1-4 family $ 643 $ 57 $ — $ — $ 700

Real estate construction other 1,017 256 — — 1,273

Real estate term owner occupied 2,188 366 ( 85 ) — 2,469

Real estate term non-owner occupied 5,180 302 — — 5,482

Real estate term other 671 85 — 2 758

Consumer secured by 1st deed of trust 270 ( 14 ) — — 256

Consumer other 436 5 ( 14 ) 16 443

Unallocated 2,079 28 — — 2,107

Total $ 19,088 $ 3,031 ($ 1,110 ) $ 674 $ 21,683

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

Upon adoption, the Company established an ACL of $ 16.6 million.

As of September 30, 2021 the ACL decreased to $ 13.8 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 September 30, 2021, as compared to January 1, 2021, the Company forecasted a significantly lower unemployment rate in Alaska, a slightly lower one-year percentage change in the national commercial real estate price index, and a slightly 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 September 30, 2021 ACL, management expects unemployment to remain consistent with actual levels observed in Alaska as of August 2021.

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

Management's projections for economic indicators as of September 30, 2021 improved slightly as compared to June 30, 2021.

The Company also applies qualitative factors in our CECL model, and these factors also improved in the third quarter as compared to the second quarter of 2021 due to increases in oil prices and improvement in loan portfolio quality trends.

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

These factors, which decreased the ACL during the third quarter of 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 1-4 family 702 $ 37,478 38,180 — 679 679

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

Real estate term owner occupied 6,962 $ 155,762 162,724 — 2,625 2,625

Real estate term non-owner occupied 770 $ 306,477 307,247 — 5,133 5,133

Real estate term other 1,467 $ 44,763 46,230 — 779 779

Consumer secured by 1st deed of trust 259 $ 15,289 15,548 — 261 261

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

Unallocated — — — — 2,107 2,107

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

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 1-4 family — — — 702 702

Real estate construction other — — — — —

Real estate term owner occupied — — — 6,962 7,047

Real estate term non-owner occupied — — — 771 771

Real estate term other — — — 1,467 1,467

Consumer secured by 1st deed of trust — — — 258 258

Consumer other — — — 82 87

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

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 three and nine-month periods ended September 30, 2020:

Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020

(In Thousands) Average Impaired Loans Interest Recognized Average Impaired Loans Interest Recognized

Commercial $ 12,892 $ 65 $ 13,161 $ 95

Real estate construction 1-4 family 808 — 970 —

Real estate construction other — — — —

Real estate term owner occupied 6,707 49 6,378 78

Real estate term non-owner occupied 490 3 333 7

Real estate term other 1,562 7 1,572 14

Consumer secured by 1st deed of trust 272 5 275 9

Consumer other 86 — 88 —

Total $ 22,817 $ 129 $ 22,777 $ 203

At March 31, 2022, as compared to December 31, 2021, the Company forecasted a significantly lower unemployment rate over the reasonable and supportable forecast period.

For most loan segments, an increase in loan balances more than offset the decrease in the forecast for unemployment and changes in the characteristics of loans.

However, increases in loan balances were more than offset by changes in the makeup of the underlying loans in the owner occupied commercial real estate and other construction segments.

The primary reason for the decreases in the ACL in these segments is a shorter expected life, which results in a decrease in the ACL in a discounted cash flow ("DCF") Current Expected Credit Losses ("CECL") model.

Credit Quality Information

25 unchanged sentences

Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below.

September 30, 2021 2021 2020 2019 2018 2017 Prior Total

March 31, 2022 2022 2021 2020 2019 2018 Prior Total

(In Thousands)

53 unchanged sentences

Total classified loans, net government guarantees $ 265 $ 341 $ 833 $ 13 $ 4,355 $ 10,056 $ 15,863

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

Pass Classified Total

December 31, 2021 2021 2020 2019 2018 2017 Prior Total

(In Thousands)

December 31, 2020

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

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 )

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

Total pass loans, net of government guarantees $ 341,987 $ 248,962 $ 139,255 $ 92,519 $ 62,813 $ 290,436 $ 1,175,972

Total classified loans $ 19,270 $ 3,190 $ 4,036 $ 4,459 $ 10,912 $ 13,013 $ 54,880

Government guarantees ( 7,201 ) ( 1,259 ) — — — ( 10,571 ) ( 19,031 )

Total classified loans, net government guarantees $ 12,069 $ 1,931 $ 4,036 $ 4,459 $ 10,912 $ 2,442 $ 35,849

Past Due Loans:

5 unchanged sentences

Due Current Total Greater Than 90 Days Past Due Still Accruing

September 30, 2021

March 31, 2022

Commercial & industrial loans $ 305 $ 166 $ 418 $ 889 $ 403,900 $ 404,789 $ —

28 unchanged sentences

Nonaccrual loans:

Nonaccrual loans net of government guarantees totaled $ 11.5 million and $ 9.6 million at September 30, 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:

September 30, 2021 December 31, 2020

Nonaccrual loans net of government guarantees totaled $ 8.7 million and $ 10.7 million at March 31, 2022 and December 31, 2021, respectively.

The following table presents loans on nonaccrual status and loans on nonaccrual

status for which there was no related allowance for credit losses.

All loans with no allowance for credit losses are individually evaluated for credit losses in the Company's CECL methodology.

March 31, 2022 December 31, 2021

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

12 unchanged sentences

Net nonaccrual loans $ 8,702 $ 8,481 $ 10,672 $ 10,564

There was no interest on nonaccrual loans reversed through interest income during three and nine-month periods ending September 30, 2021.

There was no interest on nonaccrual loans reversed through interest income during the three-month period ending September 30, 2020 and $ 12,000 in interest on nonaccrual loans reversed through interest income during the nine-month period ending September 30, 2020, respectively.

There was no interest earned on nonaccrual loans with a principal balance during the three and nine-month periods ending September 30, 2021 and September 30, 2020, respectively.

However, the Company recognized interest income of $ 198,000 and $ 780,000 in the three-month periods ending September 30, 2021 and 2020 and $ 565,000 and $ 986,000 in the nine-month periods ending September 30, 2021 and 2020, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.

There was $ 2,000 in interest on nonaccrual loans reversed through interest income during three-month period ending March 31, 2022.

There was no interest on nonaccrual loans reversed through interest income during the three-month period ending March 31, 2021.

There was no interest earned on nonaccrual loans with a principal balance during the three-month periods ending March 31, 2022 and March 31, 2021, respectively.

However, the Company recognized interest income of $ 57,000 and $ 134,000 in the three-month periods ending March 31, 2022 and 2021, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.

Troubled Debt Restructurings:

Loans classified as TDRs totaled $ 7.0 million and $ 7.9 million at September 30, 2021 and December 31, 2020, respectively.

Loans classified as TDRs totaled $ 10.0 million and $ 10.6 million at March 31, 2022 and December 31, 2021, respectively.

A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession that it would not grant otherwise.

The provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency.

The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019.

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

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

The Company has made the following types of loan modifications related to COVID-19, which are not classified as TDRs with principal balance outstanding of:

Loan Modifications due to COVID-19 as of September 30, 2021

Loan Modifications due to COVID-19 as of March 31, 2022

(Dollars in thousands) Interest Only Full Payment Deferral Total

18 unchanged sentences

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

The following table presents the breakout between newly restructured loans that occurred during the nine months ended September 30, 2021 and restructured loans that occurred prior to 2021 that are still included in portfolio loans.

As discussed above, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2020.

There were no newly restructured loans that occurred during the three months ended March 31, 2022 or 2021, respectively.

As discussed above, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 between March 1, 2020 and December 31, 2021 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019.

The disclosed restructurings were not related to COVID-19 modifications.

1 unchanged sentence

(In Thousands)

New Troubled Debt Restructurings

Commercial & industrial loans $ — $ 249 $ 249

Commercial real estate:

Owner occupied properties — 360 360

Other construction, land development and raw land loans — 578 578

Subtotal $ — $ 1,187 $ 1,187

Existing Troubled Debt Restructurings $ 2,978 $ 7,062 $ 10,040

Total $ 2,978 $ 7,062 $ 10,040

The following tables present newly restructured loans that occurred during the nine months ended September 30, 2021 and 2020, by concession (terms modified):

September 30, 2021

Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications

(In Thousands)

Pre-Modification Outstanding Recorded Investment:

Commercial & industrial loans 1 $ — $ 254 $ — $ — $ 254

Commercial real estate:

Owner occupied properties 1 — 360 — — 360

Other construction, land development and raw land loans 1 — 577 — — 360

Total 3 $ — $ 1,191 $ — $ — $ 974

Post-Modification Outstanding Recorded Investment:

Commercial & industrial loans 1 $ — $ 249 $ — $ — $ 249

Commercial real estate:

Owner occupied properties 1 — 360 — — 360

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

Total 3 $ — $ 1,186 $ — $ — $ 1,186

September 30, 2020

Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications

(In Thousands)

Pre-Modification Outstanding Recorded Investment:

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

Total 2 $ — $ 3,249 $ 164 $ — $ 3,413

Post-Modification Outstanding Recorded Investment:

Commercial & industrial loans 2 $ — $ 1,565 $ 163 $ — $ 1,728

Total 2 $ — $ 1,565 $ 163 $ — $ 1,728

The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs.

There were no in charge-offs in the nine months ended September 30, 2021 on loans that were newly classified as TDRs during the same period.

As of December 31, 2020, all TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment.

There were no TDRs with specific impairment at December 31, 2020.

The Company had no TDRs that defaulted within twelve months of restructure and defaulted during the nine months ended September 30, 2021 and 2020, respectively.

There were no in charge-offs in the three months ended March 31, 2022 on loans that were newly classified as TDRs during the same period.

There were no loans that defaulted during the three months ended March 31, 2022 and 2021, respectively, that were restructured in the previous twelve months.

Purchased Receivables

Purchased receivables are carried at their principal amount outstanding, net of an allowance for credit losses, and have a maturity of less than one year .

There were no purchased receivables past due at September 30, 2021 or December 31, 2020, and there were no restructured purchased receivables at September 30, 2021 or December 31, 2020.

There were no purchased receivables past due at March 31, 2022 or December 31, 2021, and there were no restructured purchased receivables at March 31, 2022 or December 31, 2021.

Income on purchased receivables is accrued and recognized on the principal amount outstanding using an effective interest method except when management believes doubt exists as to the collectability of the income or principal.

There were no nonperforming purchased receivables as of September 30, 2021 and December 31, 2020, respectively.

There were no nonperforming purchased receivables as of March 31, 2022 and December 31, 2021, respectively.

There was no activity and no balance in the ACL for purchased receivables as of March 31, 2022 and December 31, 2021.

The following table summarizes the components of net purchased receivables for the periods indicated:

(In Thousands) September 30, 2021 December 31, 2020

(In Thousands) March 31, 2022 December 31, 2021

Purchased receivables $ 8,552 $ 6,987

1 unchanged sentence

Total $ 8,552 $ 6,987

The following table sets forth information regarding changes in the ACL on purchased receivables for the three and nine-month periods ending September 30, 2021 and 2020, respectively:

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2021 2020 2021 2020

Balance, beginning of period $ — $ 93 $ — $ 94

Charge-offs — — — —

Recoveries — — — —

Charge-offs net of recoveries — — — —

Benefit for purchased receivables — ( 6 ) — ( 7 )

Balance, end of period $ — $ 87 $ — $ 87

Servicing Rights

Mortgage servicing rights

The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three and nine-month periods ended September 30, 2021 and 2020:

Three Months Ended September 30, Nine Months Ended September 30,

The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three-month periods ended March 31, 2022 and 2021:

Three Months Ended March 31,

(In Thousands) 2022 2021

8 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 as of September 30, 2021 and December 31, 2020:

(In Thousands) September 30, 2021 December 31, 2020

The following table details information related to our serviced mortgage loan portfolio as of March 31, 2022 and December 31, 2021:

(In Thousands) March 31, 2022 December 31, 2021

Balance of mortgage loans serviced for others $ 789,382 $ 772,764

MSR as a percentage of serviced loans 1.95 % 1.78 %

The Company recognized servicing fees of $ 745,000 and $ 671,000 during the three-month periods ending September 30, 2021 and 2020, respectively, and $ 2.2 million and $ 2 million during the nine-month periods ending September 30, 2021 and 2020, respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the weighted average key assumptions used in measuring the fair value of MSR as of September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020

The Company recognized servicing fees of $ 783,000 and $ 705,000 during the three-month periods ending March 31, 2022 and 2021, respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the weighted average key assumptions used in measuring the fair value of MSR as of March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

Constant prepayment rate 8.93 % 11.80 %

Discount rate 8.00 % 8.00 %

Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at September 30, 2021 and December 31, 2020 were as follows:

(In Thousands) September 30, 2021 December 31, 2020

Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at March 31, 2022 and December 31, 2021 were as follows:

(In Thousands) March 31, 2022 December 31, 2021

Aggregate portfolio principal balance $ 789,382 $ 772,764

Weighted average rate of note 3.27 % 3.31 %

September 30, 2021 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change

March 31, 2022 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change

Constant prepayment rate 8.93 % 17.87 % 26.79 %

14 unchanged sentences

in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance;

however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the

number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities.

however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities.

Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made at a particular point in time.

1 unchanged sentence

Commercial servicing rights

The commercial servicing rights asset ("CSR") has a carrying value $ 1.3 million at both September 30, 2021 and December 31, 2020, and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets.

Total commercial loans serviced for others were $ 267.9 million and $ 274.6 million at September 30, 2021 and December 31, 2020, respectively.

Key assumptions used in measuring the fair value of the CSR as of September 30, 2021 and December 31, 2020 include a constant prepayment rate of 9.66 % and a discount rate of 9.46 %.

The commercial servicing rights asset ("CSR") has a carrying value $ 1.1 million at both March 31, 2022 and December 31, 2021, and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets.

Total commercial loans serviced for others were $ 261.6 million and $ 259.8 million at March 31, 2022 and December 31, 2021, respectively.

Key assumptions used in measuring the fair value of the CSR as of March 31, 2022 and December 31, 2021 include a constant prepayment rate of 16.08 % and a discount rate of 9.94 %.

The Company's lease commitments consist primarily of agreements to lease land and office facilities that it occupies to operate several of its retail branch locations that are classified as operating leases and are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities.

As of September 30, 2021, the Company has operating lease ROU assets of $ 11.4 million and operating lease liabilities of $ 11.3 million.

As of March 31, 2022, the Company has operating lease ROU assets of $ 10.4 million and operating lease liabilities of $ 10.4 million.

As of December 31, 2021, the Company had operating lease ROU assets of $ 11.0 million and operating lease liabilities of $ 11.0 million.

The Company did not have any agreements that are classified as finance leases as of September 30, 2021 or December 31, 2020.

The Company did not have any agreements that are classified as finance leases as of March 31, 2022 or December 31, 2021.

The following table presents additional information about the Company's operating leases:

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(In Thousands) 2022 2021

Operating lease cost (1)

$ 688 $ 710 $ 2,106 $ 2,111

Short term lease cost (1)

7 unchanged sentences

(In Thousands) Operating Leases

2021 (Three months) $ 644

2022 (Nine months) $ 1,858

Thereafter 4,266

7 unchanged sentences

Similarly, the Company could be required to settle its obligations under the agreement if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels.

The Company pledged $ 8.3 million as of September 30, 2021 and $ 10.7 million as of December 31, 2020 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.

The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $ 224.0 million and $ 196.0 million at September 30, 2021 and December 31, 2020, respectively.

At September 30, 2021, the notional amount of interest rate swaps is made up of 20 variable to fixed rate swaps to commercial loan customers totaling $ 112.0 million, and 20 fixed to variable rate swaps with a counterparty totaling $ 112.0 million.

The Company pledged $ 7.8 million as of March 31, 2022 and $ 8.2 million as of December 31, 2021 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.

The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $ 210.4 million and $ 212.6 million at March 31, 2022 and December 31, 2021, respectively.

At March 31, 2022, the notional amount of interest rate swaps is made up of 19 variable to fixed rate swaps to commercial loan customers totaling $ 105.2 million, and 19 fixed to variable rate swaps with a counterparty totaling $ 105.2 million.

Changes in fair value from these 19 interest rate swaps offset each other in the first nine months of 2022.

The Company recognized $ 195,000 and $ 726,000 in fee income related to interest rate swaps in the three-month periods ending September 30, 2021 and 2020, and $ 390,000 and $ 743,000 in fee income related to interest rate swaps in the nine-month periods ending September 30, 2021 and 2020, respectively.

The Company recognized $ 3,000 and $ 92,000 in fee income related to interest rate swaps in the three-month periods ending March 31, 2022 and 2021, respectively.

Interest rate swap income is recorded in other operating income on the Consolidated Statements of Income.

4 unchanged sentences

The floating rate that the dealer pays is equal to the three month LIBOR plus 1.37 % which reprices quarterly on the payment date.

This rate was 1.49 % as of September 30, 2021.

The Company pledged $ 2.9 million in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of September 30, 2021 and December 31, 2020.

This rate was 2.20 % as of March 31, 2022.

The Company pledged $ 2.9 million in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of both March 31, 2022 and December 31, 2021.

Changes in the fair value of this interest rate swap are reported in other comprehensive income on the Consolidated Statements of Income.

The unrealized loss on this interest rate swap was $ 0.9 million as of September 30, 2021 and the unrealized loss was $ 1.7 million as of December 31, 2020.

The unrealized loss on this interest rate swap was $ 28,000 as of March 31, 2022 and the unrealized loss was $ 1.0 million as of December 31, 2021.

Derivatives related to home mortgage banking activities

4 unchanged sentences

Market risk with respect to commitments to originate loans arises from changes in the value of contractual positions due to changes in interest rates.

RML had commitments to originate mortgage loans held for sale totaling $ 169.4 million and $ 150.3 million at September 30, 2021 and December 31, 2020, respectively.

RML had commitments to originate mortgage loans held for sale totaling $ 130.2 million and $ 81.6 million at March 31, 2022 and December 31, 2021, respectively.

Changes in the value of RML's interest rate derivatives are recorded in mortgage banking income on the Consolidated Statements of Income.

None of these derivatives are designated as hedging instruments.

The following table presents the fair value of derivatives not designated as hedging instruments at September 30, 2021 and December 31, 2020:

The following table presents the fair value of derivatives not designated as hedging instruments at March 31, 2022 and December 31, 2021:

(In Thousands) Asset Derivatives

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Balance Sheet Location Fair Value Fair Value

4 unchanged sentences

(In Thousands) Liability Derivatives

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Balance Sheet Location Fair Value Fair Value

Interest rate swaps Other liabilities $ 6,531 $ 6,030

Retail interest rate contracts Other liabilities — 880

Total $ 6,531 $ 6,030

The following table presents the net gains (losses) of derivatives not designated as hedging instruments for periods indicated below:

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(In Thousands) Income Statement Location 2022 2021

5 unchanged sentences

We do not offset such financial instruments for financial reporting purposes.

The following table summarizes the derivatives that have a right of offset as of September 30, 2021 and December 31, 2020:

September 30, 2021 Gross amounts not offset in the Statement of Financial Position

The following table summarizes the derivatives that have a right of offset as of March 31, 2022 and December 31, 2021:

March 31, 2022 Gross amounts not offset in the Statement of Financial Position

(In Thousands) Gross amounts of recognized assets and liabilities Gross amounts offset in the Statement of Financial Position Net amounts of assets and liabilities presented in the Statement of Financial Position Financial Instruments Collateral Posted Net Amount

8 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

Fair Value Measurements

16 unchanged sentences

Although the Company has determined that the majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.

However, as of September 30, 2021, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives.

However, as of March 31, 2022, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives.

As a result, the Company has classified its interest rate derivative valuations in Level 2 of the fair value hierarchy.

4 unchanged sentences

Assets Subject to Nonrecurring Adjustment to Fair Value

The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets, impaired loans, and OREO at fair value on a nonrecurring basis in accordance with GAAP.

The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets, impaired loans, and Other Real Estate Owned ("OREO") at fair value on a nonrecurring basis in accordance with GAAP.

Any nonrecurring adjustments to fair value usually result from the write-down of individual assets.

16 unchanged sentences

Estimated fair values as of the periods indicated are as follows:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(In Thousands) Carrying Amount Fair Value Carrying Amount Fair Value

10 unchanged sentences

Interest rate swaps 6,531 6,531 6,030 6,030

Retail interest rate contracts 1,055 1,055 166 166

Level 3 inputs:

11 unchanged sentences

Interest rate swaps 6,559 6,559 6,985 6,985

Retail interest rate contracts — — 880 880

Level 3 inputs:

2 unchanged sentences

(In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)

September 30, 2021

March 31, 2022

Available for sale securities

27 unchanged sentences

Commercial servicing rights 1,084 — — 1,084

Retail interest rate contracts 166 — 166 —

Total other assets $ 22,391 $ — $ 6,196 $ 16,195

Interest rate swaps $ 6,985 $ — $ 6,985 $ —

Retail interest rate contracts 880 — 880 —

Total other liabilities $ 6,985 $ — $ 6,985 $ —

The following tables provide a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine-month periods ended September 30, 2021 and 2020:

(In Thousands) Beginning balance Change included in earnings Purchases and issuances Sales and settlements Ending balance Net change in unrealized gains (losses) relating to items held at end of period

Three Months Ended September 30, 2021

Interest rate lock commitments $ 3,044 ($ 867 ) $ 7,428 ($ 6,357 ) $ 3,248 $ 3,248

Mortgage servicing rights 12,835 ( 1,458 ) 1,703 — 13,080 —

Commercial servicing rights 1,292 ( 58 ) 44 — 1,278 —

Total $ 17,171 ($ 2,383 ) $ 9,175 ($ 6,357 ) $ 17,606 $ 3,248

Three Months Ended September 30, 2020

Interest rate lock commitments $ 4,653 ($ 1,784 ) $ 15,329 ($ 11,679 ) $ 6,519 $ 6,519

Mortgage servicing rights 10,721 ( 1,505 ) 1,373 — 10,589 —

Commercial servicing rights 1,162 ( 101 ) 225 — 1,286 —

Total $ 16,536 ($ 3,390 ) $ 16,927 ($ 11,679 ) $ 18,394 $ 6,519

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Interest rate lock commitments $ 1,387 ($ 509 ) $ 4,350 ($ 4,263 ) $ 965 $ 965

2 unchanged sentences

Total $ 16,195 $ 176 $ 5,370 ($ 4,263 ) $ 17,478 $ 965

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Interest rate lock commitments $ 4,034 ($ 1,147 ) $ 9,268 ($ 9,442 ) $ 2,713 $ 2,713

2 unchanged sentences

Total $ 16,562 ($ 2,179 ) $ 10,756 ($ 9,442 ) $ 15,697 $ 2,713

There were no changes in unrealized gains and losses for the three and nine-month periods ending September 30, 2021 and 2020 included in other comprehensive income for recurring Level 3 fair value measurements.

As of and for the periods ending September 30, 2021 and December 31, 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 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.

There were no changes in unrealized gains and losses for the three-month periods ending March 31, 2022 and 2021 included in other comprehensive income for recurring Level 3 fair value measurements.

As of and for the periods ending March 31, 2022 and December 31, 2021, except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis.

For loans individually measured for credit losses, the Company classifies fair value measurements using observable inputs, such as external appraisals, as Level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as Level 3 valuations in the fair value hierarchy.

(In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)

September 30, 2021

Loans measured for impairment $ 4,282 $ — $ — $ 4,282

March 31, 2022

Loans individually measured for credit losses $ 166 $ — $ — $ 166

Total $ 166 $ — $ — $ 166

December 31, 2021

Loans measured for impairment $ 308 $ — $ — $ 308

Loans individually measured for credit losses $ — $ — $ — $ —

Total $ — $ — $ — $ —

The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three and nine-month periods ended September 30, 2021 and 2020:

Three Months Ended September 30, Nine Months Ended September 30,

The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three-month periods ended March 31, 2022 and 2021:

Three Months Ended March 31,

(In Thousands) 2021 2020

Loans measured for impairment ($ 122 ) $ 10 $ 650 $ 24

Loans individually measured for credit losses $ 89 $ 985

Total loss from nonrecurring measurements $ 89 $ 985

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at September 30, 2021 and December 31, 2020:

Financial Instrument Valuation Technique Unobservable Input Weighted Average Rate Range

September 30, 2021

Loans measured for impairment In-house valuation of collateral Discount rate 10 % - 100 %

March 31, 2022

Loans individually measured for credit losses In-house valuation of collateral Discount rate 100 %

Interest rate lock commitment External pricing model Pull through rate 94.37 %

4 unchanged sentences

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 %

7 unchanged sentences

The Community Banking segment's principal business focus is the offering of loan and deposit products to business and consumer customers in its primary market areas.

As of September 30, 2021, the Community Banking segment operated 17 branches throughout Alaska.

As of March 31, 2022, the Community Banking segment operated 17 branches throughout Alaska.

The Home Mortgage Lending segment's principal business focus is the origination and sale of mortgage loans for 1-4 family residential properties.

Summarized financial information for the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables:

Three Months Ended September 30, 2021

Three Months Ended March 31, 2022

(In Thousands) Community Banking Home Mortgage Lending Consolidated

8 unchanged sentences

Net income $ 6,428 $ 798 $ 7,226

Three Months Ended September 30, 2020

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 18,821 $ 973 $ 19,794

Interest expense 1,433 67 1,500

Net interest income 17,388 906 18,294

Provision for credit losses 567 — 567

Other operating income 3,696 17,932 21,628

Other operating expense 14,353 9,153 23,506

Income before provision for income taxes 6,164 9,685 15,849

Provision for income taxes 1,249 2,745 3,994

Net income $ 4,915 $ 6,940 $ 11,855

Nine Months Ended September 30, 2021

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 59,816 $ 2,315 $ 62,131

Interest expense 2,886 128 3,014

Net interest income 56,930 2,187 59,117

Provision for credit losses ( 3,021 ) — ( 3,021 )

Other operating income 7,811 34,875 42,686

Other operating expense 43,064 23,133 66,197

Income before provision for income taxes 24,698 13,929 38,627

Provision for income taxes 5,257 3,967 9,224

Net income $ 19,441 $ 9,962 $ 29,403

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

(In Thousands) Community Banking Home Mortgage Lending Consolidated

2 unchanged sentences

Net interest income 18,734 759 19,493

Provision for credit losses 3,031 — 3,031

Benefit for credit losses ( 1,488 ) — ( 1,488 )

Other operating income 2,274 13,622 15,896

3 unchanged sentences

Net income $ 7,380 $ 4,801 $ 12,181

September 30, 2021

March 31, 2022

(In Thousands) Community Banking Home Mortgage Lending Consolidated

6 unchanged sentences

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-Q

Item 1. Financial Statements