What changed in this filing

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Item 1. Financial Statements

2022-08-05 compared with 2022-05-06 · 208 added, 144 removed, 872 unchanged (29% of the section changed)

38 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, 5,881,708 and 6,014,813 issued and outstanding at March 31, 2022 and December 31, 2021, respectively

Common stock, $ 1 par value, 10,000,000 shares authorized, 5,681,089 and 6,014,813 issued and outstanding at June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital 17,716 31,162

6 unchanged sentences

Consolidated Statements of Income

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In Thousands, Except Per Share Data) 2022 2021 2022 2021

13 unchanged sentences

Net Interest Income 22,212 19,192 41,516 38,685

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

Net Interest Income After (Benefit) Provision for Credit Losses 19,454 20,981

Provision (benefit) for credit losses 463 ( 427 ) 313 ( 1,915 )

Net Interest Income After Provision (Benefit) for Credit Losses 21,749 19,619 41,203 40,600

Other Operating Income

Mortgage banking income 5,900 11,360 12,882 24,982

Keyman life insurance proceeds 2,002 —

Bankcard fees 927 879 1,731 1,619

1 unchanged sentence

Service charges on deposit accounts 402 308 776 598

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

Gain on sale of marketable equity securities, net — 31 — 31

Keyman life insurance proceeds — — 2,002 —

Unrealized (loss) gain on marketable equity securities ( 810 ) 178 ( 1,232 ) 94

Other income 822 801 1,503 1,597

4 unchanged sentences

Occupancy expense 1,748 1,869 3,474 3,529

Marketing expense 814 672 1,239 1,076

Professional and outside services 708 642 1,430 1,266

Insurance expense 516 329 1,082 643

Marketing expense 425 404

OREO expense, net rental income and gains on sale 19 47 7 11

Intangible asset amortization expense 6 9 12 18

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

Other operating expense 1,715 1,645 3,285 3,234

10 unchanged sentences

Consolidated Statements of Comprehensive Income

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In Thousands) 2022 2021 2022 2021

4 unchanged sentences

Derivatives and hedging activities:

Unrealized holding gains arising during the period 927 1,260

Unrealized holding (losses) gains arising during the period 827 ( 587 ) 1,754 673

Income tax benefit related to unrealized gains and losses 1,958 189 6,329 266

13 unchanged sentences

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

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

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

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

4 unchanged sentences

Stock-based compensation expense — — 229 — — 229

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

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

Net income — — — 8,345 — 8,345

12 unchanged sentences

Repurchase of common stock ( 188 ) ( 188 ) ( 7,930 ) — — ( 8,118 )

Other comprehensive income, net of tax — — — — ( 2,490 ) ( 2,490 )

Other comprehensive loss, net of tax — — — — ( 2,490 ) ( 2,490 )

Net income — — — 8,114 — 8,114

14 unchanged sentences

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

Cash dividend on common stock ($ 0.41 per share)

— — — ( 2,364 ) — ( 2,364 )

Stock-based compensation expense — — 190 — — 190

Repurchase of common stock ( 201 ) ( 201 ) ( 8,033 ) — — ( 8,234 )

Other comprehensive loss, net of tax — — — — ( 4,930 ) ( 4,930 )

Net income — — — 4,795 — 4,795

Balance as of June 30, 2022 5,681 $ 5,681 $ 17,716 $ 211,232 ($ 19,340 ) $ 215,289

See notes to consolidated financial statements

1 unchanged sentence

Consolidated Statements of Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

(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 — ( 31 )

Depreciation and amortization of premises and equipment 1,585 1,632

2 unchanged sentences

Amortization of investment security premium, net of discount accretion 347 223

Unrealized loss on marketable equity securities 422 84

Unrealized loss (gain) on marketable equity securities 1,232 ( 94 )

Deferred tax (benefit) expense — 958

1 unchanged sentence

Deferred loan fees and amortization, net of costs ( 3,247 ) 5,710

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

Provision (benefit) for credit losses 313 ( 1,915 )

Additions to home mortgage servicing rights carried at fair value ( 2,115 ) ( 3,193 )

10 unchanged sentences

(Decrease) in other liabilities ( 6,010 ) ( 4,698 )

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

Net Cash Provided by Operating Activities 15,309 68,450

Investing Activities:

5 unchanged sentences

Proceeds from sales/calls/maturities of securities available for sale 5,000 82,575

Proceeds from sales of marketable equity securities — 47

Proceeds from redemption of FHLB stock 10 7

17 unchanged sentences

Supplemental Information:

Income taxes paid $ 40 $ 1,852

Interest paid $ 1,471 $ 2,132

2 unchanged sentences

Cash dividends declared but not paid $ 46 $ 45

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

Operating results for the interim period ended June 30, 2022 are not necessarily indicative of the results anticipated for the year ending December 31, 2022.

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

22 unchanged sentences

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.

As of June 30, 2022, we had approximately $ 179.1 million of assets, including $ 101.0 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 March 31, 2022, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $ 151.6 million.

As of June 30, 2022, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $ 150.8 million.

Of this amount, $ 70.0 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers.

4 unchanged sentences

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

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

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

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

10 unchanged sentences

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 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 $ 8.0 million and $ 8.4 million at March 31, 2022 and December 31, 2021, respectively.

The Company held marketable equity securities with fair values of $ 9.1 million and $ 8.4 million at June 30, 2022 and December 31, 2021, respectively.

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In Thousands) 2022 2021 2022 2021

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

Unrealized (loss) gain on marketable equity securities ($ 810 ) $ 178 ($ 1,232 ) $ 94

Gain on sale of marketable equity securities, net — 31 — 31

4 unchanged sentences

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

March 31, 2022

June 30, 2022

Securities available for sale

5 unchanged sentences

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

March 31, 2022

June 30, 2022

Securities held to maturity

16 unchanged sentences

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:

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 June 30, 2022 and December 31, 2021 were as follows:

Less Than 12 Months More Than 12 Months Total

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

March 31, 2022:

June 30, 2022

Securities available for sale

12 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 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.

At June 30, 2022, the Company had 79 available for sale securities in an unrealized loss position without an ACL.

At June 30, 2022, the Company had four held to maturity securities in an unrealized loss position without an ACL.

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

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

Accordingly, as of March 31, 2022,

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

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

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

Accordingly, as of June 30, 2022, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no losses have been recognized in the Company's Consolidated Statements of Income.

At June 30, 2022 and December 31, 2021, $ 54.7 million and $ 59.5 million in securities were pledged for deposits and borrowings, respectively.

The amortized cost and estimated fair values of debt securities at June 30, 2022, are distributed by contractual maturity as shown below.

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

1 unchanged sentence

US Treasury and government sponsored entities

Within 1 year $ 5,000 $ 5,007

1-5 years $ 546,885 $ 521,339

12 unchanged sentences

Total $ 820 $ 807

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,

There were no proceeds from sales of investment securities for the three and six-month periods ending June 30, 2022 and 2021.

A summary of interest income for the three and six-month periods ending June 30, 2022 and 2021, on available for sale investment securities are as follows:

Three Months Ended June 30, Six Months Ended June 30,

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

Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of June 30, 2022 and December 31, 2021.

Loans Held for Investment

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

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

15 unchanged sentences

$ 1,394,172 $ 1,414,005 ($ 8,296 ) $ 1,402,147 $ 1,425,429 ($ 11,543 )

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

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

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

The difference between the amortized cost and unpaid principal balance is net deferred origination fees totaling $ 8.3 million and $ 11.5 million at June 30, 2022 and December 31, 2021, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 5.3 million and $ 5.5 million at June 30, 2022 and December 31, 2021, respectively, and was included in other assets in the Consolidated Balance Sheets.

Amortized cost in the above table includes $ 31.9 million and $ 118.2 million as of June 30, 2022 and December 31, 2021, respectively, in Paycheck Protection Program ("PPP") loans administered by the U.S.

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

1 unchanged sentence

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

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

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

(In Thousands)

27 unchanged sentences

Total $ 14,764 ($ 161 ) ($ 110 ) $ 46 $ 14,539

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.

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

(In Thousands)

Commercial & industrial loans $ 3,027 $ 279 ($ 461 ) $ 116 $ 2,961

Commercial real estate:

Owner occupied properties 3,176 ( 603 ) — — 2,573

Non-owner occupied and multifamily properties 2,930 177 — — 3,107

Residential real estate:

1-4 family residential properties secured by first liens 439 181 — — 620

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 215 91 — 21 327

1-4 family residential construction loans 120 111 — — 231

Other construction, land development and raw land loans 1,635 ( 173 ) — — 1,462

Obligations of states and political subdivisions in the US 32 27 — — 59

Agricultural production, including commercial fishing 91 21 — 15 127

Consumer loans 67 ( 4 ) — 1 64

Other loans 7 ( 1 ) — — 6

Total $ 11,739 $ 106 ($ 461 ) $ 153 $ 11,537

Commercial & industrial loans $ 4,348 $ 4 ($ 273 ) $ 212 $ 4,291

Commercial real estate:

Owner occupied properties 3,579 ( 243 ) — 4 3,340

Non-owner occupied and multifamily properties 4,944 ( 1,103 ) — — 3,841

Residential real estate:

1-4 family residential properties secured by first liens 673 ( 43 ) — — 630

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 419 ( 99 ) — 20 340

1-4 family residential construction loans 454 ( 223 ) — — 231

Other construction, land development and raw land loans 1,994 ( 324 ) — — 1,670

Obligations of states and political subdivisions in the US 44 ( 5 ) — — 39

Agricultural production, including commercial fishing 49 ( 7 ) — 15 57

Consumer loans 118 ( 26 ) — 2 94

Other loans 3 3 — — 6

Total $ 16,625 ($ 2,066 ) ($ 273 ) $ 253 $ 14,539

At June 30, 2022, as compared to March 31, 2022 and December 31, 2021, the Company forecasted a lower unemployment rate over the reasonable and supportable forecast period.

In the second quarter, the ACL increased because an increase in loan balances more than offset the decrease in the forecast for unemployment, changes in the characteristics of loans, and a decrease in the ACL for loans individually evaluated.

In the six months ending June 30, 2022, the ACL decreased as compared to the same six month period of 2021 because the decrease in the forecast for unemployment and changes in the characteristics of loans were only partially offset by increases in loan balances.

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.

March 31, 2022 2022 2021 2020 2019 2018 Prior Total

June 30, 2022 2022 2021 2020 2019 2018 Prior Total

(In Thousands)

110 unchanged sentences

Past Due Loans:

The following tables present an aging of contractually past due loans:

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

(In Thousands) 30-59 Days

3 unchanged sentences

Due Current Total Greater Than 90 Days Past Due Still Accruing

March 31, 2022

June 30, 2022

Commercial & industrial loans $ 246 $ 132 $ 387 $ 765 $ 394,076 $ 394,841 $ —

28 unchanged sentences

Nonaccrual loans:

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

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

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

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

March 31, 2022 December 31, 2021

Nonaccrual loans net of government guarantees totaled $ 7.3 million and $ 10.7 million at June 30, 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 ACL.

All loans with no ACL are individually evaluated for credit losses in the Company's Current Expected Credit Losses methodology.

June 30, 2022 December 31, 2021

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

12 unchanged sentences

Net nonaccrual loans $ 7,318 $ 7,241 $ 10,672 $ 10,564

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

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

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

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

There was no interest on nonaccrual loans reversed through interest income during three-month period ending June 30, 2022 and $ 2,000 in interest on nonaccrual loans reversed through interest income during the six-month period ending June 30, 2022.

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

There was no interest earned on nonaccrual loans with a principal balance during the three and six-month periods ending June 30, 2022 and June 30, 2021, respectively.

However, the Company recognized interest income of $ 873,000 and $ 232,000 in the three-month periods ending June 30, 2022 and 2021, respectively, and $ 930,000 and $ 366,000 in the six-month periods ending June 30, 2022 and 2021, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.

Troubled Debt Restructurings:

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

Loans classified as TDRs totaled $ 8.9 million and $ 10.6 million at June 30, 2022 and December 31, 2021, respectively.

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

3 unchanged sentences

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

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

Loan Modifications due to COVID-19 as of June 30, 2022

(Dollars in thousands) Interest Only Full Payment Deferral Total

18 unchanged sentences

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

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

There were no newly restructured loans that occurred during the six months ended June 30, 2022.

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

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

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

Accrual Status Nonaccrual Status Total Modifications

2 unchanged sentences

Total $ 3,008 $ 5,844 $ 8,852

The following table presents newly restructured loans that occurred during the six months ended June 30, 2021, by concession (terms modified):

June 30, 2021

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

(In Thousands)

Pre-Modification Outstanding Recorded Investment:

Commercial - AQR substandard 1 $ — $ 254 $ — $ — $ 254

Total 1 $ — $ 254 $ — $ — $ 254

Post-Modification Outstanding Recorded Investment:

Commercial - AQR substandard 1 $ — $ 251 $ — $ — $ 251

Total 1 $ — $ 251 $ — $ — $ 251

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

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

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

There were no in charge-offs in the six months ended June 30, 2022 on loans that were newly classified as TDRs during the same period.

There were no loans that defaulted during the six months ended June 30, 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 March 31, 2022 or December 31, 2021, and there were no restructured purchased receivables at March 31, 2022 or December 31, 2021.

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

There were no purchased receivables past due at June 30, 2022 or December 31, 2021, and there were no restructured purchased receivables at June 30, 2022 or December 31, 2021.

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

There were no nonperforming purchased receivables as of 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.

There were no nonperforming purchased receivables as of June 30, 2022 or December 31, 2021.

There was no activity and no balance in the ACL for purchased receivables as of June 30, 2022 or December 31, 2021.

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

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

(In Thousands) June 30, 2022 December 31, 2021

Purchased receivables $ 15,277 $ 6,987

3 unchanged sentences

Mortgage servicing rights

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

Three Months Ended March 31,

The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three and six-month periods ended June 30, 2022 and 2021:

Three Months Ended June 30, Six Months Ended June 30,

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

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

The following table details information related to our serviced mortgage loan portfolio as of June 30, 2022 and December 31, 2021:

(In Thousands) June 30, 2022 December 31, 2021

Balance of mortgage loans serviced for others $ 818,266 $ 772,764

MSR as a percentage of serviced loans 1.99 % 1.78 %

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

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

March 31, 2022 December 31, 2021

The Company recognized servicing fees of $ 804,000 and $ 707,000 during the three-month periods ending June 30, 2022 and 2021, respectively, and $ 1.6 million and $ 1.4 million during the six-month periods ending June 30, 2022 and 2021, respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the weighted average key assumptions used in measuring the fair value of MSR as of June 30, 2022 and December 31, 2021:

June 30, 2022 December 31, 2021

Constant prepayment rate 7.37 % 11.80 %

Discount rate 9.25 % 8.00 %

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

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

Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at June 30, 2022 and December 31, 2021 were as follows:

(In Thousands) June 30, 2022 December 31, 2021

Aggregate portfolio principal balance $ 818,266 $ 772,764

Weighted average rate of note 3.28 % 3.31 %

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

June 30, 2022 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change

Constant prepayment rate 7.37 % 14.75 % 22.12 %

18 unchanged sentences

Commercial servicing rights

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

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

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

The commercial servicing rights asset ("CSR") has a carrying value $ 1.1 million at both June 30, 2022 and December 31, 2021, and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets.

Total commercial loans serviced for others were $ 254.5 million and $ 259.8 million at June 30, 2022 and December 31, 2021, respectively.

Key assumptions used in measuring the fair value of the CSR as of June 30, 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 March 31, 2022, the Company has operating lease ROU assets of $ 10.4 million and operating lease liabilities of $ 10.4 million.

As of June 30, 2022, the Company has operating lease ROU assets of $ 9.9 million and operating lease liabilities of $ 9.8 million.

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

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

The Company did not have any agreements that are classified as finance leases as of June 30, 2022 or December 31, 2021.

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In Thousands) 2022 2021 2022 2021

Operating lease cost (1)

$ 672 $ 702 $ 1,353 $ 1,418

Short term lease cost (1)

7 unchanged sentences

(In Thousands) Operating Leases

2022 (Nine months) $ 1,858

2022 (Six months) $ 1,224

Thereafter 4,266

4 unchanged sentences

The Company enters into commercial loan interest rate swap agreements with commercial banking customers which are offset with a corresponding swap agreement with a third party financial institution ("counterparty").

The Company has agreements with its counterparties that contain provisions that provide that if the Company fails to maintain its status as a "well-capitalized" institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

The Company has agreements with its counterparties that contain provisions that provide that if the Company fails to maintain its status as a "well-capitalized" institution under regulatory guidelines, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

These agreements also require that the Company and the counterparty collateralize any fair value shortfalls that exceed $ 250,000 with eligible collateral, which includes cash and securities backed with the full faith and credit of the federal government.

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

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

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

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

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

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

The Company pledged $ 569,000 as of June 30, 2022 and $ 8.2 million as of December 31, 2021 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.

The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $ 213.0 million and $ 212.6 million at June 30, 2022 and December 31, 2021, respectively.

At June 30, 2022, the notional amount of interest rate swaps is made up of 19 variable to fixed rate swaps to commercial loan customers totaling $ 106.5 million, and 19 fixed to variable rate swaps with a counterparty totaling $ 106.5 million.

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

The Company recognized $ 87,000 and $ 90,000 in fee income related to interest rate swaps in the three and six-month periods ending June 30, 2022, respectively, and $ 103,000 and $ 195,000 in fee income related to interest rate swaps in the three and six-month periods ending June 30, 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 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.

This rate was 3.20 % as of June 30, 2022.

The Company pledged $ 130,000 in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of June 30, 2022 and $ 2.9 million as of December 31, 2021.

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

The unrealized 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.

The unrealized gain on this interest rate swap was $ 798,000 as of June 30, 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 $ 130.2 million and $ 81.6 million at March 31, 2022 and December 31, 2021, respectively.

RML had commitments to originate mortgage loans held for sale totaling $ 116.2 million and $ 81.6 million at June 30, 2022 and December 31, 2021, respectively.

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

None of these derivatives are designated as hedging instruments.

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

The following table presents the fair value of derivatives not designated as hedging instruments at June 30, 2022 and December 31, 2021:

(In Thousands) Asset Derivatives

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Balance Sheet Location Fair Value Fair Value

4 unchanged sentences

(In Thousands) Liability Derivatives

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Balance Sheet Location Fair Value Fair Value

Interest rate swaps Other liabilities $ 8,316 $ 6,030

Retail interest rate contracts Other liabilities 376 —

Total $ 8,692 $ 6,030

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In Thousands) Income Statement Location 2022 2021 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 March 31, 2022 and December 31, 2021:

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

The following table summarizes the derivatives that have a right of offset as of June 30, 2022 and December 31, 2021:

June 30, 2022 Gross amounts not offset in the Statement of Financial Position

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

1 unchanged sentence

Interest rate swaps $ 8,316 $ — $ 8,316 $ — $ — $ 8,316

Retail interest rate contracts 1,055 — 1,055 — — 1,055

Liability Derivatives

Interest rate swaps $ 8,316 $ — $ 8,316 $ — $ 569 $ 7,747

Retail interest rate contracts 376 — 376 — — 376

December 31, 2021 Gross amounts not offset in the Statement of Financial Position

15 unchanged sentences

Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates, and ancillary fee income net of servicing costs.

The model assumptions are also compared to publicly filed information from several large MSR holders, as available.

Derivative instruments:

2 unchanged sentences

as such, the interest rate lock commitment derivatives are classified as Level 3.

Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation

adjustments to reflect nonperformance risk in the measurement of fair value.

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

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

Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value.

Although the Company has determined that the majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation

adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.

However, as of June 30, 2022, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives.

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

11 unchanged sentences

Those factors are balanced with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists.

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

These projects are generally valued as if complete, with an appropriate allowance for cost of completion, including contingencies developed from external sources such as vendors, engineers and contractors.

The Company believes that recording OREO that is not fully constructed based on as if complete values is more appropriate than recording OREO that is not fully constructed using as is values.

We concluded that as-is-complete values are appropriate for these types of projects based on the accounting guidance for capitalization of project costs and subsequent measurement of the value of real estate.

GAAP specifically states that estimates and cost allocations must be reviewed at the end of each reporting period and reallocated based on revised estimates.

The Company adjusts the carrying value of OREO in accordance with this guidance for increases in estimated cost to complete that exceed the fair value of the real estate at the end of each reporting period.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.

4 unchanged sentences

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

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

28 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)

March 31, 2022

June 30, 2022

Available for sale securities

10 unchanged sentences

Commercial servicing rights 1,069 — — 1,069

Retail interest rate contracts 1,055 — 1,055 —

Total other assets $ 28,253 $ — $ 8,316 $ 19,937

Interest rate swaps $ 8,316 $ — $ 8,316 $ —

Retail interest rate contracts 376 — 376 —

Total other liabilities $ 8,692 $ — $ 8,692 $ —

16 unchanged sentences

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

The following tables provide a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three-month periods ended March 31, 2022 and 2021:

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

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

Interest rate lock commitments $ 965 ($ 520 ) $ 3,863 ($ 1,741 ) $ 2,567 $ 2,567

2 unchanged sentences

Total $ 17,478 ($ 791 ) $ 4,991 ($ 1,741 ) $ 19,937 $ 2,567

Three Months Ended March 31, 2021

Three Months Ended June 30, 2021

Interest rate lock commitments $ 2,713 ($ 867 ) $ 7,183 ($ 5,985 ) $ 3,044 $ 3,044

2 unchanged sentences

Total $ 15,697 ($ 1,487 ) $ 8,946 ($ 5,985 ) $ 17,171 $ 3,044

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)

March 31, 2022

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

Six Months Ended June 30, 2022

Interest rate lock commitments $ 1,387 ($ 1,029 ) $ 8,212 ($ 6,004 ) $ 2,567 $ 2,567

Mortgage servicing rights 13,724 462 2,115 — 16,301 —

Commercial servicing rights 1,084 ( 48 ) 33 — 1,069 —

Total $ 16,195 ($ 615 ) $ 10,360 ($ 6,004 ) $ 19,937 $ 2,567

December 31, 2021

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

Six Months Ended June 30, 2021

Interest rate lock commitments $ 4,034 ($ 2,014 ) $ 16,451 ($ 15,427 ) $ 3,044 $ 3,044

Mortgage servicing rights 11,218 ( 1,576 ) 3,193 — 12,835 —

Commercial servicing rights 1,310 ( 76 ) 58 — 1,292 —

Total $ 16,562 ($ 3,666 ) $ 19,702 ($ 15,427 ) $ 17,171 $ 3,044

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,

There were no changes in unrealized gains and losses for the three and six-month periods ending June 30, 2022 and 2021 included in other comprehensive income for recurring Level 3 fair value measurements.

As of and for the periods ending June 30, 2022 and December 31, 2021, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis.

The following table presents the (gains) losses resulting from nonrecurring fair value adjustments for the three and six-month periods ended June 30, 2022 and 2021:

Three Months Ended June 30, Six Months Ended June 30,

(In Thousands) 2022 2021 2022 2021

2 unchanged sentences

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

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at March 31, 2022 and December 31, 2021:

Financial Instrument Valuation Technique Unobservable Input Weighted Average Rate Range

March 31, 2022

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

June 30, 2022

Interest rate lock commitment External pricing model Pull through rate 91.85 %

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

As of June 30, 2022, the Community Banking segment operated 17 branches throughout Alaska.

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

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

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

(In Thousands) Community Banking Home Mortgage Lending Consolidated

2 unchanged sentences

Net interest income 21,603 609 22,212

Provision for credit losses 463 — 463

Other operating income 1,907 5,900 7,807

Other operating expense 16,415 6,823 23,238

Income before provision for income taxes 6,632 ( 314 ) 6,318

Provision for income taxes 1,605 ( 82 ) 1,523

Net income $ 5,027 ($ 232 ) $ 4,795

Three Months Ended June 30, 2021

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 19,476 $ 777 $ 20,253

Interest expense 1,008 53 1,061

Net interest income 18,468 724 19,192

Benefit for credit losses ( 427 ) — ( 427 )

4 unchanged sentences

Net income $ 5,266 $ 3,079 $ 8,345

Three Months Ended March 31, 2021

Six Months Ended June 30, 2022

(In Thousands) Community Banking Home Mortgage Lending Consolidated

2 unchanged sentences

Net interest income 40,512 1,004 41,516

Provision for credit losses 313 — 313

Other operating income 5,748 12,882 18,630

Other operating expense 31,246 13,093 44,339

Income before provision for income taxes 14,701 793 15,494

Provision for income taxes 3,246 227 3,473

Net income $ 11,455 $ 566 $ 12,021

Six Months Ended June 30, 2021

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 39,275 $ 1,574 $ 40,849

Interest expense 2,073 91 2,164

Net interest income 37,202 1,483 38,685

Benefit for credit losses ( 1,915 ) — ( 1,915 )

4 unchanged sentences

Net income $ 12,646 $ 7,880 $ 20,526

March 31, 2022

June 30, 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