What changed in this filing

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Item 1. Financial Statements

2022-11-04 compared with 2022-08-05 · 141 added, 128 removed, 952 unchanged (22% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

September 30,

2022 December 31,

33 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, 5,681,089 and 6,014,813 issued and outstanding at June 30, 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 September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital 17,907 31,162

6 unchanged sentences

Consolidated Statements of Income

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

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

13 unchanged sentences

Net Interest Income 26,311 20,432 67,827 59,117

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

Benefit for credit losses ( 353 ) ( 1,106 ) ( 40 ) ( 3,021 )

Net Interest Income After Benefit for Credit Losses 26,664 21,538 67,867 62,138

Other Operating Income

3 unchanged sentences

Service charges on deposit accounts 432 345 1,208 943

Unrealized (loss) gain on marketable equity securities 33 ( 67 ) ( 1,199 ) 27

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

Keyman life insurance proceeds — — 2,002 —

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

Other income 920 1,043 2,423 2,640

4 unchanged sentences

Occupancy expense 1,710 1,707 5,184 5,236

Marketing expense 814 672 1,239 1,076

Professional and outside services 894 703 2,324 1,969

Insurance expense 545 322 1,627 965

Marketing expense 524 533 1,763 1,609

OREO expense, net rental income and gains on sale 109 ( 378 ) 116 ( 367 )

12 unchanged sentences

Consolidated Statements of Comprehensive Income

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

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

(In Thousands) 2022 2021 2022 2021

66 unchanged sentences

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

Cash dividend on common stock ($ 0.50 per share)

— — — ( 2,858 ) — ( 2,858 )

Stock-based compensation expense — — 191 — — 191

Other comprehensive loss, net of tax — — — — ( 12,048 ) ( 12,048 )

Net income — — — 10,125 — 10,125

Balance as of September 30, 2022 5,681 $ 5,681 $ 17,907 $ 218,499 ($ 31,388 ) $ 210,699

See notes to consolidated financial statements

1 unchanged sentence

Consolidated Statements of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

(In Thousands) 2022 2021

11 unchanged sentences

Deferred loan fees and amortization, net of costs ( 3,570 ) 3,128

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

Benefit for credit losses ( 40 ) ( 3,021 )

Additions to home mortgage servicing rights carried at fair value ( 3,378 ) ( 4,896 )

7 unchanged sentences

Net changes in assets and liabilities:

(Increase) in accrued interest receivable ( 1,271 ) 132

(Increase) decrease in accrued interest receivable ( 1,649 ) 433

Decrease in other assets 5,123 5,504

18 unchanged sentences

Financing Activities:

(Decrease) increase in deposits ( 86,241 ) 321,457

Increase in deposits 17,704 471,560

(Decrease) in borrowings ( 309 ) ( 212 )

10 unchanged sentences

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 $ 75 $ 71

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

Operating results for the interim period ended September 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 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.

As of September 30, 2022, we had approximately $ 159.9 million of assets, including $ 83.8 million in commercial loans and $ 76.1 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 June 30, 2022, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $ 150.8 million.

As of September 30, 2022, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $ 148.4 million.

Of this amount, $ 69.2 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers.

19 unchanged sentences

Marketable Equity Securities

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 Company held marketable equity securities with fair values of $ 11.1 million and $ 8.4 million at September 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 June 30, Six Months Ended June 30,

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

(In Thousands) 2022 2021 2022 2021

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

Unrealized gain (loss) on marketable equity securities $ 33 ($ 67 ) ($ 1,199 ) $ 27

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

4 unchanged sentences

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

June 30, 2022

September 30, 2022

Securities available for sale

5 unchanged sentences

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

June 30, 2022

September 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 June 30, 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 September 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

June 30, 2022

September 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 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.

At September 30, 2022, the Company had 86 available for sale securities in an unrealized loss position without an ACL.

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

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

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

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.

Accordingly, as of September 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 September 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 September 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 $ 30,065 $ 29,497

1-5 years 576,237 534,575

12 unchanged sentences

Total $ 820 $ 796

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,

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

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

Three Months Ended September 30, Nine Months Ended September 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 June 30, 2022 and December 31, 2021.

Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of September 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:

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

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

15 unchanged sentences

$ 1,395,284 $ 1,415,239 ($ 7,973 ) $ 1,402,147 $ 1,425,429 ($ 11,543 )

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.

The difference between the amortized cost and unpaid principal balance is net deferred origination fees totaling $ 8.0 million and $ 11.5 million at September 30, 2022 and December 31, 2021, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 4.6 million and $ 5.5 million at September 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 $ 11.3 million and $ 118.2 million as of September 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 June 30, Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance

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

(In Thousands)

27 unchanged sentences

Total $ 14,539 ($ 762 ) $ — $ 39 $ 13,816

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

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

(In Thousands)

27 unchanged sentences

Total $ 16,625 ($ 2,828 ) ($ 273 ) $ 292 $ 13,816

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.

The ACL on loans increased at September 30, 2022, as compared to June 30, 2022 primarily due to an increase in the Company's forecasted unemployment rate over the reasonable and supportable forecast period, and this increase was only partially offset by a decrease in non-government guaranteed loan balances.

The ACL on loans also increased at September 30, 2022, as compared to December 31, 2021;

however, this increase was primarily due to an increase in non-government guaranteed loan balances.

Credit Quality Information

7 unchanged sentences

Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances.

The Company has competent management with an acceptable track record.

The borrower has competent management with an acceptable track record.

The category does not include loans with undue or unwarranted credit risks that constitute identifiable weaknesses.

15 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.

June 30, 2022 2022 2021 2020 2019 2018 Prior Total

September 30, 2022 2022 2021 2020 2019 2018 Prior Total

(In Thousands)

116 unchanged sentences

Due Current Total Greater Than 90 Days Past Due Still Accruing

June 30, 2022

September 30, 2022

Commercial & industrial loans $ 2,596 $ 3,082 $ 223 $ 5,901 $ 369,932 $ 375,833 $ —

28 unchanged sentences

Nonaccrual loans:

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.

Nonaccrual loans net of government guarantees totaled $ 6.5 million and $ 10.7 million at September 30, 2022 and December 31, 2021, respectively.

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

status for the periods presented for which there was no related ACL.

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

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

2 unchanged sentences

Owner occupied properties 1,531 1,531 3,506 3,506

Non-owner occupied and multifamily properties 275 275 — —

Residential real estate:

4 unchanged sentences

Other construction, land development and raw land loans 1,546 1,546 1,636 1,636

Consumer loans — — — —

Total nonaccrual loans 7,092 7,043 11,650 11,542

1 unchanged sentence

Net nonaccrual loans $ 6,473 $ 6,424 $ 10,672 $ 10,564

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.

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

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

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

However, the Company recognized interest income of $ 1.2 million and $ 419,000 in the three-month periods ending September 30, 2022 and 2021, respectively, and $ 2.1 million and $ 785,000 in the nine-month periods ending September 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 $ 8.9 million and $ 10.6 million at June 30, 2022 and December 31, 2021, respectively.

Loans classified as TDRs totaled $ 8.1 million and $ 10.6 million at September 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 June 30, 2022

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

(Dollars in thousands) Interest Only Full Payment Deferral Total

5 unchanged sentences

Number of modifications 16 — 16

The $ 8.4 million in COVID-19 loan accommodations as of September 30, 2022 are scheduled to return to normal principal and interest payments in the fourth quarter of 2022.

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

8 unchanged sentences

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

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

By definition, TDRs are considered impaired loans.

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

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

There were no newly restructured loans that occurred during the nine months ended September 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 loan restructurings were not related to COVID-19 modifications.

The disclosed loan restructurings on the table below were not related to COVID-19 modifications.

Accrual Status Nonaccrual Status Total Modifications

(In Thousands)

Existing Troubled Debt Restructurings $ 3,008 $ 5,844 $ 8,852

Troubled Debt Restructurings $ 3,033 $ 5,075 $ 8,108

Total $ 3,033 $ 5,075 $ 8,108

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

June 30, 2021

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

September 30, 2021

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

2 unchanged sentences

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

Commercial real estate:

Owner occupied properties 1 — 360 — — 360

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

Total 3 $ — $ 1,191 $ — $ — $ 1,191

1 unchanged sentence

Commercial - AQR substandard 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

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 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.

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

There were no loans that defaulted during the nine months ended September 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 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.

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

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

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

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

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

Purchased receivables $ 4,785 $ 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 and six-month periods ended June 30, 2022 and 2021:

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

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

Three Months Ended September 30, Nine Months Ended September 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 June 30, 2022 and December 31, 2021:

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

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

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

Balance of mortgage loans serviced for others $ 859,288 $ 772,764

MSR as a percentage of serviced loans 2.06 % 1.78 %

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

The Company recognized servicing fees of $ 858,000 and $ 745,000 during the three-month periods ending September 30, 2022 and 2021, respectively, and $ 2.4 million and $ 2.2 million during the nine-month periods ending September 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 September 30, 2022 and December 31, 2021:

September 30, 2022 December 31, 2021

Constant prepayment rate 7.27 % 11.80 %

Discount rate 10.00 % 8.00 %

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

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

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

Aggregate portfolio principal balance $ 859,288 $ 772,764

Weighted average rate of note 3.36 % 3.31 %

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

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

Constant prepayment rate 7.27 % 14.54 % 21.82 %

18 unchanged sentences

Commercial servicing rights

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 commercial servicing rights asset ("CSR") has a carrying value of $ 1.1 million at both September 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 $ 255.9 million and $ 259.8 million at September 30, 2022 and December 31, 2021, respectively.

Key assumptions used in measuring the fair value of the CSR as of September 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 June 30, 2022, the Company has operating lease ROU assets of $ 9.9 million and operating lease liabilities of $ 9.8 million.

As of September 30, 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 June 30, 2022 or December 31, 2021.

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

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

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

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

(In Thousands) 2022 2021 2022 2021

10 unchanged sentences

(In Thousands) Operating Leases

2022 (Six months) $ 1,224

2022 (Three months) $ 645

Thereafter 4,581

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 $ 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.

The Company pledged $ 549,000 as of September 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 $ 211.0 million and $ 212.6 million at September 30, 2022 and December 31, 2021, respectively.

At September 30, 2022, the notional amount of interest rate swaps is made up of 19 variable to fixed rate swaps to commercial loan customers totaling $ 105.5 million, and 19 fixed to variable rate swaps with a counterparty totaling $ 105.5 million.

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

The Company recognized zero and $ 90,000 in fee income related to interest rate swaps in the three and nine-month periods ending September 30, 2022, respectively, and $ 195,000 and $ 390,000 in fee income related to interest rate swaps in the three and nine-month periods ending September 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 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.

This rate was 4.66 % as of September 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 September 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 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.

The unrealized gain on this interest rate swap was $ 1.5 million as of September 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 $ 116.2 million and $ 81.6 million at June 30, 2022 and December 31, 2021, respectively.

RML had commitments to originate mortgage loans held for sale totaling $ 74.7 million and $ 81.6 million at September 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 June 30, 2022 and December 31, 2021:

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

(In Thousands) Asset Derivatives

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Balance Sheet Location Fair Value Fair Value

4 unchanged sentences

(In Thousands) Liability Derivatives

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Balance Sheet Location Fair Value Fair Value

Interest rate swaps Other liabilities $ 13,374 $ 6,030

Retail interest rate contracts Other liabilities 376 —

Total $ 13,374 $ 6,030

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

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

Three Months Ended September 30, Nine Months Ended September 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 June 30, 2022 and December 31, 2021:

June 30, 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 September 30, 2022 and December 31, 2021:

September 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 $ 13,374 $ — $ 13,374 $ — $ — $ 13,374

Retail interest rate contracts 593 — 593 — — 593

Liability Derivatives

Interest rate swaps $ 13,374 $ — $ 13,374 $ — $ 549 $ 12,825

Retail interest rate contracts 376 — 376 — — 376

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

20 unchanged sentences

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.

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, 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.

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

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

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

June 30, 2022

September 30, 2022

Available for sale securities

10 unchanged sentences

Commercial servicing rights 1,067 — — 1,067

Retail interest rate contracts 593 — — 593

Total other assets $ 34,579 $ — $ 14,856 $ 19,723

Interest rate swaps $ 13,374 $ — $ 13,374 $ —

Retail interest rate contracts 376 — 376 —

Total other liabilities $ 13,374 $ — $ 13,374 $ —

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 and six-month periods ended June 30, 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 June 30, 2022

Three Months Ended September 30, 2022

Interest rate lock commitments $ 2,567 ($ 370 ) $ 2,976 ($ 4,819 ) $ 354 $ 354

2 unchanged sentences

Total $ 19,937 ($ 300 ) $ 4,312 ($ 4,819 ) $ 19,130 $ 354

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

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

3 unchanged sentences

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Interest rate lock commitments $ 1,387 ($ 1,399 ) $ 11,189 ($ 10,823 ) $ 354 $ 354

2 unchanged sentences

Total $ 16,195 ($ 915 ) $ 14,673 ($ 10,823 ) $ 19,130 $ 354

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Interest rate lock commitments $ 4,034 ($ 2,881 ) $ 23,879 ($ 21,784 ) $ 3,248 $ 3,248

2 unchanged sentences

Total $ 16,562 ($ 6,049 ) $ 28,877 ($ 21,784 ) $ 17,606 $ 3,248

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.

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

As of and for the periods ending September 30, 2022 and December 31, 2021, 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.

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,

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

Three Months Ended September 30, Nine Months Ended September 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 June 30, 2022 and December 31, 2021:

Financial Instrument Valuation Technique Unobservable Input Weighted Average Rate Range

June 30, 2022

September 30, 2022

Interest rate lock commitment External pricing model Pull through rate 96.1 %

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

As of September 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 June 30, 2022

Three Months Ended September 30, 2022

(In Thousands) Community Banking Home Mortgage Lending Consolidated

2 unchanged sentences

Net interest income 25,668 643 26,311

Provision for credit losses 463 — 463

Benefit for credit losses ( 353 ) — ( 353 )

Other operating income 2,938 5,734 8,672

3 unchanged sentences

Net income $ 10,071 $ 54 $ 10,125

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

(In Thousands) Community Banking Home Mortgage Lending Consolidated

8 unchanged sentences

Net income $ 6,795 $ 2,082 $ 8,877

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

(In Thousands) Community Banking Home Mortgage Lending Consolidated

2 unchanged sentences

Net interest income 66,180 1,647 67,827

Provision for credit losses 313 — 313

Benefit for credit losses ( 40 ) — ( 40 )

Other operating income 8,686 18,616 27,302

3 unchanged sentences

Net income $ 21,526 $ 620 $ 22,146

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

(In Thousands) Community Banking Home Mortgage Lending Consolidated

8 unchanged sentences

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

June 30, 2022

September 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