What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-03-07 compared with 2022-03-04 · 155 added, 173 removed, 754 unchanged (30% of the section changed)

10 unchanged sentences

Executive Overview

Net income attributable to the Company increased 14% to $37.5 million or $6.00 per diluted share for the year ended December 31, 2021, from $32.9 million, or $5.11 per diluted share, for the year ended December 31, 2020.

The increase in net income is the result of an $11.6 million increase in net income in the Community Banking segment, which was only partially offset by a $7.0 million decrease in net income in the Home Mortgage Lending segment.

Net income decreased 18% to $30.7 million or $5.27 per diluted share for the year ended December 31, 2022, from $37.5 million, or $6.00 per diluted share, for the year ended December 31, 2021.

The decrease in net income is primarily the result of a $11.2 million decrease in net income in the Home Mortgage Lending segment, which was only partially offset by an $4.5 million increase in net income in the Community Banking segment.

Highlights for the year ended December 31, 2022 are as follows:

• Net income in the Home Mortgage Lending segment decreased 109%, or $11.2 million, to a loss of $897,000 in 2022 from $10.3 million in 2021 driven by a decrease in production volume to $585.5 million in 2022 from $1.118 billion in 2021 largely due to the significant increase in interest rates in 2022.

• Net income in the Community Banking segment increased 16% or $4.5 million, to $31.6 million in 2022 as compared to 2021.

This increase was primarily the result of the following:

◦ Interest and fee income on PPP loans increased $7.3 million to $15.4 million in 2021 from $8.1 million in 2020.

Interest income on PPP loans was $2.9 million and $2.5 million in 2021 and 2020, respectively.

Loan fee income on PPP loans was $12.5 million and $5.6 million in 2021 and 2020, respectively.

Loan fee income on PPP loans is largely made up of fees fully recognized upon loan forgiveness from the SBA.

In 2021, $426.3 million PPP loans were forgiven compared to $65.1 million in 2020.

As of December 31, 2021, there is $4.5 million in deferred PPP loan fees, net of deferred costs, remaining to be recognized.

Management expects the majority of the remaining deferred fees to be recognized in 2022.

◦ The provision for credit losses decreased in 2021 to a benefit of $4.1 million from a provision of $2.4 million in 2020.

As of January 1, 2021, the Company implemented ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13" or "CECL").

The provision for 2021 was recorded using the CECL methodology and reflects expected lifetime credit losses on loans and off-balance sheet unfunded loan commitments.

The decrease in the provision for credit losses in 2021 compared to 2020 is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses, which have improved but are not yet at pre-pandemic levels.

Our nonperforming loans, net of government guarantees, increased to $10.7 million at the end of 2021 compared to $10.0 million at the end of 2020, while total adversely classified loans, net of government guarantees at December 31, 2021 increased to $13.7 million from $12.8 million at December 31, 2020.

◦ Net interest income increased $14.8 million to $92.9 million in 2022 from $78.1 million in 2021 despite a decrease of $10.7 million in PPP interest and fee income primarily due to the increase in interest rates in 2022, and due to growth in core loans (excluding PPP loans) and higher average balances in long-term investments and interest-bearing deposits in other banks.

◦ The provision for credit losses increased in 2022 to a provision of $1.8 million from a benefit of $4.1 million in 2021.

In 2022, the provision for credit losses included a provision for growth in both unguaranteed loan balances and unfunded commitments, and a provision for a slight increase in projected loss rates.

These increases were only partially offset by net recoveries for the year.

In 2021, there was a reversal of the provision for credit losses due to a decrease in projected loss rates that was only partially offset by growth in unguaranteed loan and unfunded commitment balances and net charge offs for the year.

• The net interest margin increased to 3.85% in 2022 from 3.58% in 2021 mostly due to an increase in average yields on interest earning assets to 4.06% in 2022 compared to 3.74% in 2021 as a result of higher interest rates.

• In 2020 and 2021, Northrim funded approximately 5,800 PPP loans totaling approximately $612.6 million to both existing and new customers.

Management estimates that Northrim funded approximately 24% of the number and 32% of the value of all Alaska PPP second round loans.

• As of December 31, 2022, Northrim's PPP efforts have resulted in approximately 2,300 new customers totaling $135.9 million in new deposit balances and contributed to the growth in core portfolio loans.

• The Company implemented assistance to help its customers experiencing financial challenges as a result of COVID-19.

The total outstanding principal balance of loan modifications due to the impacts of COVID-19 as of December 31, 2022 was $1.0 million, down from $8.4 million as of September 30, 2022 and $49.2 million as of December 31, 2021.

The $1.0 million of remaining COVID-19 loan accommodations are scheduled to return to normal principal and interest payments in the first quarter of 2023.

• Nonperforming loans, net of government guarantees, decreased to $6.4 million at the end of 2022 compared to $10.7 million at the end of 2021, while total adversely classified loans, net of government guarantees at December 31, 2022 decreased to $7.6 million from $13.7 million at December 31, 2021.

The Allowance for Credit Losses ("ACL") totaled 0.92% of total portfolio loans at December 31, 2022, compared to 0.83% at December 31, 2021.

The ACL compared to nonperforming loans, net of government guarantees, was 110% at December 31, 2021 compared to 210% at the end of 2020.

◦ Interest expense decreased $2.3 million to $3.8 million in 2021 from $6.1 million in 2020 due to lower interest rates.

◦ The changes above where partially offset by a $3.8 million increase in tax expense in the Community Banking segment in 2021 primarily due to higher taxable income in 2021 compared to 2020.

• Net income in the Home Mortgage Lending segment decreased 40%, or $7.0 million, to $10.3 million in 2021 from $17.3 million in 2020 primarily due to a decrease in production volume to $1.118 billion in 2021 from $1.295 billion in 2020, as well as a $3.7 million decrease in the change in fair value of the interest rate lock commitments as the loan pipeline decreased at December 31, 2021 compared to December 31, 2020.

• The net interest margin decreased to 3.58% in 2021 from 4.02% in 2020 mostly due to a decrease in average yields on interest earning assets to 3.74% in 2021 compared to 4.36% in 2020 as a result of lower interest rates.

Additionally, the mix of earning assets, specifically an increase in interest-bearing cash, also contributed to the decrease in the net interest margin in 2021 as compared to the prior year.

• The Company continued to maintain strong capital ratios with Tier 1 Capital to Risk Adjusted Assets of 14.08% at December 31, 2021 as compared to 14.20% at December 31, 2020.

This increase is primarily due to a decrease in government loan guarantees resulting from a decrease in PPP loans as a percentage of the Company's loan portfolio.

The ACL as a percentage of total portfolio loans, net of government guarantees was 0.99% at December 31, 2022 compared to 0.93% at December 31, 2021.

• The aggregate cash dividends paid by the Company in 2022 rose 13% to $10.6 million from $9.4 million paid in 2021.

• The Company repurchased 333,724 shares of its common stock in 2022 at an average price of $42.42 per share.

COVID-19 Issues:

• Industry Exposure:

Northrim has identified various industries that may be adversely impacted by the COVID-19 pandemic and the volatility in oil prices that has occurred over the last year and a half, though oil prices have rebounded recently.

Though the industries affected may change through the progression of the pandemic, the following sectors for which the Company has exposure, as a percent of the total loan portfolio as of December 31, 2021 are being impacted:

Healthcare (8%), Tourism (7%), Oil and Gas (4%), Aviation (non-tourism) (4%), Accommodations (4%), Fishing (4%), Restaurants and Breweries (3%) and Retail (2%).

The portion of the Company's Allowance that related to the loans with exposure to these industries is estimated at the following amounts as of December 31, 2021:

(In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Restaurants and Breweries Fishing Accommodations Total

Allowance $896 $565 $1,257 $332 $486 $432 $507 $4,475

• Customer Accommodations:

The Company has implemented assistance to help customers experiencing financial challenges as a result of COVID-19 in addition to our participation in PPP lending.

The provisions of the CARES Act included an election to not apply the guidance on accounting for certain troubled debt restructurings ("TDR") related to COVID-19 and allow certain accommodations to borrowers.

These accommodations include interest only and deferral options on loan payments, as well as the waiver of various fees related to loans, deposits and other services.

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

The outstanding principal balance of loan modifications due to the economic impacts of COVID-19 for the periods below were as follows:

Loan Modifications due to COVID-19 as of December 31, 2021

(Dollars in thousands) Interest Only Full Payment Deferral Total

Portfolio loans $49,219 $31 $49,250

Number of modifications 16 1 17

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

(Dollars in thousands) Interest Only Full Payment Deferral Total

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

Number of modifications 23 11 34

All 17 loan modifications as of December 31, 2021, have entered into more than one modification.

• Branch Operations:

All branches have returned to pre-pandemic levels, while a number of customer and employee safety measure continue to be implemented.

• Growth and Paycheck Protection Program:

• Over the last two years, Northrim funded a total of nearly 5,800 PPP loans totaling $612.6 million to both existing and new customers.

• Management estimates that Northrim funded approximately 24% of the number and 32% of the value of all Alaska PPP second round loans.

• As of December 31, 2021, Northrim customers had received forgiveness through the SBA on 4,451 PPP loans totaling $491.4 million.

• The Company initially utilized the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility (the "PPPLF") to fund PPP loans, but paid those funds back in full during the second quarter of 2020 and has since funded the PPP loans through core deposits and maturity of long-term investments.

• Total shareholders' equity was $218.6 million as of December 31, 2022, up 4% from the preceding quarter, and down 8% from $237.8 million a year ago.

Shareholders' equity was negatively impacted by the fair value of the available for sales securities portfolio which decreased $27.4 million in 2022 and, to a lesser extent the share repurchases totaling $14.2 million.

The Company continued to maintain strong regulatory capital ratios with Tier 1 Capital to Risk Adjusted Assets of 12.81% at December 31, 2022.

Trends in Miscellaneous Financial Data (1)

3 unchanged sentences

Net interest income $95,115 $80,827 $70,665 $64,442 $61,208 $57,678 11 %

Provision (benefit) for credit losses (4,099) 2,432 (1,175) (500) 3,200 2,298 NM

Provision (benefit) for credit losses 1,846 (4,099) 2,432 (1,175) (500) 3,200 (10) %

Other operating income 34,077 52,263 63,328 37,346 32,167 40,474 (3) %

48 unchanged sentences

Nonperforming loans, net of government guarantees/portfolio loans 0.43 % 0.75 % 0.70 % 1.34 % 1.49 % 2.24 % (28) %

Net charge-offs (recoveries)/average loans 0.07 % 0.03 % (0.07) % 0.15 % 0.15 % 0.08 % (3) %

Net charge-offs (recoveries)/average loans (0.08) % 0.07 % 0.03 % (0.07) % 0.15 % 0.15 % NM

Allowance for credit losses/portfolio loans 0.92 % 0.83 % 1.46 % 1.83 % 1.98 % 2.25 % (16) %

6 unchanged sentences

469 451 438 431 430 429 2 %

1 These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.

1 These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with Part II Item 7.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.

2 Tangible book value per share is a non-GAAP ratio defined as shareholders’ equity, less intangible assets, divided by common shares outstanding.

5 unchanged sentences

See reconciliation to shareholders' equity to total assets below.

4 Tax-equivalent net interest margin is a non-GAAP performance measurement in which interest income on non-taxable investments and loans is presented on a tax-equivalent basis using a combined federal and state statutory rate of 28.43% in 2018 through 2021 and 41.11% in all other years presented.

Management believes that tax-equivalent net interest margin is a useful financial measure because it enables investors to evaluate net interest margin excluding tax expense in order to monitor our effectiveness in growing higher interest yielding assets and

managing our costs of interest bearing liabilities over time on a fully tax equivalent basis.

interest bearing liabilities over time on a fully tax equivalent basis.

See reconciliation to net interest margin, the comparable GAAP measurement below.

15 unchanged sentences

2020 number of banking offices includes 16 full service branches and 1 loan production office.

2018 number of banking offices includes 15 full service branches and 1 loan production office.

8 FTE includes 336, 321, 312, 311, 320, and 314 Community Banking employees in 2022, 2021, 2020, 2019, 2018 and 2017, respectively.

69 unchanged sentences

Net interest income in 2022 was $95.1 million, compared to $80.8 million in 2021.

The increase in 2021 as compared to 2020 was primarily the result of a $7.3 million increase in interest and fee income on PPP loans in 2021 compared to 2020.

Interest income on PPP loans was $2.9 million and $2.5 million in 2021 and 2020, respectively.

The increase in 2022 as compared to 2021 was primarily the result of increased interest on core loans (excluding PPP loans), investments, and interest bearing deposits in other banks which was only partially offset by a decrease in loan interest and fee income from PPP loans.

Interest income on PPP loans was $405,000 and $2.9 million in 2022 and 2021, respectively.

Loan fee income on PPP loans was $4.3 million and $12.5 million in 2022 and 2021, respectively.

Loan fee income on PPP loans is largely made up of fees fully recognized upon loan forgiveness from the SBA.

Interest income not related to PPP loans also increased $934,000 in 2021 as compared to 2020 due to higher net average interest-earning asset balances that was only partially offset by a decrease in interest rates.

Interest expense decreased $2.1 million as a result of lower interest rates.

Loan fee income decreased due to decreased recognition of the deferred PPP loan fees upon forgiveness through the SBA in 2022 compared to 2021.

Interest income on core loans increased $26.5 million in 2022 as compared to 2021 due to an increase in interest rates and higher net average interest-earning asset balances.

Interest expense increased $1.4 million as a result of higher interest rates and average higher interest-bearing deposit balances.

During 2022 and 2021, net interest margins were 3.85% and 3.58%, respectively.

The decrease in net interest margin in 2021 as compared to 2020 is the result of decreases in the spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities which was impacted by a decrease in interest rates, as well as a change in the mix of interest earning-assets.

Average loans, the Company's highest yielding interest-earning asset, decreased to 65% of total average interest-earning assets in 2021 from 76% in the 2020.

Short-term investments, the Company's lowest yielding interest-earning asset, increased to 14% of total average interest-earning assets in 2021 from 4% in the 2020.

The increase in net interest margin in 2022 as compared to 2021 is primarily the result of higher yields on earning-assets and higher average core portfolio loan balances and long-term and short-term investment balances.

The following table sets forth for the periods indicated information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities.

66 unchanged sentences

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

The provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the ACL at an appropriate level under CECL.

The provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the ACL at an appropriate level under the current expected credit loss methodology ("CECL").

The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity.

1 unchanged sentence

Item 8 of this report for detailed discussion regarding ACL methodologies for loans, available for sale debt securities, held to maturity securities, loans held for investment, unfunded commitments, and purchased receivables.

The following table presents the major categories of credit loss expense:

The following table presents the major categories of credit loss expense for the periods presented:

(In Thousands) 2022 2021

5 unchanged sentences

Total credit loss expense $1,846 ($4,099)

As noted above, the provision for credit losses was recorded in accordance with CECL in 2021.

The provision for credit losses in 2020, prior to adoption of CECL, was recorded under the incurred loss model.

Despite the fact that a different methodology was used in the calculation of the provision for credit losses in 2021 versus 2020, in general the decrease in the provision for credit losses on loans in 2021 as compared to 2020 is primarily the result of improvement in economic assumptions used to estimate credit losses.

As noted above, the provision for credit losses was recorded in accordance with CECL in 2022 and 2021.

In general the increase in the provision for credit losses in 2022 as compared to 2021 is primarily the result of increased portfolio loan and unfunded commitment balances, and, to a lesser extent, an increase in projected loss rates.

In 2021, there was a reversal of the provision primarily due to a decrease in projected loss rates following the uncertainty of the impacts of the COVID-19 pandemic in 2020 and the first half of 2021.

The ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration.

8 unchanged sentences

Purchased receivable income 2,002 (257) (11) % 2,259 (391) (15) % 2,650

Keyman insurance proceeds 2,002 2,002 NM — — NM —

Commercial servicing revenue 1,628 1,322 432 % 306 (221) (42) % 527

Service charges on deposit accounts 1,611 314 24 % 1,297 195 18 % 1,102

Merchant fees 561 146 35 % 415 (52) (11) % 467

Interest rate swap income 157 (295) (65) % 452 (497) (52) % 949

Commercial servicing revenue 306 (221) (42) % 527 (97) (16) % 624

Rental income 188 (90) (32) % 278 (219) (44) % 497

Gain (loss) on sale of securities — (67) (100) % 67 (31) 100 % 98

Gain (loss) on marketable equity securities (101) (162) (266) % 61 (850) 93 % 911

(Loss) gain on marketable equity securities (1,119) (1,018) (1,008) % (101) (162) 266 % 61

Other income 2,527 77 3 % 2,450 (19) (1) % 2,469

1 unchanged sentence

2022 Compared to 2021

The most significant change in other operating income in 2021 was a decrease in mortgage banking income, followed by an increase in bankcard fees and decreases in interest rate swap income and purchased receivable income.

The most significant decreases in other operating income in 2022 was a decrease in mortgage banking income, followed by a decrease in the fair market value of marketable equity securities, a decrease in interest rate swap income, and a decrease in purchased receivable income.

These decreases were partially offset by life insurance proceeds received in connections with the death of the Company's former Executive Vice President, General Counsel and Corporate Secretary who passed away on November 11, 2021, as well as increases in commercial servicing revenue, service charges on deposit accounts, and bankcard fees.

Mortgage banking income consists of gross income from the origination and sale of mortgages as well as mortgage loan servicing fees and is the largest component of other operating income at 63% of total other operating income in 2022 and 81% in 2021.

Mortgage banking income decreased in 2021 compared to 2020 mainly due to a decrease in mortgage loans originated and sold as this volume decreased to $1.1 billion in 2021 from $1.3 billion in 2020.

The overall decrease in mortgage originations in 2021 as compared to the prior year is primarily the result of the changes in interest rates during the year that led to decreased refinance activity.

Additionally, there was a $3.7 million decrease in the fair value of the interest rate lock commitments, which is also included in mortgage banking income, due to a decrease in the loan origination pipeline at December 31, 2021 compared to December 31, 2020.

Mortgage banking income decreased in 2022 compared to 2021 mainly due to a decrease in mortgage loans originated and sold as this volume decreased to $585.5 million in 2022 from $1.12 billion in 2021.

The overall decrease in mortgage originations in 2022 as compared to the prior year is primarily the result of the changes in interest rates during the year that led to decreased activity.

Interest rate swap income decreased in 2022 as compared to 2021 due to a decrease in the origination of new swap contracts with commercial loan customers.

1 unchanged sentence

Purchased receivable income decreased in 2022 as compared to 2021 due to customers reportedly using PPP funds instead of selling receivables to fund their operating cash needs.

Bankcard fees and service charges on deposit accounts increased in 2021 due to the cessation of COVID-19 quarantine restrictions, which led to higher transaction volume as compared to 2020, as well as the increase in customers.

Commercial servicing revenue increased in 2022 as compared to 2021 primarily resulting from an increase in the fair value of our commercial servicing rights, which generally increase when interest rates rise causing the expected life of the servicing asset, and the resulting cash flow to the Company, to increase.

Bankcard fees and service charges on deposit accounts increased in 2022 due an increase in the number of the Company's deposit customers, as well as due to the cessation of COVID-19 quarantine restrictions, which both led to higher transaction volume as compared to 2021.

Other Operating Expense

8 unchanged sentences

Insurance expense 2,054 461 29 % 1,593 365 30 % 1,228

Compensation expense - RML acquisition payments — — NM — (468) (100) % 468

Intangible asset amortization 25 (12) (32) % 37 (11) (23) % 48

2 unchanged sentences

Rental income on OREO (548) (24) (5) % (524) (15) (3) % (509)

Gains on sale of OREO (685) (294) (75) % (391) (11) NM (380)

Losses (gains) on sale of OREO 414 1,099 160 % (685) (294) NM (391)

Subtotal 500 932 216 % (432) (190) 79 % (242)

2 unchanged sentences

2022 Compared to 2021

Other operating expense increased by less than 1% in 2021 as compared to 2020.

The largest increases where in data processing expense, occupancy expense, insurance expense, and marketing expense.

These increases were only mostly offset by decreases in salary and other personnel expense, professional and outside services, and OREO expense.

Data processing expense increased in 2021 compared to 2020 mostly due to increased customer and transaction volume.

Occupancy expense, insurance expense, and marketing expense increased in 2021 as compared to 2020 due to miscellaneous repairs and maintenance and tenant improvements at several of the Company's locations, increased FDIC insurance costs associated with asset growth, and increased marketing expense due to higher giving in the form of increased sponsorship and charitable contributions.

Decreases in salaries and other personnel expense and professional and outside services in 2021 as compared to 2020 are primarily related to mortgage banking operations, which fluctuate with production volumes.

OREO expense decreased in 2021 primarily due to increased gains on sale of OREO properties as compared to 2020.

The provision for income taxes increased $917,000 or 10%, to $10.5 million in 2021 as compared to 2020.

The increase in 2021 is primarily due to higher pretax income.

The Company's effective tax rates were relatively consistent at 21.8% and 22.5% in 2021 and 2020, respectively.

Other operating expense decreased by less than 1% in 2022 as compared to 2021.

The largest decrease was in salaries and other personnel expense primarily related to mortgage banking operations, which fluctuate with production volumes.

Occupancy expense and intangible asset expense also decreased slightly in 2022 compared to 2021 due to lower repairs and maintenance costs.

These decreases were mostly offset by increases in OREO expense, insurance expense, data processing expense, and professional and outside services.

OREO expense increased in 2022 primarily due to increased losses on sale of OREO properties as compared to 2021.

Insurance expense, data processing expense, and professional and outside services increased in 2022 as compared to 2021 due to increased FDIC insurance costs associated with asset growth, increased customer and transaction volume, and increased investment management fees attributable to the growth in our investment portfolio.

The provision for income taxes decreased $2.7 million or 26%, to $7.8 million in 2022 as compared to 2021.

The decrease in 2022 is primarily due to lower pretax income.

The Company's effective tax rate decreased to 20.1% in 2022 from 21.8% in 2021, primarily due to an increase in tax exempt income and low income housing tax credits as a percentage of pre-tax income in 2022 compared to 2021.

FINANCIAL CONDITION

Investment Securities

The composition of our investment securities portfolio, which includes securities available for sale and marketable equity securities, reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income.

The composition of our investment securities portfolio, which includes securities available for sale, held-to-maturity investments, and marketable equity securities, reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income.

The investment securities portfolio also mitigates interest rate and credit risk inherent in the loan portfolio, while providing a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral or through repurchase agreements), and collateral for certain public funds deposits.

Investment securities designated as available for sale comprised 94% of the portfolio as of December 31, 2021 and are available to meet liquidity requirements.

Investment securities designated as available for sale comprised 93% of the portfolio as of December 31, 2022 and are available to meet liquidity requirements in a contingency situation.

Our investment portfolio consists primarily of government sponsored entity securities, corporate securities, collateralized loan obligations, and municipal securities.

Investment securities at December 31, 2022 increased $269.4 million, or 59%, to $724.5 million from $455.1 million at December 31, 2021.

The increase at December 31, 2021 as compared to December 31, 2020 came from an increase in deposits that were not lent out were invested.

The average maturity of the investment portfolio was approximately four years at December 31, 2021.

The increase at December 31, 2022 as compared to December 31, 2021 came from the investment of short-term funds included in interest bearing deposits in other banks.

The average maturity of the investment portfolio was approximately three and a quarter years at December 31, 2022.

Investment securities may be pledged as collateral to secure public deposits or borrowings.

At December 31, 2022 and 2021, $59.3 million and $59.5 million in securities were pledged for deposits and borrowings, respectively.

Pledged securities decreased at December 31, 2021 as compared to December 31, 2020 primarily due to decreased pledges to the FHLB to support the Company's immediate borrowing capacity at December 31, 2021.

The following tables set forth the composition of our investment portfolio at December 31 for the years indicated:

29 unchanged sentences

Corporate Bonds $10,000 $10,000

Total $10,000 $10,000

The following table sets forth the market value, maturities, and weighted average pretax yields of our investment portfolio as of December 31, 2022:

39 unchanged sentences

however, no individual direct relationship exceeded the loans-to-one borrower limitation.

The Company's loans have grown significantly in recent history, in part due to PPP loans, but over the last 3 years, non-PPP loans have also increased significantly.

Management attributes higher growth in loans, excluding PPP loans, in 2021 and 2020 to our ability to attract new customers through our outreach to the community.

The Company's loans have grown significantly in recent history, in part due to PPP loans, but over the last 3 years, core loans have also increased significantly.

Management attributes higher growth in core loans in 2022 and 2021 to our ability to attract new customers through our outreach to the community.

The Company's "Land and Expand" program was designed to increase both loans and deposits as we attract a broader customer base and convert new PPP customers into full banking relationships.

26 unchanged sentences

By Maturity Loans Over One Year By Rate Sensitivity

(In Thousands) Within 1 Year 1-5 Years 5-15 Years Over 15 Years Total Fixed Interest Rate Floating Interest Rate

(In Thousands) Within 1 Year 1-5 Years 5-15 Years Over 15 Years Total Fixed Interest Rate Variable Interest Rate

Commercial & industrial loans $74,235 $147,790 $136,103 $— $358,128 $134,161 $149,732

4 unchanged sentences

Total $192,601 $316,402 $843,086 $149,696 $1,501,785 $469,304 $839,880

Loans Directly Exposed to the Oil and Gas Industry:

Information about industry concentrations:

Management utilizes the loan segments included in the tables above within the Company's CECL methodology to assess credit risk.

These segments are largely determined by type of loan collateral.

The Company also separately monitors concentrations in the loan portfolio based on industries, and these industry concentration are discussed below.

The Company defines "direct exposure" to the oil and gas industry as companies that it has identified as significantly reliant upon activity related to the oil and gas industry, such as oil producers or drilling and exploration companies, and companies who provide oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry.

The Company estimates that $83.4 million, or approximately 6% of loans as of December 31, 2022 have direct exposure to the oil and gas industry as compared to $63.6 million, or approximately 4% of loans as of December 31, 2021.

The Company's exposure as a percent of the total loan portfolio excluding PPP loans as of December 31, 2021 was 5%.

The Company has no loans to oil producers or drilling and exploration companies as of the end of 2021 or 2020, but the $63.6 million outstanding as of December 31, 2021 noted above does include $1.8 million related to the construction of an oil drilling rig.

The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $51.8 million and $66.4 million at December 31, 2022 and 2021, respectively.

The portion of the Company's allowance for loan losses that related to the loans with direct exposure to the oil and gas industry was estimated at $684,000 and $1.2 million as of December 31, 2021 and 2020, respectively.

The portion of the Company's ACL that related to the loans with direct exposure to the oil and gas industry was estimated at $786,000 and $684,000 as of December 31, 2022 and 2021, respectively.

The following table details loan balances by loan segment and class of financing receivable for loans with direct oil and gas exposure as of the dates indicated:

4 unchanged sentences

Non-owner occupied and multifamily properties 6,013 6,564

Consumer loans — 2,256

Other loans 1,431 1,495

Total loans $83,416 $63,641

The Company monitors other concentrations within the loan portfolio depending on trends in the current and future estimated economic conditions.

At December 31, 2022, the Company had $126.5 million, or 8% of total portfolio loans, in the Healthcare sector;

$96.3 million, or 6% of portfolio loans, in the Tourism sector;

$70.8 million, or 5% in the Fishing sector;

$65.1 million, or 4% in the Accommodations sector;

$54.8 million, or 4% in Retail loans;

$50.8 million, or 3% of portfolio loans, in the Aviation (non-tourism) sector;

and $46.9 million, or 3% in the Restaurants and Breweries sector.

The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of December 31, 2022:

(In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurants and Breweries Accommodations Total

ACL $570 $397 $1,096 $525 $503 $388 $569 $4,048

Credit Quality and Nonperforming Assets

8 unchanged sentences

Other real estate owned — $5,638

Repossessed assets — 231

Other real estate owned guaranteed by government — ($1,279)

32 unchanged sentences

year-to-date annualized (0.08) % 0.07 %

The Company’s nonperforming loans, net of government guarantees increased in 2021 to $10.7 million as compared to $10.0 million in 2020.

This increase was mostly due to several additions to nonaccrual loans which were only partially offset by principal paydowns and charge-offs on nonaccrual loans in 2021.

There was interest income of $1.6 million and $924,000 recognized in net income for 2021 and 2020, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero.

The Company had three relationships that each represented more than 10% of nonaccrual loans as of December 31, 2021.

The Company’s nonperforming assets, net of government guarantees decreased to $6.4 million at December 31, 2022 as compared to $15.0 million at December 31, 2021.

This decrease was mostly due to principal paydowns on nonaccrual loans

which were only partially offset by additions to nonaccrual loans in 2022.

There was interest income of $2.2 million and $1.6 million recognized in net income for 2022 and 2021, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.

Additionally, the sale of the only OREO property held by the Company for all of 2022 reduced OREO to zero as of December 31, 2022 from $4.4 million, net of government guarantees, at December 31, 2021.

The Company holds a government guarantee related to the OREO property that was sold in December 2022;

however, the value of this guarantee has not been included in the Company's financial statements in 2022 due to uncertainty as to the total amount that will be received from the guarantee.

For the fourth quarter of 2022, a loss from the sale of OREO of $414,000 is included in OREO expense, net of rental income in the income statement.

We expect to receive proceeds related to this government guarantee in 2023.

The Company had $291,000 and $773,000 in loans classified as TDRs, net of government guarantees that were performing as of December 31, 2022 and 2021, respectively.

Additionally, there were $6.5 million and $5.5 million in TDRs included in nonaccrual loans at December 31, 2021 and 2020 for total TDRs, net of government guarantees of $7.3 million and $5.3 million at December 31, 2021 and 2020, respectively.

The increase in TDRs at December 31, 2021 as compared to 2020 was primarily due additions to TDRs that were only partially offset by payoffs and paydowns on loans classified as TDRs in 2021.

Additionally, there were $4.8 million and $6.5 million in TDRs included in nonaccrual loans at December 31, 2022 and 2021, respectively, for total TDRs, net of government guarantees of $5.1 million and $7.3 million at December 31, 2022 and 2021, respectively.

The decrease in TDRs at December 31, 2022 as compared to 2021 was primarily due to payoffs and paydowns on loans classified as TDRs in 2022.

See Note 5 of the Notes to Consolidated Financial Statements included in Part II.

2 unchanged sentences

Potential problem loans are loans which are currently performing that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, or impaired loans.

The $4.0 million decrease in potential problem loans at December 31, 2021 from December 31, 2020 was primarily the result of one $3.9 million relationship moving to nonaccrual as well as paydowns and credit risk upgrades to existing potential problem loans that were partially offset by the addition of new potential problem loans in 2021.

The decrease in potential problem loans at December 31, 2022 from December 31, 2021 was primarily due to paydowns and credit risk upgrades to existing potential problem loans that were partially offset by the addition of new potential problem loans in 2022.

The Company acquired a vessel totaling $231,000 in the third quarter of 2019 through foreclosure proceedings related to one lending relationship that was sold in the second quarter of 2021.

4 unchanged sentences

Proceeds from the sale of other real estate owned (5,224) (2,610) (797)

Gain on sale of other real estate owned, net 685 391 380

(Loss) Gain on sale of other real estate owned, net (414) 685 391

Balance, end of year — 5,638 7,289

31 unchanged sentences

(In Thousands) Amount

Commercial $7,973 39 % 0.04 %

Real estate construction one-to-four family 679 3 % — %

Real estate construction other 1,179 6 % — %

Real estate term owner occupied 2,625 11 % 0.06 %

Real estate term non-owner occupied 5,133 21 % — %

Real estate term other 779 3 % — %

Consumer secured by 1st deed of trust 261 1 % — %

Consumer other 400 2 % (0.04) %

Unallocated 2,107 — % — %

Commercial & industrial loans $3,027 33 % 0.21 %

Commercial real estate:

Owner occupied properties 3,176 21 % — %

Non-owner occupied and multifamily properties 2,930 31 % — %

Residential real estate:

1-4 family residential properties secured by first liens 439 2 % — %

1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens 215 1 % (0.21) %

1-4 family residential construction loans 120 3 % — %

Other construction, land development and raw land loans 1,635 6 % — %

Obligations of states and political subdivisions in the US 32 1 % — %

Agricultural production, including commercial fishing 91 2 % (0.15) %

Consumer loans 67 — % (0.27) %

Other loans 7 — % — %

Total $11,739 100 % 0.07 %

1 Represents percentage of this category of loans to total portfolio loans.

As of December 31, 2021, and 2020, loans acquired in connection with our acquisition of Alaska Pacific on April 1, 2014 are included in the Company's ACL using the same methodology as all other loans as described in Note 1 of the notes to Consolidated Financial Statements included in Part II.

Item 8 of this report due to the amount of time that has passed since the loans were purchased.

The purchase discount related to acquired credit impaired loans was zero and $328,000 as of December 31, 2021 and 2020, respectively.

The provision for credit losses in 2021 as compared to 2020 decreased $6.5 million to a benefit for credit losses of $4.1 million compared to a provision of $2.4 million in 2020.

This decrease is primarily due to improvement in economic assumptions.

The Company determined that an ACL of $11.7 million, or 0.83% of portfolio loans, is appropriate as of December 31, 2021 based on our analysis of the current credit quality of the portfolio and current economic conditions.

The provision for credit losses in 2020 as compared to 2019 increased $3.6 million to a provision for credit losses of $2.4 million compared to a benefit of $1.2 million in 2019.

This increase is primarily due to management's assessment of risk associated with the economic impacts of the COVID-19 pandemic, the reduction in oil prices and a slowing Alaska economy, as well as growth in the unguaranteed portion of the loan portfolio.

As noted above, the ACL was recorded in accordance with CECL in 2021.

The allowance for loan losses in 2020, prior to adoption of CECL, was recorded under the incurred loss model.

Despite the fact that a different methodology was used in the calculation of the provision for credit losses in 2021 versus 2020, in general the decrease in the ACL on loans as of December 31, 2021 compared to December 31, 2020 is primarily the result of improvement in economic assumptions used to estimate credit losses following the economy's recovery from the COVID-19 pandemic.

The ACL for loans increased to $13.8 million at December 31, 2022 compared to $11.7 million at December 31, 2021 primarily due to an increase in loan balances, net of guarantees, as well as a slight increase in expected future loss rates.

The Company determined that an ACL of $13.8 million, or 0.92% of portfolio loans, is appropriate as of December 31, 2022 based on our analysis of the current credit quality of the portfolio and forecasted economic conditions.

The ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, as well as loan portfolio composition, quality, and duration.

8 unchanged sentences

Purchased Receivables

Purchased receivable balances decreased at December 31, 2021 to $7.0 million from $13.9 million at December 31, 2020, and year-to-date average purchased receivable balances were $12.4 million and $14.5 million in 2021 and 2020, respectively.

Purchased receivable balances increased at December 31, 2022 to $20.0 million from $7.0 million at December 31, 2021, and year-to-date average purchased receivable balances were $7.0 million and $12.4 million in 2022 and 2021, respectively.

Purchased receivable income was $2.0 million and $2.3 million in 2022 and 2021, respectively.

3 unchanged sentences

Balance at beginning of year $— $73 $94

Cumulative effect of adopting ASU 2016-13 — (73) —

Charge-offs — — —

5 unchanged sentences

Deposits are our primary source of funds.

Total deposits increased 33% to $2.4 billion at December 31, 2021 from $1.8 billion at December 31, 2020.

This increase is primarily due to funding PPP loans, but is also due to new client relationships as a result of the Company's significant PPP efforts during 2021 and 2020.

Total deposits decreased 1% to $2.39 billion at December 31, 2022 from $2.42 billion at December 31, 2021.

Our deposits generally are expected to fluctuate according to the level of our market share, economic conditions, and normal seasonal trends.

33 unchanged sentences

At December 31, 2022, our maximum borrowing line from the FHLB was $1.195 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements.

The Company has outstanding advances of $14.5 million as of December 31, 2021 which were originated to match fund low income housing projects that qualify for long term fixed interest

The Company has outstanding advances of $14.1 million as of December 31, 2022 which were originated to match fund low income housing projects that qualify for long term fixed interest rates.

These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23% to 3.25%.

3 unchanged sentences

The Company paid less than $1,000 in interest in 2022 and 2021 on this agreement.

The Company utilized the Federal Reserve Bank's PPPLF to fund SBA PPP loans during the second quarter of 2020, but has repaid those funds in full as of June 30, 2020.

This advance had an interest rate of 0.35%.

Other Short and Long-term Borrowings:

The Company had no short or long-term borrowings outstanding other than the FHLB advances noted above as of December 31, 2022 or 2021.

The Company is subject to provisions under Alaska state law which generally limit the amount of outstanding debt to 35% of total assets or $948.0 million at December 31, 2021 and 35% of total assets or $736.0 million at December 31, 2020.

The Company is subject to provisions under Alaska state law which generally limits the amount of outstanding debt to 35% of total assets or $929.3 million at December 31, 2021 and 35% of total assets or $948.0 million at December 31, 2021.

Junior Subordinated Debentures

22 unchanged sentences

The Company had cash and cash equivalents of $259.4 million, or 10% of total assets at December 31, 2022 compared to $645.8 million, or 24% of total assets as of December 31, 2021.

The increase in cash and cash equivalents is primarily due to a significant increase in deposits.

Management expects this elevated level of liquidity to continue through 2022 and potentially into subsequent years.

Accordingly, management has invested in slightly longer term investment securities as compared to the last several years.

As of December 31, 2021, the weighted average maturity of available for sale securities is 4.1 years compared to 2.6 years at December 31, 2020.

At December 31, 2021, $5.0 million in available for sale securities mature in 2022, $15 million mature in 2023, and $116.2 million mature in 2024.

Our total unfunded commitments to fund loans, loans held for sale, and letters of credit at December 31, 2021, were $445.9 million.

The decrease in cash and cash equivalents is primarily due to increases in investment securities and loans.

While down from December 31, 2021, this level of cash and cash equivalents is still elevated as compared to historical norms both in balance and as a percentage of total assets.

The Company had cumulative other comprehensive losses, net of tax, of $29.1 million in 2022 primarily due to unrealized holding losses on available for sale securities due to increases in interest rates.

Management does not believe that liquidation of these securities, which would result in realized losses, will occur prior to maturity of these securities.

Furthermore, management expects that the Company's elevated level of liquidity will continue into 2023 and potentially into subsequent years.

Accordingly, management has invested in slightly longer term investment securities in 2021 and 2022 as compared to the last several years.

As of December 31, 2022, the weighted average maturity of available for sale securities is 3.3 years compared to 4.1 years at December 31, 2021 and 2.6 years at December 31, 2020.

At December 31, 2022, $70.3 million available for sale securities mature within one year, $167.8 million mature in 2024, and $138.6 million mature in 2025.

Our total unfunded commitments to fund loans and letters of credit at December 31, 2022 were $497.7 million.

We do not expect that all of these loans are likely to be fully drawn upon at any one time.

At December 31, 2022, certificates of deposit totaling $128.4 million and $52.1 million, respectively, contractually mature in 2023 and 2024, and may be withdrawn from the Bank.

Similar to loans, we do not

expect that these maturing certificates of deposit, or other non-maturity deposits, to be withdrawn from the Bank in a manner that will strain liquidity;

Similar to loans, we do not expect that these maturing certificates of deposit, or other non-maturity deposits, to be withdrawn from the Bank in a manner that will strain liquidity;

however, unforeseen future circumstances or events may cause higher than anticipated withdrawal of deposits or draws of unfunded commitments to fund new loans.

5 unchanged sentences

As shown in the Consolidated Statements of Cash Flows included in Part II.

Item 8 of this report, net cash provided by operating activities was $112.0 million in 2021 and net cash used by operating activities was $36.5 million in 2020.

The primary source of cash provided by, and used by operating activities for all periods presented was positive net income.

In 2021 proceeds from the sale of loans held for sale exceeded proceeds used in originations as refinance activity slowed, and in 2020 the opposite was true.

In 2020 the origination of loans held for sale exceeded proceeds from the sale of loans held for sale which is the primary reason that operating cash flow is negative in 2020.

Net cash used by investing activities was $159.1 million in 2021 primarily due to purchases of available for sale and held to maturity securities.

Net cash used by investing activities was $382.8 million in 2020 primarily due to increases in loans, in particular PPP loans.

Financing activities provided cash of $577.0 million in 2021 and $439.8 million in 2020.

Financing activities provided cash in both 2021 and 2020 due to increases in deposits that were only partially offset by the payment of cash dividends to shareholders and the repurchase of shares of the Company's common stock.

Item 8 of this report, net cash provided by operating activities was $78.1 million in 2022 and $112.0 million in 2021, respectively.

The primary source of cash provided by operating activities for both periods was proceeds from the sale of loans held for sale net of proceeds used in originations, as well as positive net income.

In 2022, proceeds from the sale of loans held for sale net of proceeds used in originations decreased as compared to 2021 as refinance and purchase activity slowed.

Net cash used by investing activities was $405.6 million in 2022 primarily due to purchases of available for sale and held to maturity securities and to a lesser extent, increases in loans and purchased receivables.

Net cash used by investing activities was $159.1 million in 2021 primarily due to purchases of available for sale and held to maturity securities, net of proceeds from the maturity of available for sale securities.

Financing activities used cash of $59.0 million in 2022 and provided cash of $577.0 million in 2021.

Financing activities used cash in 2022 due to a decrease in deposits as wells as payment of cash dividends to shareholders and the repurchase of shares of the Company's common stock.

Financing activities provided cash in 2021 due to increases in deposits that were only partially offset by the payment of cash dividends to shareholders and the repurchase of shares of the Company's common stock.

Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market.

7 unchanged sentences

2018 15,468 $31.90

At December, 31, 2021, there were 33,724 shares available under the previously announced stock repurchase program.

At December, 31, 2022, there were no shares available under the previously announced stock repurchase program.

However, on January 27, 2023 the Company announced that its Board of Directors authorized the repurchase of up to an additional 285,000 shares of common stock.

14 unchanged sentences

The table below illustrates the capital requirements in effect in 2022 for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements.

Management intends to maintain capital ratios for the Bank in 2022 exceeding the FDIC’s new requirements for the “well-capitalized” classification.

Management intends to maintain capital ratios for the Bank in 2023 exceeding the FDIC’s requirements for the “well-capitalized” classification.

The capital ratios for the Company exceed those for the Bank primarily because the $10 million trust preferred securities offering is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our consolidated financial statements.

40 unchanged sentences

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

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

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

As of December 31, 2021, management utilized and forecasted Alaska unemployment as a loss driver for all of the loans pools that utilize the DCF method.

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

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

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

Additionally, the Company's regression models for PD as of December 31, 2021 utilized the Company's actual historical loan level default data.

As of January 1, 2022, management utilizes and forecasts U.S.

unemployment as the sole loss driver for all of the loan pools that utilize the DCF method.

The Company's regression models for PD as of January 1, 2022 utilize peer historical loan level default data.

Peers for this purpose include banks in the United States with total assets between $1 billion and $5 billion whose loan portfolios share certain characteristics with the Company's loan portfolio.

Peers differ by loan segment;

a bank is included in the peer group for each loan segment under the following circumstances:

• The percentage the balance of the loan segment compared to total loans over a five year look back period is within 1.5 standard deviations of the Company's data;

• The percentage of total charge offs for the loan segment over a five year look back period is within 1 standard deviation of the Company's data;

• The percentage of total charge offs for the loan segment during the recessionary period from the fourth quarter of 2008 to the fourth quarter of 2012 is within 1 standard deviation of the Company's data.

For all periods presented, following the forecast period, the economic variables used to calculate PD revert to a historical average at a constant rate over an eight quarter reversion period.

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

1 unchanged sentence

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

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

The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses under CECL as adopted by the Company on January 1, 2021, which are unchanged as of December 31, 2022:

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

8 unchanged sentences

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

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

industrial buildings, warehouses or retail buildings where the owner of the building does not occupy the property, non-owner occupied apartment or multifamily residential buildings, and various special purpose properties.

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

32 unchanged sentences

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

• Inflation and monetary policy in the United States;

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

7 unchanged sentences

There can be no assurance that changes in circumstances, estimates or assumptions may result in additional impairment of all, or some portion of, goodwill or other intangible assets.

The Company performed its annual goodwill impairment testing at December 31, 2021 and 2020 in

accordance with the policy described in Note 1 to the financial statements included in Part II.

The Company performed its annual goodwill impairment testing at December 31, 2022 and 2021 in accordance with the policy described in Note 1 to the financial statements included in Part II.

Item 8 of this report.

6 unchanged sentences

improvements in the Alaskan economy in 2022;

increases in the volume of mortgage originations in Alaska;

increases in the Company's market share of mortgage originations;

and increases in the Company's stock price.

Significant negative inputs to the qualitative assessment included the muted pace of growth in the Alaska economy.

Significant negative inputs to the qualitative assessment included the muted pace of growth in the Alaska economy and a decline in home mortgage originations.

We believe that the positive inputs to the qualitative assessment noted above outweigh the negative inputs for both of the Company's operating segments, and we therefore concluded that it is more likely than not that the fair value of the Company exceeds its carrying value at December 31, 2022 and that no potential impairment existed at that time.

Valuation of OREO:

Other Real Estate Owned ("OREO") represents properties acquired through foreclosure or its equivalent.

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

The amount by which the fair value less cost to sell is greater than the carrying amount of the loan plus amounts previously charged off is recognized in earnings.

Any subsequent reduction in the carrying value is charged against earnings.

Management's evaluation of fair value is based on appraisals or discounted cash flows of anticipated sales.

The amounts ultimately recovered from the sale of OREO may differ from the carrying value of the assets because of market factors beyond the Company's control or due to changes in the Company's strategies for recovering the investment.

Servicing rights:

13 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-K

Item 7. Management’s Discussion and Analysis