What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-07 compared with 2022-03-04 · 259 added, 331 removed, 1608 unchanged (27% of the section changed)

10 unchanged sentences

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

The Shareholders and the Board of Directors of

Northrim BanCorp, Inc.

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

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

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

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

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

Basis for Opinions

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Definition and Limitations of Internal Control Over Financial Reporting

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

accepted accounting principles.

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

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

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

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

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

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

Auditing management’s judgments regarding the estimation and application of forecasted economic conditions portion of the allowance for credit losses - loans involved significant audit effort, as well as especially challenging and subjective auditor judgement when performing audit procedures and evaluating the results of those procedures.

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

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

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

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

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

• Evaluating the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses – loans, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, and the application of the forecast of economic conditions used in the calculation to determine probabilities of default.

/s/ Moss Adams LLP

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Investment securities held to maturity, at amortized cost 36,750 20,000

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

Investment in Federal Home Loan Bank stock, at cost 3,816 3,107

Loans held for sale 27,538 73,650

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Retained earnings 224,225 204,046

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

Accumulated other comprehensive (loss), net of tax ( 29,081 ) ( 3,406 )

Total shareholders' equity 218,629 237,817

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Interest expense on deposits 4,485 3,077 5,279

Interest expense on securities sold under agreements to repurchase — — 40

Interest expense on borrowings 339 320 387

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Net Interest Income 95,115 80,827 70,665

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

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

Provision (benefit) for credit losses 1,846 ( 4,099 ) 2,432

Net Interest Income After Provision (Benefit) for Credit Losses 93,269 84,926 68,233

Other Operating Income

2 unchanged sentences

Purchased receivable income 2,002 2,259 2,650

Keyman insurance proceeds 2,002 — —

Commercial servicing revenue 1,628 306 527

Service charges on deposit accounts 1,611 1,297 1,102

Interest rate swap income 157 452 949

Commercial servicing revenue 306 527 624

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

Unrealized (loss) gain on marketable equity securities ( 1,119 ) ( 101 ) 61

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

Other income 2,527 2,450 2,469

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Insurance expense 2,054 1,593 1,228

Intangible asset amortization expense 37 48 60

Compensation expense - RML acquisition payments — — 468

OREO (income) expense, net of rental income and gains on sale 500 ( 432 ) ( 242 )

Intangible asset amortization expense 25 37 48

Other operating expense 6,520 6,399 7,174

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Unrealized holding (losses) gains arising during the period ($ 38,283 ) ($ 5,564 ) $ 411

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

expense of $ — , $ — , and $ 7 in 2021, 2020, and 2019,

respectively) — — ( 16 )

Derivatives and hedging activities:

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

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

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

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

Net income — — — 32,888 — 32,888

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

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

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

Net income — — — 37,517 — 37,517

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Other comprehensive (loss), net of tax — — — — ( 25,675 ) ( 25,675 )

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

Net income — — — 30,741 — 30,741

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Origination of loans held for sale ( 585,533 ) ( 1,118,186 ) ( 1,295,411 )

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

Loss (gain) on sale of other real estate owned 414 ( 685 ) ( 391 )

Net changes in assets and liabilities:

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

(Increase) decrease in accrued interest receivable ( 3,091 ) 1,133 ( 3,467 )

Decrease (increase) in other assets 5,528 12,739 ( 15,096 )

10 unchanged sentences

Proceeds from redemption of FHLB stock 21 17 5,518

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

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

(Increase) decrease in purchased receivables, net ( 13,007 ) 6,935 10,472

(Increase) decrease in loans, net ( 83,839 ) 28,975 ( 408,365 )

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

4 unchanged sentences

Increase in deposits ( 34,420 ) 596,650 452,630

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

Proceeds from borrowings — — 110,610

3 unchanged sentences

Cash dividends paid ( 10,571 ) ( 9,388 ) ( 8,844 )

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

Net Cash (Used) Provided by Financing Activities ( 58,975 ) 576,962 439,820

Net Change in Cash and Cash Equivalents ( 386,477 ) 529,862 20,541

4 unchanged sentences

Interest paid $ 5,190 $ 3,813 $ 6,009

Noncash commitments to invest in Low Income Housing Tax Credit Partnerships $ — $ — $ 11,267

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

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Actual results could differ from those estimates.

Significant estimates include the allowance for loan losses (“Allowance”), valuation of goodwill and other intangibles, valuation of other real estate owned (“OREO”), valuation of mortgage servicing rights, and fair value disclosures.

Significant estimates include the allowance for credit losses (“ACL”), valuation of goodwill and other intangibles, valuation of other real estate owned (“OREO”), valuation of mortgage servicing rights (“MSRs”), and fair value disclosures.

Consolidation:

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

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

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

Investment Securities:

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

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

Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings.

The ACL may be reversed if conditions change.

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

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

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

Allowance for Credit Losses - Loans :

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

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

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

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

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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.

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 ACL for loans.

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

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Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

Operating Leases:

The Company leases branch locations, corporate office space, and equipment under non-cancelable leases.

Leases with an initial term of 12 months or less are not recorded on the balance sheet.

The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule.

Substantially all of the leases provide the Company with one or more options to renew, with renewal terms that can extend the lease term from one to ten years or more.

The exercise of lease renewal options is at management's sole discretion.

The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

In addition to annual impairment reviews, management reviews right-of-use assets anytime a change in circumstances indicates the carrying amount of these assets may not be recoverable.

Goodwill and Other Intangible Assets:

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In order to determine the fair value of servicing rights, the present value of net expected future cash flows is estimated.

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

For mortgage servicing rights ("MSRs"), the model assumptions are also compared to publicly filed information from several large MSR holders, as available.

Assumptions used include market discount rates, anticipated prepayment speeds,

escrow calculations, delinquency rates, and ancillary fee income net of servicing costs.

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

Other Assets:

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

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

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

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

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

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

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

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

Bankcard fees are primarily comprised of debit card income and ATM fees.

Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa or MasterCard.

ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM.

The Company’s performance obligation for bankcard fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.

Payments are typically received immediately or in the following month.

Service charges on deposit accounts consist of general service fees for monthly account maintenance, activity- or transaction-based fees, and account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), and other deposit account related fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue.

Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed.

Payments for service charges on deposit accounts are primarily received immediately or in the following month through a direct charge to customers’ accounts.

Other operating income consists of other recurring revenue streams such as merchant services income, commissions from sales of mutual funds and other investments, safety deposit box rental fees, bank check and other check fees, unrealized gains and

losses on marketable securities, and other miscellaneous revenue streams.

Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.

The Company’s performance obligation for merchant services income is largely satisfied, and related revenue recognized, when the transactions have been completed.

Payment is typically received immediately or in the following month.

The Company earns commissions from the sale of mutual funds as periodic service fees (i.e., trailers) from Elliott Cove Capital Management typically based on a percentage of net asset value.

Trailer revenue is recorded over time, quarterly, as net asset value is determined.

The Company also earns commission income from the sale of annuity products.

The Company acts as an intermediary between the Company's customer and Elliott Cove Investment Advisors for these transactions, and commissions from annuity product sales are recorded when the Company’s performance obligation is satisfied, which is generally upon the issuance of the annuity policy.

The Company does not earn trailer fees on annuity sales.

Payment for commissions from sales of mutual funds and other investments and annuity sales is typically received in the following quarter.

Other service charges include revenue from safety deposit box rental fees, processing wire transfers, bank check and other check fees, and other services.

The Company’s performance obligations for these other revenue streams are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.

Payments are typically received immediately or in the following month.

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

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The Company recognizes compensation expense over the vesting period of each award.

The Company's accounting policy changed during the year ended December 31, 2020 and now recognizes forfeitures as they occur.

The Company's recognizes forfeitures as they occur.

Income Taxes:

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

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

that includes the enactment date.

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

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

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Comprehensive Income:

Comprehensive income consists of net income, net unrealized gains (losses) on securities available for sale after the tax effect, and net unrealized gains (losses) on derivative and hedging activities.

Concentrations:

Substantially all of the Company’s business is derived from the Anchorage, Matanuska-Susitna Valley, Fairbanks, Kenai Peninsula, and Southeast areas of Alaska.

Substantially all of the Company’s business is derived from the Anchorage, Matanuska-Susitna Valley, Fairbanks, Kenai Peninsula, Nome, and Southeast areas of Alaska.

As such, the Company’s growth and operations depend upon the economic conditions of Alaska and these specific markets.

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At December 31, 2022 and 2021, the Company had $ 501.3 million and $ 572.7 million, respectively, in commercial and construction loans.

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

Small Business Administration ("SBA").

Additionally, the Company continues to have a concentration in large borrowing relationships.

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Recent Accounting Pronouncements

Accounting pronouncements implemented in 2021

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

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

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

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

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

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

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

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

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

Early application was permitted for specified periods.

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

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

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

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

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

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

Accounting pronouncements to be implemented in future periods

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

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

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

In March 2021, the UK Financial Conduct Authority announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of LIBOR had been changed from December 31, 2021 to June 30, 2023.

In response to this change, in December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848 ("ASU 2022-06").

ASU 2022-06 effectively amends ASU 2020-04 so that the expedients are in effect from March 12, 2020, through December 31, 2024.

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

In January 2021, the FASB issued ASU No.

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An additional $ 68.3 million in notional value represent corresponding swap agreements with third party financial institutions that offset the commercial loan swaps.

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

The Company has one additional interest rate swap agreement with a third party institution for $ 10.0 million in notional value related to our junior subordinated debentures.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NOTE 2 – Cash and Due from Banks

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

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

The Company is required to maintain a $ 100,000 and $ 2.8 million balance with a correspondent bank to collateralize the initial margin and the fair value exposure of one of its interest rate swaps, respectively.

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

The Company is required to maintain a $ 100,000 and $ 30,000 balance with a correspondent bank to collateralize the initial margin and the fair value exposure of one of its interest rate swaps, respectively, at December 31, 2022.

The Company was required to maintain a $ 100,000 and $ 2.8 million balance with a correspondent bank to collateralize the initial margin and the fair value exposure of one of its interest rate swaps, respectively, at December 31, 2021.

NOTE 3 - Interest Bearing Deposits in Other Banks

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Total securities available for sale $ 719,117 $ 38 ($ 42,126 ) $ — $ 677,029

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

December 31, 2021

Securities held to maturity

Corporate bonds $ 20,000 $ — ($ 836 ) $ 19,164

Allowance for credit losses — — — —

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

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

December 31, 2020

Securities available for sale

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Total securities available for sale $ 430,486 $ 664 ($ 4,466 ) $ — $ 426,684

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

December 31, 2022

Securities held to maturity

Corporate bonds $ 36,750 $ — ($ 4,111 ) $ 32,639

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

Allowance for credit losses — — — —

Total securities held to maturity, net of ACL $ 36,750 $ — ($ 4,111 ) $ 32,639

December 31, 2021

Securities held to maturity

Corporate bonds $ 20,000 $ — ($ 836 ) $ 19,164

Allowance for credit losses — — — —

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

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

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Corporate bonds 13,216 ( 43 ) 4,394 ( 631 ) 17,610 ( 674 )

Municipal securities 795 ( 25 ) — — 795 ( 25 )

Collateralized loan obligations 22,309 ( 632 ) 35,120 ( 1,373 ) 57,429 ( 2,005 )

9 unchanged sentences

There were 47 and 3 available for sale securities without an ACL with unrealized losses at December 31, 2022 and 2021, respectively, that have been at a loss position for more than twelve months.

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

At December 31, 2022 and 2021, there were three and two held to maturity securities in an unrealized loss position without an ACL, respectively, that have been in a loss position for less than twelve months.

At December 31, 2022 and 2021, there were two and zero held to maturity securities in an unrealized loss position without an ACL, respectively, that have been in a loss position for more than twelve months.

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

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Collateralized loan obligations

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

Within 1 year $ 5,000 $ 4,751 5.86 %

5-10 years 26,941 26,401 5.40 %

Over 10 years 27,493 26,277 5.39 %

Total $ 59,434 $ 57,429 5.43 %

19 unchanged sentences

Loans Held for Investment

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

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

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

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

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

(In Thousands) Pre-ASU 2016-13

Commercial loans $ 780,058

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

Real estate construction other 80,315

Real estate term owner occupied 163,597

Real estate term non-owner occupied 309,074

Real estate term other 46,620

Consumer secured by 1st deeds of trust 15,585

Consumer other 22,069

Subtotal 1,455,785

Unearned loan fees, net ( 11,735 )

Total portfolio loans $ 1,444,050

Post-ASU 2016-13

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

December 31, 2022 December 31, 2021

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

Commercial & industrial loans $ 358,128 $ 359,900 ($ 1,772 ) $ 448,338 $ 454,106 ($ 5,768 )

11 unchanged sentences

Other loans 3,619 3,632 ( 13 ) 4,406 4,422 ( 16 )

Subtotal $ 1,455,785

Unearned loan fees, net ($ 11,735 )

Total portfolio loans $ 1,444,050

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

December 31, 2021 December 31, 2020

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

Total 1,501,785 1,510,395 ( 8,610 ) 1,413,886 1,425,429 ( 11,543 )

Allowance for credit losses ( 13,838 ) ( 11,739 )

$ 1,487,947 $ 1,510,395 ($ 8,610 ) $ 1,402,147 $ 1,425,429 ($ 11,543 )

The difference between the amortized cost and unpaid principal balance is primarily net deferred origination fees totaling $ 8.6 million and $ 11.5 million at December 31, 2022 and 2021, respectively.

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

Amortized cost in the above table includes $ 7.1 million and $ 118.2 million as of December 31, 2022 and 2021, respectively, in PPP loans administered by the U.S.

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

At December 31, 2022, approximately 69 % of the Company’s loans, excluding PPP loans, are secured by real estate and 1 % are unsecured.

Approximately 30 % are for general commercial uses, including professional, retail, and small businesses.

Repayment is expected from the borrowers’ cash flow or, secondarily, the collateral.

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

Allowance for Credit Losses

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

Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance

(In Thousands)

Commercial & industrial loans $ 3,027 ($ 1,124 ) ($ 506 ) $ 1,517 $ 2,914

12 unchanged sentences

Total $ 11,739 $ 972 ($ 509 ) $ 1,636 $ 13,838

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

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

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

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

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

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

Approximately 24 % are for general commercial uses, including professional, retail, and small businesses.

Repayment is expected from the borrowers’ cash flow or, secondarily, the collateral.

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

Allowance for Credit Losses

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

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

Beginning Balance Credit Loss Expense (Benefit) Charge-offs Recoveries Ending Balance

(In Thousands)

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

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

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

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

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

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

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

Consumer other 400 ( 400 ) — — — —

Unallocated 2,107 ( 2,107 ) — — — —

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

12 unchanged sentences

Total $ 16,625 ($ 3,779 ) ($ 1,452 ) $ 345 $ 11,739

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

(In Thousands)

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

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

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

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

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

Real estate term other 671 106 — 2 779

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

Consumer other 436 ( 46 ) ( 15 ) 25 400

Unallocated 2,079 28 — — 2,107

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

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

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

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

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

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

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

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

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

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

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

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

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

(In Thousands) Loan Evaluation ALLL Allocations

Individually Collectively Total Individually Collectively Total

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

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

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

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

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

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

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

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

Unallocated — — — — 2,107 2,107

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

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

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

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

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

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

Real estate construction other — — — — —

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

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

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

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

Consumer other — — — 82 87

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

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

(In Thousands) Average Impaired Loans Interest Recognized

Commercial $ 10,964 $ 147

Real estate construction 1-4 family 781 —

Real estate construction other — —

Real estate term owner occupied 6,739 125

Real estate term non-owner occupied 562 29

Real estate term other 1,551 20

Consumer secured by 1st deed of trust 299 12

Consumer other 86 —

Total $ 20,982 $ 333

As of December 31, 2022 the ACL increased to $ 13.8 million, or 0.92 % of portfolio loans and 0.99 % of portfolio loans, net of government guarantees from $ 11.7 million, or 0.83 % of portfolio loans and 0.97 % of portfolio loans, net of government guarantees at December 31, 2021.

The Company primarily uses a DCF method to estimate the ACL for loans and generally does not record an ACL for the government guaranteed portion of loans.

The increase in the ACL for loans at December 31, 2022, as compared to December 31, 2021 is primarily due to an increase in non-government guaranteed loan balances.

Additionally, the Company forecasted a slight increase in future unemployment rates as of December 31, 2022 as compared to the forecast at December 31, 2021.

Credit Quality Information

81 unchanged sentences

Total classified loans, net government guarantees $ 137 $ 483 ($ 738 ) $ 365 $ 3,592 $ 8,502 $ 12,341

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

Pass Classified Total

December 31, 2021 2021 2020 2019 2018 2017 Prior Total

(In Thousands)

December 31, 2020

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

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

Real estate construction other 79,403 — 79,403

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

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

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

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

Consumer other 22,144 106 22,250

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

Commercial & industrial loans

Pass $ 227,376 $ 54,478 $ 29,846 $ 37,339 $ 23,205 $ 44,554 $ 416,798

Classified 18,853 714 3,564 3,118 517 4,774 31,540

Total commercial & industrial loans $ 246,229 $ 55,192 $ 33,410 $ 40,457 $ 23,722 $ 49,328 $ 448,338

Commercial real estate:

Owner occupied properties

Pass $ 81,533 $ 83,975 $ 39,254 $ 14,841 $ 14,452 $ 57,717 $ 291,772

Classified — 1,399 — 522 — 6,507 8,428

Total commercial real estate owner occupied properties $ 81,533 $ 85,374 $ 39,254 $ 15,363 $ 14,452 $ 64,224 $ 300,200

Non-owner occupied and multifamily properties

Pass $ 77,205 $ 77,961 $ 61,147 $ 34,307 $ 19,833 $ 154,561 $ 425,014

Classified — — — 10 10,286 1 10,297

Total commercial real estate non-owner occupied and multifamily properties $ 77,205 $ 77,961 $ 61,147 $ 34,317 $ 30,119 $ 154,562 $ 435,311

Residential real estate:

1-4 family residential properties secured by first liens

Pass $ 7,756 $ 8,023 $ 3,689 $ 531 $ 1,466 $ 8,812 $ 30,277

Classified 417 1,077 472 90 — 209 2,265

Total residential real estate 1-4 family residential properties secured by first liens $ 8,173 $ 9,100 $ 4,161 $ 621 $ 1,466 $ 9,021 $ 32,542

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

Pass $ 5,806 $ 2,535 $ 3,229 $ 3,464 $ 259 $ 4,046 $ 19,339

Classified — — — 259 — 12 271

Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens $ 5,806 $ 2,535 $ 3,229 $ 3,723 $ 259 $ 4,058 $ 19,610

1-4 family residential construction loans

Pass $ 21,409 $ 1,056 $ 1,707 $ 62 $ — $ 11,879 $ 36,113

Classified — — — — 109 — 109

Total residential real estate 1-4 family residential construction loans $ 21,409 $ 1,056 $ 1,707 $ 62 $ 109 $ 11,879 $ 36,222

Other construction, land development and raw land loans

Pass $ 39,624 $ 26,458 $ 11,044 $ 3,315 $ 139 $ 5,544 $ 86,124

Classified — — — 460 — 1,510 1,970

Total other construction, land development and raw land loans $ 39,624 $ 26,458 $ 11,044 $ 3,775 $ 139 $ 7,054 $ 88,094

Obligations of states and political subdivisions in the US

Pass $ 4,120 $ 812 $ 1,875 $ 343 $ 2,733 $ 6,520 $ 16,403

Classified — — — — — — —

Total obligations of states and political subdivisions in the US $ 4,120 $ 812 $ 1,875 $ 343 $ 2,733 $ 6,520 $ 16,403

Agricultural production, including commercial fishing

Pass $ 19,970 $ 3,929 $ 810 $ 1,118 $ 741 $ 1,391 $ 27,959

Classified — — — — — — —

Total agricultural production, including commercial fishing $ 19,970 $ 3,929 $ 810 $ 1,118 $ 741 $ 1,391 $ 27,959

Consumer loans

Pass $ 873 $ 815 $ 653 $ 403 $ 291 $ 1,766 $ 4,801

Classified — — — — — — —

Total consumer loans $ 873 $ 815 $ 653 $ 403 $ 291 $ 1,766 $ 4,801

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

Classified — — — — — — —

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

Pass $ 487,700 $ 261,687 $ 153,684 $ 95,818 $ 63,119 $ 296,998 $ 1,359,006

Classified 19,270 3,190 4,036 4,459 10,912 13,013 54,880

Total loans $ 506,970 $ 264,877 $ 157,720 $ 100,277 $ 74,031 $ 310,011 $ 1,413,886

Total pass loans $ 487,700 $ 261,687 $ 153,684 $ 95,818 $ 63,119 $ 296,998 $ 1,359,006

Government guarantees ( 145,713 ) ( 12,725 ) ( 14,429 ) ( 3,299 ) ( 306 ) ( 6,562 ) ( 183,034 )

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

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

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

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

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

Past Due Loans

37 unchanged sentences

Nonaccrual loans net of government guarantees totaled $ 6.4 million and $ 10.7 million at December 31, 2022 and December 31, 2021, respectively.

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

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

December 31, 2022 December 31, 2021

13 unchanged sentences

Net nonaccrual loans $ 6,430 $ 6,368 $ 10,672 $ 10,564

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

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

Interest income which would have been earned on nonaccrual loans for 2022, 2021, and 2020 amounted to $ 434,000 , $ 744,000 , and $ 856,000 , respectively.

There was $ 10,000 in interest on nonaccrual loans reversed through interest income in both 2022 and 2021.

There was no interest earned on nonaccrual loans with a principal balance during 2022 or 2021.

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

However, the Company recognized interest income of $ 2.2 million, $ 1.6 million, and $ 924,000 in 2022, 2021, and 2020, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero.

Loans are classified as collateral dependent when it it probable that the Company will be unable to collect the scheduled payments of principal and interest when due, and repayment is expected to be provided substantially through the sale of the collateral.

As of December 31, 2022 and 2021, there are no collateral dependent loans for which foreclosure is probable.

Troubled Debt Restructurings

23 unchanged sentences

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

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

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

There were no newly restructured loans that occurred in 2022.

The below disclosed restructurings were not related to COVID-19 modifications:

1 unchanged sentence

(In Thousands)

New Troubled Debt Restructurings

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

Commercial real estate:

Owner occupied properties — 350 350

Residential real estate:

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

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

Subtotal — 4,184 4,184

Existing Troubled Debt Restructurings 3,291 3,163 6,454

Troubled Debt Restructurings $ 291 $ 4,844 $ 5,135

Total $ 291 $ 4,844 $ 5,135

The following tables present newly restructured loans that occurred during 2021 and 2020, by concession (terms modified):

The following tables present newly restructured loans that occurred during 2021, by concession (terms modified):

December 31, 2021

16 unchanged sentences

Total 4 $ — $ 4,045 $ 139 $ — $ 4,184

December 31, 2020

(In Thousands) Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications

Pre-Modification Outstanding Recorded Investment:

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

Total 2 $ — $ 3,249 $ 164 $ — $ 3,413

Post-Modification Outstanding Recorded Investment:

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

Total 2 $ — $ 1,590 $ 161 $ — $ 1,751

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in TDRs at December 31, 2022.

15 unchanged sentences

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

There are no purchased receivables past due at December 31, 2021 or 2020, and there were no restructured purchased receivables in 2021, 2020, or 2019.

There are no purchased receivables past due at December 31, 2022 or 2021.

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

49 unchanged sentences

Percentage of MSR 1.78 % 1.24 % 0.94 %

The above tables show the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four family Alaska Housing Finance Corporation/FNMA/FHLMC serviced home loan.

The above tables show the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four family AHFC/FNMA/FHLMC serviced home loan.

The above tables reference a 100 basis point and 200 basis point decrease in discount rates.

9 unchanged sentences

Commercial servicing right assets ("CSRs") have a carrying value of $ 2.1 million and $ 1.1 million at December 31, 2022 and 2021, respectively, and total commercial loans serviced for others were $ 285.3 million and $ 259.8 million at December 31, 2022 and 2021, respectively.

Key assumptions used in measuring the fair value of CSRs as of December 31, 2021 and 2020 include a conditional prepayment rate of 16.08 % and 9.66 % and a discount rate of 9.94 % and 9.46 %, respectively.

Key assumptions used in measuring the fair value of CSRs as of December 31, 2022 and 2021 include an average conditional prepayment rate of 10.19 % and 16.08 % and a discount rate of 12.00 % and 9.94 %, respectively.

NOTE 8 - Other Real Estate Owned

At December 31, 2021 and 2020, the Company held $ 5.6 million and $ 7.3 million, respectively, as OREO.

At December 31, 2022 and 2021, the Company held zero and $ 5.6 million, respectively, as OREO.

The following table details net operating (income) expense related to OREO for the years indicated:

4 unchanged sentences

Rental income on OREO ( 548 ) ( 524 ) ( 509 )

Gains on sale of OREO ( 685 ) ( 391 ) ( 380 )

Losses/ (gains) on sale of OREO 414 ( 685 ) ( 391 )

Total $ 500 ($ 432 ) ($ 242 )

6 unchanged sentences

Tenant improvements 2 - 15 years

10,409 10,394

Buildings 39 years 39,333 37,283

2 unchanged sentences

Total Premises and Equipment, Net $ 37,821 $ 37,164

Depreciation expense and amortization of leasehold improvements was $ 3.3 million, $ 3.1 million, and $ 3.0 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Depreciation and amortization expense was $ 3.1 million, $ 3.3 million, and $ 3.1 million for the years ended December 31, 2022, 2021, and 2020, respectively.

NOTE 10 – Leases

37 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 the muted pace of growth in the Alaskan economy.

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

We believe that the positive inputs to the qualitative assessment noted above outweigh the negative inputs, and we therefore concluded that it is more likely than not that no impairment existed at that time.

8 unchanged sentences

Investment in Low Income Housing Partnerships $ 17,289 $ 20,640

Accrued interest receivable 6,846 7,979

Interest rate swaps not designated as hedging instruments, at fair value 12,725 6,030

Deferred taxes, net 11,367 3,278

Accrued interest receivable 9,937 6,846

Bank owned life insurance, net 4,345 4,293

Taxes receivable 1,994 4,083

Interest rate lock commitments 1,387 4,034

Software 2,855 3,905

Equity method investments 2,219 2,462

Prepaid expenses 2,358 2,210

Deferred taxes, net 3,278 1,980

Commercial servicing rights, at fair value 2,129 1,084

Repossessed assets — 231

Equity method investments 1,925 2,219

Taxes receivable 1,749 1,994

Software 1,741 2,855

Interest rate lock commitments 440 1,387

Other assets 2,841 1,525

26 unchanged sentences

At December 31, 2022 and 2021, the Company held $ 3.8 million and $ 3.6 million, respectively, in deposits for related parties, including directors, executive officers, and their affiliates.

At December 31, 2022 and 2021, the Company reclassified $ 1.3 million and $ 163,000 , respectively, in overdrafts from deposits to loans.

NOTE 14 - Borrowings

8 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%.

The Company is subject to provisions under Alaska state law, which generally limit the amount of the Bank's outstanding debt to 35 % of total assets or $ 929.3 million at December 31, 2022 and $ 948.0 million at December 31, 2021.

14 unchanged sentences

The debentures, which represent the sole asset of Trust 2, accrue and pay distributions quarterly at a variable rate of 90 -day LIBOR plus 1.37 % per annum, adjusted quarterly, of the stated liquidation value of $ 1,000 per capital security.

The interest rate on these debentures was 1.57 % at December 31, 2021.

The interest rate on these debentures was 6.14 % at December 31, 2022 compared to 1.57 % at December 31, 2021.

The interest cost to the Company on these debentures was $ 326,000 , $ 160,000 , and $ 219,000 in 2022, 2021, and 2020, respectively.

19 unchanged sentences

Balance at December 31, 2022 ($ 30,122 ) $ 1,041 ($ 29,081 )

NOTE 17 – Revenue

The Company records revenue when control of the promised products or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those products or services.

All of the Company's revenue from contracts with customers in the scope of Topic 606 is recognized in non-interest income.

The following table presents the Company's sources other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2021, 2020 and 2019:

(In Thousands) December 31,

Other operating income 2021 2020 2019

In-scope of Topic 606:

Bankcard fees $ 3,389 $ 2,837 $ 2,976

Service charges on deposit accounts 1,297 1,102 1,557

Merchant fees 560 416 467

Commission income on the sale of mutual funds and annuity products 417 369 385

Other 826 743 812

Other operating income (in-scope of Topic 606) $ 6,489 $ 5,467 $ 6,197

Other operating income (out-of-scope of Topic 606) 45,774 57,861 31,149

Total other operating income $ 52,263 $ 63,328 $ 37,346

Bankcard fees

Bankcard fees are primarily comprised of debit card income and ATM fees.

Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa or MasterCard.

ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM.

The Company’s performance obligation for bankcard fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.

Payments are typically received immediately or in the following month.

Service charges on deposit accounts